SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly period ended: September 30, 1998
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ___________
Commission File Number 0-19410
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SEPRACOR INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2536587
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(State or Other Jurisdiction of (I.R.S. Employer Identification number)
Organization or Incorporation)
111 Locke Drive, Marlborough, Massachusetts 01752
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(Address of Principal Executive Offices) (Zip Code)
(508) 481-6700
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.10 per share 28,468,186
- -------------------------------------- ---------------------------------
Class Outstanding at November 6, 1998
<PAGE>
SEPRACOR INC.
INDEX
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of
September 30, 1998 and December 31, 1997 (Unaudited) 3
Consolidated Statements of Operations for the Three
and Nine Month Periods Ended September 30, 1998 and 1997
(Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II - Other Information 20
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE>
SEPRACOR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands) September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 119,366 $ 82,579
Marketable securities 109,387 9,981
Accounts receivable, net 3,635 2,415
Inventories 3,623 2,722
Other current assets 3,100 1,543
----------- ---------
Total Current Assets 239,111 99,240
Property, plant and equipment, net 16,837 15,126
Deferred financing costs, net 7,152 1,917
Excess of investments over net assets acquired, net 4,994 5,288
Investment in affiliates 2,131 3,971
Other assets 3,365 2,965
----------- ---------
Total Assets $ 273,590 $ 128,507
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,535 $ 4,018
Accrued expenses 32,894 17,670
Notes payable and current portion
of capital lease obligation and long-term debt 2,795 861
Deferred revenue 87 21
Convertible redeemable preferred stock - 6,700
----------- ---------
Total Current Liabilities 40,311 29,270
Long-term debt and capital lease obligation 2,551 3,388
Convertible subordinated debentures 270,355 80,880
----------- ---------
Total Liabilities 313,217 113,538
----------- ---------
Minority interest 2,398 2,937
Stockholders' Equity (Deficit):
Common stock 2,856 2,785
Additional paid-in capital 227,190 222,504
Unearned compensation, net - (94)
Accumulated deficit (271,958) (213,028)
Equity adjustments (113) (135)
----------- ---------
Total Stockholders' Equity (Deficit) (42,025) 12,032
----------- ---------
Total Liabilities and Stockholders' Equity $ 273,590 $ 128,507
=========== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
3
<PAGE>
SEPRACOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 and 1997
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three month periods ended Nine month periods ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Collaborative research and development $ 1,417 $ 56 $ 3,825 $ 184
License fees - 1,875 5,090 2,475
Product 1,178 1,523 4,683 6,517
Royalties 61 51 175 153
--------- --------- --------- ---------
Total Revenues 2,656 3,505 13,773 9,329
Cost of revenues:
License fees - 469 400 469
Product 941 811 2,916 3,737
Royalties 21 - 57 -
--------- --------- --------- ---------
Total Cost of Revenues 962 1,280 3,373 4,206
Gross Margin 1,694 2,225 10,400 5,123
Operating Expenses:
Research and development 20,416 10,469 44,419 33,472
Sales and marketing 6,995 1,854 13,115 4,331
Administration 2,384 1,950 6,810 7,415
Restructuring recoveries - - (351) -
Patent costs 477 548 1,412 1,203
--------- --------- --------- ---------
Total Operating Expenses 30,272 14,821 65,405 46,421
(Loss) from operations (28,578) (12,596) (55,005) (41,298)
Other income (expense):
Interest income 3,483 1,274 9,459 4,445
Interest expense (4,502) (1,497) (12,132) (4,487)
Other income (expense) 179 209 56 377
Equity in income (loss) of investees (600) 134 (1,846) (1,937)
Gain on sale of ChiRex Inc. - - - 30,069
--------- --------- --------- ---------
Total Other Income (Expense) (1,440) 120 (4,463) 28,467
Net (loss) before minority interests (30,018) (12,476) (59,468) (12,831)
Minority interest in subsidiary 390 349 538 744
--------- --------- --------- ---------
Net (loss) (29,628) (12,127) (58,930) (12,087)
========= ========= ========= =========
Dividends on preferred stock - (150) (150) (450)
--------- --------- --------- ---------
Net (loss) applicable to
common shares $ (29,628) $ (12,277) $ (59,080) $ (12,537)
========= ========= ========= =========
Basic and diluted net (loss) per common share $ (1.05) $ (0.44) $ (2.10) $ (0.46)
--------- --------- --------- ---------
Shares used in computing basic and diluted net
(loss) per common share:
Basic and diluted 28,315 27,662 28,092 27,529
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
4
<PAGE>
Sepracor Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(in thousands) Nine month periods ended
September 30,
------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (58,930) $ (12,087)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interests in subsidiaries (538) (744)
Gain on sale of equity investee - (30,069)
Depreciation and amortization 3,642 3,452
Provision for doubtful accounts (209) 276
Equity in investee losses 1,846 1,937
Loss on disposal of property and equipment 21 4
Changes in operating assets and liabilities:
Accounts receivable (1,129) 938
Inventories (669) (439)
Other current assets (1,585) (779)
Accounts payable 480 (1,669)
Accrued expenses 15,170 7,510
Deferred revenue 60 (509)
---------- ----------
Net cash (used in) operating activities: (41,841) (32,179)
---------- ----------
Cash flows from investing activities:
Purchases of marketable securities (210,916) (49,544)
Sales of marketable securities 111,510 35,298
Additions to property and equipment (4,819) (6,675)
Proceeds from sale of equipment 11 18
Investment in affiliate 75 -
Net proceeds from sale of equity investee - 30,625
Other assets 472 (475)
---------- ----------
Net cash (used in) provided by investing activities: (103,667) 9,247
---------- ----------
Cash flows from financing activities:
Proceeds from sale of convertible subordinated debentures 189,475 -
Costs associated with sale of convertible subordinated debentures (6,105) -
Repurchase of series B redeemable exchangeable preferred stock (6,850) -
Net proceeds from issuances of common stock 4,760 2,587
Issuance of warrants 31 -
Borrowings of long term debt - 110
Repayments of long term debt and capital lease (946) (706)
Borrowings under line of credit agreements 2,002 35
---------- ----------
Net cash provided by financing activities 182,367 2,026
---------- ----------
Effect of exchange rates on cash and cash equivalents (72) (139)
---------- ----------
Net increase (decrease) in cash and cash equivalents 36,787 (21,045)
Cash and cash equivalents at beginning of period 82,579 83,344
---------- ----------
Cash and cash equivalents at end of period $ 119,366 $ 62,299
========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
5
<PAGE>
ITEM 1.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. Basis of presentation:
The accompanying consolidated interim financial statements are unaudited and
have been prepared on a basis substantially consistent with the audited
financial statements. Certain information and footnote disclosures normally
included in the Company's annual financial statements have been condensed or
omitted. The year-end consolidated condensed balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. The consolidated interim financial
statements, in the opinion of management, reflect all adjustments (including
normal recurring accruals) necessary for a fair presentation of the results for
the interim periods ended September 30, 1998 and 1997.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the fiscal year. These
consolidated interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1997, which are
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, filed with the Securities and Exchange Commission.
The consolidated interim financial statements include the accounts of Sepracor
Inc. ("Sepracor") and its majority and wholly-owned subsidiaries, including
BioSepra Inc. ("BioSepra"), Sepracor Canada Limited, and Versicor Inc.
("Versicor") (from May 1995 to December 1997).
Effective December 10, 1997, Sepracor's ownership percentage of Versicor Inc.
was approximately 22%, thereby making Versicor an affiliate and reportable under
the equity method. At September 30, 1998, Sepracor's investment in HemaSure Inc.
("HemaSure") was zero.
2. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials $858 $600
Work in progress 201 129
Finished goods 2,564 1,993
------ ------
$3,623 $2,722
====== ======
</TABLE>
3. Basic and diluted net (loss) per common share:
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is based upon the weighted
average number of common shares outstanding during the period plus the
additional weighted average common equivalent shares during the period. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive. Common equivalent shares
result from the assumed conversion of preferred stock and convertible debt and
the assumed exercises of outstanding stock options, the proceeds of which are
then assumed to have been used to repurchase outstanding stock options using the
treasury stock method. For the three and nine months ended September 30, 1998
and 1997, basic and diluted net loss per common share is computed based on the
weighted-average number of common shares outstanding during the period, because
the effect of common stock equivalents would be anti-dilutive.
6
<PAGE>
Included in the three and nine months ended September 30, 1998 and 1997 net
loss applicable to common shares is $0 and $150,000, and $150,000 and $450,000,
respectively, of dividends relating to Series B Redeemable Exchangeable
Preferred Stock. Certain securities were not included in the computation of
diluted earnings per share for the three and nine months ended September 30,
1998 and 1997, respectively, because they would have an anti-dilutive effect due
to net losses for such periods. These securities include (i) options to purchase
4,535,312 and 4,535,312 shares of Common Stock for the three and nine months
ended September 30, 1998, and 3,604,960 and 3,604,960 shares of common stock for
the three and nine months ended September 30, 1997, with a purchase price of
$1.00 to $48.63 per share, $1.00 to $48.63 per share, and $1.00 to $24.75 per
share, $1.00 to $24.75 per share, respectively; (ii) 8,101,302 and 8,101,302
shares of Common Stock for the three and nine months ended September 30, 1998,
and 4,109,756 and 4,109,756 shares of common stock for the three and nine months
ended September 30, 1997, for issuance upon conversion of 7% and 6 1/4%
subordinated convertible debentures, and (iii) 312,500 shares of common stock
for conversion of Series B Redeemable Exchangeable Preferred Stock for each of
the three and nine months ended September 30, 1997.
4. 6 1/4% Convertible Subordinated Debentures
On February 10, 1998, Sepracor issued $189,475,000 of 6 1/4% Convertible
Subordinated Debentures due 2005 (the "6 1/4% Debentures"). The 6 1/4%
Debentures are convertible into Sepracor Common Stock, at the option of the
holder, at a price of $47.369 per share. The 6 1/4% Debentures bear interest at
6 1/4% payable semi-annually, commencing on August 15, 1998. As of September 30,
1998, the Company had accrued interest of $1,474,000 relating to the 6 1/4%
Debentures. The 6 1/4% Debentures are not redeemable by the Company prior to
February 18, 2001. The Company may be required to repurchase the 6 1/4%
Debentures at the option of the holders in certain circumstances. As part of the
sale of the 6 1/4% Debentures, Sepracor incurred approximately $6,105,000 of
offering costs, which are being amortized over seven years, the term of the
6 1/4% Debentures. The net proceeds to the Company after offering costs are
$183,370,000. The Company intends to use the proceeds from the sale of the
6 1/4% Debentures for the establishment and pre-launch operations of the
Company's respiratory sales force, marketing of certain improved chemical
entities ("ICEs"), ongoing preclinical and clinical trials, funding of other
research and development programs, and working capital and other general
corporate purposes.
5. Series B Redeemable Exchangeable Preferred Stock:
In March 1995, Beckman Instruments, Inc. acquired 312,500 shares of Sepracor's
Series B Redeemable Exchangeable Preferred Stock for $5,000,000. On March 26,
1998, Sepracor and Beckman terminated their Stock Purchase Agreement under which
Beckman had acquired the 312,500 shares of Sepracor Series B Redeemable
Exchangeable Preferred Stock. Sepracor paid Beckman the original purchase price
of the stock plus accrued dividends totaling $6,850,000. In addition, BioSepra
and Beckman amended their distribution agreement whereby BioSepra granted a
non-exclusive right to manufacture instruments to Beckman, was released from its
obligation to manufacture instruments for Beckman, and sold the discontinued
instrument product inventory to Beckman for $250,000.
6. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130"), which requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements for full year financials.
Footnote disclosure is provided quarterly. The Company's only significant item
of other comprehensive income relates to foreign currency translation
adjustments, which is presented separately on the balance sheet.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(in thousands)
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss $(29,628) $(12,277) $(59,080) $(12,537)
Cumulative translation adjustment 186 (18) 22 (499)
-------- -------- -------- --------
Total comprehensive income (loss) $(29,442) $(12,295) $(59,058) $(13,036)
======== ======== ======== ========
</TABLE>
7
<PAGE>
7. Other
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. Sepracor is in the process of evaluating the impact
of the new standard on the presentation of the financial statements and the
disclosure therein. SFAS 131 is effective for fiscal years beginning after
December 15, 1997, but need not be applied to interim financial statements in
the initial year of application.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. The
statement requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The statement is effective for fiscal
years beginning after June 15, 1999. The Company will adopt SFAS 133 by January
1, 2000. The Company is evaluating SFAS 133 to determine its impact on its
consolidated financial statements.
8. Litigation
In July 1997, the United States Patent and Trademark Office (the "PTO") informed
Sepracor that it had declared an interference between Sepracor's previously
issued method-of-use patent on fexofenadine to treat allergic rhinitis and
another similar patent application of Sepracor, and Hoechst Marion Roussel
Inc.'s ("HMRI") method-of-use patent application on the anti-histaminic effects
of fexofenadine on hepatically impaired patents. The primary objective of a
patent interference, which can only be declared by the PTO, is to determine the
first to invent any overlapping subject matter claimed by more than one party.
In the course of an interference, the parties typically present evidence
relating to their inventive activities as to the overlapping subject matter. The
PTO then reviews the evidence to determine which party has the earliest legally
sufficient inventive date, and, therefore, is entitled to a patent claiming the
overlapping subject matter.
If Sepracor prevails in the interference, Sepracor will retain all of its claims
in its issued patent. If, however, Sepracor loses the interference, HMRI will be
issued a U.S. patent containing its claims involved in the interference and may
not be obligated to pay Sepracor milestone or royalty payments pursuant to the
terms of the license agreement whereby Sepracor licensed its U.S. patent rights
covering fexofenadine to HMRI in 1993.
HemaSure is a defendant in two lawsuits brought by Pall Corporation ("Pall"). In
complaints filed in February 1996 and November 1996, Pall alleged that
HemaSure's manufacture, use and/or sale of the LeukoNet product infringes upon
three patents held by Pall.
On October 14, 1996, in connection with the first action concerning U.S. Patent
No. 5,451,321(the "'321 patent"), HemaSure filed for summary judgment of
noninfringement. Pall filed a cross motion for summary judgment of infringement
at the same time.
In October 1997, the U.S. District Court of the Eastern District of New York
("the court") granted in part Pall's summary judgment motion relating to the
'321 patent. HemaSure has agreed to terminate the manufacture, use, sale and
offer for sale of the filter, subject to the court's order. In April 1998, the
court granted to HemaSure its request to appeal the October 1997 decision. The
appeal of the October 1997 decision is currently pending before the U.S. Court
of Appeals for the Federal Circuit.
8
<PAGE>
With respect to the second action concerning U.S. Patent No. 4,952,572 (the
"'572 patent"), HemaSure has answered the complaint stating that it does not
infringe any claim of the asserted patents and has filed for summary judgement
of noninfringement. Pall filed a cross motion for summary judgement of
infringement at the same time. Further, HemaSure has counterclaimed for
declaratory judgment of invalidity, noninfringement and unenforceability of the
'572 patent.
HemaSure believes, based on advice of its patent counsel, that a properly
informed court should conclude that the manufacture, use and/or sale by HemaSure
or its customers of the present LeukoNet product did not infringe any valid
enforceable claim of the two Pall patents. However, there can be no assurance
that HemaSure will prevail in the pending litigations, and an adverse outcome in
a patent infringement action would have a material adverse effect on HemaSure's
future business and operations.
9. Subsidiaries and summarized income statement information:
The following is the summarized income statement information for the Company's
unconsolidated subsidiaries HemaSure and Versicor for the three and nine month
periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(in thousands)
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
HemaSure:
Net sales $-- $522 $25 $1,590
Gross profit (loss) -- (104) (632) (915)
Loss from continuing
operations (2,667) (1,879) (9,029) (8,185)
Net income (loss) $(2,682) $363 $ (8,974) $ (6,271)
Versicor:
Net sales $-- $-- $-- $--
Gross profit (loss) -- -- -- --
Loss from continuing
operations (2,429) (1,513) (8,614) (4,979)
Net loss $(2,386) $(1,799) $(8,392) $(5,629)
</TABLE>
The Company recognized 22% of Versicor's net loss as equity in loss of
subsidiary. The Company has recognized none of HemaSure's current year loss
since its investment in subsidiary is zero.
In September 1998, HemaSure entered into a $5,000,000 revolving line of credit
with a commercial bank. Under the agreement up to $3 million is available
immediately with the remainder available upon the completion of certain events
as defined. The revolving line of credit, which expires on August 31, 2000, will
be used to help finance HemaSure's working capital requirements. Amounts
borrowed under the line bear interest at the bank's prime lending rate plus 1/2%
payable quarterly in arrears. The bank will have a first lien on all assets of
HemaSure including its intellectual property. Sepracor has agreed to guarantee
repayment by HemaSure of amounts borrowed under the line of credit. In exchange
for the guarantee, HemaSure has granted to Sepracor warrants to purchase up to
1,700,000 shares of HemaSure's common stock at a price of $0.69 per share, of
which 1,000,000 warrants will be exercisable immediately and 700,000 warrants
will be exercisable in the event HemaSure draws down in excess of $3 million
under the line of credit. The warrants will expire in the year 2003 and have
certain registration rights associated with them.
10. Subsequent Events:
Redemption of Convertible Subordinated Debentures
On October 30, 1998, the Company issued a Notice of Redemption for all of its 7%
Convertible Subordinated Debentures with a scheduled maturity in 2002,
aggregating $80,880,000 in principal amount. The Debentures will be redeemed on
December 1, 1998. The right to convert each $1,000 of principal amount of
Debentures into 50.813 shares of Sepracor Common Stock, based on the conversion
price of $19.68 per share, will expire at the close of business on November 16,
1998. In lieu of issuing any fractional shares in connection with any conversion
of the Debentures, the Company shall make payment in cash based on the last sale
price of Common Stock on the day prior to the day of conversion.
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains, in addition to historical
information, forward-looking statements which involve risk and uncertainties.
The Company's actual results could differ significantly from the results
discussed in such forward-looking statements. See "Factors Affecting Future
Operating Results" below.
Overview
The consolidated interim financial statements include the accounts of Sepracor
Inc. ("Sepracor") and its majority and wholly-owned subsidiaries, including
BioSepra Inc. ("BioSepra"), Sepracor Canada Limited, and Versicor Inc.
("Versicor") (from May 1995 to December 1997).
Effective December 10, 1997, Sepracor's ownership percentage of Versicor was
approximately 22%, thereby making Versicor an affiliate and reportable under the
equity method. Sepracor has recorded $600,000 and $1,846,000 as its share of
Versicor losses for the three and nine month periods ended September 30, 1998.
At September 30, 1998, Sepracor had an investment in Versicor of $2,125,000. At
September 30, 1998, Sepracor's investment in HemaSure was zero.
In December 1997, Sepracor signed a licensing agreement with Schering-Plough
Corporation ("Schering") giving Schering exclusive worldwide rights to
Sepracor's patents covering descarboethoxyloratadine ("DCL"), an active
metabolite of loratadine ("the Schering Agreement"). Under the terms of the
Schering Agreement, Sepracor has exclusively licensed its DCL rights to
Schering, which expects to develop and market the DCL product worldwide. Under
the Schering Agreement, Schering paid Sepracor an up-front license fee of
$5,000,000 which will be offset against future royalties, if any, on DCL sales
beginning at first product launch. Any royalties paid to Sepracor will escalate
over time and upon the achievement of sales volume and other milestones. In
January 1998, Sepracor and Schering were notified that no objection would be
raised under the Hart Scott Rodino Act with respect to the Schering Agreement.
On February 4, 1998, Sepracor signed a collaboration and license agreement with
Janssen Pharmaceutica, N.V. ("Janssen"), a wholly-owned subsidiary of Johnson &
Johnson, relating to the development and marketing of norastemizole, a third
generation nonsedating antihistamine ("the Janssen norastemizole Agreement").
Under the terms of the Janssen norastemizole Agreement, the companies will
jointly fund the development of norastemizole, and Janssen has an option to
acquire certain rights regarding the product in the U.S. and abroad. When
exercised, Janssen and Sepracor will equally share the costs and profits
associated with the further development, marketing and sale of norastemizole in
the United States. Sepracor will also retain the right to co-promote the product
in the U.S. Alternatively, Sepracor can elect to receive royalties, if any, on
Janssen sales of norastemizole in the U.S. in the event it decides not to
co-promote the product. Outside of the U.S., Janssen has the right to develop
and market norastemizole, and Sepracor will earn royalties, if any, on product
sales. In addition, Janssen has worldwide over-the-counter rights to
norastemizole. Under the Janssen norastemizole Agreement, Sepracor recorded
collaborative research and development revenue of $1,753,000, $497,000 and
$1,368,000 in the first, second and third quarters of 1998, respectively.
On July 2, 1998, Sepracor Inc. received an approvable letter for Xopenex(TM)
(levalbuterol HCl), inhalation solution, in multidose strengths, from the U.S.
Food and Drug Administration ("FDA"). Xopenex(TM) is the therapeutically active
isomer of racemic albuterol. Final approval by the FDA of the Xopenex(TM) New
Drug Application ("NDA") is subject to satisfactory completion of the product
labeling discussions and certain other conditions.
On July 20, 1998, Sepracor signed a second license agreement with Janssen (the
"Janssen Norcisapride Agreement") giving Janssen exclusive worldwide rights to
Sepracor's patents covering Norcisapride, an isomer of the active metabolite of
Propulsid(TM). Under the terms of the Janssen Norcisapride Agreement, Sepracor
has exclusively licensed its Norcisapride rights to Janssen, which expects to
develop and market the Norcisapride product worldwide. Under the Janssen
Norcisapride Agreement, Janssen would pay Sepracor royalties, if any, on
Norcisapride sales beginning at first product launch. Any royalties paid to
Sepracor will escalate upon the achievement of sales volume milestones.
10
<PAGE>
In September 1998, HemaSure entered into a $5,000,000 revolving line of credit
with a commercial bank. Under the agreement up to $3 million is available
immediately with the remainder available upon the completion of certain events
as defined. The revolving line of credit, which expires on August 31, 2000, will
be used to help finance HemaSure's working capital requirements. Amounts
borrowed under the line bear interest at the bank's prime lending rate plus 1/2%
payable quarterly in arrears. The bank will have a first lien on all assets of
HemaSure including its intellectual property. Sepracor has agreed to guarantee
repayment by HemaSure of amounts borrowed under the line of credit. In exchange
for the guarantee, HemaSure has granted to Sepracor warrants to purchase up to
1,700,000 shares of HemaSure's common stock at a price of $0.69 per share, of
which 1,000,000 warrants will be exercisable immediately and 700,000 warrants
will be exercisable in the event HemaSure draws down in excess of $3 million
under the line of credit. The warrants will expire in the year 2003 and have
certain registration rights associated with them.
Three and nine months ended September 30, 1998 and 1997
License fees were $0 and $5,090,000 for the three and nine months ended
September 30, 1998, respectively, compared to $1,875,000 and $2,475,000,
respectively, for the same periods in 1997. The decrease for the three month
period in 1998 as compared to 1997 is due to a $1,875,000 milestone payment,
which Sepracor received from HMRI in 1997. The increase for the nine month
period in 1998 as compared to 1997 is due primarily to the $5,000,000 license
payment, which Sepracor received under the Schering Agreement in 1998.
Product revenues were $1,178,000 and $4,683,000 for the three and nine months
ended September 30, 1998, respectively, compared to $1,523,000 and $6,517,000,
respectively, for the same periods in 1997. The decrease in revenue for the
three and nine month periods ended September 30, 1998 is attributed to
BioSepra's discontinuation of the instrument product line.
Collaborative research and development revenue was $1,417,000 and $3,825,000 for
the three and nine months ended September 30, 1998, respectively, compared to
$56,000 and $184,000, respectively, for the same periods in 1997. The increases
for the three and nine month periods ending September 30, 1998, related
primarily to revenue from the Janssen norastemizole Agreement of $1,368,000 and
$3,618,000, respectively.
Cost of product revenues, as a percentage of product revenues, was 80% and 62%
for the three and nine months ended September 30, 1998, respectively, compared
to 53% and 57% for the same periods in 1997. The increase for the three month
period in 1998 as compared to 1997 is due primarily to BioSepra's cost to
implement improvements in manufacturing processes, and an adverse yield for a
specific product sale.
Research and development expenses were $20,416,000 and $44,419,000 in the three
and nine months ended September 30, 1998, respectively, compared to $10,469,000
and $33,472,000, respectively, in the same periods last year. The increases for
the periods in 1998 as compared to 1997 is due primarily to increased expenses
related to preclinical and clinical trials in the Company's pharmaceutical
programs which include two major Phase III norastemizole trials, a fall seasonal
allergic rhinitis study and a controlled allergen challenge study, Phase II
pediatric study for the syrup formulation of Xopenex(TM) (levalbuteral HC1),
Phase II study for (R,R,)-formoterol and a Phase I clinical trial for
(R,)-fluoxetine.
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Sales and marketing expenses were $6,995,000 and $13,115,000 for the three and
nine months ended September 30, 1998, respectively, compared to $1,854,000 and
$4,331,000, respectively, for the same periods last year. The increase for the
periods in 1998 as compared to 1997 is due primarily to costs related to
infrastructure development and operation of a specialty sales force for
Xopenex(TM). Sepracor is planning to introduce Xopenex(TM) commercially upon FDA
approval.
General and administrative expenses were $2,384,000 and $6,810,000 for the three
and nine months ended September 30, 1998, respectively, compared to $1,950,000
and $7,415,000, respectively, for the same periods last year. The increase for
the three month period ended September 30, 1998 is primarily due to increased
headcount and related costs at Sepracor. The decrease for the nine month period
ended September 30, 1998 is primarily due to reductions in personnel and related
costs at BioSepra, the Company no longer consolidating Versicor, offset in part
by increased headcount and related costs at Sepracor.
Legal expenses related to patents were $477,000 and $1,412,000 for the three and
nine months ended September 30, 1998, respectively, compared to $548,000 and
$1,203,000 for the same periods last year. The decrease for the three month
period in 1998 as compared to 1997 is due primarily to a reduction in costs
relating to patent interference proceedings. The increase for the nine month
period in 1998 as compared to 1997 is due primarily to costs associated with the
increased volume of patent filings.
Interest income, interest expense and other income (expense) was ($840,000) and
($2,617,000) in the three and nine months ended September 30, 1998,
respectively, compared to $(14,000) and $335,000 in the same periods in 1997.
The increase in expense in 1998 as compared to 1997 is primarily the result of
increased interest expense related to the 6 1/4% Debentures, offset by an
increase in interest income due to an increase of the average daily cash balance
available for investment.
Equity in income (loss) of investees was $(600,000) and $(1,846,000) for the
three and nine months ended September 30, 1998, respectively, compared to
$134,000 and $(1,937,000) in the same periods last year. In the three and nine
month period ended September 30, 1998, the equity in loss consists of the
Company's portion of Versicor's results. The increase in loss for the three
month period in 1998 as compared to 1997 is primarily due to the Company's
recognition of Versicor losses in 1998. The decrease in loss for the nine month
period in 1998 as compared to 1997 is due primarily to the Company no longer
recognizing equity losses related to HemaSure, offset by recognition of Versicor
losses in 1998.
Minority interest in subsidiary resulted in a decrease to consolidated net loss
of $390,000 and $538,000 for the three and nine months ended September 30, 1998,
respectively, compared to a decrease in net loss of $349,000 and $744,000 for
the same periods in 1997. The fluctuation in minority interest is the result of
BioSepra's fluctuation in earnings.
Liquidity and Capital Resources
Cash and cash equivalents plus marketable securities of Sepracor and its
subsidiaries, including BioSepra, totaled $228,753,000 at September 30, 1998,
compared to $92,560,000 at December 31, 1997. Cash and cash equivalents plus
marketable securities of Sepracor, excluding BioSepra, at September 30, 1998
were $225,955,000.
The net cash used in operating activities for the nine months ended September
30, 1998 was $41,841,000. The net cash used in operating activities includes a
net loss of $58,930,000 adjusted by net non-cash charges of $4,762,000. The
accounts payable and accrued expense balances increased a total of $15,650,000
from the December 31, 1997 balances, primarily due to increased research and
development accruals and accrued interest at Sepracor.
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In 1994, Sepracor, BioSepra and HemaSure entered into an equipment leasing
arrangement that provides for a total of up to $2,000,000 of financing to
Sepracor and its subsidiaries for the purpose of financing capital equipment in
the United States. All outstanding amounts are collateralized by the assets so
financed and are guaranteed by Sepracor. At September 30, 1998, there was
$455,000 outstanding under this credit facility relating to Sepracor, BioSepra
and HemaSure, of which $104,000, $77,000 and $274,000 represented Sepracor's,
BioSepra's and HemaSure's portion, respectively.
At September 30, 1998, Sepracor had guaranteed $469,000 of outstanding bank
borrowings of BioSepra S.A., BioSepra's wholly owned French subsidiary.
In 1994, Sepracor's wholly-owned subsidiary, Sepracor Canada Limited, entered
into two credit agreements with two Canadian provincial and federal business
development agencies for approximately $2,960,000 in term debt, of which
$2,590,000 is at an annual interest rate of 9.25% and $370,000 is interest free.
As of September 30, 1998, Sepracor Canada Limited had received approximately
$2,960,000 of such term debt, of which $1,814,000 was outstanding.
In December 1996, Sepracor and BioSepra amended their revolving credit agreement
with a commercial bank, which provides for borrowing of up to an aggregate of
$10,000,000 (the "Revolving Credit Agreement"), to remove Versicor as a party.
Under the amended Revolving Credit Agreement, BioSepra can borrow up to
$3,000,000. All borrowings are collateralized by certain assets of Sepracor and
BioSepra. The revolving credit agreement contains covenants relating to minimum
tangible capital base, minimum cash or cash equivalents, minimum liquidity ratio
and maximum leverage for Sepracor and BioSepra. Sepracor is a guarantor of all
outstanding borrowings. At September 30, 1998, there was $2,000,000 outstanding
under this agreement, relating to BioSepra. The annual interest rate on such
borrowings is at the lower of the prime rate or LIBOR plus 175 basis points.
On December 30, 1997, Sepracor entered into a put agreement with a commercial
bank pursuant to which Sepracor agreed to purchase $2,000,000 of indebtedness of
Versicor, a former wholly-owned subsidiary, in the event of a default by
Versicor under its loan agreement with the bank. In the event that the put right
is exercised by the bank, the bank will assign its security interest in the
fixed assets of Versicor to Sepracor. As of September 30, 1998, Versicor is in
compliance with all requirements under this agreement.
On February 10, 1998, Sepracor issued $189,475,000 of 6 1/4% Convertible
Subordinated Debentures due 2005 (the "6 1/4% Debentures"). The 6 1/4%
Debentures are convertible into Sepracor Common Stock, at the option of the
holder, at a price of $47.369 per share. The 6 1/4% Debentures bear interest at
6 1/4% payable semi-annually, commencing on August 15, 1998. The 6 1/4%
Debentures are not redeemable by the Company prior to February 18, 2001. The
Company may be required to repurchase the 6 1/4% Debentures at the option of the
holders in certain circumstances. As part of the sale of the 6 1/4% Debentures,
Sepracor incurred approximately $6,105,000 of offering costs, which are being
amortized over seven years, the term of the 6 1/4% Debentures. The net proceeds
to the Company after offering costs are $183,370,000. The Company intends to use
the proceeds from the sale of the 6 1/4% Debentures for the establishment and
pre-launch operations of the Company's respiratory sales force, marketing of
certain improved chemical entities, "ICEs", ongoing pre-clinical and clinical
trials, funding of other research and development programs, and working capital
and other general corporate purposes.
On October 30, 1998, the Company issued a Notice of Redemption for all of its 7%
Convertible Subordinated Debentures with a scheduled maturity in 2002,
aggregating $80,880,000 in principal amount. The Debentures will be redeemed on
December 1, 1998. The right to convert each $1,000 of principal amount of
Debentures into 50.813 shares of Sepracor Common Stock, based on the conversion
price of $19.68 per share, will expire at the close of business on November 16,
1998. In lieu of issuing any fractional shares in connection with any conversion
of the Debentures, the Company shall make payment in cash based on the last sale
price of Common Stock on the day prior to the day of conversion.
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In March 1995, Beckman acquired 312,500 shares of Sepracor's Series B
Redeemable Exchangeable Preferred Stock for $5,000,000. On March 26, 1998,
Sepracor and Beckman terminated their Stock Purchase Agreement. Sepracor paid
Beckman the original purchase price of the stock plus accrued dividends totaling
$6,850,000. In addition, BioSepra and Beckman amended their distribution
agreement whereby BioSepra granted a non-exclusive right to manufacture
instruments to Beckman, removed its obligation to manufacture instruments for
Beckman, and sold the discontinued instrument product inventory to Beckman for
$250,000.
Factors Affecting Future Operating Results
Certain of the information contained in this Quarterly Report, including
information with respect to the safety, efficacy and potential benefits of the
Company's ICEs under development and the scope of patent protection with respect
to these products and information with respect to the other plans and strategy
for the Company's business and the business of the subsidiaries and certain
affiliates of the Company, consists of forward-looking statements. Important
factors that could cause actual results to differ materially from the
forward-looking statements include the following:
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculation or
system failures. The Company is currently evaluating the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. In 1996, Sepracor began a comprehensive
project, fully supported by senior management, to determine the risks and
impacts of the Year 2000 ("Y2K") computer problem on the Company's ability to
operate into the next century. This plan took into account Sepracor's status as
a pharmaceutical research and development company, and its transition to a
fully-developed pharmaceutical company, with R&D, manufacturing, distribution,
and sales functions. The project relates to the following areas: (i) The
Company's internal systems (including information technology systems, such as
financial systems, and non-information technology systems, such as telephones
and facilities); and (ii) the readiness of the Company's vendors. As an emerging
pharmaceutical company, customers are not expected to play a critical role in
the Company's Y2K analysis. In addition, the Company's products under
development will not require Y2K compliance.
Department managers in every business area participate in the project, under the
leadership of a Y2K Project Manager. Sepracor began this project in 1996 so as
to incorporate Y2K readiness into its business strategy, and to identify and
replace non-compliant systems and procedures as part of its normal operating
plan and budget.
Sepracor's goal is to be fully Y2K ready, in respect to both its own systems and
those of its key vendors and strategic alliance partners, no later than June
1999.
To date, Sepracor has spent $145,000 to retrofit or replace computer-based
systems, which were identified as lacking compliance. This included the
migration of all of Sepracor's desktop computers to an operating status Sepracor
considers to be Y2K certified, through software upgrades or full system
replacements. Sepracor's key telecommunications systems were also upgraded
and/or replaced. These costs have been minimal due to the fact that Y2K
compliance has been a prerequisite to all new systems acquisitions and
maintenance upgrades.
The Company estimates approximately $400,000 in additional direct costs to
complete its Y2K certification efforts. This funding will be partially used to
contract with an independent testing firm to perform a platform and system
review of the Company's IT-based systems. At this time, the Company also plans
to contract with an independent auditor to perform a full review of its
compliance efforts, including contingency planning. This funding will also be
used to address any system or process replacement requirements that may be
identified as these reviews progress.
Areas that need further attention include vendor compliance certification, which
is in progress at this time, and contingency planning. Completion of the vendor
compliance certification is impacted by vendors' respective Y2K efforts. The
Company expects to have initial vendor responses completed by March 1999, and
will determine what follow-up is required at that time. The Company relies on
third party suppliers and service providers. If these or other third parties
experience Year 2000 failures or malfunctions, there could be an adverse impact
on the Company's ability to conduct operations, including conducting continued
pharmaceutical development efforts and manufacturing pharmaceutical products.
The Company does not currently have Year 2000 related contingency plans because
there are virtually no legacy systems at Sepracor and because very few potential
issues have surfaced to date. A more formal contingency planning effort will be
addressed in early 1999 if required.
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Sepracor's focus for the coming months will be to determine the exact level of
exposure with outside vendors/customers, and to complete independent
verification of internal compliance efforts. Based on the activities described
above, the Company does not believe that the Year 2000 problem will have a
material adverse effect on the Company's business or results of operations.
Other Factors
Since substantially all of Sepracor's ICEs are at the early stages of
development, there can be no assurance that these drugs will have improved
characteristics that provide greater benefits or fewer side effects than the
corresponding parent drugs or that research efforts undertaken by Sepracor will
lead to the discovery of future drugs with such improved characteristics. All of
the drugs under development will require significant additional research,
development, preclinical and/or clinical testing, regulatory approval and an
additional commitment of resources prior to their successful development and
commercialization. Sepracor has limited experience in conducting human clinical
trials and in manufacturing pharmaceutical products and has no experience in
marketing such products.
The products of Sepracor will be protected from unauthorized use by third
parties only to the extent that they are covered by valid and enforceable
patents or are maintained in confidence as trade secrets.
The Company currently has very limited sales and marketing experience. If the
Company is successful in developing and obtaining required FDA regulatory
approval for its products under development, it expects to license certain
products to large pharmaceutical companies and market and sell certain other
products through its direct specialty sales forces or through other
arrangements, including co-promotion arrangements. In anticipation of FDA
approval of Xopenex(TM) the Company has established a direct sales force to
market Xopenex(TM). Further, as the Company begins to enter into co-promotion
arrangements or market and sell additional products directly, the Company will
need to significantly expand its sales force. The ability of the Company to
realize significant revenues from its direct marketing and sales activities is
dependent on its ability to attract and retain qualified sales personnel in the
pharmaceutical industry. There can be no assurance, however, that the Company
will be able to attract and retain such qualified sales personnel, that it will
successfully expand its marketing and direct sales force in the future on a
timely basis, that the cost of establishing such marketing or sales force will
not exceed any product revenues, that its sales and marketing efforts will be
successful, or that the need to comply with FDA limits on drug product
marketing, including limits on claims of comparative safety or efficacy, will
not inhibit the effectiveness of such marketing. In addition, the Company will
need to enter into co-promotion arrangements with third parties where its own
direct sales force is neither well situated nor large enough to achieve maximum
penetration in the market. There can be no assurance that the Company will be
successful in entering into any such arrangements or that the terms of any such
arrangements will be favorable to the Company.
15
<PAGE>
Sepracor has filed patent applications covering compositions containing, and
methods of using, single isomer or active-metabolite forms of various compounds
for specific applications. The ability to commercialize successfully any ICEs
will depend to a significant degree upon the ability to obtain and maintain use
patents of sufficient scope to prevent third parties from developing similar or
competitive products. Most of the ICEs for which Sepracor has obtained use
patents or filed applications therefore are claimed by composition of matter or
other patents or patent applications held by third parties. In each such case,
unless subject to an existing license agreement, the ICEs may not be
commercialized until the expiration of corresponding third party
composition-of-matter or other patents. There can be no assurance that any
pending patent applications relating to the products of Sepracor will result in
patents being issued or that any such patents will afford protection against
competitors with similar technology. There may be pending or issued third-party
patents relating to the products of Sepracor and Sepracor may need to acquire
licenses to, or to contest the validity of, any such patents. It is likely that
significant funds would be required to defend any claim that Sepracor infringes
a third-party patent, and any such claim could adversely affect sales of the
challenged product of Sepracor until the claim is resolved. There can be no
assurance that any license required under any such patent would be made
available. Certain of the technology that may be used in the products of
Sepracor is not covered by any patent or patent application. In the absence of
patent protection, the business of Sepracor may be adversely affected by
competitors who independently develop substantially equivalent technology.
In July 1997, the United States Patent and Trademark Office (the "PTO") informed
Sepracor that it had declared an interference between Sepracor's previously
issued use patent on fexofenadine to treat allergic rhinitis and another similar
patent application of Sepracor, and the use patent application of HMRI on the
anti-histaminic effects of fexofenadine on hepatically impaired patients. The
primary objective of a patent interference, which can only be declared by the
PTO, is to determine which party was the first to invent any overlapping subject
matter claimed by more than one party. In the course of an interference, the
parties typically present evidence relating to their invention of the
overlapping subject matter. The PTO then reviews the evidence to determine which
party has the earliest legally sufficient date of invention, and, therefore, is
entitled to a patent claiming the overlapping subject matter. If Sepracor
prevails in the interference, Sepracor will retain all of its claims in its
issued patent. If, however, Sepracor loses the interference, HMRI will be issued
a U.S. patent containing its claims involved in the interference and may not be
obligated to pay Sepracor milestone or royalty payments pursuant to the terms of
the license agreement whereby Sepracor licensed its U.S. patent rights covering
fexofenadine to HMRI in 1993. Sepracor and HMRI have agreed to resolve the
interference by arbitration. The arbitrator has been selected and the
arbitration proceeding is ongoing. While it is possible that the arbitrator's
decision may be rendered during 1998, there can be no assurance that the
arbitrator's decision will be rendered at that time. Once rendered, the
arbitrator's decision must be submitted to the PTO for final approval. The
interference is ongoing and the Company is unable to predict its outcome.
16
<PAGE>
The marketing and sale of pharmaceutical products developed by Sepracor or its
development partners will require FDA approvals as well as similar approvals in
foreign countries. To obtain such approvals, the safety and efficacy of such
products must be demonstrated through clinical trials. There can be no assurance
that the results of such clinical trials will be consistent with the results
obtained in preclinical studies or that the results obtained in later phases of
clinical trials will be consistent with those obtained in earlier phases. There
also can be no assurance that any such products will be shown to be safe and
efficacious or that regulatory approval for any such products will be obtained
on a timely basis, if at all. The clinical trial and regulatory approval process
can take a number of years and require the expenditure of substantial resources.
With respect to certain of the Company's ICEs, the Company has been able to
reduce the number and duration of required clinical trials for its ICEs by
relying on preclinical and clinical toxicology data already on file with the FDA
with respect to the parent drug. Although Sepracor has to date been successful
in employing this strategy in connection with certain of its proposed products,
there can be no assurance that the FDA will permit the Company to utilize this
strategy in the future. Accordingly, the Company may be required to expend
significant resources to complete such preclinical and clinical studies for its
other ICEs, thereby significantly delaying regulatory approval. The failure of
the Company to obtain regulatory approval on a timely basis and unanticipated
significant expenditures on preclinical and clinical studies could adversely
affect the financial condition of the Company. While in July 1998 the FDA issued
to the Company a so-called "approvable" letter for Xopenex(TM), there can be no
assurance that the FDA will approve Xopenex(TM) or, if such approval is granted,
when it will be issued.
Sepracor's ability to commercialize certain drugs that it develops is likely to
depend in significant part on its ability to enter into collaborative agreements
with pharmaceutical companies to fund all or part of the costs to complete the
development of such drugs and to manufacture and/or market such drugs. To date,
the Company has entered into four such collaborative agreements. The Company has
licensed its U.S. patent rights to Allegra(TM) (fexofenadine) to HMRI and is
entitled to receive royalties on all U.S. sales of Allegra(TM) when the patent
on the parent drug expires. The Company, however, is currently party to an
interference involving Allegra(TM) which, if decided adversely to the Company,
could result in the loss of all or substantially all of the royalties to which
the Company is entitled under the license agreement on future sales of
Allegra(TM). The Company has also licensed its worldwide patent rights in DCL to
Schering-Plough, pursuant to which the Company is entitled to receive royalties
from Schering-Plough upon the initial sale of the product. The Company has
entered into two agreements with Janssen, one concerning joint development and
co-promotion of norastemizole and the other, a license of worldwide patent
rights for Norcisapride. In each of these collaborative arrangements, and to the
extent the Company enters into additional collaborative arrangements, the
Company is dependent upon the efforts of the collaboration partners and there
can be no assurance that such efforts will be successful. If any collaborators
were to breach or terminate their agreements with the Company or fail to perform
their obligations thereunder in a timely manner, the development and
commercialization of the products could be delayed or terminated. Any such delay
or termination could have a material, adverse effect on the Company's financial
condition and results of operations. Sepracor's failure or inability to perform
certain of its obligations under a collaborative agreement could result in a
reduction or loss of the benefits to which Sepracor is otherwise entitled under
such agreements. There can be no assurance that Sepracor will be able to enter
into any such agreements for ICEs in the future or that such collaborative
agreements, if any, will be entered into on terms favorable to the Company.
17
<PAGE>
The Company currently operates a current Good Manufacturing Practices ("cGMP")
compliant manufacturing plant which the Company believes has sufficient capacity
to support the production of its drugs in quantities required for its clinical
trials. While the Company believes it has the capability to scale up its
manufacturing processes and manufacture sufficient quantities of certain of the
products which may be approved for sale, without additional expansion, the
Company will not have the capability to manufacture in sufficient quantities all
of the products which may be approved for sale. Accordingly, the Company may be
required to expend additional resources to expand its current facility,
construct an additional facility or contract the production of these drugs to
third party manufacturers. There can be no assurance that the Company will have
the resources to expand its existing or develop additional facilities or
contract with manufacturers to produce its products in commercial quantities or
that any contract with third party manufacturers will be on favorable terms to
the Company. There can be no assurance that the Company will succeed in scaling
up its manufacturing processes or maintaining cGMP compliance. Failure in either
respect can lead to refusal by the FDA to approve marketing applications.
Failure to maintain cGMP compliance may also be the basis for action by the FDA
to withdraw approvals that have been granted and for other regulatory action.
The testing, manufacturing, marketing and sale of human health care products
entails an inherent risk of product liability and there can be no assurance that
product liability claims will not be asserted against Sepracor. Sepracor and its
subsidiaries maintain limited product liability insurance coverage for both the
clinical trials and commercialization of its products. There can be no assurance
that this coverage is adequate to cover potential liability claims and may not
be adequate as the Company develops additional products. As the Company receives
regulatory approval for products under development, there can be no assurance
that the Company will be able to obtain further product liability insurance on
acceptable terms, if at all. The Company's business, financial condition, cash
flows and results of operations could be materially adversely affected by the
assertion of a product liability claim.
The Company will require substantial additional funds for its research and
product development programs, operating expenses, the pursuit of regulatory
approvals and expansion of its production, sales and marketing capabilities.
Adequate funds for these purposes, whether through equity or debt financing,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or at terms acceptable to the Company.
Insufficient funds could require the Company to delay, scale back or eliminate
certain of its research and product development programs or to license to third
parties to commercialize products or technologies that the Company would
otherwise develop or commercialize itself. While the Company believes that its
available cash balances will be sufficient to meet its capital requirements into
2000, the Company may need to raise additional funds to support its long-term
product development and commercialization programs. There can be no assurance
that such capital will be available on favorable terms, if at all. The Company's
cash requirements may vary materially from those now planned because of results
of research and development, results of product testing, relationships with
customers, changes in focus and direction of the Company's research and
development programs, competitive and technological advances, patent
developments, the FDA regulatory process, the capital requirements of BioSepra
and Sepracor Canada Limited, and other factors.
18
<PAGE>
The Company has called for redemption all of its 7% Convertible Subordinated
Debentures due December 1, 2002 (the "7% Debentures"). 7% Debentures in
aggregate principal amount of $80,880,000 are currently outstanding. As an
alternative to redemption, holders of the 7% Debentures have the option until
5:00 p.m. Eastern Standard Time on November 16, 1998 (the "Final Conversion
Date"), of converting their 7% Debentures into Sepracor Common Stock, $.10 par
value per share (the "Sepracor Common Stock"), at a conversion price of $19.68
per share. Each $1,000 principal amount of the Debentures will be convertible
into 50.81 shares of Sepracor Common Stock. Cash will be paid in lieu of any
fractional shares of Sepracor Common Stock upon conversion. Based on the last
reported sale price of the Sepracor Common Stock on the Nasdaq National Market
System on October 29, 1998, the 50.81 shares have a current market value of
approximately $3,328.06, which substantially exceeds the redemption price. The
Company expects that all or substantially all of the holders of the 7%
Debentures will convert the 7% Debentures on or before the Final Conversion
Date. If the 7% Debentures are not converted by the holders either because of a
significant decline in the price of the Company's Common Stock or otherwise, the
Company would be required to redeem the 7% Debentures. Redemption of all or
substantially all of the 7% Debentures could have a material adverse effect on
the Company's ability to finance its planned operations.
Other factors that may affect the Company's future operating results include the
Company's fluctuations in quarterly operating results, its ability to meet its
debt service requirements and to compete successfully in the market.
Because of the foregoing factors, past financial results should not be relied
upon as an indication of future performance. The Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and it expects that its results of operations may fluctuate from
period to period in the future.
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PART II
OTHER INFORMATION
Item 1. Legal proceedings
In July 1997, the United States Patent and Trademark Office (the "PTO") informed
Sepracor that it had declared an interference between Sepracor's previously
issued method-of-use patent on fexofenadine to treat allergic rhinitis and
another similar patent application of Sepracor, and HMRI method-of-use patent
application on the anti-histaminic effects of fexofenadine on hepatically
impaired patents. The primary objective of a patent interference, which can only
be declared by the PTO, is to determine the first to invent any overlapping
subject matter claimed by more than one party. In the course of an interference,
the parties typically present evidence relating to their inventive activities as
to the overlapping subject matter. The PTO then reviews the evidence to
determine which party has the earliest legally sufficient inventive date, and,
therefore, is entitled to a patent claiming the overlapping subject matter.
If Sepracor prevails in the interference, Sepracor will retain all of its claims
in its issued patent. If, however, Sepracor loses the interference, HMRI will be
issued a U.S. patent containing its claims involved in the interference and may
not be obligated to pay Sepracor milestone or royalty payments pursuant to the
terms of the license agreement whereby Sepracor licensed its U.S. patent rights
covering fexofenadine to HMRI in 1993.
HemaSure is a defendant in two lawsuits brought by Pall Corporation ("Pall"). In
complaints filed in February 1996 and November 1996, Pall alleged that
HemaSure's manufacture, use and/or sale of the LeukoNet product infringes upon
three patents held by Pall.
On October 14, 1996, in connection with the first action concerning U.S. Patent
No. 5,451,321(the "'321 patent"), HemaSure filed for summary judgment of
noninfringement. Pall filed a cross motion for summary judgment of infringement
at the same time.
In October 1997, the U.S. District Court of the Eastern District of New York
("the court") granted in part Pall's summary judgment motion relating to the
'321 patent. HemaSure has agreed to terminate the manufacture, use, sale and
offer for sale of the filter, subject to the court's order. In April 1998, the
court granted to HemaSure its request to appeal the October 1997 decision. The
appeal of the October 1997 decision is currently pending before the U.S. Court
of Appeals for the Federal Circuit.
With respect to the second action concerning U.S. Patent No. 4,952,572 (the
"'572 patent"), HemaSure has answered the complaint stating that it does not
infringe any claim of the asserted patents and has filed for summary judgement
of noninfringement. Pall filed a cross motion for summary judgement of
infringement at the same time. Further, HemaSure has counterclaimed for
declaratory judgment of invalidity, noninfringement and unenforceability of the
'572 patent.
HemaSure believes, based on advice of its patent counsel, that a properly
informed court should conclude that the manufacture, use and/or sale by HemaSure
or its customers of the present LeukoNet product did not infringe any valid
enforceable claim of the two Pall patents. However, there can be no assurance
that HemaSure will prevail in the pending litigations, and an adverse outcome in
a patent infringement action would have a material adverse effect on HemaSure's
future business and operations.
20
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Items 2 - 5 None
Item 6. Exhibits and Reports on Form 8-K
Exhibit listed in the Exhibit Index which immediately precedes the exhibits
attached thereto.
a) Exhibits:
10.1 Material Contracts
27.1 Financial Data Schedule
27.2 Financial Data Schedule Restated
b) Reports on Form 8-K
1. Form 8-K filed with the Securities and Exchange Commission on July
28, 1998
2. Form 8-K filed with the Securities and Exchange Commission on
November 5, 1998
21
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEPRACOR INC.
Date: November 13, 1998 /s/ Timothy J. Barberich
------------------------
Timothy J. Barberich
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 /s/ Robert F. Scumaci
---------------------
Robert F. Scumaci
Senior Vice President
of Finance and Administration
(Principal Financial and
Accounting Officer)
22
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
NORCISAPRIDE DEVELOPMENT AND LICENSE AGREEMENT
THIS NORCISAPRIDE DEVELOPMENT AND LICENSE AGREEMENT
("Agreement") is made and entered into as of the 20th day of July, 1998 by and
between SEPRACOR INC. ("Sepracor"), a Delaware corporation which has offices at
111 Locke Drive, Suite 2, Marlborough, Massachusetts, and JANSSEN PHARMACEUTICA
N.V. ("Janssen"), a Belgian company which has offices at
Turnhoutseweg 30, B-2340 Beerse, Belgium.
WHEREAS, Sepracor and Janssen (the "Parties") each possesses
certain intellectual property rights relating to norcisapride;
WHEREAS, Janssen desires to engage in research, development,
marketing, and sale of pharmaceutical products involving a norcisapride
enantiomer as an active ingredient;
WHEREAS, Sepracor desires to grant, and Janssen desires to
acquire, a license under the intellectual property rights owned by Sepracor
relating to (+) norcisapride and (-) norcisapride; and
WHEREAS, the Parties have on 12 June 1998 executed a Letter
of Intent related to such license.
NOW, THEREFORE, in consideration of the premises and mutual
promises, terms and conditions hereinafter set forth, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties do hereby agree as follows:
1. DEFINITIONS
As used herein, the following terms shall have the following
definitions.
1.1 Affiliates. "Affiliates" of a Party hereto shall mean: (i)
companies the majority of whose voting shares are now or hereafter owned or
controlled directly or indirectly by such Party; (ii) companies which now or
hereafter own or control directly or indirectly a majority of the voting shares
of such Party; and (iii) companies a majority of whose voting shares are now or
hereafter owned or controlled directly or indirectly by any company mentioned in
(i) or (ii) of this definition. A company shall be considered an "Affiliate"
only for so long as such
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ownership or control exists. For the purposes of this definition, partnerships
or similar entities where a majority-in-interest of its partners or owners are a
Party hereto and/or Affiliates of such Party shall also be deemed to be
Affiliates of such Party. For the purpose hereof "majority" shall mean fifty
percent (50%) or more.
1.2 Business Day. "Business Day" shall mean a day on which
banks are open for business in both Marlborough, Massachusetts and Beerse,
Belgium.
1.3 Business Information. "Business Information" shall mean
all information relating to the business of a Party which is disclosed by that
Party to the other prior to the termination or expiration of this Agreement.
1.4 Combination Product. "Combination Product" shall mean a
Product which comprises two or more active ingredients at least one of which is
not Compound.
1.5 Compound. "Compound" shall mean the dextrorotatory (+)
optical isomer and/or the levorotatory (-) optical isomer of the compound
4-amino-5-chloro-N-(3-methoxy-4-piperidinyl)-2-methoxybenzamide, which optical
isomers are sometimes referred to as (+) norcisapride and (-) norcisapride,
respectively, and any salts, crystal polymorphs, clathrates, metabolites and
other non-covalent derivatives thereof.
1.6 Confidential Information. "Confidential Information" shall
mean those parts of Business Information and those parts of the Technical
Information, whether written or oral, which are (i) not publicly known and (ii)
annotated as "confidential" or "proprietary" either at the time of disclosure
or, in the case of an oral disclosure, by a written instrument provided by a
Party within thirty (30) days of its oral disclosure of such Business or
Technical Information to the other Party (the "receiving Party").
1.7 Dollars. "Dollars" or "$" shall mean lawful money of the
United States in immediately available funds.
1.8 Effective Date. "Effective Date" shall mean the latest of
(a) the date on which Sepracor executes this Agreement and (b) the date on which
Janssen executes this Agreement.
1.9 FDA. "FDA" shall mean the United States Food and Drug
Administration.
1.10 Improvement Patent. "Improvement Patent" shall mean any
patent or patent application (except Sepracor Basic Patent Rights described in
Section 1.22) and all continuations, divisions, extensions including
supplementary protection
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
certificates, reissues, foreign equivalents or counterparts, and other filings
thereof, containing claims that cover an enhancement in the formulation,
ingredients, preparation, presentation, means of delivery, dosage, packaging of,
manufacture, or any new or expanded therapeutic indication(s) for, Product
developed prior to or during the term of this Agreement by or on behalf of
Sepracor.
1.11 Janssen Net Invoice Price. "Janssen Net Invoice Price"
shall mean, on a country-by-country basis, the invoiced sale price of Janssen,
its Affiliates or its Permitted Sublicensees or assigns for Product to third
parties, ex works the manufacturing facility for such Product, excluding: [**].
Notwithstanding the first paragraph of this Section 1.11, [**];
provided, however, in no event shall [**].
1.12 Janssen Patent Rights. "Janssen Patent Rights" shall mean
the patents and patent applications listed on Exhibit 1.12 hereto, and all
continuations, divisions, extensions including supplementary protection
certificates, reissues, foreign equivalents or counterparts, and other filings
thereof.
1.13 Janssen Technical Information. "Janssen Technical
Information" shall mean Technical Information which is now in (or hereafter,
during the term of this Agreement, comes into) the possession of Janssen, which
it is allowed to disclose and which relates specifically to the manufacture,
sale, distribution, registration, use or testing of Compound or Product.
1.14 Licensed Technology. "Licensed Technology" shall mean the
Sepracor Patent Rights and Sepracor Technical Information.
1.15 NDA. "NDA" shall mean a New Drug Application for Product
in the United States and its equivalents outside the United States.
1.16 Net Sales. "Net Sales" of a Product shall mean the sum of
all Janssen Net Invoice Prices for such Product.
1.17 OTC Product. "OTC Product" shall mean: (a) within the
United States, any and all over-the-counter pharmaceutical products (including
Combination Products) comprising Compound as an active ingredient; and (b)
outside the United States, any and all products (including combination products)
comprising Compound as an active ingredient and of which the legal status is a
non-prescription medicine.
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1.18 Payment Period. "Payment Period" shall mean each of the
calendar quarters as defined in the Johnson & Johnson universal calendar, as
specified in Exhibit 1.18 hereto as amended by Janssen each subsequent year.
1.19 Permitted Sublicensee. "Permitted Sublicensee" shall mean
the holder of any sublicense granted pursuant to Section 2.2.
1.20 Product. "Product" shall mean OTC Product and Rx Product.
1.21 Rx Product. "Rx Product" shall mean any and all
prescription pharmaceutical products (including Combination Products) comprising
Compound as an active ingredient.
1.22 Sepracor Basic Patent Rights. "Sepracor Basic Patent
Rights" shall mean the patents and patent applications listed on Exhibit 1.22
hereto, and all continuations, divisions, extensions including supplementary
protection certificates, reissues, foreign equivalents or counterparts, and
other filings thereof.
1.23 Sepracor Patent Rights. "Sepracor Patent Rights" shall
mean Sepracor Basic Patent Rights and Improvement Patents.
1.24 Sepracor Technical Information. "Sepracor Technical
Information" shall mean Technical Information which is now in (or hereafter,
during the term of this Agreement, comes into) the possession of Sepracor, which
it is allowed to disclose and which relates specifically to the manufacture,
sale, distribution, registration, use or testing of Compound or Product.
1.25 Technical Information. "Technical Information" shall mean
all technical and scientific know-how and information, pre-clinical and clinical
trial results, computer programs, knowledge, technology, means, methods,
processes, practices, formulas, techniques, procedures, technical assistance,
designs, drawings, apparatus, written and oral representations of data,
specifications, assembly procedures, schematics and other valuable information
of whatever nature, whether confidential or not, and whether proprietary or not.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
1.26 Valid Claim. "Valid Claim" shall mean, with respect to a
country, a claim of any patent application or unexpired patent in such country
which shall not have been irrevocably and finally withdrawn, cancelled, or
disclaimed, nor held invalid by a court of competent jurisdiction or other
authorized tribunal in an unappealed or unappealable decision; provided,
however, that with respect to an Improvement Patent the term "Valid Claim" shall
[**]. For the purposes of royalty determination and payment under Article 4
hereof, [**]. For the purposes of this Section 1.26,[**].
A Valid Claim shall be deemed to cover a Product if such Valid Claim is
infringed by the manufacture, use, sale, or offer for sale of such Product
according to the established principles of patent claim interpretation in the
jurisdiction where such Valid Claim is applied. A Valid Claim that covers the
use of Compound of Product for an indication recited in the approved label for
Product shall be deemed to cover Product.
2. GRANT
Subject to all of the terms and conditions set forth in this Agreement:
2.1 Licensing of Rights.
(a) Sepracor hereby grants to Janssen an
exclusive (exclusive even as to Sepracor and its Affiliates) worldwide right and
license during the term of this Agreement to develop, make, have made, use, and
sell Compound and Product under the Sepracor Patent Rights and the Sepracor
Technical Information.
(b) As soon as practical after the Effective
Date, but in no event later than thirty (30) days after the Effective Date,
Sepracor shall provide to Janssen, at no additional cost to Janssen, all
Sepracor Technical Information.
2.2 Right to Sublicense.
(a) Janssen shall have the right to sublicense
any of the rights and licenses granted hereunder with Sepracor's prior written
consent
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<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
(such consent not to be unreasonably withheld), so long as Janssen remains
responsible to Sepracor under this Agreement and each such sublicensee confirms
in writing to Janssen that it agrees to be bound by all of the terms and
conditions contained in this Agreement. Notwithstanding the above, Janssen shall
have the right, without the consent of Sepracor, to grant sublicenses to
Affiliates.
(b) Notwithstanding Section 2.2(a) above, Product
may be sold by Janssen through its distributors or agents in any country.
2.3 No Rights by Implication. No rights or licenses with
respect to Licensed Technology are granted or deemed granted hereunder or in
connection herewith, other than those rights or licenses expressly granted in
this Agreement.
2.4 Government Filings. To the extent necessary, each of
Sepracor and Janssen shall cooperate with one another to the extent necessary in
the preparation of any submissions that may be required to be made to government
agencies with respect to the transactions contemplated by this Agreement. Each
Party shall be responsible for its own costs, expenses, and filing fees
associated with any such submissions.
3. JANSSEN'S OBLIGATIONS
3.1 Product Development, Registration, and
Commercialization.
(a) Janssen undertakes to use good faith reasonable
efforts, at its own expense, in conducting trials and applying for all
governmental approvals necessary to manufacture, sell, market, and distribute
Product, and to develop and commercialize Product, for gastroesophageal reflux
disease.
(b) Janssen shall have sole and exclusive
responsibility for and shall bear all costs and expenses related to development
of Product and all regulatory filings related thereto. Any and all data arising
out of studies performed by Janssen shall be owned by Janssen. During the term
of this Agreement, Janssen shall inform Sepracor of commencement and
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
completion of Phase II and Phase III clinical trials, NDA submission, NDA
filing, approvable and approval letters, and launch of Product. [**].
3.2 Ownership of NDAs. NDAs relating to Product shall be
owned by Janssen. As the owner of such NDAs, Janssen shall be responsible
at its own expense and discretion for maintaining such NDAs, ADE reporting, and
all other required reports and filings.
3.3 Progress Reports to Sepracor. During the term of this
Agreement, Janssen shall provide Sepracor with quarterly written reports,
including a meaningful summary of Product development (including summary results
from preclinical and clinical trials conducted on Product) and registration
progress under this Agreement.
3.4 Emesis, Irritable Bowel Disease, and Bulimia Indications.
Janssen shall conduct appropriate preclinical or clinical studies in accordance
with the timelines set forth in Exhibit 3.4 in order to assess the feasibility
of developing Product for emesis, irritable bowel disease, and bulimia. Janssen
shall disclose to Sepracor the results of the assessment, including but not
limited to study reports and market analyses relating to Janssen's assessment of
feasibility. If Janssen determines that Product has potential use in any of
these indications, Janssen will at its own cost either (i) conduct a proof of
principle study or studies in patients, or (ii) fund such study or studies to
be conducted by Sepracor. The final decisions to conduct the proof of principle
studies and to go to full clinical development following proof of principle will
be Janssen's.
3.5 Co-Promotion. Janssen may elect, at its own discretion, to
appoint a co-promotion partner in the United States to sell Rx Product to
pediatricians. If Janssen so elects, it shall negotiate in good faith a
co-promotion agreement with Sepracor, provided, however, that Sepracor shall
have, in Janssen's judgment which shall be subject to Section 11.3 below,
established an adequately trained sales force of an adequate professional level,
specialization and training consistent with industry standards and shall have
available a sufficient number of sales representatives to be in a position to
give the priorities to the promotion of Rx Product as established by Janssen.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
4. COMPENSATION PAYABLE TO SEPRACOR
4.1 Royalties.
(a) Janssen agrees to pay Sepracor, for the rights
granted to Janssen with respect to OTC Product pursuant to Section 2.1 above, a
royalty for OTC Product covered by a Valid Claim of a Sepracor Patent Right sold
by or on behalf of Janssen or its Affiliates, Permitted Sublicensees or assigns
in the amount of [**] for such OTC Product. Such royalty shall be payable on a
country by country basis commencing upon first sale of OTC Product in such
country by or on behalf of Janssen or its Affiliates, Permitted Sublicensees or
assigns.
(b) Each royalty for OTC Product described in Section
4.1(a) shall be payable for sales in a country until the date upon which the
last of the Sepracor Patent Rights expire, are abandoned, or are declared no
longer valid in such country; provided, however, that after expiration,
abandonment, or declaration of invalidity of Sepracor Basic Patent Rights in
such country, [**]. On a country-by-country basis, upon expiration of all
Sepracor Patent Rights, the license of the Licensed Technology shall be
considered fully paid up in such country and no royalties shall be payable to
Sepracor for sales of such OTC Product in such country of sale.
(c) Janssen agrees to pay Sepracor, for the rights
granted to Janssen with respect to Rx Products pursuant to Section 2.1 above, a
royalty for Rx Product covered by a Valid Claim of a Sepracor Patent Right sold
by or on behalf of Janssen or its Affiliates, Permitted Sublicensees or assigns.
Such royalty shall be payable commencing upon first sale in a country of Rx
Product by or on behalf of Janssen or its Affiliates, Permitted Sublicensees or
assigns. Such royalty for Rx Product shall be:
[**]
(d) Each royalty for Rx Product described in Section
4.1(c) shall be payable for sales in a country until the date upon which the
last of the Sepracor Patent Rights expire, are abandoned, or are declared no
longer valid in such country, provided, however, that after expiration,
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<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
abandonment, or declaration of invalidity of Sepracor Basic Patent Rights in
such country,[**].
On a country-by-country basis, upon expiration of all Sepracor Patent Rights,
the license of the Licensed Technology shall be considered fully paid up in such
country and no royalties shall be payable to Sepracor for sales of such Rx
Product in such country of sale.
(e) Once a royalty becomes payable on a Product in
accordance with this Section 4.1, no other royalty shall ever become payable on
such Product, regardless of whether and how such Product may subsequently be
sold. For the purposes of this Section 4.1, a sale shall be deemed to occur when
Janssen, its Affiliates or its Permitted Sublicensees or assigns sends an
invoice to an independent third party with respect to such sale.
(f) If Janssen pays a royalty on a Product pursuant
to this Section 4.1 which has been or is subsequently returned to Janssen, its
Affiliates or its Permitted Sublicensees or assigns or if Janssen pays such a
royalty on a Product, the sale of which is subsequently cancelled, and any money
paid to Janssen is returned to the buyer, the royalty so paid shall be deemed a
credit against royalties payable by Janssen for subsequent Payment Periods. If
no royalty amounts are payable for a subsequent Payment Period pursuant to this
Section 4.1, then the remaining balance of such credits shall be refunded to
Janssen within [**] after Sepracor's receipt of Janssen's report for such
Payment Period prepared pursuant to Section 4.3 below.
4.2 Timing of Sale. Sales of Product shall be deemed to occur
when they are invoiced, or if not invoiced, when Product is delivered to a third
party.
4.3 Contents of Janssen's Reports. Janssen shall deliver to
Sepracor within [**] after the end of each Payment Period, beginning with the
first Payment Period, a written report describing, for the applicable Payment
Period:
(a) the number and full description of each Product
sold by or on behalf of Janssen, its Affiliates and its Permitted Sublicensees
and assigns during such Payment Period;
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
(b) the Net Sales for Product; and
(c) the total royalty due under Section 4.1 above.
4.4 Payments Accompany Janssen's Reports. Each report for a
Payment Period required in Section 4.3 above shall be accompanied by full
payment to Sepracor of the royalties payable under Section 4.1 above.
4.5 Minimum Royalty.
(a) Minimum royalty requirements for the three
(3) full calendar years starting after two (2) full calendar years have elapsed
following first commercial launch of Rx Product in each of the United States,
Japan, the United Kingdom, Germany, Italy, and France, independently, shall be
calculated based on [**] for each such country to be submitted by Janssen to
Sepracor for the immediately succeeding calendar year. The minimum royalty for
each such country shall be [**] for such country multiplied by the average
Janssen Net Invoice Price for Rx Products in the relevant country multiplied by
the applicable royalty rate in Section 4.1.
(b) Janssen's failure to meet the minimum
royalty requirements of Section 4.5(a) above shall constitute a basis for
Sepracor to convert the exclusive rights and licenses granted to Janssen
hereunder with respect to Compound and Product to non-exclusive rights in any
such country where the minimum requirements where not reached; provided,
however, that before and in lieu of such decision by Sepracor, Janssen may opt
to pay the difference between the minimum royalty requirement and the royalty
payments actually due for any calendar year within [**] after having received
notification from Sepracor that the minimum royalty requirements were not met.
4.6 Payment of Compensation to Sepracor.
(a) All payments to Sepracor pursuant to this
Agreement shall be made by wire transfer, to Fleet Bank of Massachusetts, 75
State Street, Boston, Massachusetts 02109 (ABA #011000138) to Account No. [**]
or such other bank or account as Sepracor may from time to time designate in
writing. All such payments shall be made in Dollars.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
(b) Whenever any payment hereunder shall be
stated to be due on a day which is not a Business Day, such payment shall be
made on the immediately succeeding Business Day.
(c) Payments hereunder shall be considered to be
made as of the day on which they are received in Sepracor's designated bank or
account.
(d) If the Janssen Net Invoice Price of any
Product for a Payment Period is stated in a currency other than Dollars, then,
for the purpose of determining the amount of royalties payable pursuant to
Section 4.1 above such Janssen Net Invoice Price shall be converted into Dollars
using an average exchange rate between those two currencies during the Payment
Period for which such royalties become due, wherein such calculated average
exchange rate is calculated as the average of the exchange rates most recently
quoted in the Wall Street Journal in New York on or before each of the last days
for (i) each month according to the Johnson & Johnson universal calendar in the
Payment Period, and (ii) the last month according to the Johnson and Johnson
universal calendar in the immediately preceding Payment Period. If no such
exchange rates have been quoted in the Wall Street Journal in New York at any
time during the twelve (12) month period preceding the date on which such
royalties become due, then such Janssen Net Invoice Price shall be converted to
Dollars at the average exchange rate used by BankBoston during the Payment
Period.
(e) All payments due to Sepracor hereunder but
not paid by Janssen on the due date thereof shall bear interest (in Dollars) at
the rate which is the lesser of: (i) [**]; and (ii) the maximum lawful interest
rate permitted under applicable law. Such interest shall accrue on the balance
of unpaid amounts from time to time outstanding from the date on which portions
of such amounts become due and owing until payment thereof in full.
4.7 Books and Records; Audits.
(a) Janssen shall keep and maintain, and shall
cause its Affiliates, Permitted Sublicensees and assigns to keep and maintain,
complete and accurate records and books of account in sufficient detail and form
so as to enable amounts payable under Article 4 to be determined. Such records
and books of account shall be maintained for a period of no less than [**]
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
following the calendar year to which they pertain. Janssen shall permit such
records and books of account to be examined no more than once each calendar year
by an independent certified public accounting form selected by Sepracor and
approved by Janssen, which approval shall not unreasonably be withheld. Such
examination shall be during normal business hours, upon [**] prior written
notice to Janssen, and at Sepracor's expense unless the examination should
establish that Janssen's payment of such royalties for the period examined were
less than [**] of the royalties which should have been paid, in which case
Janssen shall be responsible for the reasonable expenses of such examination.
Audits related to Products sold as part of a bundle shall be conducted by an
independent certified public accounting form selected by Sepracor and approved
by Janssen, which approval shall not unreasonably be withheld which shall
disclose to Sepracor only (i) whether the calculated invoice price for such
Products is consistent with the terms of this Agreement and Janssen's normal
business practices for pharmaceutical products not licensed from a third party
and (ii) the specific details concerning any discrepancies.
(b) Prompt adjustment shall be made by Janssen
to compensate for any errors or omissions disclosed by such examinations.
Information obtained during the course of such an examination shall be kept
confidential by Sepracor and its agents, except to the extent necessary to
enforce Sepracor's rights hereunder.
4.8 Reports and Invoices Conclusively Correct. All reports,
invoices and payments not disputed as to correctness by Sepracor within [**]
after receipt thereof shall thereafter conclusively be deemed correct for all
purposes.
4.9 Third Party Licenses.
(a) Janssen shall have the sole discretion to
settle claims of third party patent infringement involving Compound or Product
and to obtain any patent licenses from a third party Janssen may deem necessary
or desirable for manufacture, use or sale of Product.
(b) If any third party patent is or would be
infringed by any and all practice of Sepracor Patent Rights, then [**];
provided however, that in no event [**].
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
(c) Except as set forth in Section 4.9(b) above,
if Janssen elects to acquire rights under other third party patents which are or
would be infringed by use or sale of Product and which Janssen determines are
necessary or desirable for commercial success of Product, except for patents
relating to controlled release technology, then [**], provided however,
that in no event [**].
(d) Except as set forth in Section 4.9(b) above,
if Janssen elects to acquire rights under third party patents covering
controlled release technology which are or would be infringed by manufacture,
use or sale of Product, then [**] provided however, that in no event [**],
and further provided that in no event [**].
(e) Notwithstanding anything to the contrary in
this Section 4.9, in no event shall royalty payments to Sepracor be [**]
pursuant to Subsections (b), (c), and (d) above.
5. INTELLECTUAL PROPERTY RIGHTS
5.1 Filing, Prosecution and Maintenance of Patents
(a) Sepracor shall at its own cost diligently
file, prosecute and maintain Sepracor Patent Rights including without
limitation, any Improvement Patent. Sepracor shall supply Janssen with a copy of
the applications as filed, together with notice of its filing date and serial
number. Sepracor shall keep Janssen advised of the status of pending patent
applications (including, without limitation, the grant of any Sepracor Patent
Rights), and shall provide copies of any substantive papers submitted in the
course of filing, prosecution and maintenance of such patent filings in the
United States, Japan, the United Kingdom, Germany, Italy, and France. Janssen
shall treat all information, papers, and other materials provided by Sepracor
pursuant to this Section 5.1 in accordance with the confidentiality provisions
of this Agreement.
5.2 Option of Janssen to Prosecute and Maintain Patents.
Sepracor shall give [**] notice to Janssen of any desire to cease prosecution or
maintenance of a particular Sepracor Patent Right and, in such case, shall
permit Janssen, at its sole discretion, to continue prosecution or maintenance
at its own expense. If Janssen elects to continue prosecution or maintenance,
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Sepracor shall execute such documents and perform such acts, at Janssen's
expense, as may be reasonably necessary to effect an assignment of such Sepracor
Patent Right to Janssen. Any such assignment shall be completed in a timely
manner to allow Janssen to continue such prosecution or maintenance. Any patents
or patent applications so assigned shall not be considered Sepracor Patent
Rights and therefore no royalties are due to Sepracor under such patent or
patent application.
5.3 Improvement Patents and Other Intellectual Property
Rights. All right, title, and interest in any Sepracor Technical Information
(including but not limited to inventions, whether patentable or not) shall vest
in Sepracor. Sepracor may apply, at its own expense and discretion, for
appropriate patent and other intellectual property right registrations of such
Sepracor Technical Information in any and all jurisdictions.
5.4 Patent Term Restoration. The Parties hereto shall
cooperate with each other in obtaining patent term restoration or its equivalent
(including but not limited to supplementary protection certificates) for Product
where applicable to Janssen Patent Rights or Sepracor Patent Rights. In the
event that elections with respect to obtaining such patent term restoration are
to be made, Janssen shall have the right to make the election and Sepracor
agrees to abide by such election.
5.5 Studies in Support of Sepracor Patent Rights. Sepracor
shall have the right to perform studies using Compound and disclose the results
of such studies for the purpose of filing, prosecuting, and supporting Sepracor
Patent Rights with Janssen's prior written approval, which approval shall not
unreasonably be withheld.
6. CONFIDENTIAL INFORMATION
6.1 Confidentiality Maintained. Each Party hereto has a
proprietary interest in its own Confidential Information. [**], all disclosures
of the Confidential Information of a Party (the "disclosing Party") to the other
Party (the "receiving Party"), its agents and employees shall be held in
confidence by such receiving Party, which shall disclose such Confidential
Information only to those of its or its Affiliates agents and employees to whom
it is necessary in order to properly carry out their duties as limited by the
terms and conditions hereof. [**], the receiving Party shall not use such
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Confidential Information except for the purposes of exercising its rights and
carrying out its duties hereunder or except to the extent the licenses granted
under this Agreement have been fully paid up in accordance with Article 4 of
this Agreement. This Section 6.1 shall also apply to any consultants or
subcontractors during and after the term of this Agreement, that the receiving
Party may engage in connection with its obligations under this Agreement.
Notwithstanding the foregoing, a Party shall be able to use and disclose
Confidential Information of the other Party to the extent reasonably necessary
to exploit the rights granted to that Party pursuant to this Agreement.
6.2 Liability for Disclosure. Notwithstanding anything
contained in this Agreement to the contrary, obligations of confidentiality
shall not apply when and to the extent that Confidential Information:
(a) was in the public domain at the time it was
disclosed by the disclosing Party to the receiving Party; or
(b) was known to the receiving Party prior to
the time of disclosure by the disclosing Party to the receiving Party and can be
so demonstrated; or
(c) is disclosed inadvertently despite the
exercise of the same degree of care which the receiving Party takes to preserve
and safeguard its own proprietary confidential information; or
(d) was independently developed by the receiving
Party and is so demonstrated promptly upon receipt of the documentation
and technology by the receiving Party; or
(e) becomes known to the receiving Party from a
source other than the disclosing Party without breach of an obligation of
confidentiality owed to the disclosing Party and can be so demonstrated; or
(f) must be disclosed pursuant to a court order
or as otherwise required by law, order, or regulation.
[**]
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<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
7. PROTECTION OF LICENSED TECHNOLOGY; LIMITATIONS ON LIABILITY
7.1 Infringements of Licensed Technology.
(a) Janssen may take and control, but is not
required to take and control, at its own expense any and all actions which are
necessary to terminate infringements of any part of the Janssen Patent Rights.
Any monetary recoveries received by Janssen shall be retained by Janssen.
(b) In the event that either Janssen or Sepracor
becomes aware of any infringement involving Compound or Product of any issued
patent within the Sepracor Patent Rights, it will notify the other Party in
writing to that effect. Any such notice shall include evidence to support an
allegation of infringement by such third party. Sepracor shall use reasonable
efforts to obtain a discontinuance of such infringement or bring suit against
the third party infringer. Sepracor shall bear all the costs and expenses of any
suit brought by it. Janssen will reasonably cooperate with Sepracor in any such
suit or action and shall have the right to consult with Sepracor and be
represented by its own counsel at its own expense Any recovery or damages
derived from such a suit shall be retained by Sepracor.
If Sepracor does not initiate such action [**], then Janssen
may initiate and control action or bring suit against the third party infringer.
Janssen shall bear all the costs and expenses of any such action or suit,
provided, however, that Janssen shall [**] under this Agreement; and further
provided, however, that in no event [**]. Any recovery or damages derived from
such an action or suit shall be used first to reimburse Janssen for its
documented out-of-pocket legal costs and expenses relating to the action or
suit, then to reimburse Sepracor for the royalty amounts credited by Janssen
toward the costs and expenses of the action or suit, with any remaining amounts
to be shared equally by the Parties.
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<PAGE>
8. INDEMNITY AND LIMITATION OF LIABILITY
8.1 Indemnity.
(a) Janssen shall defend and indemnify against,
and hold Sepracor and its Affiliates, employees, directors, officers and agents
harmless from, any loss, cost, liability or expense (including court costs and
reasonable fees of attorneys and other professionals) incurred from a claim
arising or alleged to arise out of the manufacture, use, distribution or sale by
Janssen, its Affiliates and its Permitted Sublicensees and assigns of any
Product anywhere in the world (except as specifically provided in Section 4.9
above); provided, however, that: (i) Sepracor shall provide notice promptly to
Janssen of any such actual or threatened claim of which Sepracor becomes aware
and reasonable cooperation, information, and assistance in connection therewith;
(ii) Janssen shall have sole control and authority with respect to the defense,
settlement, or compromise thereof; and (iii) this Section 8.1 shall not apply to
the extent that any such claim is caused directly or indirectly by Sepracor's
negligence or willful misconduct.
(b) Sepracor shall defend and indemnify against,
and hold Janssen and its Affiliates, employees, directors, officers and agents
harmless from, any loss, cost, liability or expense (including court costs and
reasonable fees of attorneys and other professionals) caused directly or
indirectly by Sepracor's negligence or willful misconduct; provided, however,
that (i) Janssen shall provide notice promptly to Sepracor of any such actual or
threatened claim of which Janssen becomes aware and reasonable cooperation,
information, and assistance in connection therewith; and (ii) Sepracor shall
have sole control and authority with respect to the defense, settlement, or
compromise thereof.
(c) In the event a claim is based partially on
an indemnified claim described in Section 8.1 (a) or (b) above and partially on
a non-indemnified claim, or in the event a claim is based partially on an
indemnified claim described in Section 8.1(a) above and partially on an
indemnified claim described in Section 8.1(b) above, any payments and reasonable
attorney fees incurred in connection with such claims are to be apportioned
between the Parties in accordance with the degree of cause attributable to each
Party.
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<PAGE>
(d) Janssen has the right, but not the
obligation, to defend any suit brought against it by any third party for
infringement of a patent of such third party in connection with the development,
manufacture, use, or sale of Product, subject to the provisions of Section 4.9
should such third party patent be licensed by Janssen.
8.3 Use of Name in Suit. Where, in the reasonable judgement of
Sepracor or Janssen it is necessary to use the other Party's name to prosecute
or defend an action pursuant to this Article 8, Sepracor and Janssen agree to
allow the other Party to so use its name; provided, however, that the other
Party agrees to hold Sepracor or Janssen, as the case may be, harmless against
any award of court costs or damages resulting solely from the use of Sepracor's
or Janssen's name by such other Party in such action.
8.4 Limitations on Liability. IN NO EVENT SHALL EITHER
PARTY BE LIABLE TO THE OTHER PARTY FOR SPECIAL, INCIDENTAL,
CONSEQUENTIAL OR EXEMPLARY DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF
PROFITS OR LOSS OF USE DAMAGES) ARISING OUT OF THE MANUFACTURE, SALE OR
SUPPLYING OF PRODUCT, EVEN IF SUCH PARTY HAD BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES OR LOSSES.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS
9.1 Representations and Warranties of Both Parties. Each
of Sepracor and Janssen hereby represents, warrants and covenants to the other
as follows:
(a) It has full right, power and authority to
enter into this Agreement and there is nothing which would prevent it from
performing its obligations under the terms and conditions imposed on it by this
Agreement.
(b) This Agreement has been duly authorized by
all necessary corporate and stockholder action and constitutes a valid and
binding obligation, enforceable in accordance with the terms hereof.
(c) There is no provision in its articles of
incorporation, by-laws or equivalent governing documents which would be
contravened by the execution, delivery or performance by it of this Agreement.
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<PAGE>
(d) There is no action or proceeding pending or
in so far as it knows or ought to know threatened against it before any court,
administrative agency or other tribunal which might have a material adverse
effect on its business or condition, financial or otherwise.
(e) It knows of no third party patent,
trademark, copyright, trade secret or other intellectual property right that
would be infringed by manufacture, use, or sale of Product as contemplated by
this Agreement.
(f) Neither its execution nor its delivery of
this Agreement, nor its fulfillment of or compliance with the terms and
provisions hereof, shall contravene any provision of the laws of any
jurisdiction, including, without limitation, any statute, rule, regulation,
judgment, decree, order, franchise or permit applicable to it.
(g) It has been represented by legal counsel in
connection with this Agreement and acknowledges that it has participated in the
drafting hereof. In interpreting and applying the terms and provisions of this
Agreement, the parties agree that no presumption shall exist or be implied
against the party which drafted such terms and provisions.
9.2 Representations and Warranties of Sepracor. Sepracor
represents and warrants that:
(a) It has not previously granted, and will not
grant to any third party during the term of this Agreement, any rights, licenses
or options with respect to Product, Sepracor Patent Rights or Sepracor Technical
Information that are inconsistent with the rights and licenses granted to
Janssen herein.
(b) It is a corporation, duly organized and
validly existing and in good standing under the laws of Delaware, and is duly
qualified and authorized to do business wherever the nature of its activities or
properties requires such qualification or authorization.
(c) Except as provided in Exhibit 9.2(c) hereto,
no consent of any trustee or holder of any of its indebtedness or any other
third party is or shall be required as a condition to the validity of this
Agreement.
(d) It is the sole and exclusive owner of the
Sepracor Patent Rights and Sepracor Technical Information, and no other person,
corporate or other private entity, or governmental entity or subdivision
thereof, has or shall have any claim of ownership therein.
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<PAGE>
9.3 Representations and Warranties of Janssen. Janssen
represents and warrants that:
(a) It is a corporation, duly organized and
validly existing and in good standing under the laws of Belgium, and is duly
qualified and authorized to do business wherever the nature of its activities or
properties requires such qualification or authorization.
(b) No consent of any trustee or holder of any
of its indebtedness or any other third party is or shall be required as a
condition to the validity of this Agreement.
9.4 Limitation of Warranty. NEITHER PARTY MAKES ANY
EXPRESS OR IMPLIED WARRANTY, STATUTORY OR OTHERWISE, CONCERNING THE LICENSED
TECHNOLOGY OR ANY CONFIDENTIAL INFORMATION COMMUNICATED TO THE OTHER PARTY
HERETO, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE, OR ANY WARRANTY AS TO QUALITY OR THE USEFULNESS OF THE LICENSED
TECHNOLOGY FOR ITS INTENDED PURPOSE.
Janssen makes no representation or warranty that development and
marketing of Product shall be the exclusive means by which Janssen will
participate in development, manufacturing, use, and sale of pharmaceutical
products for treatment and prevention of upper gastrointestinal disorders.
Subject to the terms of this Agreement, all decisions concerning marketing and
sales of Product including, without limitation, the design, sale, price and
promotion of Products covered under this Agreement shall be within the sole
discretion of Janssen. Sepracor realizes that Janssen already sells products for
the treatment of upper gastrointestinal disorders and acknowledges that Janssen
may now or in the future develop or acquire products for the treatment and
prevention of upper gastrointestinal disorders such as gastroesophageal reflux
disease, dyspepsia, gastroparesis, and gastritis, irritable bowel syndrome,
emesis and bulimia.
10. TERMINATION OR EXPIRATION
10.1 Term of Agreement. Unless it is terminated earlier
pursuant to this Article 10, this Agreement shall continue in full force and
effect until the last of the obligations of Janssen to pay royalties to Sepracor
pursuant to Section 4.1 is expired. The term of this Agreement shall be from
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<PAGE>
the Effective Date to the date of termination or expiration of this Agreement,
as the case may be.
10.2 Termination by Janssen.
(a) This Agreement may be terminated by Janssen
for cause by giving written notice of termination to Sepracor, such termination
being immediately effective upon the giving of such notice of termination, after
the occurrence of any of the following events:
(i) a material breach or material
default as to any obligation hereunder by Sepracor and the failure of Sepracor
cure such material breach or material default within the time specified in
Section 10.7; or
(ii) the filing of a petition in
bankruptcy, insolvency or reorganization against or by Sepracor, or Sepracor
becoming subject to a composition for creditors, whether by law or agreement, or
Sepracor going into receivership or otherwise becoming insolvent.
(b) This Agreement may be terminated by Janssen
at any time without cause by giving written notice of termination to Sepracor,
such termination becoming effective ninety (90) days after the giving of such
notice. Upon such termination all rights and licenses granted to Janssen
hereunder shall be immediately revoked, and Janssen shall have no right to any
continued use of Sepracor Patent Rights or Technical Information of Sepracor,
and Sepracor shall have (1) the right to read and reference the preclinical
toxicology section of the cisapride NDA and any Janssen Technical Information
(excluding any business related information including but not limited to market
analyses), and (2) a worldwide royalty bearing exclusive (exclusive even as
Janssen and its Affiliates) right and license under Janssen Patent Rights and
Janssen Technical Information (excluding any business related information
including but not limited to market analyses) for the purpose of making, using
and selling Compound and Product for emesis or bulimia, or both, wherein the
terms of Article 4 and other applicable terms of this Agreement shall apply
mutatis mutandis; furthermore, on a country by country basis, for the purpose of
developing Product for any other indication for launch upon or after expiration
of Janssen Patent Rights, and for making, using, and selling Product thereafter,
Sepracor shall also have the right to read and reference the preclinical
toxicology section of the cisapride NDA and a worldwide royalty free right and
license under any Janssen Technical Information (excluding any business related
information including but not limited to market analyses). If Sepracor exercises
this right to read and reference the preclinical toxicology section of the
cisapride NDA in connection
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<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
with a regulatory submission for a Product for an indication other than emesis
or bulimia, [**].
10.3 Termination by Sepracor.
(a) This Agreement may be terminated by Sepracor
for cause by giving written notice of termination to Janssen, such termination
being immediately effective upon the giving of such notice of termination, after
the occurrence of any of the following events:
(i) a material breach or material
default as to any obligation hereunder by Janssen and the failure of Janssen to
cure such material breach or material default within the time specified in
Section 10.7; or
(ii) the filing of a petition in
bankruptcy, insolvency or reorganization against or by Janssen, or Janssen
becoming subject to a composition for creditors, whether by law or agreement, or
Janssen going into receivership or otherwise becoming insolvent.
Upon termination pursuant to Section 10.3(a)(i), all rights and licenses granted
to Janssen hereunder shall be immediately revoked, and Janssen shall have no
right to any continued use of Sepracor Patent Rights or Technical Information of
Sepracor, and Sepracor shall have(1) the right to read and reference the
preclinical toxicology section of the cisapride NDA and any Janssen Technical
Information (excluding any business related information including but not
limited to market analyses), and (2) a worldwide royalty bearing exclusive
(exclusive even as Janssen and its Affiliates) right and license under Janssen
Patent Rights and Janssen Technical Information (excluding any business related
information including but not limited to market analyses) for the purpose of
making, using and selling Compound and Product for emesis or bulimia, or both,
wherein the terms of Article 4 and other applicable terms of this Agreement
shall apply mutatis mutandis; furthermore, on a country by country basis, for
the purpose of developing Product for any other indication for launch upon or
after expiration of Janssen Patent Rights, and for making, using, and selling
Product thereafter, Sepracor shall also have the right to read and reference the
preclinical toxicology section of the cisapride NDA and a worldwide royalty free
right and license under any Janssen Technical Information (excluding any
business related information including but not limited to market analyses). If
Sepracor exercises this right to read and reference the preclinical toxicology
section of the cisapride NDA in connection
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<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
with a regulatory submission for a Product for an indication other than emesis
or bulimia,[**].
(b) This Agreement may be terminated by Sepracor
if Janssen ceases development of Product (as evidenced by Janssen's quarterly
reports submitted to Sepracor pursuant to Section 3.3) by giving written notice
of termination to Janssen, such termination becoming effective [**] after the
giving of such notice. Upon such termination all rights and licenses granted to
Janssen hereunder shall be immediately revoked, and Janssen shall have no right
to any continued use of Sepracor Patent Rights or Technical Information of
Sepracor, and Sepracor shall have (1) the right to read and reference the
preclinical toxicology section of the cisapride NDA and any Janssen Technical
Information (excluding any business related information including but not
limited to market analyses), and (2) a worldwide royalty bearing exclusive
(exclusive even as Janssen and its Affiliates) right and license under Janssen
Patent Rights and Janssen Technical Information (excluding any business related
information including but not limited to market analyses) for the purpose of
making, using and selling Compound and Product for emesis or bulimia, or both,
wherein the terms of Article 4 and other applicable terms of this Agreement
shall apply mutatis mutandis; furthermore, on a country by country basis, for
the purpose of developing Product for any other indication for launch upon or
after expiration of Janssen Patent Rights, and for making, using, and selling
Product thereafter, Sepracor shall also have the right to read and reference the
preclinical toxicology section of the cisapride NDA and a worldwide royalty free
right and license under any Janssen Technical Information (excluding any
business related information including but not limited to market analyses). If
Sepracor exercises this right to read and reference the preclinical toxicology
section of the cisapride NDA in connection with a regulatory submission for a
Product for an indication other than emesis or bulimia,[**].
(c) Nothing in this Agreement precludes Janssen
from contesting validity of Sepracor Patent Rights. Contesting validity of
Sepracor Patent rights by Janssen shall not be deemed to be a breach of this
Agreement by Janssen. Assertion by Janssen or its Affiliates, Permitted
Sublicensees or assigns, of the invalidity of the of any claim of Sepracor
Patent Rights, if coupled with or followed by (i) withholding, or notice of
intent to withhold, or denial of obligation to pay, royalties otherwise payable
under this Agreement in respect of such claim, or (ii) initiation or
participation in an action before a court of competent jurisdiction or other
authorized tribunal
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<PAGE>
challenging or denying the validity of such claim in reference to the operations
of Janssen or its Affiliates, Permitted Sublicensees or assigns under this
Agreement, shall, at Sepracor's option, give Sepracor the right to terminate,
as of the earliest provable date of such withholding, notice, initiation, or
participation, Janssen's license in respect of such claim and Janssen's
obligation under this Agreement to pay royalties in respect to the future
operations of Janssen or its Affiliates, Permitted Sublicensees or assigns under
such claim (but not under any other claim). For the avoidance of any doubt, the
parties expressly agree that in the event of termination by Sepracor pursuant to
this Section 10.3(c), Sepracor shall not be entitled to the grant of the
licenses recited in Sections 10.2(b), 10.3(a), or 10.3(b).
10.4 After Termination.
(a) If this Agreement is rejected by a trustee
(including without limitation by Sepracor as debtor in possession) in a
bankruptcy proceeding with respect to Sepracor, then Sepracor and Janssen agree
that Janssen, as a licensee of the rights granted under this Agreement, shall
retain and may fully exercise all of its rights and elections under the relevant
bankruptcy code. Sepracor agrees during the term of this Agreement to maintain
and create current copies or, if not amenable to copying, detailed descriptions
or other appropriate embodiments of the Licensed Technology hereunder. If a case
is commenced by or against Sepracor under the relevant bankruptcy code, then,
unless and until this Agreement is rejected as provided in the relevant
bankruptcy code, Sepracor (in any capacity, including debtor-in-possession) and
its successors and assigns (including, without limitation, a bankruptcy trustee)
shall either perform all of the obligations provided in this Agreement to be
performed by Sepracor or provide to Janssen all Licensed Technology (including
all embodiments thereof) held by Sepracor and such successors and assigns, as
Janssen may elect in a written request, immediately upon such request. If a
bankruptcy case is commenced by or against Sepracor, this Agreement is rejected
as provided in the relevant bankruptcy code and Janssen elects to retain the
rights hereunder as provided in the relevant bankruptcy code, then Sepracor (in
any capacity, including debtor-in-possession) and its successors and assigns
(including without limitation, a bankruptcy trustee) shall provide to Janssen
all Licensed Technology (including all embodiments thereof) held by Sepracor and
such successors and assigns immediately upon Janssen's written request therefor.
All rights, powers and remedies of Janssen 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, the
relevant bankruptcy code) in the event of commencement of a bankruptcy case by
or against Sepracor. Janssen, in addition to the rights, powers and remedies
expressly provided herein, shall be entitled to exercise all other such
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<PAGE>
rights and powers and resort to all other such remedies as may now or hereafter
exist at law or in equity (including the relevant bankruptcy code) in such
event.
(b) In the event that this Agreement is
terminated by Janssen in accordance with Section 10.2(a)(i) above based on a
material breach or material default by Sepracor, then all rights and licenses
granted by Sepracor to Janssen under this Agreement shall become perpetual,
worldwide, royalty-free, and fully paid up, effective immediately upon such
termination.
(c) In the event that this Agreement is
terminated by Sepracor in accordance with Sections 10.3(a)(i) above based on a
material breach or material default by Janssen, then all rights and licenses
granted to Janssen under this Agreement shall cease, effective immediately upon
such termination. If this Agreement is rejected by a trustee (including without
limitation by Janssen as debtor in possession) in a bankruptcy proceeding with
respect to Janssen, then Sepracor and Janssen agree that Sepracor, as a licensee
of the rights granted under this Agreement, shall retain and may fully exercise
all of its rights and elections under the relevant bankruptcy code. To the
extent consistent with Belgium's bankruptcy code, if a case is commenced by or
against Janssen under the relevant bankruptcy code, then, unless and until this
Agreement is rejected as provided in the relevant bankruptcy code, Janssen (in
any capacity, including debtor-in-possession) and its successors and assigns
(including, without limitation, a bankruptcy trustee) shall either perform all
of the obligations provided in this Agreement to be performed by Janssen as
Sepracor may elect in a written request, immediately upon such request. All
rights, powers and remedies of Sepracor 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, the
relevant bankruptcy code) in the event of commencement of a bankruptcy case by
or against Janssen. Sepracor, 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 (including the relevant bankruptcy code) in such event.
(d) The Parties hereto agree that, once this
Agreement is terminated for material breach or material default, the breaching
or defaulting Party shall, at its own expense, return to the disclosing Party
all of its Confidential Information as soon as practicable after the date of
such termination or expiration, including, but not limited to, original
documents, drawings, computer diskettes, models, samples, notes, reports,
notebooks, letters, manuals, prints, memoranda and any copies thereof, which
have been received by the receiving Party. All Confidential Information of the
disclosing
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
Party shall remain the exclusive property of the disclosing Party
during the term of this Agreement and thereafter.
10.5 Payment Obligations Continue. Upon termination or
expiration of this Agreement, nothing shall be construed to release either Party
from its obligations to pay the other Party any and all fees, royalties or other
amounts accrued or irrevocably obligated but unpaid hereunder prior to the date
of such termination or expiration.
10.6 No Damages for Termination. The Parties hereto agree that
if either Party terminates the other Party pursuant to this Article 10, then the
terminating Party shall not be liable for damages or injuries suffered by the
other Party as a result of that termination.
10.7 Cure Period For Material Breach or Material Default. A
Party receiving a written notice of termination for a material breach or
material default shall have the following period within which to effect a cure
therefor:
(a) for any such breach or default relating to
an amount(s) payable to the other Party,[**] after receiving the written notice
of termination from the other Party; or
(b) for any other such breach or default,[**]
after receiving the written notice of termination from the other Party.
10.8 Materiality Dispute. If either Party disputes the
materiality of a breach or default, then the relevant period for cure of such
breach or default shall be stayed until resolution of the dispute pursuant to
Section 11.3.
11. MISCELLANEOUS
11.1 Assignments and Change of Control. For the purposes of
this Section 11.1, "Control" shall mean the holding and/or possession of a
beneficial interest in and/or the ability to exercise the voting rights
applicable to shares, stocks, or other securities of a Party (whether directly
or by means of holding such interests in one or more legal entities) which
confer in aggregate on the holders thereof fifty percent (50%) or more of the
total voting
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rights exercisable at general meetings of that Party or with respect to all or
substantially all matters affecting that Party.
(a) Except as provided in Section 2.2 above,
this Agreement and any and all of the rights and obligations of either Party
hereunder shall not be assigned, delegated, sublicensed, sold, transferred or
otherwise disposed of, by operation of law or otherwise, without the prior
written consent of the other Party; provided, however, that either Party may
assign, delegate, sublicense, sell, transfer or otherwise dispose of
(collectively "transfer") rights and obligations hereunder without such prior
written consent to: (i) any of its respective Affiliates; or (ii) a third party
which acquires Control of or all or substantially all of the assets or stock of
such Party through purchase, merger, consolidation or otherwise. This Agreement
shall be binding upon, and inure to the benefit of, Sepracor and Janssen and
their respective permitted successors and assigns, to the extent such
assignments are in accordance with this Section 11.1(a); provided, however, that
with respect to Section 3.5, if a third party acquires Control of or all or
substantially all of the assets or stock of Sepracor through purchase, merger,
consolidation or otherwise, then Janssen shall elect in its sole discretion to
negotiate under Section 3.5 with such third party.
11.2 Governing Law. This Agreement shall be governed,
interpreted and construed in accordance with the laws of the State of Delaware,
applicable to agreements made and to be fully performed therein, without giving
effect to its principles of conflict of laws.
11.3 Dispute Resolution. Any dispute, claim or controversy
arising from or related in any way to this agreement or the interpretation,
application, breach, termination or validity thereof, including any claim of
inducement of this agreement by fraud or otherwise, will be governed by the
provisions of Exhibit 11.3.
11.4 Waiver. A waiver of any breach of any provision of this
Agreement shall not be construed as a continuing waiver of other breaches of the
same or other provisions of this Agreement.
11.5 No Other Relationship. Nothing herein contained shall be
deemed to create a joint venture, agency or partnership relationship between the
Parties hereto. Neither Party shall have any power to enter into any contracts
or commitments in the name of, or on behalf of, the other Party, or to bind the
other Party in any respect whatsoever.
11.6 Notices.
- 27 -
<PAGE>
(a) Each notice required or permitted to be sent
under this Agreement shall be given by telecopy transmission or by registered or
recorded delivery letter to Sepracor and to Janssen at the addresses and
telecopy numbers indicated below.
For Sepracor:
111 Locke Drive
Suite 2
Marlborough, Massachusetts 01752-7231
Attention: President, Pharmaceuticals
Telecopy: 508-357-7492
For Janssen:
Turnhoutseweg 30
B-2340 Beerse, Belgium
Attention: Managing Director
Telecopy: 011 3214 60 3999
Either Party may change its address and/or telecopy number for purposes of this
Agreement by giving the other Party written notice of its new address and/or
telecopy number.
(b) Any properly addressed notice if given or
made by registered or recorded delivery letter shall be deemed to have been
received on the earlier of the date actually received and the date ten (10)
Business Days after the same was posted (and in proving such it shall be
sufficient to prove that the envelope containing the same was properly addressed
and posted as aforesaid) and if given or made by telecopy transmission shall be
deemed to have been received at the time of dispatch, unless such date of deemed
receipt is not a Business Day, in which case the date of deemed receipt shall be
the next succeeding Business Day.
11.7 Entire Understanding. This Agreement supercedes the
Letter of Intent between the Parties dated 12 June 1998 and embodies the entire
understanding between the Parties relating to the subject matter hereof, whether
written or oral, and there are no prior representations, warranties or
agreements between the Parties not contained in this Agreement.
11.8 Invalidity. If any provision of this Agreement is
declared invalid or unenforceable by arbitration or a court having competent
- 28 -
<PAGE>
jurisdiction, it is mutually agreed that this Agreement shall endure except for
the part declared invalid or unenforceable by order of such court. The Parties
shall consult and use their best efforts to agree upon a valid and enforceable
provision which shall be a reasonable substitute for such invalid or
unenforceable provision in light of the intent of this Agreement, and if the
Parties cannot agree, the provision in question shall be severed from this
Agreement and the Agreement shall endure except for the provision severed.
11.9 Amendments. Any amendment or modification of any
provision of this Agreement must be in writing, dated and signed by both Parties
hereto.
11.10 Responsibility for Taxes.
(a) Janssen shall be responsible for payment of
taxes arising out of or related to Product sales made by Janssen and for
submission of proper documentation with respect thereto to the tax authorities.
Janssen shall indemnify and hold Sepracor harmless from and against any and all
claims and losses (including but not limited to attorney fees) arising out of
Janssen's failure or delay in paying such taxes or submitting such
documentation.
(b) Any tax required to be withheld by Janssen
for the account of Sepracor in respect of payments to be made by Janssen to
Sepracor shall be promptly paid by Janssen for and on behalf of Sepracor to the
appropriate tax authorities and Janssen shall furnish Sepracor with proof of
payment of such tax together with receipts or other evidence of payment
sufficient to enable Sepracor to support a claim for income tax credit in
respect of any sum so withheld. Any such tax required to be withheld shall be
borne solely by Sepracor.
11.11 Force Majeure.
(a) Neither Sepracor nor Janssen shall be liable
in damages, or shall be subject to termination of this Agreement by the other
Party, for any delay or default in performing any obligation hereunder (other
than payment obligations) if that delay or default is due to any cause beyond
the reasonable control and without fault or negligence of such Party; provided,
however, that: (i) in order to excuse its delay or default hereunder, a Party
shall notify the other Party of the occurrence or the cause, specifying the
nature and particulars thereof and the expected duration thereof; and (ii)
within ten (10) Business Days after the termination of such occurrence or cause,
such Party shall give notice to the other Party specifying the date of
termination thereof. All obligations of both Parties shall return to being in
full
- 29 -
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
force and effect upon the termination of such occurrence or cause. The
Parties also agree that if either Party is prevented from performing its
obligation hereunder for a period of more than six (6) months, then the other
Party shall have the right to terminate this Agreement, effectively immediately.
(b) For the purposes of this Section 11.11, a
"cause beyond the reasonable control" of a Party shall include, without
limitation, any act of God, act of any government or other authority or
statutory undertaking, industrial dispute, fire, explosion, accident, power
failure, flood, riot or war (declared or undeclared).
11.12 Public Announcements. If either Party desires to, or is
required by law to, make a public announcement concerning this Agreement
(including but not limited to the terms hereof), such Party shall [**].
Notwithstanding the foregoing, for annual reports and other financial statements
each party may use the substance of previously approved public announcements
without prior notice provided that the nature and character of the previously
approved subject matter is not changed and further provided that the disclosure
is a truthful representation and does not forecast future events.
11.13 Publication. No publication of Technical Information of
a Party hereto may be made without the prior written consent of that Party. If
any proposed publication (as defined below) discloses Technical Information of a
Party, the Party or its Affiliates, Permitted Sublicensees, assigns, employees
or consultants wishing to make a publication shall deliver to the other Party a
copy of the proposed written publication or an outline of an oral disclosure
[**] prior to submission for publication or presentation. For purposes of this
Agreement, the term "publication" shall include, without limitation, abstracts
and manuscripts for publication, slides and texts of oral or other public
presentations, and texts of any transmission through any electronic media, e.g.,
any computer access system such as the Internet, World Wide Web. The reviewing
Party shall have the right (i) to propose modifications to the publication for
patent reasons, trade secret reasons or business reasons or (ii) to request
delay of the publication or presentation in order to protect patentable
information. If the reviewing Party requests a further delay for the purpose of
filing a patent application, the publishing Party shall delay submission or
presentation [**]. If the reviewing Party requests modifications to the
publication, the publishing Party may edit such
- 30 -
<PAGE>
publication to prevent disclosure of trade secret or proprietary business
information prior to submission of the publication or presentation.
11.14 Compliance With Laws. Each Party covenants and agrees
that all of its activities under or pursuant to this Agreement shall comply with
all applicable laws, rules and regulations.
11.15 Headings. Any headings contained herein are for
directory purposes only, do not constitute a part of this Agreement, and shall
not be employed in interpreting this Agreement.
11.16 Counterparts. This Agreement may be executed in any
number of counterparts and each such counterpart shall be deemed to be an
original.
11.17 Exhibits. All exhibits referred to in this Agreement are
attached hereto and incorporated herein by this reference.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed and entered into by their duly authorized representatives.
SEPRACOR INC. JANSSEN PHARMACEUTICA
N.V.
By: /s/Timothy J. Barberich By: /s/ William C. Walden
---------------------------- -------------------------------
Name: Timothy J. Barberich Name: Executive Committee
Title: President and Title: Member
Chief Executive Officer
By: /s/Guy Veracauteren
-------------------------------
Name: Guy Vercauteren
Title: VP Business Development
- 31 -
<PAGE>
EXHIBIT 1.12 Janssen Patents and Patent Applications
EXHIBIT 1.18 J&J Universal Calendar
EXHIBIT 1.22 Sepracor Patents and Patent Applications
EXHIBIT 3.4 Emesis, Irritable Bowel Disease,
Bulimia Development Timelines
EXHIBIT 9.2(c) Fleet Bank Letter
EXHIBIT 11.3 Dispute Resolution
- 32 -
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
EXHIBIT 1.12
Janssen Patents and Patent Applications
1. Patents and patent applications covering cisapride and norcisapride.
<TABLE>
<CAPTION>
Country Application Filing Date Patent Grant Date Expiry Date Status
Number Number
<S> <C> <C> <C> <C> <C> <C>
Algeria
Australia
Austria
Bahrain
Bangledesh
Belarus
Belgium
Belize
Bermuda
Bosnia
Bulgarta
Canada
Congo, Democratic Rep.
Croatia
Cyprus (Greek)
Cyprus (Turk)
Czech Republic
Denmark
Egypt
El Salvador
EPO
Fiji
Finland
France
France
Germany
Great Britain
Greece
Greece
Hong Kong
Hungary
Ireland
Israel
Italy
Japan
Jersey
Kenya
Korea S.
Korea S.
Korea S.
Latvia [**]
Lebanon
Lithuania
Luxembourg
Macedonia
Malaysia
Mexico
Morocco
Netherlands
New Zealand
Nigeria
Norway
</TABLE>
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
Pakistan
Panama
Philippines
Poland
Poland
Portugal
Romania
Romania
Romania
Russia
Saban
Sarawak
Sierra Leone
Singapore
Slovak Republic
Slovenia
South Africa
Spain
Spain
Sweden
Switzerland [**]
Taiwan
Taiwan
Tanzania
Trinidad & Tobago
Tunisia
Uganda
Ukraine
USA
USA
Venezuela
Virgin Islands
Yugoslavia
Zambia
Zanzibar
Zimbabwe
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
EXHIBIT 1.18
J&J Pharmaceutical Group
1998 Reporting Calendar
[**]
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
EXHIBIT 1.22
SEPRACOR PATENTS AND PATENT APPLICATION
---------------------------------------
NORCISAPRIDE
------------
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Case Number Country Status FilDate ApplNumber PatNumber/ Title
Iss Date
- ---------------------------------------------------------------------------------------------------------------------------
[**]
- ---------------------------------------------------------------------------------------------------------------------------
P089 A ISSUED 07-June-1995 08/485,570 5,712,293 METHOD FOR TREATING GASTRO-
27-Jan-1998 ESOPHAGEL REFLUX DISEASE AND
OTHER DISORDERS WITH
OPTICALLY PURE (-) NORCISAPRIDE
- ---------------------------------------------------------------------------------------------------------------------------
[**]
P104 A Issued 19-July-1996 08/684,753 5,739,151 METHOD FOR TREATING EMESIS
14-Apr-1998 AND CNS DISORDERS WITH
OPTICALLY PURE (-) NORCISAPRIDE
</TABLE>
[**]
<PAGE>
EXHIBIT 3.4
Emesis, Irritable Bowel Disease, Bulimia
Development Timetable
This Page Intentionally Left Blank
Janssen to provide timeline
<PAGE>
EXHIBIT 9.2(c)
Fleet Bank Letter
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
EXHIBIT 11.3
------------
1. Mediation
a. Any dispute, controversy or claim arising out of ore related to this
agreement, or the interpretation, application, breach, termination or validity
thereof, including any claim of inducement of this agreement by fraud or
otherwise shall first be mediated through non-binding mediation in accordance
with the Model Procedures for the Mediation of Business Disputes promulgated by
the Center for Public Resources ("CPR") then in effect, except where those rules
conflict with these provisions, in which case these provisions control. The
mediation shall be conducted in New York, New York, and shall be attended by a
senior executive with authority to resolve the dispute from each of the
operating companies that are parties.
b. The mediator shall be an attorney specializing in business
litigation who has at least fifteen (15) years of experience as a lawyer with a
law firm of over twenty-five (25) lawyers or was a judge of a court of general
jurisdiction and who shall be appointed from the list of neutrals maintained by
CPR.
c. The parties shall promptly confer in an effort to select a mediator
by mutual agreement. In the absence of such an agreement, the mediator shall be
selected from a list generated by CPR with each party having the right to
exercise challenges for cause and two (2) preemptory challenges within
seventy-two (72) hours of receiving the CPR list.
d. The mediator shall confer with the parties to design procedures to
conclude the mediation within no more than [**] after initiation. Under no
circumstances shall the commencement of arbitration under paragraph 2 below be
delayed more than [**] by the mediation process specified herein.
e. Each party agrees to toll all applicable statutes of limitation
during the mediation process and not to use the period or pendency of the
mediation to disadvantage the other party procedurally or otherwise. No
statements made by either side during the mediation may be used by the other
during any subsequent arbitration.
f. Each party has the right to pursue provisional relief from any
court, such as attachment, preliminary injunction, replevin, etc., to avoid
irreparable harm, maintain the status quo or preserve the subject matter of the
arbitration, even though mediation has not been commenced or completed.
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
2. Arbitration
a. any dispute, claim or controversy arising from or related in any way
to this agreement or the interpretation, application, breach, termination or
validity thereof, including any claim of inducement of this agreement by fraud
or otherwise, which is not resolved by mediation pursuant to paragraph 1 above,
will be submitted for resolution to arbitration pursuant to the commercial
arbitration rules then pertaining of the Center for Public Resources ("CPR"),
except where those rules conflict with these provisions, in which case these
provisions control. The arbitration will be held in New Brunswick, New Jersey,
if initiated by Sepracor, or in Marlborough, Massachusetts, if initiated by
Janssen.
b. The panel shall consist of three arbitrators chose from the CPR
Panels of Distinguished Neutrals each of who is a lawyer specializing in
business litigation with at least fifteen (15) years experience with a law firm
of over twenty-five (25) lawyers or was a judge of a court of general
jurisdiction. In the event the aggregated damages sought [**], then a single
arbitrator shall be chosen, having the same qualifications and experience
specified above.
c. The parties agree to cooperation (1) to obtain selection of the
arbitrator(s) [**] of initiation of the arbitration, (2) to meet with the
arbitrator(s) within [**] of selection and (3) to agree at that meeting or
before upon procedures for discovery ad as to the conduct of the heating which
will result in the hearing being concluded within no more than [**] after
selection of the arbitrator(s) and in the award being rendered within [**] of
the conclusion of the hearings, or of any post- hearing briefing, which briefing
will be completed by both sides within [**] after the conclusion of the
hearings. In the event no such agreement is reached, the CPR will select
arbitrator(s), allowing appropriate strikes for reasons of conflicts or other
cause and three (3) preemptory challenges for each side. The arbitrator(s) shall
set a date for the hearing, commit to the rendering of the award [**] of the
conclusion of the evidence at the hearing, or of any post-hearing briefing
(which briefing will be completed by both sides in no more than [**] after the
conclusion of the hearings), and provide for discovery according to these time
limits, giving recognition to the understanding of the parties hereto that they
contemplate reasonable discovery, including document demands and depositions,
but that such discovery be limited so that the time limits specified herein may
be met without undue difficulty. In no event will the arbitrator(s) allow either
side to obtain more than a total of [**] of deposition testimony from all
witness, including both fact and expert witnesses. In the event multiple hearing
days are required, they will be scheduled consecutively to the greatest extent
possible.
<PAGE>
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
d. The arbitrator(s) shall render their award following the substantive
law of Delaware. The arbitrator(s) shall render an opinion setting forth
findings of fact and conclusions of law with the reasons therefor stated. A
transcript of the evidence adduced at the hearing shall be made and shall, upon
request, be made available to either party.
e. To the extent possible, the arbitration hearings and award will be
maintained in confidence.
f. The United States District Court for the District of New Jersey may
enter judgment upon any award. In the event the panel's award [**], then the
court shall vacate, modify or correct any award where the arbitrators' findings
of act are clearly erroneous, and/or where the arbitrators' conclusion of law
are erroneous; in other words, it will undertake the same review as if it were a
federal appellate court reviewing a district court's findings of fact and
conclusions of law rendered after a bench trial. An award for [**] may be
vacated, modified or corrected only upon the grounds specified in the Federal
Arbitration Act. The parties consent to the jurisdiction of the above-specified
Court for the enforcement of these provisions, the entry of judgment on any
ward, and the vacatur, modification and correction of any award as above
specified. In the event such court lacks jurisdiction, then any court having
jurisdiction of this matter may enter judgment upon any award and provide the
same relief, and undertake the same review, as specified herein.
g. Each party has the right before or during the arbitration to seek
and obtain from the appropriate court provisional remedies such as attachment,
preliminary injunction, replevin, etc. to avoid irreparable harm, maintain the
status quo, or preserve the subject matter of the arbitration.
h. EACH PARTY HERETO WAIVES ITS RIGHTS TO A TRIAL OF ANY ISSUED BY
JURY.
i. EACH PARTY HERETO WAIVES ANY CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES
FROM THE OTHER.
j. EACH PARTY HERETO WAIVES ANY CLAIM OF CONSEQUENTIAL DAMAGES FROM THE
OTHER UNLESS (1) THE FORESEEABILITY OF SUCH DAMAGES AT THE TIME OF THE CONTRACT
AND (2) THE AMOUNT OF SUCH DAMAGES ARE PROVEN BY CLEAR AND CONVINCING EVIDENCE.
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 119,366,000
<SECURITIES> 109,387,000
<RECEIVABLES> 3,795,000
<ALLOWANCES> 160,000
<INVENTORY> 3,623,000
<CURRENT-ASSETS> 239,111,000
<PP&E> 26,917,000
<DEPRECIATION> 10,080,000
<TOTAL-ASSETS> 273,590,000
<CURRENT-LIABILITIES> 40,311,000
<BONDS> 270,355,000
0
0
<COMMON> 2,856,000
<OTHER-SE> (44,881,000)
<TOTAL-LIABILITY-AND-EQUITY> 273,590,000
<SALES> 4,683,000
<TOTAL-REVENUES> 13,773,000
<CGS> 2,916,000
<TOTAL-COSTS> 3,373,000
<OTHER-EXPENSES> 65,405,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,132,000
<INCOME-PRETAX> (59,080,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (59,080,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,080,000)
<EPS-PRIMARY> (2.10)
<EPS-DILUTED> (2.10)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 62,299,000
<SECURITIES> 34,552,000
<RECEIVABLES> 2,551,000
<ALLOWANCES> 504,000
<INVENTORY> 3,619,000
<CURRENT-ASSETS> 104,599,000
<PP&E> 28,968,000
<DEPRECIATION> 8,020,000
<TOTAL-ASSETS> 140,756,000
<CURRENT-LIABILITIES> 26,150,000
<BONDS> 80,880,000
6,550,000
0
<COMMON> 2,781,000
<OTHER-SE> 17,172,000
<TOTAL-LIABILITY-AND-EQUITY> 140,756,000
<SALES> 6,517,000
<TOTAL-REVENUES> 9,329,000
<CGS> 3,737,000
<TOTAL-COSTS> 4,206,000
<OTHER-EXPENSES> 46,421,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,487,000
<INCOME-PRETAX> (12,537,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,537,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,537,000)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
