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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended DECEMBER 31, 1996
or
[ ] 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 0-19651
MAGAININ PHARMACEUTICALS INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
Delaware 13-3445668
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5110 Campus Drive
Plymouth Meeting, Pennsylvania 19462
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 941-4020
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.002 par value per share
---------------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $169,804,108. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the NASDAQ, National Market of The Nasdaq Stock Market, on March 24, 1997. For
purposes of this calculation only, the registrant has defined affiliates as
including all directors and executive officers. In making such calculation,
registrant is not making a determination of the affiliate or non-affiliate
status of any holders of shares of Common Stock.
The number of shares of the registrant's Common Stock outstanding as of March
24, 1997 was 19,364,468.
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DOCUMENTS INCORPORATED BY REFERENCE
As stated in Parts II and III of this Annual Report on Form 10-K,
portions of the following documents are incorporated herein by reference:
Annual Report to Stockholders for the fiscal year ended December 31,
1996.
Definitive Proxy Statement to be filed within 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K (the "Proxy
Statement").
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INDEX TO FORM 10-K
MAGAININ PHARMACEUTICALS INC.
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PART I
ITEM 1. BUSINESS.................................................................................. 1
ITEM 2. PROPERTIES................................................................................ 14
ITEM 3. LEGAL PROCEEDINGS......................................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................... 14
ITEM 6. SELECTED FINANCIAL DATA................................................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................................ 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................................ 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................ 15
ITEM 11. EXECUTIVE COMPENSATION.................................................................... 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................ 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................... 15
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PART I
ITEM 1. BUSINESS
GENERAL
Magainin Pharmaceuticals Inc. ("Magainin" or the "Company") is a
biopharmaceutical company engaged in the development of breakthrough medicines
for serious diseases. The Company isolates and develops compounds from the
host-defense systems of animals and uses molecular techniques such as gene
identification to understand the pathogenesis of disease. The Company's
development efforts are focused on anti-infectives, oncology and, pulmonary and
allergic disorders.
The Company's lead development compound is Cytolex(TM) (MSI-78), a
topical anti-infective. Magainin has completed two successful, pivotal Phase III
clinical trials of Cytolex for the treatment of infection in diabetic foot
ulcers.
The Company is engaged in the preclinical development of an aminosterol
class of compounds, discovered in the dogfish shark. The Company believes these
compounds may have application in disease conditions characterized by cell
growth. The Company is evaluating one such compound, squalamine, in solid cancer
tumors, and another such compound, MSI-1436, in viral infections.
The Company's newest research efforts are in the understanding of the
pathogenesis of disease using molecular techniques. The Company's initial
disease focus in this area is the genomics of asthma.
Since commencing operations, the Company has not generated any sales
revenue, and has received nominal amounts of revenue from contracts and grants.
The Company has funded operations primarily from the proceeds of public and
private placements of securities. The Company has incurred net losses in each
year since its inception, and expects to incur substantial additional losses for
the next several years. The Company currently has no marketable products, and it
may be several years, if ever, until marketable products are developed and
approved.
Magainin was incorporated in Delaware in June 1987. The Company's
executive offices and research facility are located at 5110 Campus Drive,
Plymouth Meeting, Pennsylvania 19462, and its telephone number is (610)
941-4020.
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BACKGROUND - HOST DEFENSE SYSTEM AND GENOMICS
HOST-DEFENSE SYSTEM
The Company was formed to engage in the research, development and
commercialization of compounds derived from the host-defense system of animals.
The host-defense system is the complex of natural processes and mechanisms used
by the body to protect itself against infection and certain cancers. This system
comprises physical barriers to infection, such as skin and mucosal membranes and
fluids, as well as more complex chemical and biological components, such as the
immune system. The Company believe that certain classes of naturally occurring
peptides, such as magainins, and certain non-peptide small molecules, such as
the aminosterols, both described below, are used by the host-defense system to
provide a first line of defense against infection and may have activity against
certain cancers.
The Company's approach to identifying pharmaceutically active compounds
in the host-defense systems of animals involves the extraction of compounds from
animal tissues. The extracts are assayed for activity against selected
pathogens, such as bacteria, fungi, viruses and certain cancers. The assays are
designed to detect the relatively small quantities of active agents that are
present in animal tissues. The Company then purifies the active compound and
determines the precise chemical structure of the purified molecule.
Once naturally occurring molecules have been isolated, the Company
analyzes the relationship between the molecular structure of the compound and
its biological activity. In general, this requires identification of the
structures in the compound which are believed to have therapeutic effects and an
analysis of how the compounds could be modified to improve the desired
therapeutic effects. As a result of such analysis, Company scientists have
modified naturally occurring molecules by substituting different amino acids and
shortening or lengthening the chain of molecules making up the compound. Company
scientists have also been able to add fatty acids, carbohydrates or other
constituents to the molecules to alter biological activity or increase
stability.
MAGAININS
The first magainins were isolated from the African frog Xenopus laevis
by Dr. Michael A. Zasloff (presently Vice Chairman and Executive Vice President
of the Company, and President of the Magainin Research Institute, a division of
the Company) while conducting genetic and molecular biological research at the
National Institutes of Health ("NIH") in 1987. In connection with his research,
Dr. Zasloff was performing surgery on African clawed frogs in his laboratory.
After suturing the frogs and returning them to their aquarium tank, he noticed
that the incisions healed without infection, inflammation or notable scarring,
despite being exposed to the bacteria-filled aquarium water. Dr. Zasloff deduced
that the frogs produced a substance that protected them against infection.
Eventually, he isolated, from the skin, two related peptides, which he called
magainins and which were later shown to kill a variety of pathogens, including
bacteria, amoeba, fungi and parasites. Many synthetic magainin peptides have
been produced by the Company since this original discovery.
In general, magainins, when present in solution, have no specific
structure. However, in the presence of a cell membrane rich in acidic
phospholipids and poor in cholesterol, such as bacterial membranes, magainins
twist into two-sided, spiral shaped molecules (helices), with one side soluble
in the fat-like substance that comprises cell membranes and the other side
soluble in water. Individual magainin peptides then aggregate and line up to
form a channel in the membrane of a pathogen. Once formed, this aggregate
punctures the cell membrane, breaks down the integrity of the cell and kills the
pathogen.
An increasing problem in the antibiotic field is resistance, the
process by which antibiotics lose their effectiveness over time as bacteria,
through mutation, develop the means to produce enzymes capable of diminishing
the antibiotic utility. To date, the Company has not noted the development of
resistance to the magainins, which the Company believes is due to the means by
which magainins break down cells and kill pathogens.
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AMINOSTEROLS
In 1992, while continuing his search for novel anti-infectives from
vertebrates, Dr. Zasloff and his associates discovered squalamine, a steroid, in
the body tissues of the dogfish shark. The shark was initially examined because
of its known resistance to infection and cancer. Since 1992, Dr. Zasloff and his
team have discovered several other aminosterol compounds in the shark. In
preclinical testing conducted to date, these compounds have demonstrated an
ability to control cell growth. These properties may have application in a
number of disease indications, including solid cancer tumors and lymphocytic
viral infections.
The aminosterol compounds are believed to have a unique mechanism of
action whereby they inhibit cell proliferation at an early stage in cell
activation by blocking the function of sodium proton exchangers. These
exchangers act as pumps on the surface of cells, and control cell function
through regulation of intracellular pH and volume. This system represents a
naturally occurring growth regulatory system in animals, and its regulation may
allow for control of cell proliferation.
ASTHMA GENOMICS PROGRAM
New techniques in molecular biology have significantly enhanced the
ability of scientists to clone and sequence human genes, and more closely study
genetic variations between individuals. This, in turn, has allowed for an
examination of the genetic influences on many human diseases. This field of
research is called genomics, or the study of the genome. Genomics has led to an
increasing acceptance that genes, in addition to factors such as lifestyle and
environment, play a fundamental role in human disease.
A genome is the total DNA content of an organism that is identically
present in each of its cells. DNA (deoxyribonucleic acid) is a molecule
comprised of four compounds, or nucleotides, that contain the genetic
instructions for living organisms. These genetic instructions are specified by
the order of the nucleotides. Genes represent a segment of DNA that codes for a
protein that is responsible for the structure and function of all living things.
The cloning and sequencing of DNA, made possible by recombinant DNA technology
in the 1970s, fueled the significant expansion of the genomics field. Scientists
could, for the first time, extensively study how differences in order of amino
acids affect protein function and, therefore, human health. Mutations in amino
acid sequences can decrease the ability of a protein to perform its proper
function, causing a disease or an increased susceptibility to a disease.
In 1996, the Company initiated a research program in the genomics of
asthma. The Company's research initiative in this area is based principally on
the concept of positional cloning, or the analysis of disease inheritance
patterns. Positional cloning refers to a collection of tagging and sequencing
techniques that are used to localize and identify genes associated with
particular diseases. For example, DNA may be collected from family groups where
a particular disease is more prevalent than in the general population. Analysis
of the sequence of such DNA should then allow for insight into the pathogenesis
of the disease. While a number of companies in the genomics field are primarily
focused on sequencing without regard to function, the Company's focus is to
locate specific genes in a particular disease. The Company believes that
identification of disease genes will provide insight into the causes of disease,
and facilitate the development of therapeutic products against that disease.
The Company's research and development strategy in genomics involves:
- defining the genetic pathways that underlie susceptibility
to disease
- defining the therapeutic target in the pathway
- developing compounds to alter clinical outcome
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PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
INFECTED DIABETIC FOOT ULCERS
Infected foot ulcers in diabetic patients are a serious complication.
The often compromised vasculature and nervous systems in the diabetic patient
can create conditions conducive to infection. These infections can lead to
osteomyelitis (bone infection) and limb amputation. Patients with infected
ulcers are typically treated with oral antibiotics and no topical antibiotics
are currently approved specifically for the treatment of infection in diabetic
foot ulcers.
There are a number of potential shortcomings in oral antibiotic
treatment of infection in diabetic foot ulcers. Increasing utilization of oral
antibiotics has exacerbated the development of antibiotic resistance, and
resistant organisms are expected to continue to develop. Additionally, there can
be side effects associated with oral antibiotics, including gastrointestinal
distress and headaches.
The Company's most advanced development compound is Cytolex, a topical
cream antibiotic intended for the treatment of infection in diabetic foot
ulcers. In September 1996, the Company announced successful results of its
initial, pivotal Phase III clinical trial of Cytolex, and in March 1997,
Magainin reported successful results from a second such pivotal trial. These
trials were designed as equivalence studies with the goal of demonstrating that
Cytolex topical cream is as effective as orally administered ofloxacin, a
quinolone antibiotic, indicated for the treatment of skin and soft tissue
infections. The Company's analysis of the data from the studies showed
statistical equivalence between Cytolex and ofloxacin, with respect to the
primary end point of clinical response of infection at day 10 of treatment, and
at subsequent time points through day 28, and at follow-up. The two studies
together enrolled approximately 925 patients.
As a secondary endpoint in the trials, Cytolex and ofloxacin were
comparable with respect to overall assessments of microbiological improvements.
Analyses of adverse events in the studies suggest a favorable profile
for Cytolex. Both drugs were well tolerated, however, treatment with ofloxacin
was associated with a significant excess of adverse events related to the
central nervous system, particularly as it relates to insomnia.
The clinical trials conducted for Cytolex yielded substantial data.
Such additional data includes information relating to the primary endpoints for
the studies, as well as data relating to patient subgroup analysis, wound
healing, side effects, and secondary endpoints of the study, including
microbiological results. Although the Company believes the two pivotal trials of
Cytolex yielded successful results, there can be no assurance that the United
States Food and Drug Administration (the "FDA") will concur with the Company's
analysis in this regard.
SOLID CANCER TUMORS
Cancer is the second most common cause of death in the western world,
exceeded only by coronary heart disease. Cancer is characterized by uncontrolled
cell division resulting in the growth of a mass of cells commonly known as a
tumor. Cancer cells, if not eradicated, can spread ("metastasize") throughout
the body. Cancerous tumors can arise in almost any tissue or organ within the
human body.
The three most prevalent methods of treating patients with cancer are
surgery, radiation therapy and chemotherapy. A cancer patient often receives a
combination of these treatment methods. Surgery and radiation therapy are
particularly effective in patients in which the disease has not yet spread to
other tissue or organs. Chemotherapy is the principal treatment for tumors that
have metastasized. Chemotherapy involves the administration of drugs designed to
kill cancer cells ("cytotoxic drugs") or the administration of hormone analogues
to either reduce the production of, or block the action of, certain hormones,
such as estrogens and androgens, which
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affect the growth of tumors. Because chemotherapeutic agents generally attack
rapidly dividing cells indiscriminately, damaging normal as well as cancerous
cells, use of such agents often has adverse effects.
Although several types of tumors can now be treated effectively with
drugs, survival rates for the most common tumors have only begun to improve
slightly. Advances in technology, though, have continued to yield new approaches
to cancer tumor treatment. One such approach is the control of angiogenesis, or
new blood vessel growth. Angiogenesis is a key stage in the development of tumor
malignancy, and its inhibition should contribute to the tumor becoming dormant.
The Company's initial disease focus for squalamine is solid cancer
tumors. Squalamine may be of benefit in the treatment of solid cancer tumors by
inhibition of new blood vessel growth required for tumor nourishment. Squalamine
has exhibited anti-angiogenic properties in several in vitro and in vivo assays.
The Company is currently conducting preclinical research on squalamine,
including pathology and toxicology testing. Should squalamine proceed into human
clinical testing, the Company expects that it will be evaluated as a cancer
therapy in conjunction with existing cytotoxic treatment.
VIRAL DISEASE
Acquired immune deficiency syndrome ("AIDS") was first recognized in
1981 in homosexual men. In 1983, the Human Immunodeficiency Virus ("HIV") was
identified. The HIV virus infects cells and instructs the cellular machinery to
produce new virus particles. As the body attempts to combat the infection, a
process ensues in which many virus-infected cells are destroyed and replaced
each day. Over time, however, the immune system is unable to keep up this pace,
and the patient becomes increasingly susceptible to a variety of opportunistic
infections and cancers, which define the end stage of HIV infection known as
AIDS.
A number of drugs, including reverse transcriptase inhibitors and
protease inhibitors, have been recently introduced for the treatment of HIV,
and, when used in combination, have been successful in significantly reducing
virus levels in patients. However, these drugs are not likely to eliminate HIV
from the body and there are concerns as to the development of resistance to
these therapies.
The Company's initial disease focus for MSI-1436 is HIV. MSI-1436 has
been shown to be an effective inhibitor of HIV replication in tissue culture for
both acute and chronically infected lymphocytes. Unlike current HIV therapies
which target the active infection, MSI-1436 acts on the host lymphocyte,
reducing the likelihood of drug resistance. The Company has a Cooperative
Research and Development Agreement ("CRADA") with the NIH, and is currently
conducting preclinical research on MSI-1436, including pathology/toxicology
testing. Should MSI-1436 proceed into human clinical testing, the Company
expects that it will be evaluated in conjunction with existing HIV therapies.
ASTHMA
Asthma is characterized clinically by wheezing and shortness of breath
due to reversible bronchospasm. It is a chronic, disabling disorder that appears
to be increasing in prevalence and severity. The complex pathophysiology of
asthma is under intensive scrutiny, however, its precise causes are not well
understood. A number of studies suggest a heritable component to asthma, but
family studies have been difficult to interpret due to other influences,
including allergens and pollutants. Current treatments for asthma are limited to
controlling inflammation or treating airway constriction through use of
bronchial dilators.
Asthma is the initial disease focus of the Company's genomics program.
The Company has identified two genes which it believes may be critical in the
pathogenesis of asthma. These genes, Asthma Associated Factor 1 ("AAF1") and
Asthma Associated Factor 2 ("AAF2") are the subject of pending patent
publications. AAF1 and AAF2 appear critical in determining the allergic and
inflammatory response characteristic of bronchial asthma.
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These genes regulate mediators of the allergic response, including serum IgE
molecules. Variant forms of these genes occur widely and appear to be
significant in susceptibility to asthma. The Company has conducted confirmatory
analysis in animals, and is engaged in the early stages of a compound
development program.
OTHER PROGRAMS
The Company has a number of other early stage research programs. One
such program is directed toward the treatment of pseudomonas infections in
cystic fibrosis patients. Another program is targeted to many of the pathogens
involved in certain sexually transmitted diseases. Additionally, the Company is
engaged in research efforts on defensins. Defensins are compounds found in
animals and man which have host-defense properties similar to magainins and
aminosterols. The longer-term evolution of the host-defense field may lie in
compounds that regulate endogenous defensin expression, rather than direct
application of the defensin molecules themselves.
PRODUCT DEVELOPMENT RISKS
The Company's proposed products are in the development stage, require
significant further research, development, testing and regulatory approvals, and
are subject to the risks of failure inherent in the development of all
pharmaceutical products. These risks include the possibilities that any or all
of the proposed products are found to be ineffective or toxic, or otherwise fail
to receive necessary regulatory approvals; that the proposed products, although
effective, are uneconomical to manufacture or to market; that third parties hold
proprietary rights that preclude the Company from marketing any products; or
that third parties market superior or equivalent products. There can be no
assurance that any of the Company's product development candidates will progress
beyond their current state of development or ultimately receive necessary
regulatory approvals. There can be no assurance that the results of animal
studies or in vitro testing will be indicative of the results of any human
clinical trials or otherwise pertinent to the development of products for use as
human pharmaceuticals.
MANUFACTURING
Production of peptides (such as magainins) is expensive relative to
production of traditional antibiotics. The Company contracts with third parties
for the manufacture of materials, and is working with Abbott Laboratories
("Abbott") with regard to the manufacture of bulk Cytolex. The Company's current
arrangement with Abbott provides for the development by Abbott of a solution
phase chemical process to manufacture bulk Cytolex on a commercial scale, for
the production of bulk Cytolex, and for Abbott to perform those activities
necessary to submit a Drug Master File to the FDA in support of any filing for
marketing approval of Cytolex. This arrangement provides for cash payments by
the Company to Abbott through early 1998 aggregating approximately $12,900,000,
as well as the issuance by the Company to Abbott of up to 500,000 shares of its
common stock and the obligation to pay a royalty on future sales of Cytolex.
Through December 31, 1996, the Company has paid Abbott approximately $8,600,000
under this arrangement. Stock issuances by the Company to Abbott will result in
a charge to earnings, representing the fair value of the shares when issued. The
Company issued 125,000 shares of common stock to Abbott in October 1995,
resulting in a charge to earnings of $1,250,000 in the year ended December 31,
1995. Future stock issuances are related to the achievement by Abbott of
contractual performance milestones which could begin to occur in 1997.
Substantial additional funds will also be required to continue manufacturing
development efforts beyond the term of this current arrangement.
The Company does not have the resources, facilities or capabilities to
manufacture any of its proposed products. The Company has no current plans to
establish a manufacturing facility. The Company expects that it will be
dependent to a significant extent on contract manufacturers for commercial-scale
manufacturing of its proposed products in accordance with regulatory standards.
There are a limited number of companies currently able to produce materials on
the scale which the Company expects to require to commercialize its compounds.
There can be no assurance that qualified outside contractors will be available
to manufacture materials for the Company, or do so at costs which are affordable
by the Company. The Company is currently dependent upon Abbott for the
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production of bulk Cytolex, and, as described above, Abbott is currently
conducting certain manufacturing development activities. The Company and Abbott
have agreed that, upon completion of such activities, they will negotiate in
good faith a supply agreement for the Company's worldwide supply needs of
Cytolex. In the event that this agreement is not entered into, or Abbott does
not otherwise continue to manufacture Cytolex, the Company's timeline to
commercialize Cytolex would be adversely affected, and the Company would need to
spend substantial funds on securing other manufacturing arrangements or building
a manufacturing infrastructure, and licensing applicable manufacturing related
technology from such contract manufacturer.
The Company also expects to conduct significant manufacturing
development activities for its other products under development. The Company is
currently working with outside contractors for the chemical production of its
aminosterol compounds. The Company expects to expend significant resources in
the chemical synthesis of these compounds, and there can be no assurance that
these efforts will be successful.
The Company's dependence on third parties for manufacturing may
adversely affect operating results as well as the Company's ability to develop
and deliver products on a timely and competitive basis. Significant progress in
scale-up and manufacturing development efforts will be required to enable the
Company to manufacture and sell Cytolex on a profitable basis. No assurance can
be given that a cost-effective manufacturing process can be developed, or that
any such process would be approved by the FDA, or that the Company, Abbott, or
others will be able to manufacture Cytolex or any of the Company's other
proposed products on a commercially viable basis.
RESEARCH AND DEVELOPMENT ORGANIZATION
The Company conducts the majority of its research and development
activities through its own staff and facilities, including the Magainin Research
Institute, an internal division of the Company focused on host-defense research,
and the Magainin Institute of Molecular Medicine, an internal division of the
Company focused on the genomics of asthma. The Company also employs contract
research organizations, independent consultants and other research professionals
to aid in its research and development activities, and maintains a Scientific
Advisory Board to help guide its efforts.
COLLABORATIVE ARRANGEMENTS
Research and License Agreements. The Company has rights under license
agreements to several patents and patent applications under which the Company
expects to owe royalties on sales of certain of its proposed products.
Additionally, certain of these agreements also provide that if the Company
elects not to pursue the commercial development of any licensed technology, or
does not adhere to an acceptable schedule of commercialization, then the
Company's exclusive rights to such technology would terminate. The Company also
funds research at certain institutions, and these relationships may provide the
Company with an option to license any results of the research.
Collaborations. Collaborations may allow the Company to leverage its
own scientific and financial resources and gain access to markets and
technologies that would not otherwise be available to the Company. In the long
term, development and distribution arrangements with established companies in
the markets in which potential products will compete may allow the Company's
products easier access to their intended market and may accordingly conserve
Company resources. The Company expects that it will enter into marketing,
manufacturing and distribution arrangements for most of the products it may
develop. From time to time, the Company has held discussions with various
potential partners related thereto.
SmithKline Beecham. In February 1997, the Company entered into a
development, supply and distribution agreement (the "Agreement") in North
America with SmithKline Beecham ("SB") for Cytolex. The Agreement provides for
an upfront payment by SB to the Company of $5 million. SB may make additional
payments to
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Magainin of up to $27.5 million upon the occurrence of certain product
milestones. SB will also fund a percentage of development expenses for any
additional indications for Cytolex. Upon the commencement of commercial sales,
Magainin will be responsible for the supply of Cytolex, and SB will be
responsible for the marketing and sales of Cytolex. Magainin will receive
certain percentages of SB sales revenues under agreed upon terms. The Agreement
also gives SB the right to negotiate for rights to another Magainin product
development candidate, under certain terms and conditions.
Abbott Laboratories. In August 1994, the Company entered into a
three-year, $450,000, collaborative arrangement with Abbott, under which the
Company is screening certain Abbott food additives to identify those with the
ability to increase defensin production in the body, and thereby, prevent or
treat infection. Abbott has paid the Company $362,000 to date under this
arrangement.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research
and development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. In the United States,
vaccines, drugs and certain diagnostic products are subject to rigorous review
by the FDA. The Federal Food, Drug, and Cosmetic Act, the Public Health Service
Act and other federal statutes and regulations govern or influence the testing,
manufacture, safety, efficacy, labeling, storage, recordkeeping, approval,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, refusal of the
government to approve product approval applications or to allow the Company to
enter into government supply contracts, the withdrawal of previously approved
new drug applications and criminal prosecution.
In order to obtain FDA approval of a new product, the Company must
submit proof of safety, purity, potency and efficacy. Such proof entails
extensive and time consuming preclinical and clinical testing. The results of
preclinical studies are submitted to the FDA as part of an Investigational New
Drug Application ("IND"). Preclinical studies involve laboratory evaluation of
product characteristics and animal studies to assess the efficacy and safety of
the product. Once the IND is approved, human clinical trials may be conducted.
Human clinical trials are typically conducted in three sequential phases, but
the phases may overlap. Phase I trials consist of testing the product in a small
number of patients or healthy volunteer subjects primarily for safety at one or
more doses. In Phase II, in addition to safety, the efficacy of the product is
evaluated in a patient population somewhat larger than Phase I trials. Phase III
trials typically involve additional testing for safety and clinical efficacy in
an expanded population at geographically dispersed test sites. A clinical plan,
or "protocol," accompanied by the approval of the Institutional Review Board
participating in the trials, must be submitted to the FDA prior to commencement
of each clinical trial. Various reports must be submitted to the FDA during the
course of the trials, and the FDA may order the temporary or permanent
discontinuation of a clinical trial at any time.
The results of the clinical trials are submitted to the FDA as part of
a new drug application ("NDA"). Detailed manufacturing documentation is also
required, and with respect to Cytolex, even if clinical testing is successful,
the submission to FDA of any application for approval, and the review by FDA of
such application, will require additional time to complete manufacturing
stability studies, which additional time may be significant. Following extensive
review of the NDA, the FDA may grant marketing approval, require additional
testing or information, or deny the application. Sales of a new drug may
commence following FDA approval of an NDA and satisfactory completion of a
pre-approval review of the manufacturing facility and pertinent production
records. If there are any modifications to the drug, including any changes in
indication, manufacturing process, labeling or manufacturing facility, an NDA
supplement may be required to be submitted to the FDA.
There is no assurance that the FDA will act favorably or quickly in
reviewing submitted applications, and significant difficulties or costs may be
encountered by the Company in its efforts to obtain FDA approvals that could
delay or preclude the Company from marketing any products it may develop. The
FDA may also require post-marketing testing and surveillance to monitor the
effects of approved products or place conditions on any
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approvals that could restrict the commercial applications of such products.
Product approvals may be withdrawn if compliance with regulatory standards is
not maintained.
Continued compliance with all FDA requirements and conditions in an
approved application, including those concerning product specification,
manufacturing process, validation, labeling, promotional material, recordkeeping
and reporting requirements, is necessary for all products. Failure to comply
could lead to the need for product recall or other FDA-initiated actions, which
could delay further marketing until the products are brought into compliance.
Even after any approval by the FDA and foreign regulatory authorities, products
may later exhibit adverse effects that prevent their widespread use or
necessitate their withdrawal from the market.
In October 1992, the Prescription Drug User Fee Act of 1992 was
enacted, imposing substantial fees on a one-time basis for applications for
approval, and on an annual basis for the manufacturing and marketing of
prescription drugs.
The Company is also subject to regulation by other regulatory
authorities, including the Occupational Safety and Health Administration, the
Environmental Protection Agency, the Nuclear Regulatory Commission, the Drug
Enforcement Agency and the United States Department of Agriculture, and to
regulation under the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other regulatory statutes, and may in the future be subject to
additional federal, state or local regulations. These agencies may promulgate
regulations that affect the Company's research and development programs.
Sales of pharmaceutical products outside the United States are subject
to foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval by comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing in those countries. The time required to obtain such approval may be
longer or shorter than that required for FDA approval.
REIMBURSEMENT; HEALTH CARE REFORM
Successful commercialization of the Company's potential products will
be dependent in part on the availability of reimbursement of the costs of such
products from third-party payors, such as government authorities, private health
insurers and other organizations, such as health maintenance organizations.
There can be no assurance that such reimbursement will be available or, if
available, will be in adequate amounts.
Various proposals have been put forth to reform the current health care
system in the United States. Additionally, several states have enacted
modifications to the current health care system to both improve access and
control costs. Such reform measures could adversely affect the amount of
reimbursement available from governmental agencies or third-party insurers, or
could affect the ability to set prices for newly approved therapeutic products.
Similar proposals are being considered by governmental officials in other
significant pharmaceutical markets, including Europe. Governmental or private
payors for health care goods and services can be expected to continue to
undertake cost reduction efforts.
The Company cannot predict if such reforms will be implemented or the
effect any such reforms might have on the Company's business, and no assurance
can be given that any such reforms will not have an adverse effect on the
Company's business. In particular, it is possible that any such reform could
impact the manner in which drugs or therapies are marketed and could include
restrictions on the ability of pharmaceutical and biotechnology companies to
price drugs or therapies, which in turn could impact the ability of
biotechnology companies, such as the Company, to obtain financing for the
continued development of potential products. Furthermore, any such reform could
also impose limits on the overall growth of health care spending, as well as
limits on the growth of Medicare and Medicaid spending, all which could have an
adverse effect on the Company.
9
<PAGE> 13
PATENT AND PROPRIETARY RIGHTS; LICENSED TECHNOLOGY
The Company's success will depend in part upon its ability to obtain
patent protection for compounds, uses of compounds, and processes. Patent
matters involve complex legal and factual issues, and can be highly uncertain.
Host-defense compounds can be isolated from a wide variety of sources, and it is
not possible for the Company or any other entity to have proprietary rights to
all such compounds, or their uses. In the genomics area, a number of companies
are attempting to rapidly identify and patent genes whose functions have not yet
been characterized. Additional companies are seeking to patent fully
characterized genes. The criteria for obtaining patent protection for genes is
unclear, and the impact of this uncertainty on the Company's business can not be
determined.
There can be no assurance that any patent applications now pending or
filed in the future will result in patents being issued or that any patents now
held by or licensed to the Company, or issued or licensed to the Company in the
future, will afford any competitive advantages for the Company, will not be
challenged by third parties, or cannot be designed around by others. The cost of
litigation to uphold the validity and prevent infringement of patents and to
enforce licensing rights can be substantial. Furthermore, there can be no
assurance that others will not independently develop similar technologies or
duplicate the technology owned by or licensed to the Company or design around
the patented aspects of such technology. In addition, there can be no assurance
that the products and technologies the Company will seek to market will not
infringe patents or other rights owned by others, licenses to which may not be
available to the Company.
The Company also relies upon unpatented proprietary technology, and may
determine in appropriate circumstances that its interest would be better served
by reliance on trade secrets or confidentiality agreements rather than patents.
No assurances can be given that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to such proprietary technology or that the Company can meaningfully
protect its rights in such unpatented proprietary technology. Additionally, if
the Company is unable to obtain strong proprietary rights protection of its
products after obtaining regulatory clearance, competitors may be able to market
competing products by obtaining regulatory clearance, through showing
equivalency to the Company's product, without being required to conduct the
lengthy clinical tests required to be conducted by the Company.
To the extent that consultants, key employees, vendors or other third
parties apply technological information independently developed by them or by
others to the Company's proposed products, disputes may arise as to the
proprietary rights to such information, which may not be resolved in favor of
the Company. Members of the Company's Scientific Advisory Board and other
consultants are employed by or have consulting agreements with third parties,
and any inventions discovered by such individuals are not likely to become the
property of the Company.
The Company has rights under license agreements to several patents and
patent applications under which the Company expects to owe royalties on sales of
certain of its proposed products. Additionally, certain of these agreements also
provide that if the Company elects not to pursue the commercial development of
any licensed technology, or does not adhere to an acceptable schedule of
commercialization, then the Company's exclusive rights to such technology would
terminate.
COMPETITION
The pharmaceutical industry is characterized by intense competition.
Many companies, research institutions and universities are working in a number
of areas similar to the Company's field of interest. In addition, many companies
are engaged in the development and sale of products, such as traditional
antibiotics, which may be, or are, competitive with the Company's proposed
products. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources than the
Company. The Company is aware that research is being conducted by others in
connection with compounds from the host-defense systems of various animals. Many
companies are involved in research and development activities focused on the
pathogenesis of
10
<PAGE> 14
disease, and competition among companies attempting to find the genes
responsible for disease is intense. In addition, the Company's proposed products
may be subject to competition from products using techniques other than those
developed by the Company or based on advances that may render the Company's
products obsolete.
The Company expects technological developments in the
biopharmaceutical field to occur at a rapid rate and expects competition to
intensify as advances in this field are made. Accordingly, the Company will be
required to continue to devote substantial resources and efforts to research and
development activities in order to maintain a competitive position in this
field. Compounds, products or processes developed by the Company may become
obsolete before the Company is able to recover a significant portion of its
research and development expenses. The Company will be competing with respect to
its proposed products with companies that have significantly more experience in
undertaking preclinical testing and human clinical trials of new or improved
therapeutic products and obtaining regulatory approvals of such products. Some
of these companies may be in advanced phases of clinical testing of various
drugs that may be competitive with the Company's proposed products.
Colleges, universities, governmental agencies and other public and
private research organizations are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed, some of which may be directly competitive with that of
the Company. In addition, these institutions, along with pharmaceutical and
specialized biotechnology companies, can be expected to compete with the Company
in recruiting highly qualified scientific personnel.
As to the disease areas being targeted by the Company, there can be no
assurance that Cytolex will be successfully marketed against oral antibiotics
for the treatment of infection in diabetic foot ulcers. These infections have
historically been treated with systemically administered antibiotics. There also
can be no assurance that Cytolex can be manufactured at a cost which will allow
it to be sold at a competitive price relative to oral antibiotics. Significant
efforts are underway by many companies in the development and marketing of
products intended for the additional disease areas being targeted by the
Company, including HIV, cancer and asthma. A number of major pharmaceuticals
companies have significant franchises in these disease areas, and can be
expected to invest heavily to protect these interests.
There can be no assurance that the interests of the Company will
continue to coincide with the interests of its collaborators. Collaborators
could develop products independently, or through third parties, which could
compete with the Company's products. With respect to Cytolex, SB maintains a
significant presence in the antibiotic area, and currently sells a topical
antibiotic product indicated for certain skin infections. Furthermore, there can
be no assurance that collaborative agreements will not be terminated by the
Company's collaborators.
PRODUCT LIABILITY AND INSURANCE
Before obtaining required regulatory approvals for the commercial sale
of products, the Company must demonstrate through human clinical testing that
such products are safe and efficacious for use in each target indication. The
administration of any product being developed by the Company could produce
undesirable side effects in humans. The Company carries limited clinical trial
insurance and there can be no assurance that such coverage is adequate.
In addition, in the event the Company successfully develops any
products, the marketing of such products could expose the Company to product
liability claims. Certain agreements require the Company to maintain insurance
coverage naming third parties as additional insureds at such time as any related
products may be marketed. There can be no assurance that the Company will be
able to maintain such insurance or that such insurance can be maintained in
sufficient amounts to protect the Company against such liability or at a
reasonable cost. Certain arrangements also require the Company to indemnify
third parties against any liabilities that may arise in connection with such
third party's activities on behalf of the Company.
11
<PAGE> 15
In the event of an uninsured or inadequately insured claim, the
Company's business and financial condition could be materially adversely
affected.
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Jay Moorin 45 Chairman, President and Chief Executive Officer
Michael A. Zasloff, M.D., Ph.D. 51 Vice Chairman and Executive Vice President
Michael R. Dougherty 39 Executive Vice President and Chief Financial Officer
Roy C. Levitt, M.D. 43 Executive Vice President
Thomas J. Bigger 40 Senior Vice President
Paul A. Litka, M.D. 48 Senior Vice President
</TABLE>
Jay Moorin has served as President and Chief Executive Officer of the
Company since 1991. In July 1996, Mr. Moorin was appointed Chairman of the
Board. Prior to joining the Company, Mr. Moorin served as a Managing Director at
Bear, Stearns & Co., Inc. and was responsible for health care investment banking
and other services to the pharmaceutical and distribution industry. Mr. Moorin
was employed in other capacities by Bear, Stearns from 1988 to 1990. From 1983
to 1988, Mr. Moorin was employed by E. R. Squibb & Co., Inc. ("Squibb"), joining
Squibb as its first Corporate National Accounts Director and subsequently was
promoted to Business Area Director and Vice President of Marketing and Business
Development at SquibbMark, a division of Squibb.
Michael A. Zasloff, M.D. has served as Executive Vice President of the
Company and President of the Magainin Research Institute, a division of the
Company, since July 1992. In July 1996, Dr. Zasloff was appointed Vice Chairman
of the Board. From 1988 until Dr. Zasloff joined the Company on a full-time
basis in July 1992, Dr. Zasloff was the Company's Chief Scientific Advisor and
served as the Charles E.H. Upham Professor, Department of Pediatrics and
Genetics, University of Pennsylvania School of Medicine, and Chief, Division of
Human Genetics and Molecular Biology, the Children's Hospital of Philadelphia.
From 1982 until 1988, Dr. Zasloff was Chief, Human Genetics Branch, National
Institutes of Child Health and Human Development, National Institutes of Health.
Dr. Zasloff currently also serves as Adjunct Professor, Department of Human
Genetics and Orthopedics, University of Pennsylvania School of Medicine.
Michael R. Dougherty has served as Executive Vice President and Chief
Financial Officer of the Company since March 1995. From August 1993, when he
joined the Company, until March 1995, Mr. Dougherty served as Senior Vice
President and Chief Financial Officer. Prior to joining the Company, Mr.
Dougherty served in the following capacities at Centocor, Inc. (a
biopharmaceutical company): Senior Vice President, Chief Financial Officer and
Treasurer, from February 1992 to August 1993, Vice President Corporate Finance
from May 1990 to February 1992 and Treasurer from June 1986 to May 1990.
Roy C. Levitt, M.D., has served as Executive Vice President and the
Director of the Magainin Institute of Molecular Medicine since joining the
Company in January 1996. From 1986 to 1995, Dr. Levitt was a faculty member of
the Department of Anesthesiology and Critical Care Medicine, Neurological
Surgery and Environmental Health Sciences at Johns Hopkins University.
12
<PAGE> 16
Thomas J. Bigger has served as Senior Vice President Business
Development, Marketing and Sales since joining the Company in July 1996. Mr.
Bigger served as Senior Vice President of Advanced Polymer Systems (a drug
development company), in 1994 and 1995. From 1979 to 1994, Mr. Bigger held a
number of positions of increasing responsibility at Rhone-Poulenc Rorer ("RPR"),
including serving as President of Dermik Laboratories, a subsidiary of RPR.
Paul A. Litka, M.D. has served as Senior Vice President Clinical
Research and Regulatory Affairs of the Company since May 1996. From March 1995,
when he joined the Company, until May 1996, Dr. Litka served as Vice President
Clinical Research. From 1991 to 1994, Dr. Litka was Senior Vice President and
General Manager of the Institute for Biological Research and Development, a
clinical research organization.
Officers are elected or appointed by the Board of Directors to serve
until the appointment or election and qualification of their successors or their
earlier termination or resignation.
EMPLOYEES
As of December 31, 1996, the Company had 60 full-time employees. No
employees are covered by collective bargaining agreements, and the Company
considers relations with its employees to be good.
13
<PAGE> 17
ITEM 2. PROPERTIES.
The Company occupies an aggregate of approximately 21,000 square feet
of space in Plymouth Meeting, Pennsylvania, which is used as office and
laboratory space. The Company leases this space pursuant to a lease expiring in
1999, which provides for minimum annual rent payments of approximately $322,000
in the year ending December 31, 1997 and is subject to increases on an annual
basis for the remaining term.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information required by this item is incorporated herein by
reference to page 21 of the Company's 1996 Annual Report to Stockholders, which
is filed as an exhibit to this Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by
reference to page 4 of the Company's 1996 Annual Report to Stockholders, which
is filed as an exhibit to this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein by
reference to pages 5 through 7 of the Company's 1996 Annual Report to
Stockholders, which is filed as an exhibit to this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is incorporated herein by
reference to pages 8 through 19 of the Company's 1996 Annual Report to
Stockholders, which is filed as an exhibit to this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
14
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning directors is
incorporated herein by reference to pages 3 through 5 of the Company's Proxy
Statement, dated March 27, 1997. Set forth in Part I herein is the information
required by this Item concerning executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to pages 8 through 11 of the Company's Proxy Statement, dated March
27, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference to pages 6 through 8 of the Company's Proxy Statement, dated March 27,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Financial Statements
See Index to Financial Statements at page F-1.
Financial Statement Schedules
All schedules have been omitted because they are not applicable, or
not required, or the information is shown in the Financial Statements or Notes
thereto.
Reports on Form 8-K
None.
15
<PAGE> 19
Exhibits
The following is a list of exhibits filed as part of this Annual
Report on Form 10-K. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated
parenthetically, together with a reference to the filing indicated by footnote.
Exhibit No.
-----------
3.1 Restated Certificate of Incorporation of the Registrant
(Exhibit 3.1)(1)
3.2* Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant
3.3 By-laws of the Registrant (Exhibit 3.2)(2)
4.1 Specimen copy of stock certificate for shares of Common Stock
of the Registrant (Exhibit 4.1)(3)
10.1+ 1990 Stock Option Plan of the Registrant (Exhibit 10.1)(2)
10.2+ 1992 Stock Option Plan of the Registrant, as amended (4)
10.3+ Stock Option Agreement with Jay Moorin (Exhibit 10.24)(3)
10.4+ Amendment to Stock Option Agreement with Jay Moorin (Exhibit
10.4)(1)
10.5+ Form of Stock Option Agreement under Stock Option Plans
(Exhibit 4.6)(2)
10.6+ Employment Agreement with Jay Moorin (Exhibit 10.2)(2)
10.7+ Employment Agreement with Michael A. Zasloff (Exhibit
10.23)(3)
10.8+ Amendment of Employment Agreement with Michael A. Zasloff
(Exhibit 10.9)(3)
10.9+ Employment Agreement with Michael R. Dougherty (Exhibit
10.26)(7)
10.10+ Employment Agreement with Roy C. Levitt, M.D. (Exhibit
10.24)(5)(9)
10.11+* Employment Agreement with Paul A. Litka, M.D.
10.12+* Employment Agreement with Thomas J. Bigger
10.13 Lease with respect to Plymouth Meeting, Pennsylvania offices
and laboratories (Exhibit 10.16)(2)
10.14 Master Lease Agreement with Comdisco, Inc. (Exhibit 10.19)(6)
10.15 Patent License Agreement and Sponsored Research Agreement with
The Children's Hospital of Philadelphia (Exhibit 10.15)(2)
10.16 License Agreement with Multiple Peptide Systems, Inc. (Exhibit
10.12)(2)
16
<PAGE> 20
Exhibit No.
-----------
10.17 Second Amendment to License Agreement with Multiple Peptide
Systems, Inc. (Exhibit 10.30)(12)
10.18 Stock Issuance Agreement between the Company and The Scripps
Research Institute. (Exhibit 10.2)(11)
10.19 Stock Issuance Agreement between the Company and Houghten
Pharmaceuticals, Inc. (Exhibit 10.1)(11)
10.20 Form of Credit Agreement, including form of Promissory Note
and Warrant (Exhibit 10.22)(2)
10.21 Form of Amendment to Credit Agreement Warrant (Exhibit
10.18)(6)
10.22 Research and Development Agreement with Abbott Laboratories
(Exhibit 10.23)(7)
10.23 Warrant Agreement with Abbott Laboratories (Exhibit 10.25)(7)
10.24 Manufacturing Agreement with Abbott Laboratories, dated
October 4, 1995 (Exhibit 10.27)(5)(8)
10.25 Stock Issuance Agreement with Abbott Laboratories, dated
October 4, 1995 (Exhibit 10.28)(5)(8)
10.26 Assignment Agreement between Magainin Pharmaceuticals Inc.,
Roy C. Levitt, M.D. and GeneQuest, Inc. (Exhibit 10.25) (5)(9)
10.27 Form of Purchase Agreement relating to the issuance by the
Company of units consisting of shares of the Company's Common
Stock and warrants to purchase shares of the Company's Common
Stock. (Exhibit 10.1)(10)
10.28 Form of Warrant to purchase shares of the Company's Common
Stock. (Exhibit 10.2)(10)
10.29* Development, Supply and Distribution Agreement, effective as
of February 12, 1997 with SmithKline Beecham Corporation (13)
13* 1996 Annual Report to Stockholders
23* Consent of Richard A. Eisner & Company
24* Power of Attorney (included on signature page of this Annual
Report on Form 10-K)
- -------------------
* Filed herewith.
+ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended June 30, 1992 filed with the Securities and Exchange Commission
on September 24, 1992.
(2) Filed as an Exhibit to Registration Statement (No. 33-43579) on Form
S-1 filed with the Securities and Exchange Commission on October 24,
1991.
17
<PAGE> 21
(3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement (No. 33-43579) on Form S-1 filed with the Securities and
Exchange Commission on November 27, 1991.
(4) Filed as Exhibit A to the Company's Proxy Statement for the 1996 Annual
Meeting of Stockholders.
(5) Portions of this Exhibit were omitted and filed separately with the
Securities and Exchange Commission pursuant to an order granting
confidential treatment.
(6) Filed as an Exhibit to the Transition Report on Form 10-K for the year
ended December 31, 1993 filed with the Securities and Exchange
Commission on March 9, 1994.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1994 filed with the Securities and Exchange
Commission on March 31, 1995.
(8) Filed as an Exhibit to the Form 10-Q for the quarter ended September
30, 1995 filed with the Securities and Exchange Commission on November
9, 1995.
(9) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1995 filed with the Securities and Exchange
Commission on March 29, 1996.
(10) Filed as an Exhibit to Registration Statement (No. 333-9927) on Form
S-3 filed with the Securities and Exchange Commission on August 9,
1996.
(11) Filed as an Exhibit to Registration Statement (No. 333-14555) on Form
S-3 filed with the Securities and Exchange Commission on October 21,
1996.
(12) Filed as an Exhibit to the Form 10-Q for the quarter ended September
30, 1996 filed with the Securities and Exchange Commission on November
14, 1996.
(13) Portions of this Exhibit have been omitted and filed separately with
the Securities and Exchange Commission pursuant to the Company's
Application Requesting Confidential Treatment under the Securities
Exchange Act of 1934.
18
<PAGE> 22
MAGAININ PHARMACEUTICALS INC.
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2 19*
Balance Sheets 8*
Statements of Operations 9*
Statements of Changes in Stockholders' Equity 10*
Statements of Cash Flows 11*
Notes to Financial Statements 12-18*
* References to page numbers, except page F-2, are to the Company's 1996
Annual Report to Stockholders, which is included as Exhibit 13 hereto.
F-1
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Magainin Pharmaceuticals Inc.
Plymouth Meeting, Pennsylvania
We have audited the accompanying balance sheets of Magainin Pharmaceuticals Inc.
(a development stage company) as at December 31, 1996, and December 31, 1995 and
the related statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996 and
for the period June 29, 1987 (inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Magainin Pharmaceuticals Inc. at
December 31, 1996, and December 31, 1995 and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1996 and for the period June 29, 1987 (inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
January 29, 1997
F-2
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MAGAININ PHARMACEUTICALS INC.
Date: March 25, 1997 By: /s/Jay Moorin
--------------------------------
Jay Moorin
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Each person whose signature appears below in so signing also makes,
constitutes and appoints Jay Moorin, Chairman, President and Chief Executive
Officer, and Michael R. Dougherty, Executive Vice President and Chief Financial
Officer, and each of them severally, his true and lawful attorney-in-fact, in
his name, place and stead to execute and cause to be filed with the Securities
and Exchange Commission any or all amendments to this report.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Jay Moorin Chairman, President and Chief March 25, 1997
- ---------------------------------------- Executive Officer and Director
Jay Moorin (Principal Executive Officer)
/s/Michael A. Zasloff, M.D., Ph.D. Vice Chairman, Executive Vice President March 25, 1997
- ---------------------------------------- and Director
Michael A. Zasloff, M.D., Ph.D.
/s/Michael R. Dougherty Executive Vice President and Chief March 25, 1997
- ---------------------------------------- Financial Officer (Principal
Michael R. Dougherty Financial and Accounting Officer)
/s/Bernard Canavan, M.D. Director March 25, 1997
- ----------------------------------------
Bernard Canavan, M.D.
/s/James H. Cavanaugh, Ph.D Director March 25, 1997
- ----------------------------------------
James H. Cavanaugh, Ph.D.
/s/Zola P. Horovitz, Ph.D Director March 25, 1997
- ----------------------------------------
Zola P. Horovitz, Ph.D.
/s/Charles A. Sanders, M.D. Director March 25, 1997
- ----------------------------------------
Charles A. Sanders, M.D.
/s/Robert F. Shapiro Director March 25, 1997
- ----------------------------------------
Robert F. Shapiro
/s/James B. Wyngaarden, M.D. Director March 25, 1997
- ----------------------------------------
James B. Wyngaarden, M.D.
</TABLE>
<PAGE> 25
Exhibit Index
Exhibit No. Page No.
- ----------- --------
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant
10.11 Employment Agreement with Paul A. Litka, M.D.
10.12 Employment Agreement with Thomas J. Bigger
10.30 Development, Supply and Distribution Agreement, effective as
of February 12, 1997 with SmithKline Beecham Corporation
13 1996 Annual Report to Stockholders
23 Consent of Richard A. Eisner & Company
24 Power of Attorney (included on signature page of this Annual
Report on Form 10-K)
<PAGE> 1
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
MAGAININ PHARMACEUTICALS INC.
Magainin Pharmaceuticals Inc., a Delaware corporation (the
"Corporation"), does hereby amend its Restated Certificate of Incorporation
pursuant to the provisions of Section 242 of the Delaware General Corporation
Law as set forth below:
1. The first paragraph of Article FOURTH of the Restated
Certificate of Incorporation is hereby amended to read in its entirety as
follows:
"FOURTH: The total number of shares of all classes of stock
which the Corporation shall have authority to issue is
54,211,031, consisting of 9,211,031 shares of Convertible
Preferred Stock, $.001 par value (the "Preferred Stock"), and
45,000,000 shares of Common Stock, $.002 par value (the
"Common Stock")."
2. The Corporation hereby certifies that the amendment set
forth in paragraph 1 above has been duly adopted in accordance with the
provisions of Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate of Amendment of the Restated Certificate of Incorporation to be duly
adopted in accordance with the provisions of Section 242 of the Delaware General
Corporation Law and to be executed in its corporate name on the 20th day of May,
1996.
MAGAININ PHARMACEUTICALS INC.
By: /s/ Jay Moorin
------------------------------
Jay Moorin
President and Chief Executive
Officer
<PAGE> 1
March 20, 1995
CONFIDENTIAL
VIA FEDERAL EXPRESS
Dr. Paul Litka
305 Farwood Road
Wynnewood, PA 19096
Dear Paul:
I am pleased to offer you the position of Vice President, Clinical Research with
Magainin Pharmaceuticals Inc., reporting to Dr. Leonard Jacob, Executive Vice
President and Chief Operating Officer of the Company. The base salary for this
position will be $12,500 per month ($150,000/year). Contingent upon your
acceptance of this offer, it is expected that the Compensation Committee of the
Board of Directors will grant to you at its next meeting options to purchase
40,000 shares of Magainin common stock, exercisable at the fair market value of
the underlying common stock on the date of such meeting. These options will have
a term of 10 years and vest at the rate of 25% per year beginning on the first
anniversary of the date of your commencement of employment. As with all Magainin
options, the grant will be subject to execution of a stock option agreement in
the form specified by the Compensation Committee. A copy of our Stock Option
Plan is attached hereto. Additionally, you will be eligible to participate in
any Cash Bonus Plan which might be approved by the Company's Senior Management
and Board of Directors.
If your employment is terminated without cause, you will receive your monthly
base salary for six (6) months following the date of termination, or for such
shorter period until you have secured employment elsewhere.
Magainin may have already provided you with certain of its confidential business
or scientific information which it expects you to keep confidential and to use
only to further Magainin's legitimate business interests. If you have not
already signed an agreement to keep Magainin's business and scientific
information confidential, you will be asked to do so at the start of your
employment, and a copy of that agreement is enclosed. Just as Magainin expects
you to keep confidential its business or scientific information, Magainin also
expects you to honor your obligations to your former employers with respect to
maintaining the confidentiality of their business or scientific information.
<PAGE> 2
Dr. Paul Litka
March 20, 1995
Page 2
In addition to the confidentiality agreement, you will be subject to such other
obligations as employees of our Company may be subject. In addition, you will be
eligible for our benefits package available to all employees. This package for
you will be supplemented to include an aggregate of twenty (20) vacation days
per year, in addition to two (2) personal days. Enclosed is a summary of other
benefits.
We look forward to your joining us at Magainin Pharmaceuticals Inc. Please
indicate acceptance of this offer, which is for at will employment, by your
signature below. Please also indicate a mutually agreeable start date and return
it to me using the enclosed Federal Express mailer at your earliest convenience.
This offer of employment will remain in effect until Thursday, March 30, 1995.
If you have any questions, please do not hesitate to call myself or Dr. Jacob.
Sincerely yours,
/s/ Michael R. Dougherty
- --------------------------------
Michael R. Dougherty
Senior Vice President and
Chief Financial Officer
Accepted: /s/ Paul Litka Date: March 24, 1995
------------------------ -------------------
Dr. Paul Litka
Starting Date: April 3, 1995
-----------------------
cc: L. Jacob
MRD:mk
<PAGE> 1
June 18, 1996
CONFIDENTIAL
VIA FEDERAL EXPRESS
Mr. Thomas J. Bigger
102 Royal Worlington
Williamsburg, VA 23188
Dear Tom:
I am pleased to offer you the position of Senior Vice President Business
Development, Marketing and Sales, Magainin Pharmaceuticals Inc., reporting to
Mr. Jay Moorin, President and Chief Executive Officer of the Company, subject to
the terms and conditions of this letter. The base salary for this position will
be $17,500 per month ($210,000/year). Upon your commencement of employment with
the Company, it is expected that the Compensation Committee of the Board of
Directors will grant to you options to purchase 125,000 shares of Magainin
Common Stock, exercisable at the fair market value of the underlying Common
Stock on the date of your commencement of employment. These options will have a
term of 10 years and vest at the rate of 25% per year beginning on the first
anniversary of the date of your commencement of employment. As with all Magainin
options, the grant will be subject to execution of a stock option agreement in
the form specified by the Compensation Committee. A copy of our Stock Option
Plan is attached hereto.
The following additional provisions will apply to your employment:
(i) You will receive additional option grants, contingent upon
your continued employment and the occurrence of the following
events in the next two years:
a) 12,500 shares upon the completion of a collaborative
arrangement providing for customary terms, including
an upfront payment of at least $5 million.
b) 12,500 shares upon the completion of a second
collaborative arrangement providing for customary
terms, including an upfront payment of at least $5
million.
Such additional option grants will be exercisable at
the fair market value of the Common Stock on the date
of such grants and will vest over four years at the
rate of 25% per year, and will have a term of 10
years.
<PAGE> 2
Mr. Thomas J. Bigger
June 18, 1996
Page 2
(ii) You will be eligible for merit increases, cash bonuses, and
such further stock option grants as may be awarded at the
annual discretion of the Company's Board of Directors.
(iii) You will be eligible to participate in Magainin's Employee
Benefit Plans, including health, life, disability and 401k.
You will be entitled to 4 weeks vacation. A summary of these
benefits is available for your review.
Furthermore, we will reimburse you for relocation expenses as provided for in
Attachment A. We request that you manage the relocation process in the most cost
effective manner possible. Upon the commencement of your employment with the
Company, you will execute the Company's Drug Free Workplace Policy, Proprietary
Information Agreement, Policy Statement on Securities Trading by Magainin
Personnel and Corporate Governance - Conflict of Interest Policy, each in the
form previously provided to you. Magainin may have already provided you with
certain of its confidential business or scientific information which it expects
you to keep confidential and to use only to further Magainin's legitimate
business interests. Just as Magainin expects you to keep confidential its
business or scientific information, Magainin also expects you to honor your
obligations to your former employers with respect to maintaining the
confidentiality of their business or scientific information.
All of the terms and provisions of this Agreement shall be binding upon and
inure to the benefit and be enforceable by the respective heirs,
representatives, successors (including any successor as a result of a merger or
similar reorganization) and assigns of the parties hereto, except that your
duties and responsibilities hereunder are of a personal nature and shall not be
assignable in whole or in part by you.
We look forward to your joining us at Magainin Pharmaceuticals Inc. Please
indicate acceptance of this offer, which is for at will employment, by your
signature below. We have agreed that your starting date for employment with
Magainin will be July 1, 1996
If you have any questions, please do not hesitate to call me or Mr. Moorin.
Sincerely yours,
/s/ Michael R. Dougherty
- ---------------------------------
Michael R. Dougherty
Executive Vice President and
Chief Financial Officer
Accepted: /s/ Thomas Bigger Date: June 20, 1996
------------------------ -----------------
THOMAS BIGGER
cc: Jay Moorin
<PAGE> 3
ATTACHMENT A
MOVING COST REIMBURSEMENT
Magainin Pharmaceuticals Inc. (MPI) will pay your expenses of moving, that is,
the reasonable, direct, out of pocket costs of transporting yourself, your
family and your household items from your current residence to your new
residence located near MPI. Please submit for approval a detailed estimate of
such expenses prior to their incurrence.
HOUSE HUNTING TRIPS
MPI will reimburse you for the reasonable expenses of a two-day (two-night)
visit for you to find suitable housing in the local area. Reasonable expenses
will include the cost of transportation from your current residence, and the
cost of lodging, meals and economy car rental during your stay. MPI has
arrangements with a local hotel for guests, and we will be happy to make these
arrangements for you. At your request, our Human Resources department can
arrange for you to meet a relocation specialist to assist you during your house
hunting trip, including providing you with information prior to your visit and
giving you a tour of the local area.
CLOSING COSTS
MPI will pay the reasonable closing costs of the purchase of a home in the local
area within twelve (12) months of your date of employment. We encourage you to
secure mortgage financing on a "no points" basis.
The following closing (settlement) costs will NOT be paid by MPI:
- any real estate or other taxes (transfer taxes will be paid)
- any insurance premiums (title insurance will be paid)
- any broker fees or commissions
Please submit a detailed estimate of your closing costs to the Human Resources
department for approval PRIOR to your closing date.
TEMPORARY LIVING EXPENSE
MPI will pay the reasonable costs (rent and primary services* only) associated
with your temporary housing at a location approved in advance by the company.
These expenses will be paid for up to twelve (12) months from your date of hire
or until you find a suitable residence, if earlier.
* Primary services include utility expenses (i.e., gas, heat, electricity, phone
hook-up)
<PAGE> 1
DEVELOPMENT, SUPPLY AND DISTRIBUTION AGREEMENT
BETWEEN
SMITHKLINE BEECHAM CORPORATION
AND
MAGAININ PHARMACEUTICALS, INC.
[Confidential Treatment requested for redacted portions of document.]
<PAGE> 2
DEVELOPMENT, SUPPLY AND DISTRIBUTION AGREEMENT
BETWEEN
SMITHKLINE BEECHAM CORPORATION
AND
MAGAININ PHARMACEUTICALS, INC.
<TABLE>
<S> <C>
l. DEFINITIONS....................................................................... 1
2. PAYMENTS TO MPI................................................................... 8
3. RESEARCH, DEVELOPMENT AND
ADDITIONAL DEVELOPMENT............................................................ 11
4. [********************]............................................................ 13
5. PRESENT AND FUTURE DISTRIBUTION RIGHTS............................................ 14
6. TRADEMARKS........................................................................ 15
7. PRODUCT SUPPLY.................................................................... 18
8. RESPONSIBILITIES OF THE PARTIES................................................... 27
9. TERM AND TERMINATION.............................................................. 28
10. RIGHTS AND DUTIES UPON TERMINATION................................................ 31
11. STATEMENTS AND REMITTANCES........................................................ 31
12. RELATIONSHIP OF THE PARTIES....................................................... 36
13. EXCHANGE OF INFORMATION AND CONFIDENTIALITY....................................... 37
14. PATENT PROSECUTION AND LITIGATION................................................. 40
15. WARRANTIES AND REPRESENTATIONS.................................................... 43
16. INDEMNIFICATION AND INSURANCE..................................................... 46
17. DISPUTE RESOLUTION................................................................ 49
18. MISCELLANEOUS..................................................................... 50
18.1 Assignment............................................................... 50
18.2 Entire Agreement......................................................... 50
18.3 Notices.................................................................. 50
18.4 Separability............................................................. 51
18.5 Governing Law............................................................ 52
18.6 Force Majeure............................................................ 52
18.7 Waiver Of Breach......................................................... 52
18.8 Execution in Counterparts................................................ 52
18.9 No Intellectual Property Rights Granted.................................. 52
18.10 Recording................................................................ 52
SIGNATURES........................................................................ 53
APPENDIX A-PATENTS................................................................ 54
</TABLE>
[Confidential Treatment requested for redacted portions of document.]
<PAGE> 3
APPENDIX B-PRODUCT SPECIFICATIONS...................................... 55
[Confidential Treatment requested for redacted portions of document.]
<PAGE> 4
DEVELOPMENT, SUPPLY AND DISTRIBUTION AGREEMENT
THIS DEVELOPMENT, SUPPLY AND DISTRIBUTION AGREEMENT (hereinafter
"AGREEMENT") effective as of the 12th day of February, 1997 (hereinafter
"EFFECTIVE DATE") between SMITHKLINE BEECHAM CORPORATION, a corporation
organized and existing under the laws of the Commonwealth of Pennsylvania, and
having its principal office at One Franklin Plaza, Philadelphia, Pennsylvania
19101 (hereinafter "SB") and MAGAININ PHARMACEUTICALS INC., a corporation
organized and existing under the laws of the State of Delaware and having its
principal office at 5110 Campus Drive, Plymouth Meeting, Pennsylvania 19462
(hereinafter "MPI").
WITNESSETH
WHEREAS, MPI is the owner of all right, title and interest in, or
otherwise controls, certain PATENTS (as hereinafter defined), identified in
Appendix A hereto, and KNOW-HOW (as hereinafter defined) relating to PRODUCT
(as hereinafter defined); and
WHEREAS, SB wishes to be appointed as the exclusive distributor of
PRODUCT in the FIELD (as hereinafter defined) in the TERRITORY (as hereinafter
defined), and MPI is willing to grant such appointment to SB;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, SB and MPI agree that the following
terms and conditions shall constitute the AGREEMENT:
1. DEFINITIONS
1.1 "ADDITIONAL DEVELOPMENT" with respect to PRODUCT shall mean (i)
Phase IV studies with respect to PRODUCT for the TERRITORY which are related to
new labeling claims for PRODUCT (i.e., other than claims related to the INITIAL
INDICATION), and (ii) developing and obtaining regulatory approval for
indications other than the INITIAL INDICATION for the TERRITORY, and (iii)
developing and obtaining regulatory approval
[Confidential Treatment requested for redacted portions of document.]
<PAGE> 5
in the TERRITORY for new formulations of PRODUCT or additional dosage forms of
the formulation of PRODUCT in existence as of the EFFECTIVE DATE.
1.2 "ADVERSE EXPERIENCE(S)" shall mean any noxious, pathological or
unintended change in anatomical, physiological or metabolic function as
indicated by physical signs, symptoms and/or laboratory changes occurring in
clinical trials, post-marketing surveillance, or clinical practice during use of
PRODUCT, or published in the medical literature, whether or not considered
causally related to PRODUCT. This includes an exacerbation of a pre-existing
condition, intercurrent illness, drug interaction, significant worsening of a
disease under investigation or treatment, and significant failure of expected
pharmacological or biological action.
1.3 "ADDITIONAL PRODUCT" shall mean PRODUCT in any dosage form or for
any indication which was the result of ADDITIONAL DEVELOPMENT.
1.4 "AFFILIATE" means any corporation, firm, partnership, or other
entity, whether de jure or de facto, which directly or indirectly owns, is owned
by or is under common ownership with a PARTY to this AGREEMENT to the extent of
at least fifty percent (50%) of the equity (or, with respect to SB, such lesser
percentage which is the maximum allowed to be owned by a foreign corporation in
a particular jurisdiction) having the power to vote on or direct the affairs of
the entity and any person, firm, partnership, corporation or other entity
actually controlled by, controlling or under common control with SB or MPI, as
the case may be, except that for purposes of this AGREEMENT, any venture capital
entity that has an interest in MPI shall not be considered an AFFILIATE of MPI
and any corporation controlled by such a venture capital entity shall not be
considered an AFFILIATE of MPI by virtue of such relationship with such venture
capital entity.
1.5 "CALENDAR QUARTER" shall mean the period of three (3) consecutive
calendar months ending on each March 31, June 30, September 30 or December 31,
as the case may be, of a YEAR.
1.6 "COMBINATION PRODUCT" shall mean PRODUCT formulated in combination
with one or more additional therapeutically or prophylactically active
ingredients
[Confidential Treatment requested for redacted portions of document.] Page 2
<PAGE> 6
or with one or more agents which augments the therapeutic or prophylactic
efficacy of PRODUCT.
1.7 "COST OF GOODS" shall mean the direct labor, materials and factory
costs incurred by MPI to manufacture and package PRODUCT, on a per unit basis,
in finished package form, determined in accordance with generally accepted
accounting principles (GAAP). To the extent that the manufacturing of PRODUCT or
any component thereof is performed for MPI by a THIRD PARTY (which is not an
AFFILIATE of MPI), the actual supply price paid to such THIRD PARTY shall also
be included in COST OF GOODS, provided that such supply price shall be
negotiated by MPI in good faith with each such THIRD PARTY manufacturer.
1.8 "FDA" shall mean the United States Food and Drug Administration.
1.9 "FIELD" shall mean all human therapeutic and prophylactic uses of
PRODUCT including, but not limited to, the INITIAL INDICATION.
1.10 "FIRST COMMERCIAL SALE" shall mean the first date upon which there
is a commercial sale by SB, its AFFILIATES or its subdistributors of PRODUCT in
the FIELD in the TERRITORY.
1.11 "INITIAL INDICATION" shall mean the treatment of infection in
diabetic foot ulcers.
1.12 "KNOW-HOW" shall mean all present and future technical information
and know-how which relates to PRODUCT and shall include, without limitation, all
biological, chemical, pharmacological, toxicological, clinical, assay, control
and manufacturing data and any other information relating to PRODUCT and useful
for the development and commercialization of PRODUCT in the FIELD in the
TERRITORY.
1.13 "MPI NET SALES" shall mean the gross receipts from sales of
ADDITIONAL PRODUCT outside the TERRITORY by MPI, its AFFILIATES, its licensees
and its distributors ("the Selling Party") to THIRD PARTIES less deductions
actually allowed or specifically allocated to ADDITIONAL PRODUCT by the Selling
Party using generally accepted accounting standards for:
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<PAGE> 7
(i) packing, handling and transportation charges, including
insurance, for transporting ADDITIONAL PRODUCT to the extent
that they appear on the invoice;
(ii) sales and excise taxes and duties paid or allowed by the
Selling Party and any other governmental charges imposed upon
the production, importation, use or sale of such ADDITIONAL
PRODUCT;
(iii) trade, quantity and cash discounts allowed on ADDITIONAL
PRODUCT;
(iv) allowances or credits to customers on account of
rejection or return of ADDITIONAL PRODUCT or on account of
retroactive price reductions affecting such ADDITIONAL
PRODUCT; and
(v) ADDITIONAL PRODUCT rebates and ADDITIONAL PRODUCT charge
backs including those granted to managed care entities.
Sales between MPI, its AFFILIATES and its or their licensees and distributors
shall be excluded from the computation of MPI NET SALES and no payments will be
payable on such sales except where such AFFILIATES, licensees, or distributors
are end users, but MPI NET SALES shall include the subsequent final sales to
THIRD PARTIES by such AFFILIATES, licensees or distributors.
1.14 "MSI-78" shall mean a peptide having the following sequence:
GIGKFLKKAKKFGKAFVKILKK, wherein:
"G" means the amino acid known as glycine,
"I" means the amino acid known as isoleucine,
"K" means the amino acid known as lysine,
"F" means the amino acid known as phenylalanine,
"L" means the amino acid known as leucine,
"A" means the amino acid known as alanine, and
"V" means the amino acid known as valine,
or any analog or sequence variant of such peptide having activity substantially
similar to such peptide.
[Confidential Treatment requested for redacted portions of document.] Page 4
<PAGE> 8
1.15 "NDA APPROVAL" shall mean the FDA's approval of a New Drug
Application in accordance with the requirements of the FDA ("NDA") filed by or
on behalf of MPI to market PRODUCT in the U.S.A. for the INITIAL INDICATION.
1.16 "NET SALES" shall mean the gross receipts from sales of PRODUCT
in the TERRITORY by SB, its AFFILIATES or subdistributors ("the Selling Party")
to THIRD PARTIES less deductions actually allowed or specifically allocated to
PRODUCT by the Selling Party using generally accepted accounting standards for:
(i) packing, handling and transportation charges,
including insurance, for transporting PRODUCT to the
extent that they appear on the invoice;
(ii) sales and excise taxes and duties paid or allowed by
the Selling Party and any other governmental charges
imposed upon the production, importation, use or sale
of such PRODUCT;
(iii) trade, quantity and cash discounts allowed on
PRODUCT;
(iv) allowances or credits to customers on account of
rejection or return of PRODUCT [********************
****************************************************
****************************************************
*******************************];
(v) allowances or credits to customers on account of
retroactive price reductions affecting such PRODUCT;
and
(vi) PRODUCT rebates and PRODUCT charge backs including
those granted to managed care entities.
Sales between SB, its AFFILIATES and its or their subdistributors shall be
excluded from the computation of NET SALES and no payments will be payable on
such sales except where such AFFILIATES or subdistributors are end users, but
NET SALES shall include the subsequent final sales to THIRD PARTIES by such
AFFILIATES or subdistributors. Notwithstanding the immediately preceding
sentence, it is understood that any transactions between SB or any of its
AFFILIATES or any of its or their subdistributors on the one hand and PSB on the
other hand will be deemed to be transactions with THIRD PARTIES for the
[Confidential Treatment requested for redacted portions of document.] Page 5
<PAGE> 9
purposes of computing NET SALES, provided that the conditions of such sales to
PSB, including any and all rebates and discounts allocated to transactions with
any such PSB, shall be on an arms length basis and shall be fully deductible for
such computation purposes. In the event that any PSB type activity is within SB
or within any of its AFFILIATES or its or their subdistributors as only part of
its or their total activities rather than in a separate AFFILIATE, a notional
Net Sales figure will be calculated on an arms length basis to cover such
activities. The term "PSB" as used in this Paragraph shall mean any present or
future AFFILIATE of SB or its subdistributors which conducts a Pharmaceutical
Service Business for or on behalf of THIRD PARTIES, including Pharmaceutical
Benefits Management Services (hereinafter "PBM"), wholesaler distribution,
pharmacy distribution, managed-care services, disease- management services,
hospital services, or mail-order prescription pharmacy services. As of the
EFFECTIVE DATE, an AFFILIATE of SB which is included within the definition of
PBM is Diversified Pharmaceutical Services, a corporation of the state of
Minnesota and having a place of business at 3600 West 80th Street, Seventh
Floor, Bloomington, Minnesota 55431-1085, U.S.A. In addition, as of the
EFFECTIVE DATE, an AFFILIATE of SB which is included within the definition of
PSB is the mail-order prescription pharmacy entity known as Diversified
Prescription Delivery, a corporation of the Commonwealth of Pennsylvania and
having a place of business at 206 Welsh Road, Horsham, Pennsylvania 19044,
U.S.A.
1.17 "PARTY(IES)" means an entity(ies) who is a party to this
AGREEMENT.
1.18 "PATENTS" shall mean all patents and patent applications in the
TERRITORY, including all continuations, continuations-in-part, divisions,
patents of addition, reissues, renewals or extensions thereof, which are or
become owned by MPI, or to which MPI otherwise has, now or in the future, the
right to grant licenses, which generically or specifically claim PRODUCT, a
method of using PRODUCT, a process for manufacturing PRODUCT, or an intermediate
used in such process or a use of PRODUCT. Also included within the definition of
PATENTS are any patents or patent applications which generically or specifically
claim any improvements on PRODUCT or intermediates or manufacturing processes
required or useful for production of PRODUCT which are developed by MPI, or
which MPI otherwise has the right to grant licenses, now or in the future,
during the term of
[Confidential Treatment requested for redacted portions of document.] Page 6
<PAGE> 10
this AGREEMENT. The current list of patent applications and patents encompassed
within PATENTS is set forth in APPENDIX A attached hereto.
1.19 "PRODUCT" shall mean MSI-78 and shall include compositions
comprising MSI-78.
1.20 "RESEARCH AND DEVELOPMENT" means research, preclinical
development, clinical development and all other activities associated with the
pursuit in the U.S.A. of NDA APPROVAL and its equivalent in the other countries
of the TERRITORY, including, but not limited to, any studies requested by the
FDA after NDA APPROVAL.
1.21 "STUDY 304" shall mean that Phase III clinical study related to
PRODUCT which was submitted to the FDA by MPI with a protocol titled "MSI-78
Study 304".
1.22 "SUPPLY PRICE" shall mean, with respect to each unit of PRODUCT
which is the subject of NET SALES in a YEAR by SB, the payment outlined in
Paragraph 2.3.
1.23 "TARGET LABELING" shall mean labeling which includes, as an
indication for PRODUCT, the treatment of infection in diabetic foot ulcers.
1.24 "TERRITORY" shall mean Mexico, Canada, and the United States of
America, including all of its territories and possessions, such as, but not
limited to Puerto Rico.
1.25 "THIRD PARTY" shall mean any person other than a PARTY to this
AGREEMENT.
1.26 "TRADEMARK" shall mean, except as otherwise provided in Paragraph
6.2, the CYTOLEX trademark which MPI has applied for or registered, or will
apply for or register, at MPI's expense, in all countries in the TERRITORY.
1.27 "U.S.A." shall mean the United States of America, including all of
its territories and possessions, such as, but not limited to Puerto Rico.
1.28 "YEAR(S)" shall mean each 12-month period following the date of
the FIRST COMMERCIAL SALE in the TERRITORY.
[Confidential Treatment requested for redacted portions of document.] Page 7
<PAGE> 11
2. PAYMENTS TO MPI
2.1 SB shall make a non-refundable payment of five million U.S. dollars
(U.S. $5,000,000) to MPI within ten (10) days after the EFFECTIVE DATE.
2.2 SB shall pay to MPI up to a total of twenty seven million five
hundred thousand U.S. dollars (U.S. $27,500,000) in the increments set forth
below within thirty (30) days after the occurrence of the following events:
[***********************************************************************
************************************************************************
************************************************************************
***********************************************************************]
provided that:
(a) each such payment shall be made only one time regardless of how
many times PRODUCT achieves each of the indicated events, and no payment shall
be owed for an event which does not occur;
(b) each such payment shall be non-refundable to SB and non-creditable
by SB for any reason except as otherwise provided in this AGREEMENT;
(c) [*****************************************************************
********************************************************************************
********************************************************************************
*****************************************************************]
(d) [*****************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
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<PAGE> 12
********************************************************************************
********************************************************************************
********************************************************************************
**************************************************************************];
(e) [*****************************************************************
********************************************************************************
********************************************************************************
************************************************************************];
and
(f) [*****************************************************************
********************************************************************************
********************************************************************************
***********************************************************************].
2.3 In consideration for the supply of PRODUCT by MPI in accordance with
Article 7, SB shall pay to MPI the following SUPPLY PRICE:
(a) [***********************************************
**********************************************];
(b) [***********************************************
**********************************************];
(c) [***********************************************
**********************************************];
(d) [***********************************************
**********************************************]; and
(e) [***********************************************
**********************************************].
All payments made by SB under this Paragraph 2.3 shall be subject to any credits
due under Paragraph 7.2(a)(i) and Paragraph 7.4 and shall be made in accordance
with Paragraphs 11.7(a) and (b).
[Confidential Treatment requested for redacted portions of document.] Page 9
<PAGE> 13
2.4 The SUPPLY PRICE for COMBINATION PRODUCT shall be determined, in
good faith, by the parties at an appropriate time, provided that it is
understood that such shall be adjusted from the SUPPLY PRICE which is set forth
in Paragraph 2.3.
2.5 If, during the term of this AGREEMENT, substantial competition
occurs in a country of the TERRITORY between PRODUCT and one or more THIRD PARTY
products which contains MSI-78 and which do not infringe the PATENTS, and for so
long as such substantial competition is continuing, SB's SUPPLY PRICE
obligations under Paragraph 2.3 shall be renegotiated by the parties at SB's
request, in good faith, to determine appropriate arrangements which will enable
MPI, in its opinion, to receive adequate remuneration for each such PRODUCT
sold, while enabling SB, in SB's opinion, to remain competitive in the
marketplace and still receive adequate remuneration for each such PRODUCT sold.
For purposes of this Paragraph, "substantial competition" shall mean a total
sales volume of such THIRD PARTIES combined, in the particular country of the
TERRITORY, of at least [***********] of NET SALES volume of such PRODUCT in such
country, and "continuing" shall mean a period of at least [**************]. SB
shall give MPI written notice of such substantial competition with suitable and
reasonable supporting documentation, including, for example, but not limited to,
copies of market survey reports, THIRD PARTY bid activities, competitive
promotional materials, and internal financial statements. Any reduction in the
payment due from SB as a result of such THIRD PARTY competition shall be applied
retroactively to the date on which substantial competition appeared in the
TERRITORY as supported by reasonable documentation and shall be available to SB
only for the period such competition remains substantial (as defined in this
Paragraph).
2.6 During the term of this AGREEMENT, the parties, in good faith,
shall mutually determine if it is necessary to seek a license from, and make
royalty or other fee payments to, any THIRD PARTY in order to avoid infringement
during SB's exercise of its right to distribute PRODUCT in the TERRITORY under
this AGREEMENT, provided that if the parties cannot agree on the need for any
such license or the commercial provisions relating to such license, the parties
shall endeavor to find a mutually acceptable resolution of this matter, and if
the parties cannot determine such a mutually acceptable resolution, the parties
[Confidential Treatment requested for redacted portions of document.] Page 10
<PAGE> 14
shall submit the matter to a mutually acceptable THIRD PARTY expert for a final
and binding resolution. The cost of such expert shall be equally shared by the
parties. If there is a positive determination of the need for a license by the
parties or by the expert, all royalties or other payments to any THIRD PARTY as
a result of such license shall be paid by MPI. In addition, MPI shall bear all
financial responsibility for any agreement entered into by MPI with a THIRD
PARTY as of the EFFECTIVE DATE underwhich MPI has an obligation to make royalty
or other fee payments to such THIRD PARTY in order to avoid infringement during
SB's exercise of its right to distribute PRODUCT in the TERRITORY under this
AGREEMENT. Furthermore, MPI shall bear all financial responsibility for any
agreement entered into by MPI with a THIRD PARTY as of or after the EFFECTIVE
DATE related to the supply of PRODUCT by MPI to SB in the TERRITORY under this
AGREEMENT.
3. RESEARCH, DEVELOPMENT AND ADDITIONAL DEVELOPMENT
3.1 MPI shall determine the work to be performed with respect to
RESEARCH AND DEVELOPMENT for PRODUCT, and shall conduct and manage such RESEARCH
AND DEVELOPMENT at its sole expense. MPI shall use reasonable efforts and
diligence in conducting RESEARCH AND DEVELOPMENT in accordance with its
business, legal, medical and scientific judgment. MPI will consult with and
inform SB from time to time of its activities with respect to RESEARCH AND
DEVELOPMENT. In addition, SB, at its sole discretion, shall provide input to MPI
regarding any aspect of RESEARCH AND DEVELOPMENT, such as, but not limited to,
the design of any future clinical trial beyond STUDY 304, if such is required by
the FDA. MPI shall immediately notify SB in the event that MPI knows, or has
reason to believe, that MPI will not be able to fulfill its obligations under
this Paragraph.
3.2 MPI shall use reasonable efforts and diligence in accordance with
its business, legal, medical and scientific judgment, to obtain all requisite
registrations and regulatory licenses required for manufacturing and marketing
PRODUCT in the FIELD in the TERRITORY for the INITIAL INDICATION, and MPI shall
own all such registrations and regulatory licenses. All such activity shall be
undertaken at MPI's expense, including, but not
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limited to, all activity related to review and quality control for all clinical
and non clinical reports; auditing of clinical trial sites; review and writing
of Dossier Analysis Plans (DAP); review and writing of summary documents,
assembly and submission of regulatory files in the TERRITORY, and defense of the
NDA or equivalent thereof for the INITIAL INDICATION in the TERRITORY.
Notwithstanding the above, promptly after the EFFECTIVE DATE, the parties shall
establish an Initial Indication Steering Committee, with equal representation
from both PARTIES, to guide and manage the registration of PRODUCT throughout
the TERRITORY. SB shall provide reasonable assistance to MPI in the process of
obtaining NDA APPROVAL, including the rendering of advice and expertise in the
preparation, submission and review of PRODUCT data and the attendance at
meetings with the FDA, provided that the extent of such assistance shall be at
SB's sole discretion. In the event that the Initial Indication Steering
Committee cannot reach a consensus on any issue related thereto, such issue
shall be submitted for resolution to [***************************
*****************************************]. Any expenses incurred by a PARTY due
to its participation in the Initial Indication Steering Committee shall be borne
by such PARTY.
3.3 In the event that the PARTIES mutually agree that there should be
ADDITIONAL DEVELOPMENT of PRODUCT, the PARTIES agree that an Additional
Development Steering Committee, with equal representation from both PARTIES,
shall be established to guide and manage ADDITIONAL DEVELOPMENT of PRODUCT,
including a determination of which PARTY shall perform which aspect of such
ADDITIONAL DEVELOPMENT, provided that in the event that the Additional
Development Steering Committee cannot reach a consensus on any issue related
thereto, such issue shall be finally settled by SB, except with respect to the
budget to be determined by the Additional Development Steering Committee as
outlined in Paragraph 3.5. Except as otherwise provided in Paragraphs 3.4 and
3.5, all other details with respect to the composition, functions and the
details of the operation of the Additional Development Steering Committee shall
be negotiated by mutual agreement of the PARTIES. Any expenses incurred by a
PARTY due to
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its participation in the Additional Development Steering Committee shall be
borne by such PARTY.
3.4 All ADDITIONAL DEVELOPMENT of PRODUCT which is mutually agreed to
by the parties in accordance with Paragraph 3.3 shall be funded by the PARTIES
with SB funding [********] percent ([**]%) and MPI funding [*********] percent
([**]%) of those costs outlined in the budget referenced in Paragraph 3.5.
3.5 All ADDITIONAL DEVELOPMENT of PRODUCT which is mutually agreed to
by the parties in accordance with Paragraph 3.3 shall be performed in accordance
with a Development Plan, which shall be drafted by the Additional Development
Steering Committee, and a budget mutually agreed to by the PARTIES.
3.6 In consideration for SB's contribution to the ADDITIONAL
DEVELOPMENT of PRODUCT, MPI shall pay SB a royalty of [****] percent ([**]%) of
MPI NET SALES.
4. [*********************************************************************
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5. PRESENT AND FUTURE DISTRIBUTION RIGHTS
5.1 Subject to the terms and conditions of this AGREEMENT, SB shall
have the exclusive right to distribute PRODUCT in the FIELD in the TERRITORY. SB
shall have the unfettered right to appoint an AFFILIATE to subdistribute PRODUCT
in the FIELD in the TERRITORY. SB shall not, without the prior written consent
of MPI, appoint any THIRD PARTY subdistributor to distribute PRODUCT in the
FIELD in the TERRITORY, provided that such consent shall not be unreasonably
withheld, and further provided that if MPI consents to any such appointment, SB
shall ensure that such subdistributor shall be bound by SB to observe and
perform terms and conditions similar to those contained in this AGREEMENT so far
as the same are applicable to and are capable of observance and performance by
such subdistributor.
5.2 In the event that SB determines that there are Positive STUDY 304
Results in accordance with Paragraph 2.2(c) then, for a period of one hundred
eighty (180) days thereafter, SB shall have an exclusive option to obtain the
right to exclusively distribute PRODUCT in the FIELD outside of the TERRITORY
upon terms and conditions to be mutually negotiated by the parties in good
faith, except that it is agreed that the cost sharing outlined in Paragraph 3.4
shall remain the same outside of the TERRITORY, and provided that it is
understood that, in the event that the parties do not agree to mutually
acceptable terms [**************************************************************
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6. TRADEMARKS
6.1 MPI hereby grants to SB an exclusive, royalty-free license, with
the right to grant sublicenses, to use the TRADEMARK in the TERRITORY for the
term of this AGREEMENT in connection with the marketing and promotion of PRODUCT
by SB as contemplated in this AGREEMENT.
6.2 MPI agrees to search, file, register and maintain a registration
for the TRADEMARK in the TERRITORY, for the term of this AGREEMENT, at MPI's
expense, for use with PRODUCT. In those countries of the TERRITORY where the
CYTOLEX trademark is not available for use and registration in connection with
PRODUCT, due to a rejection of the trademark by a government agency, actual or
threatened opposition, cancellation or litigation as to use and/or registration
of the TRADEMARK by a THIRD PARTY, and/or a decision by SB that use of the
CYTOLEX trademark is likely to cause confusion with another entity's trademark,
MPI will provide SB will an alternative trademark to the CYTOLEX trademark,
which trademark, if acceptable to SB, will thereafter be known as the TRADEMARK;
and MPI will develop, search, file, register and maintain the new TRADEMARK at
MPI's sole expense.
6.3 In those countries of the TERRITORY where a trademark license must
be recorded, MPI will provide and record a separate trademark license for the
TRADEMARK at MPI's sole expense.
6.4 The ownership and all goodwill from the use of the TRADEMARK shall
vest in and inure to the benefit of MPI.
6.5 MPI controls the nature and quality of PRODUCT on which the
TRADEMARK is used.
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6.6 SB shall submit representative promotional materials, packaging,
and PRODUCT using the TRADEMARK to MPI for MPI's reasonable approval upon their
first use and thereafter upon any change or addition to the previously approved
promotional materials as may be required under applicable law to maintain the
validity of any such TRADEMARK, provided that if MPI has not responded within
four (4) weeks after such submissions, MPI's approval will be deemed to have
been received.
6.7 SB's right to use the TRADEMARK shall terminate in those countries
of the TERRITORY in which SB's rights to PRODUCT are terminated in accordance
with this AGREEMENT, except as otherwise provided in Paragraph 9.1.
6.8 MPI shall defend, indemnify and hold harmless SB, its officers,
directors, shareholders, employees, successors and assigns from any loss,
damage, or liability, including reasonable attorney's fees resulting from any
claim, complaint, suit, proceeding or cause of action by a THIRD PARTY against
any of them alleging trademark infringement resulting from the use and/or
registration of the TRADEMARK.
(a) MPI shall have no obligation under this Paragraph unless SB (i)
gives MPI prompt notice of any claim or lawsuit or other action for which it
seeks to be indemnified under this AGREEMENT, (ii) MPI is granted full authority
and control over the defense, including settlement, against such claim or law
suit or other action, and (iii) SB cooperates fully with MPI and its agents in
defense of the claims or law suit or other action;
(b) SB shall have the right to participate in the defense of any such
claim, complaint, suit, proceeding or cause of action referred to in this
Paragraph utilizing attorneys of its choice, at its own expense, provided
however, that MPI shall have full authority and control to handle any such
claim, complaint, suit, proceeding, or cause of action, including any settlement
or other disposition thereof, for which SB seeks indemnification under this
Paragraph;
6.9 In the event that MPI or SB becomes aware of actual or threatened
infringement of the TRADEMARK anywhere in the TERRITORY, that PARTY shall
promptly notify the other PARTY in writing. SB shall have the first right, but
not the obligation, to bring, at its own expense, an infringement and/or
opposition or cancellation
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action against any THIRD PARTY and to use MPI's name in connection therewith and
to name MPI as a party thereto. If SB does not commence a particular
infringement and/or opposition or cancellation action within ninety (90) days of
receipt of the notice of infringement, then MPI, after notifying SB in writing,
shall be entitled to bring such infringement and/or opposition or cancellation
action at its own expense. The PARTY conducting such action shall have full
control over its conduct, including settlement thereof. In any event, SB and MPI
shall assist one another and cooperate in any such litigation or action at the
other's request without expense to the requesting PARTY.
6.10 In any action brought pursuant to Paragraph 6.9, the PARTY
bringing the action shall indemnify the other PARTY, its officers, directors,
shareholders, employees, agents, successors and assigns from any loss, damage or
liability, including for attorney's fees and costs, which may result from
claims, counterclaims or crossclaims asserted by a defendant, except to the
extent that such losses, damages or liabilities result from negligence or
willful misconduct of the other PARTY.
6.11 MPI and SB shall recover their respective actual out-of-pocket
expenses, or equitable proportions thereof, associated with any litigation or
settlement thereof from any recovery made by any PARTY. Any excess amount shall
be shared by the parties, with SB receiving [*********] percent ([**]%) and MPI
receiving [********] percent ([**]%), until the party which did not bring the
action has received that amount it would have received under this AGREEMENT had
the sales of PRODUCT which were the subject of the litigation or settlement been
made by or on behalf of SB under this AGREEMENT, and any excess amount remaining
shall be retained by the PARTY bringing the action.
6.12 The parties shall keep one another informed of the status of and
of their respective activities regarding any litigation or settlement thereof
concerning TRADEMARK, provided however that no settlement or consent judgment or
other voluntary final disposition of any suit or proceeding defended or action
brought by a PARTY pursuant to Article 6 may be entered into without the consent
of the other PARTY if such settlement would require the other PARTY to be
subject to an injunction or to make a monetary payment or would otherwise
adversely affect the other PARTY's rights under this AGREEMENT.
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7. PRODUCT SUPPLY
7.1 (a) PRECLINICAL, CLINICAL AND PROMOTIONAL REQUIREMENTS: MPI shall
supply SB with all SB's, its AFFILIATES' and its subdistributors' preclinical,
clinical and promotional requirements of PRODUCT in all countries of the
TERRITORY during the term of this AGREEMENT in accordance with the terms and
provisions of this AGREEMENT. Such PRODUCT shall be supplied in finished product
form (i.e., packaged and labeled as appropriate for the use for which it is to
be employed). Such supply shall be supplied to SB at the lower of the lowest
applicable SUPPLY PRICE for such YEAR or COST OF GOODS. All payments made by SB
under this Paragraph shall be subject to any credits due under Paragraphs
7.2(a)(i) and 7.4 and shall be made in accordance with Paragraphs 11.7(a) and
(b).
(b) COMMERCIAL REQUIREMENTS: MPI shall supply SB with all SB's, its
AFFILIATES', and its subdistributors' commercial requirements of PRODUCT in all
countries of the TERRITORY during the term of this AGREEMENT in accordance with
the terms and provisions of this AGREEMENT. Such PRODUCT shall be supplied in
finished product form (i.e., packaged and labeled for sale to the ultimate
consumer). All payments made by SB under this Paragraph shall be subject to any
credits due under Paragraphs 7.2(a)(i) and 7.4 and shall be made in accordance
with Paragraphs 11.7(a) and (b).
7.2 (a) Subject to stability considerations, MPI shall be required to
maintain an inventory of PRODUCT equal to the written estimate provided to MPI
under Paragraph 7.2(b) for the [*************************] of such estimate. SB
shall maintain an inventory of PRODUCT in accordance with SB's normal practices,
and shall give MPI quarterly updates of the extent of such inventory. Each
PARTY's inventories shall only be used in accordance with Paragraphs 7.2(c),
7.2(d), and 7.3. MPI shall use its reasonable efforts in accordance with MPI's
normal practices to promptly replenish any inventory depleted in accordance with
Paragraphs 7.2(c), 7.2(d), and 7.3. MPI's inventory shall be maintained by MPI
at no charge to SB, except as otherwise provided by Paragraph 7.2(a)(i).
Maintenance of SB's inventory shall be subject to the payment obligations
outlined in Paragraph 7.1(b), except as otherwise provided by Paragraph 7.4.
(i) [************************************************
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(b) During the term of this AGREEMENT, at least
[****************************] prior to the start of each CALENDAR QUARTER, SB
shall provide MPI with a written estimate of the quantities of PRODUCT required
during such [***************** *********] and the
[********************************]. Each of such [*********] estimates shall
contain an update of the immediately preceding estimate with respect to the
[********************************] referred to in such preceding estimate. MPI
shall use reasonable efforts to adjust its production capacity to accommodate
SB's forecasts for PRODUCT.
(c) SB shall place its firm order with MPI for PRODUCT
requirements at least [***********************] in advance of the start of the
CALENDAR QUARTER and MPI shall use its best efforts to supply PRODUCT as
required. Such order shall be made pursuant to SB' purchase order form, provided
that no provision on SB's purchase order form which may purport to impose
different conditions upon the PARTIES hereto shall modify the terms of this
AGREEMENT. All orders made by SB shall be deemed accepted unless MPI notifies SB
within ten (10) days from receipt of an order that it is unable to accept such
order. MPI shall use its best efforts to ship PRODUCT in such quantities and on
the dates specified in SB's purchase orders, and if such efforts will not fully
satisfy any such order, SB's and MPI's inventories for such PRODUCT may be
depleted by the amount required to satisfy such order.
(d) Should a particular purchase order call for shipment of
quantities of PRODUCT in excess of [***************************] of the
immediately preceding
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estimated requirements previously provided to MPI, and MPI's reasonable efforts
cannot satisfy all of the excess, SB's and MPI's inventories for such PRODUCT
may be depleted by the amount of the excess. In the event that such inventories
cannot satisfy all the excess over [***], MPI will use reasonable efforts, but
shall not be obligated to ship that portion of excess not available in the
inventories by the dates instructed by SB.
7.3 (a) MPI shall give SB immediate written notice if MPI becomes aware
that it will not be able to substantially satisfy SB's or its subdistributors'
entire requirements of PRODUCT. In such event, or in the event that, without
such prior notice, MPI actually fails to substantially satisfy SB's, it's
AFFILIATES and its subdistributors' entire requirements of PRODUCT, provided
that such requirements cannot be satisfied by SB's and MPI's inventories for
such PRODUCT, and additionally provided that such failure will or does result in
an interruption of supply of PRODUCT to the commercial market, then SB and MPI
will immediately work together, in good faith, to identify an appropriate
alternative source of PRODUCT supply, provided that:
(i) MPI shall use its best efforts to supply SB's,
its AFFILIATES' and its subdistributor' requirements for PRODUCT until such time
as MPI is fully able to supply all such requirements;
(ii) [***********************************************
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**************************************************]; and
(iii) [**********************************************
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7.4 All PRODUCT shipped to SB shall have expiration dating approved by
the FDA of no less than [*************] months. SB shall be under no obligation
to accept any shipment of PRODUCT that does not have at least
[*******************] months remaining of FDA approved expiration dating at the
date of receipt by SB, provided that in the event that SB elects to accept
PRODUCT from MPI which has remaining FDA approved expiration dating of less than
[**********************] months at receipt, SB may return all such PRODUCT in
the event that it expires while housed in SB's inventory or if returned by a
customer for credit due to such expiration, and SB shall receive a full credit
for the SUPPLY PRICE which SB paid for such returned PRODUCT against future
payments owed by SB to MPI under this AGREEMENT.
7.5 As used in this Article, the term "Specifications" shall mean the
requirements and standards pertaining to PRODUCT as agreed by the parties after
the EFFECTIVE DATE which shall then be set forth in APPENDIX B attached hereto,
as such may be modified from time to time, by a writing mutually executed by an
authorized representative of each PARTY. MPI shall provide a Certificate of
Analysis and Conformance ("COA") to SB with each shipment of PRODUCT specifying
that PRODUCT conforms with the Specifications. MPI shall provide the results of
such analysis along with any supporting data. SB shall be under no obligation to
accept any shipment of PRODUCT without an accompanying COA. If the quality of
PRODUCT supplied by MPI under this AGREEMENT is found not to conform to the
Specifications, SB shall notify MPI of such nonconformity no later than thirty
(30) days after receipt thereof and MPI shall replace, at no additional expense
to SB, such PRODUCT with new PRODUCT which does conform within thirty (30) days
after receipt of SB's notification under this Paragraph 7.5. MPI shall be
permitted to analyze any PRODUCT rejected by SB for nonconformity, and to
present MPI's findings with respect to such PRODUCT to SB, provided that SB
shall have the final decision with respect to the nonconformity of any PRODUCT
and SB shall present reasonable evidence to MPI to support such final
nonconformity decision. MPI shall give SB written instructions as to how SB
should, at MPI's expense, dispose of the non-conforming material, and such
instructions shall comply with all appropriate governmental requirements.
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7.6 Notwithstanding anything stated in this AGREEMENT to the contrary,
it is understood and agreed that MPI shall have the right at any time to satisfy
its supply obligations to SB hereunder either in whole or in part through
arrangements with THIRD PARTIES engaged to perform services or supply facilities
or goods in connection with the manufacture, testing, and/or packaging of
PRODUCT, provided that:
(a) MPI shall use its best efforts to set up, as soon as
practicable after the EFFECTIVE DATE, appropriate supply arrangements for MSI-78
in bulk active ingredient form as well as supply arrangements for the secondary
manufacture of bulk MSI-78, such arrangements to be entered into for the purpose
of supplying SB's requirements of PRODUCT under this AGREEMENT in accordance
with the terms and conditions of this AGREEMENT,
(b) [*********************************************************
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********************************************],
(c) [*********************************************************
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********************************************],
(d) SB shall have no responsibility for any capital
expenditures incurred by MPI or its THIRD PARTY contractors for the supply of
PRODUCT to SB under this AGREEMENT, and
(e) in the event that, at any time, MPI shall file in any
court or agency pursuant to any statute or regulation of any state or country, a
petition in bankruptcy or insolvency or for reorganization or for an arrangement
or for the appointment of a receiver or trustee of the PARTY or of its assets,
or if MPI proposes a written agreement of composition or extension of its debts,
or if MPI shall be served with an involuntary petition against it, filed in any
insolvency proceeding, and such petition shall not be dismissed with sixty (60)
days after the
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filing thereof, or if MPI shall propose or be a party to any dissolution or
liquidation, or if MPI shall make an assignment for the benefit of creditors, SB
shall, at its election, assume all of MPI's responsibilities in the TERRITORY
under all of MPI's THIRD PARTY supply arrangements in existence at such time
which are related to the supply of PRODUCT to SB under this AGREEMENT.
7.7 SB shall be solely responsible for the distribution in the
TERRITORY of all PRODUCT supplied by MPI to SB under this AGREEMENT.
7.8 All PRODUCT supplied by MPI to SB under this AGREEMENT shall be
shipped F.O.B. destination, freight collect. Title shall pass to SB upon receipt
and acceptance of PRODUCT by SB. MPI shall use only SB's designated corporate
control carriers. Risk of loss in transit shall lie with MPI.
7.9 All PRODUCT supplied by MPI to SB under this AGREEMENT shall, to
the extent permissible by the laws and regulations in the TERRITORY, include
both the SB and MPI names and logos.
7.10 MPI warrants and represents the following:
(a) all PRODUCT supplied by MPI to SB under this AGREEMENT shall be
manufactured in accordance with the then current good manufacturing practices of
the FDA, as set forth in 21 C.F.R. Parts 210 and 211 and all other applicable
rules, regulations, guides and guidances in the TERRITORY (hereinafter "cGMPs")
and, at the time of delivery of PRODUCT, the PRODUCT will strictly comply with
the Specifications, shall be free from defects in materials and workmanship and
shall not be adulterated or misbranded within the meaning of the U.S. Federal
Food, Drug, and Cosmetic Act, and is not an article which may not, under the
Act, be introduced into interstate commerce.
(b) all PRODUCT sold and shipped pursuant to this AGREEMENT shall be
manufactured in accordance with all applicable federal, state and local
environmental, health and safety laws and regulations in effect at the time and
place of manufacture of PRODUCT, and all waste, including but not limited to all
hazardous waste, generated at the time of manufacture of PRODUCT shall be
disposed of in accordance with all applicable federal, state and local laws and
regulations.
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(c) no changes relating to the manufacturing process of PRODUCT or
relating to any of the materials, functions, or controls of PRODUCT shall be
made without prior written consent of SB, such consent not to be unreasonably
withheld. In the event that MPI believes that such change is necessary, MPI will
provide SB with written notice detailing such proposed change. In no event shall
any change be implemented until MPI has received written approval from SB. SB
shall endeavor to respond to MPI's written notice of such proposed change within
four (4) weeks after receipt thereof.
(d) MPI shall maintain all records as are necessary and appropriate to
demonstrate compliance with cGMPs. MPI shall manufacture PRODUCT in a facility
maintaining a current drug establishment registration with FDA as set forth in
21 C.F.R., Part 207 and registration as importer and/or manufacturer of
controlled substances with the Drug Enforcement Agency ("DEA") as set forth in
21 C.F.R., Part 1300, if applicable.
7.11 MANUFACTURING REGULATORY MATTERS
(a) MPI shall use its best efforts to maintain all regulatory and
governmental permits, licenses and approvals that may be necessary to
manufacture and ship PRODUCT to SB.
(b) MPI will be responsible for any reporting of matters regarding the
manufacture of PRODUCT to the FDA and other relevant regulatory authorities, in
accordance with pertinent laws and regulations. MPI shall immediately notify SB
of any such matter and promptly furnish complete copies of such reports to SB.
MPI shall also advise SB of any occurrence or information which arise out of
MPI's manufacturing activities, whether or not occurring with PRODUCT, which
have or could reasonably be expected to have adverse regulatory compliance
and/or reporting consequences concerning PRODUCT.
(c) MPI shall be responsible for handling and responding to any
appropriate governmental agency inspections with respect to PRODUCT during the
term of this AGREEMENT. MPI shall provide to SB any information reasonably
requested by SB and all information requested by any governmental agency in
connection with any governmental inspection related to PRODUCT. MPI shall
immediately advise SB of any requests by any governmental agency for such
inspections with respect to PRODUCT.
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(d) In the event MPI (or any THIRD PARTY who supplies any component of
PRODUCT to MPI) is inspected by the FDA, DEA, or any similar or related state or
federal health authority, MPI shall promptly notify SB of any alleged violations
or deficiencies relating to the manufacturing facility at which PRODUCT is
manufactured, packaged or stored, and shall promptly disclose to SB all relevant
portions of any notice of observations or potential violations (e.g. FDA
Form-483) as well as a copy of MPI's response thereto.
(e) MPI certifies it did not and will not use in any capacity the
services of any person, including any firm or individual, debarred or subject to
debarment under the Generic Drug Enforcement Act of 1992, amending the Food Drug
and Cosmetic Act at 21 USC 335a. MPI agrees to notify SB immediately in the
event any person providing services to MPI under the scope of the work of this
AGREEMENT is debarred or becomes subject to debarment.
(f) For the limited purpose of permitting a quality and
compliance audit, MPI shall grant to authorized representatives of SB (or a
THIRD PARTY hired on behalf of SB who is reasonably acceptable to MPI), upon
reasonable notice, access to areas of MPI's plants and each of MPI's THIRD PARTY
supply contractor's plants at such times as PRODUCT is being manufactured and
tested for SB by such THIRD PARTY. SB shall provide MPI at least seven (7)
working days notice in writing of its desire to have such access. MPI shall
promptly respond to SB's request and the PARTIES shall agree on the time of the
audit.
(g) SB shall have the right, subject to prior advance notice of at
least seven (7) working days and approval by MPI, not to be unreasonably
withheld, and during normal business hours, to examine those technical records
made by MPI that only relate to PRODUCT and not to MPI operations generally or
in whole or in part to any other product of MPI or of any other customer of MPI.
SB may remove or photocopy any information it reviews or to which it is given
access, provided that such is done solely for the purposes of this AGREEMENT and
that all such information is subject to the confidentiality provisions of
Article 13.
(h) To the extent PRODUCT or its particular manufacture is the specific
subject, MPI shall immediately notify SB of any and all inspections of any MPI
plant or any plant of
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any of MPI's THIRD PARTY supply contractor's by the FDA or any other Federal,
State or local government agency.
(i) In the event MPI should become aware of information that may
require a recall, field alert, product withdrawal or field correction arising
from any defect in any PRODUCT provided under this AGREEMENT, MPI shall
immediately notify SB in writing. In the event that SB decides that a recall,
field alert, product withdrawal, or field correction is necessary due to any
defect in any PRODUCT, SB will notify MPI.
(j) In the event that any PRODUCT is quarantined or recalled, or is
subject to stop-sale action, whether voluntary or by governmental action, it is
agreed and understood that any expenses, including reasonable fees of any
experts or attorneys that may be utilized by either PARTY, government fines or
penalties, related to such recall, quarantine or stop-sale, shall be borne by
the PARTY determined to have been responsible for the basis upon which said
recall, quarantine or stop-sale was initiated. Said determination may be made by
the governmental agency involved, or by mutual AGREEMENT of the parties
following examination and review of all records pertinent to the manufacture of
PRODUCT subject to such recall.
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8. RESPONSIBILITIES OF THE PARTIES
8.1 (a) SB shall use reasonable efforts and diligence, using good
faith and fair dealing, in accordance with its business, legal, medical and
scientific judgment efforts, to market and sell PRODUCT in the FIELD in the
TERRITORY:
(b) SB shall submit a marketing and sales plan for input by
MPI, at least ninety (90) days prior to the commencement of each YEAR. SB agrees
to appropriately consider any MPI input and comments in the finalization of such
plan. In addition, SB and MPI shall meet on an ad hoc basis, no more than two
(2) times per YEAR, at time intervals and at a location or in a teleconference
mutually agreed upon, to enable MPI to obtain an update regarding SB's sales and
marketing efforts. SB agrees to appropriately consider any MPI input and
comments at such meetings.
(c) SB shall provide MPI with quarterly sales reports in
standard SB format, and such other sales and customer information related to
sales of PRODUCT as MPI may reasonably request.
(d) SB shall ensure that PRODUCT is maintained by SB strictly
in the condition required by the Specifications (as defined in Paragraph 7.5),
or in accordance with additional requirements specified from time to time by
applicable government regulation.
(e) SB shall comply with applicable laws and regulations
relating to advertising, labeling, distribution, promotion, marketing and sale
of PRODUCT.
8.2 Each PARTY shall:
(a) Comply with all federal, state and local laws, regulations
and guidelines and professional standards applicable to the performance of its
obligations under this AGREEMENT.
(b) Promptly advise the other PARTY of any governmental
inquiries about PRODUCT. Each PARTY shall furnish to the other PARTY, within
five (5) days after receipt, any report or correspondence issued by the
governmental authority in connection with such inquiry, purged only of trade
secrets of the receiving PARTY that are unrelated to the other PARTY's
activities under this AGREEMENT and any information that is unrelated to
PRODUCT.
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9. TERM AND TERMINATION
9.1 SUPPLY PRICE obligations under this AGREEMENT in each country of
the TERRITORY shall expire in each country of the TERRITORY upon [*************
*******************************************************************************
*******************************************************************************
**************]. Expiration of SB's SUPPLY PRICE obligations in a particular
country of the TERRITORY under this provision shall not preclude SB from
continuing to distribute PRODUCT and to use KNOW-HOW in such country without
further payment obligation to MPI. In the event that SB shall desire to continue
to have an exclusive license to the TRADEMARK in such country after expiration,
it shall notify MPI in writing, and the parties shall promptly negotiate the
terms of such license, in good faith. In the event that SB shall desire to
continue to have MPI supply PRODUCT to SB for such country after expiration, it
shall notify MPI in writing, and the parties shall promptly negotiate the terms
of such supply, in good faith.
9.2 Unless otherwise terminated, this AGREEMENT shall expire upon the
expiration of SB's SUPPLY PRICE obligations to MPI under Article 2 in every
country of the TERRITORY. Expiration of this AGREEMENT under this provision
shall not preclude SB from continuing to distribute PRODUCT and to use KNOW-HOW
throughout the TERRITORY without further SUPPLY PRICE payments.
9.3 If either PARTY fails or neglects to perform any material covenant
or provision of this AGREEMENT and if such default is not corrected within sixty
(60) days after receiving written notice from the other PARTY with respect to
such default, such other PARTY shall have the right to terminate this AGREEMENT
by giving written notice to the PARTY in default provided the notice of
termination is given within six (6) months of the default and prior to
correction of the default.
9.4 SB may terminate this AGREEMENT on a country by country basis by
giving MPI at least thirty (30) days written notice thereof at any time before
SB first markets PRODUCT in such country based on a reasonable determination by
SB, using the same standards SB would use in assessing whether or not to
continue development or
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commercialization of a product of its own making, that the patent,
medical/scientific, technical, regulatory or commercial profile of PRODUCT does
not justify continued development or future commercialization of PRODUCT in such
country. After marketing PRODUCT, SB may terminate this AGREEMENT on a country
by country basis by giving MPI at least [***********] prior written notice
thereof based on a reasonable determination by SB, using the same standards SB
would use in assessing whether or not to continue development or
commercialization of a product of its own making, that the patent,
medical/scientific, technical, regulatory or commercial profile of PRODUCT does
not justify continued marketing of PRODUCT in such country.
9.5 [*************************************************************
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9.6 Notwithstanding any other provision of this AGREEMENT, MPI or SB
may suspend or terminate sale of PRODUCT if the FDA takes any action the result
of which is to prohibit or restrict the manufacture or sale or introduction into
interstate commerce of PRODUCT.
9.7 Either PARTY may terminate this AGREEMENT if, at any time, the
other PARTY shall file in any court or agency pursuant to any statute or
regulation of any state or country, a petition in bankruptcy or insolvency or
for reorganization or for an arrangement or for the appointment of a receiver or
trustee of the PARTY or of its assets, or if the other PARTY proposes a written
agreement of composition or extension of its debts, or if the other PARTY shall
be served with an involuntary petition against it, filed in any insolvency
proceeding, and such petition shall not be dismissed with sixty (60) days after
the filing
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thereof, or if the other PARTY shall propose or be a party to any dissolution or
liquidation, or if the other PARTY shall make an assignment for the benefit of
creditors.
9.8 Notwithstanding the bankruptcy of MPI, or the impairment of
performance by MPI of its obligations under this AGREEMENT as a result of
bankruptcy or insolvency of MPI, SB shall be entitled to retain the licenses
granted herein, subject to MPI's rights to terminate this AGREEMENT for reasons
other than bankruptcy or insolvency as expressly provided in this AGREEMENT.
9.9 All rights and distribution rights granted under or pursuant to
this AGREEMENT by MPI to SB are, and shall otherwise be deemed to be, for
purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of rights to
"intellectual property" as defined under Section 101(52) of the U.S. Bankruptcy
Code. The parties agree that SB, as a licensee of such rights under this
AGREEMENT, shall retain and may fully exercise all of its rights and elections
under the U.S. Bankruptcy Code, subject to performance by SB of its preexisting
obligations under this AGREEMENT. The parties further agree that, in the event
of the commencement of a bankruptcy proceeding by or against MPI under the U.S.
Bankruptcy Code, SB shall be entitled to a complete duplicate of (or complete
access to, as appropriate) any such intellectual property and all embodiments of
such intellectual property, and same, if not already in its possession, shall be
promptly delivered to SB (a) upon any such commencement of a bankruptcy
proceeding upon written request therefor by SB, unless MPI elects to continue to
perform all of its obligations under this AGREEMENT, or (b) if not delivered
under (a) above, upon the rejection of this AGREEMENT by or on behalf of MPI
upon written request therefor by SB, provided, however, that upon MPI's (or its
successor's) written notification to SB that it is again willing and able to
perform all of its obligations under this AGREEMENT, SB shall promptly return
all such tangible materials to MPI, but only to the extent that SB does not
require continued access to such materials to enable SB to perform its
obligations under this AGREEMENT.
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10. RIGHTS AND DUTIES UPON TERMINATION
10.1 Upon termination of this AGREEMENT, MPI shall have the right to
retain any sums already paid by SB hereunder, and SB shall pay all sums accrued
hereunder at the time herein provided.
10.2 Upon termination of this AGREEMENT in its entirety or with
respect to any PRODUCT in any country under Paragraphs 9.3, 9.4, or 9.7, SB
shall notify MPI of the amount of PRODUCT SB and its AFFILIATES, subdistributors
then have on hand, the sale of which would, but for the termination, be subject
to payment obligation to SB under this AGREEMENT, and SB and its subdistributors
shall thereupon be permitted to sell that amount of PRODUCT provided that SB
shall pay the payment obligation thereon at the time herein provided for.
10.3 Expiration or termination of this AGREEMENT shall terminate all
outstanding obligations and liabilities between the parties arising from this
AGREEMENT except those described in Paragraphs 4.1, 6.4, 6.5, 6.7, 6.8, 6.9,
6.10, 6.11, 6.12, 7.10(d), 7.11 (to the extent applicable to PRODUCT supplied
under the AGREEMENT), 8.2 (to the extent applicable to PRODUCT supplied under
the AGREEMENT), 9.1, 9.2, 13.2, 13.3, 13.4, 13.5, 13.6, 13.7, 13.8, 14.1, 14.4,
14.5, 14.6, 14.7, 14.8, and Articles 10, 11, 12, 15, 16, 17, and 18. In
addition, any other provision required to interpret and enforce the parties'
rights and obligations under this AGREEMENT shall also survive, but only to the
extent required for the full observation and performance of this AGREEMENT.
10.4 Termination of the AGREEMENT in accordance with the provisions
hereof shall not limit remedies which may be otherwise available in law or
equity.
11. STATEMENTS AND REMITTANCES
11.1 SB shall keep and require its AFFILIATES and subdistributors to
keep complete and accurate records of all sales of PRODUCT under the
distribution rights granted herein. MPI shall have the right, at MPI's expense,
through a certified public accountant or like person reasonably acceptable to
SB, to examine such records during regular business
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hours during the life of this AGREEMENT and for six (6) months after its
termination; provided, however, that such examination shall not take place more
often than once a year and shall not cover such records for more than the
preceding two (2) years and provided further that such accountant shall report
to MPI only as to the accuracy of the SUPPLY PRICE statements and payments.
11.2 MPI shall keep and require its AFFILIATES and manufacturing
contractors to keep complete and accurate records of all COST OF GOODS of
PRODUCT supplied to SB under this AGREEMENT. SB shall have the right, at SB's
expense, through a certified public accountant or like person reasonably
acceptable to MPI, to examine such records during regular business hours during
the life of this AGREEMENT and for six (6) months after its termination;
provided, however, that such examination shall not take place more often than
once a year and shall not cover such records for more than the preceding two (2)
years and provided further that such accountant shall report to SB only as to
the accuracy of the COST OF GOODS statements and payments.
11.3 Any tax, duty or other levy paid or required to be withheld by SB
on account of payments payable to MPI under this AGREEMENT shall be deducted
from the amount of payments otherwise due. SB shall secure and send to MPI proof
of any such taxes, duties or other levies withheld and paid by SB, its AFFILIATE
or subdistributors for the benefit of MPI.
11.4 All payments due under this AGREEMENT shall be payable in U.S.
Dollars. If governmental regulations prevent remittances from a foreign country
with respect to sales made in that country, the obligation of SB to pay payments
on sales in that country shall be suspended until such remittances are possible.
MPI shall have the right, upon giving written notice to SB, to receive payment
in that country in local currency.
11.5 Monetary conversions from the currency of a foreign country in
which PRODUCT is sold into U.S. Dollars shall be calculated at the actual
average rates of exchange for the year to date as used by SB in producing its
quarterly and annual accounts, as confirmed by SB's auditors.
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11.6 Royalty obligations due to SB under Paragraph 3.6 shall be treated
as follows:
(a) Royalty obligations under Paragraph 3.6 in each country
outside of the TERRITORY shall begin upon the commercial launch of ADDITIONAL
PRODUCT in such country for an Additional Indication (as defined in Paragraph
3.6) by MPI, its AFFILIATE, its licensee or its distributor, and such royalty
obligation shall expire in each such country upon the [********] anniversary of
the date of such launch. Termination of royalty obligations to SB in a
particular country outside of the TERRITORY under this Paragraph shall not
preclude MPI, its AFFILIATES, or its permitted licensees from selling ADDITIONAL
PRODUCT in such country for such Additional Indication without further royalty
payments or other compensation to SB.
(b) MPI shall keep and require its AFFILIATES, distributors and
licensees to keep complete and accurate records of all MPI NET SALES. SB shall
have the right, at SB's expense, through a certified public accountant or like
person reasonably acceptable to MPI, to examine such records during regular
business hours during the duration of MPI's royalty obligations to SB under
Paragraph 3.6 and for six (6) months after their expiration; provided, however,
that such examination shall not take place more often than once a year and shall
not cover such records for more than the preceding two (2) years and provided
further that such accountant shall report to SB only as to the accuracy of the
royalty statements and payments.
(c) Within forty five (45) days after the close of each CALENDAR
QUARTER, MPI shall deliver to SB a true accounting of all MPI NET SALES during
such quarter and shall at the same time pay all royalties due. Such accounting
shall show sales on a country-by-country basis.
(d) Any tax, duty or other levy paid or required to be withheld by MPI
on account of royalties payable to SB under this AGREEMENT shall be deducted
from the amount of royalties otherwise due. MPI shall secure and send to SB
proof of any such taxes, duties or other levies withheld and paid by MPI, its
AFFILIATE or licensees for the benefit of SB.
(e) All royalties due under this AGREEMENT shall be payable in U.S.
Dollars. If governmental regulations prevent remittances from a foreign country
with respect to sales
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made in that country, the obligation of MPI to pay royalties on sales in that
country shall be suspended until such remittances are possible. SB shall have
the right, upon giving written notice to MPI, to receive payment in that country
in local currency.
(f) Monetary conversions from the currency of a foreign country in
which PRODUCT is sold into U.S. Dollars shall be calculated at the actual
average rates of exchange for the year to date as used by MPI in producing its
accounts, as confirmed by MPI's auditors, provided that such shall be in
accordance with generally accepted accounting principles in the U.S.A.
11.7 (a) Payment obligations which are due to MPI under Paragraph 2.3
shall be provisionally made, on a per unit of PRODUCT basis, within thirty (30)
days of delivery to SB of the unit of PRODUCT which is the subject of such
payment obligation, subject to any credit due under Paragraphs 7.2(a)(i) and
7.4. The provisional payments under Paragraph 2.3 shall be based on the
following weighted average formula:
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(b) Payment obligations which are due to MPI under Paragraph
11.8(b) shall be calculated for each CALENDAR QUARTER, for the YEAR in question,
according to the following formula:
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11.8 (a) Within forty five (45) days after the end of each CALENDAR
QUARTER, SB shall provide MPI with a true accounting of all payment obligations,
if any, owed in accordance with Article 2 as determined in accordance with
Paragraph 11.7(b), together with a statement setting out all details necessary
to calculate the amounts actually due under Paragraph 2.3 with
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respect to NET SALES made in that CALENDAR QUARTER for units sold in that
CALENDAR QUARTER, or any overpayment by SB for such CALENDAR QUARTER which is
owed by MPI to SB. Such details to be provided shall include units of PRODUCT
sold on a country-by-country basis, gross sales of PRODUCT in that CALENDAR
QUARTER on a country-by-country basis, NET SALES in that CALENDAR QUARTER on a
country-by-country basis, all relevant deductions, and all relevant exchange
rate conversions. It is understood that no reconciliation shall be made with
respect to units for which provisional payments were made until such units are
sold.
(b) Within forty five (45) days after the end of each CALENDAR
QUARTER, SB shall remit to MPI any amounts owed for the relevant CALENDAR
QUARTER as set out in the true accounting provided under Paragraph 11.8(a),
subject to any credit due under Paragraphs 7.2(a)(i) and 7.4. If the parties
determine pursuant to the reconciliation provided hereunder that SB has made an
overpayment to MPI, SB shall be entitled to credit all such overpayments, if
any, made by SB over such CALENDAR QUARTER as set out in the true accounting
provided under Paragraph 11.8(a) against future sums to be paid by SB to MPI.
12. RELATIONSHIP OF THE PARTIES
12.1 The relationship between MPI and SB under this AGREEMENT is that
of independent contractors. MPI and SB are not joint venturers, partners,
principal and agent, master and servant, employer or employee, and have no
relationship other than as independent contracting PARTIES. MPI shall have no
power to bind or obligate SB in any manner. Likewise, SB shall have no power to
bind or obligate MPI in any manner. Neither PARTY shall have any responsibility
for the hiring, firing, compensation or employee benefits of the other PARTY's
employees.
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13. EXCHANGE OF INFORMATION AND CONFIDENTIALITY
13.1 Promptly after the EFFECTIVE DATE, MPI shall disclose and supply
to SB all KNOW-HOW known to MPI to the extent that MPI is legally able to do so
and to the extent that such is necessary to enable SB to fully carry out all of
its rights and obligations under this AGREEMENT. Thereafter, during the term of
the AGREEMENT, MPI shall promptly disclose and supply to SB any further KNOW-HOW
which may become known to MPI to the extent that MPI is legally able to do so.
13.2 With respect to ADVERSE EXPERIENCES, the following shall apply:
(a) During the term of this AGREEMENT each PARTY will report ADVERSE
EXPERIENCES reported to it in respect of PRODUCT to the appropriate regulatory
authorities in the countries in which it is developing or commercializing
PRODUCT, in accordance with the laws and regulations of the relevant countries
and authorities.
(b) Each PARTY will submit summaries of worldwide safety data on
PRODUCT to appropriate regulatory authorities in the countries in which it is
developing and commercializing PRODUCT, in accordance with the laws and
regulations of the relevant countries and authorities. Wherever possible,
duplication of reporting of worldwide data by both SB and MPI will be avoided.
(c) Promptly after the EFFECTIVE DATE, each PARTY shall appraise the
other PARTY(IES) of the standard operating procedures for the investigation and
reporting of ADVERSE EXPERIENCES regarding its products. The PARTIES shall then
promptly develop and agree upon procedures for the reporting to each other
ADVERSE EXPERIENCES concerning PRODUCT. The PARTIES shall immediately implement
such agreed procedures and shall provide each other on a regular basis with any
appropriate information which enables the other party to meet its regulatory
obligations in the territories in which it is commercializing or developing
PRODUCT or which is relevant to the safe use of PRODUCT. The agreed procedures
will be reviewed jointly on a regular basis or when there is a change in
regulations governing ADVERSE EXPERIENCE reporting.
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(d) All ADVERSE EXPERIENCE reports and queries for SB should be
addressed to its central safety department, i.e., Associate Director, Worldwide
Clinical Safety Quality Management, SmithKline Beecham Pharmaceuticals, 1250 S.
Collegeville Road, Collegeville, Pennsylvania 19426 (facsimile number
610-917-4826; telephone number 610-917-5747) and for MPI should be addressed to
its central safety department, i.e., Senior Vice President, Regulatory Affairs,
Magainin Pharmaceuticals Inc., 5110 Campus Drive, Plymouth Meeting, Pennsylvania
19462 (facsimile number 610-941-5399; telephone number 610-941-5243), or such
other safety representative as may be designated by SB for SB or by MPI for MPI.
13.3 During the term of this AGREEMENT and for five (5) years
thereafter, irrespective of any termination earlier than the expiration of the
term of this AGREEMENT, MPI and SB shall not use or reveal or disclose to THIRD
PARTIES any confidential information received from the other PARTY or otherwise
developed by either PARTY in the performance of activities in furtherance of
this AGREEMENT without first obtaining the written consent of the disclosing
PARTY, except as may be otherwise provided herein, or as may be required for
purposes of investigating, developing, manufacturing or marketing PRODUCT or for
securing essential or desirable authorizations, privileges or rights from
governmental agencies, or is required to be disclosed to a governmental agency
or is necessary to file or prosecute patent applications concerning PRODUCT or
to carry out any litigation concerning PRODUCT. This confidentiality obligation
shall not apply to such information which is or becomes a matter of public
knowledge, or is already in the possession of the receiving PARTY, or is
disclosed to the receiving PARTY by a THIRD PARTY having the right to do so, or
is subsequently and independently developed by employees of the receiving PARTY
or AFFILIATES thereof who had no knowledge of the confidential information
disclosed. The parties shall take reasonable measures to assure that no
unauthorized use or disclosure is made by others to whom access to such
information is granted. Upon termination or expiration of this AGREEMENT, each
PARTY shall return to the other all tangible forms of confidential information
furnished by the other PARTY,
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including all copies thereof and all memoranda of oral disclosure, except that
each PARTY shall each be permitted to retain one copy of the other PARTY's
confidential information in its legal department so that any continuing
obligations may be determined.
13.4 Nothing herein shall be construed as preventing either PARTY from
disclosing any information received from the other PARTY to an AFFILIATE,
licensee, subdistributor or distributor of the receiving PARTY, provided, in the
case of a licensee, subdistributor or distributor, such licensee, subdistributor
or distributor has undertaken a similar obligation of confidentiality with
respect to the confidential information.
13.5 All confidential information disclosed by one PARTY to the other
shall remain the intellectual property of the disclosing PARTY. In the event
that a court or other legal or administrative tribunal, directly or through an
appointed master, trustee or receiver, assumes partial or complete control over
the assets of a PARTY to this AGREEMENT based on the insolvency or bankruptcy of
such PARTY, the bankrupt or insolvent PARTY shall promptly notify the court or
other tribunal (i) that confidential information received from the other PARTY
under this AGREEMENT remains the property of the other PARTY and (ii) of the
confidentiality obligations under this AGREEMENT. In addition, the bankrupt or
insolvent PARTY shall, to the extent permitted by law, take all steps necessary
or desirable to maintain the confidentiality of the other PARTY's confidential
information and to ensure that the court, other tribunal or appointee maintains
such information in confidence in accordance with the terms of this AGREEMENT.
13.6 No public announcement or other disclosure to THIRD PARTIES
concerning the existence of or terms of this AGREEMENT shall be made, either
directly or indirectly, by any PARTY to this AGREEMENT, except as may be legally
required or as may be required for recording purposes (as outlined in Article
18), without first obtaining the written approval of the other PARTY and
agreement upon the nature and text of such announcement or disclosure. The PARTY
desiring to make any such public announcement or other disclosure shall inform
the other PARTY of the proposed announcement or disclosure in reasonably
sufficient time prior to public release, and shall provide the other PARTY with
a written copy thereof, in order
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to allow such other PARTY to comment upon such announcement or disclosure. Once
any such public announcement or disclosure has been approved in accordance with
this Paragraph, then either PARTY may appropriately communicate information
contained in such permitted announcement or disclosure. Each PARTY agrees that
it shall cooperate fully with the other with respect to all disclosures
regarding this AGREEMENT to the Securities Exchange Commission and any other
governmental or regulatory agencies, including requests for confidential
treatment of proprietary information of either PARTY included in any such
disclosure.
13.7 Neither PARTY shall submit for written or oral publication any
manuscript, abstract or the like which includes data or other information
relating to PRODUCT without first obtaining the prior written consent of the
other PARTY, which consent shall not be unreasonably withheld. Any publications
for which such consent is sought shall be submitted to the other PARTY in the
English language. The contribution of each party shall be noted in all
publications or presentations by acknowledgment or coauthorship, whichever is
appropriate.
13.8 Nothing in this AGREEMENT shall be construed as preventing or in
any way inhibiting SB from complying with statutory and regulatory requirements
governing SB's obligations under this AGREEMENT regarding the development, use
and sale or other distribution of PRODUCT in the FIELD in the TERRITORY in any
manner which it reasonably deems appropriate, including, for example, by
disclosing to regulatory authorities confidential or other information received
from MPI or THIRD PARTIES. Nothing in this AGREEMENT shall be construed as
preventing or in any way inhibiting MPI from complying with statutory and
regulatory requirements governing MPI's obligations under this AGREEMENT
regarding the development of PRODUCT in the FIELD in the TERRITORY in any manner
which it reasonably deems appropriate.
14. PATENT PROSECUTION AND LITIGATION
14.1 Each PARTY shall have and retain sole and exclusive title to all
inventions, discoveries and KNOW-HOW which are made, conceived, reduced to
practice or generated by
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its employees, agents, or other persons acting under its authority in the course
of or as a result of this AGREEMENT. Each PARTY shall own a fifty percent (50%)
undivided interest in all such inventions, discoveries and KNOW-HOW made,
conceived, reduced to practice or generated jointly by employees, agents, or
other persons acting under the authority of both parties in the course of or as
a result of this AGREEMENT. Except as expressly provided in this AGREEMENT, each
joint owner may make, use, sell, keep, license, assign, or mortgage such jointly
owned inventions, discoveries and KNOW-HOW, and otherwise undertake all
activities a sole owner might undertake with respect to such inventions,
discoveries and KNOW-HOW, without the consent of and without accounting to the
other joint owner.
14.2 MPI shall disclose to SB the complete texts of all PATENTS filed
by MPI in the TERRITORY which relate to PRODUCT as well as all information
received concerning the institution or possible institution of any interference,
opposition, re-examination, reissue, revocation, nullification or any official
proceeding involving a PATENT anywhere in the TERRITORY. SB shall have the right
to review all such pending applications and other proceedings and make
recommendations to MPI concerning them and their conduct. MPI agrees to keep SB
promptly and fully informed of the course of patent prosecution or other
proceedings including by providing SB with copies of substantive communications,
search reports and THIRD PARTY observations submitted to or received from patent
offices throughout the TERRITORY. SB shall provide such patent consultation to
MPI at no cost to MPI. SB shall hold all information disclosed to it under this
section as confidential in accordance with the provisions of Article 13.
14.3 SB shall have the right to assume responsibility for any PATENT or
any part of a PATENT which MPI intends to abandon or otherwise cause or allow to
be forfeited.
14.4 In the event of the institution of any suit by a THIRD PARTY
against MPI, SB, its AFFILIATES or subdistributors for patent infringement
involving the manufacture, use, sale, distribution or marketing of PRODUCT
anywhere in the TERRITORY, the PARTY sued shall promptly notify the other PARTY
in writing. SB shall have the right but not the obligation to defend such suit
at its own expense, provided there is prior notification and
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consultation with MPI. MPI and SB shall assist one another and cooperate in any
such litigation at the other's request without expense to the requesting PARTY.
14.5 In the event that MPI or SB becomes aware of actual or threatened
infringement of a PATENT anywhere in the TERRITORY, that PARTY shall promptly
notify the other PARTY in writing. SB shall have the first right but not the
obligation to bring, at its own expense, an infringement action against any
THIRD PARTY, provided there is prior notification to and consultation with MPI,
and to use MPI's name in connection therewith and to name MPI as a party
thereto. If SB does not commence a particular infringement action within ninety
(90) days of receipt of the notice of infringement, then MPI, after notifying SB
in writing, shall be entitled to bring such infringement action at its own
expense. The PARTY conducting such action shall have full control over its
conduct, including settlement thereof subject to Paragraph 14.8. In any event,
MPI and SB shall assist one another and cooperate in any such litigation at the
other's request without expense to the requesting PARTY.
14.6 In any action brought pursuant to Paragraph 14.5, the PARTY
bringing the action shall indemnify the other PARTY, its officers, directors,
shareholders, employees, agents, successors and assigns from any loss, damage or
liability, including for attorney's fees and costs, which may result from
claims, counterclaims or crossclaims asserted by a defendant, except to the
extent that such losses, damages or liabilities result from the negligence or
willful misconduct of the other PARTY.
14.7 MPI and SB shall recover their respective actual out-of-pocket
expenses, or equitable proportions thereof, associated with any litigation or
settlement thereof from any recovery made by any PARTY. Any excess shall be
shared by the parties, with SB receiving [*************] ([**]%) and MPI
receiving [***********] percent ([**]%), until the party which did not bring the
action has received that amount it would have received under this AGREEMENT had
the sales of PRODUCT which were the subject of the litigation or settlement been
made by or on behalf of SB under this AGREEMENT, and any excess amount remaining
shall be retained by the PARTY bringing the action.
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14.8 The parties shall keep one another informed of the status of and
of their respective activities regarding any litigation or settlement thereof
concerning PRODUCT in the FIELD in the TERRITORY, provided, however, that no
settlement or consent judgment or other voluntary final disposition of any suit
defended or action brought by a PARTY pursuant to this Article 7 may be entered
into without the consent of the other PARTY if such settlement would require the
other PARTY to be subject to an injunction or to make a monetary payment or
would otherwise adversely affect the other PARTY's rights under this AGREEMENT.
15. WARRANTIES AND REPRESENTATIONS
15.1 MPI warrants and represents that it has the right to grant the
exclusive distribution rights outlined in Article 5, has the right to enter into
this AGREEMENT, and is not aware of any impediment which would inhibit its
ability to perform the terms and conditions imposed on it. MPI further warrants
and represents that there is nothing in any THIRD PARTY agreement MPI has
entered into as of the EFFECTIVE DATE which, in any way, will limit MPI's
ability to perform all of the obligations undertaken by MPI hereunder. MPI
further warrants and represents that it will not enter into any THIRD PARTY
agreement after the EFFECTIVE DATE which, in any way, will limit MPI's ability
to perform all of the obligations undertaken by MPI hereunder. MPI further
warrants and represents that it will not encumber, with liens, mortgages,
security interests or otherwise, any PATENTS and KNOW HOW which would be
infringed by activities related to the distribution of PRODUCT by SB's exercise
of rights herein granted.
15.2 MPI warrants and represents that it has disclosed to SB the
complete texts of all PATENTS as of the EFFECTIVE DATE as well as all
information received by MPI as of the EFFECTIVE DATE concerning the institution
or possible institution of any interference, opposition, reexamination, reissue,
revocation, nullification or any official proceeding involving a PATENT anywhere
in the TERRITORY. MPI hereby warrants and represents that it has no present
knowledge from which it can be inferred that PATENTS are invalid or
unenforceable or that their exercise would infringe valid patent rights of THIRD
PARTIES. A
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<PAGE> 47
holding of invalidity or unenforceability of any PATENT, from which no further
appeal is or can be taken, shall not affect any obligation already accrued
hereunder, except as otherwise provided in Paragraph 2.5.
15.3 MPI acknowledges that, in entering into this AGREEMENT, SB has
relied upon information supplied by MPI and information which MPI has caused to
be supplied to SB by MPI's agents and/or representatives, pursuant to that
certain Confidentiality Agreement dated August 1, 1992, between the parties,
(all of such information being hereinafter referred to collectively as "Product
Information") and MPI warrants and represents that the Product Information is
timely and accurate in all material respects. MPI further warrants and
represents that it has not, up through and including the EFFECTIVE DATE, omitted
to furnish SB with any material information available to MPI concerning PRODUCT,
STUDY 304 or any information (material or not) regarding the results thereof, or
the transactions contemplated by this AGREEMENT.
15.4 MPI warrants and represents that it has no present knowledge of
the existence of any preclinical or clinical data or information concerning
PRODUCT including, but not limited to, information known to MPI as of the
EFFECTIVE DATE related to any previous or ongoing clinical trial which generated
data related to the efficacy of PRODUCT in the INITIAL INDICATION, such as, but
not limited to, STUDY 304, which MPI has not disclosed to SB as of the EFFECTIVE
DATE. MPI further warrants and represents that, when the STUDY 304 results are
made public, if there is not a determination that there were Positive STUDY 304
Results (as defined in Paragraph 2.2(c)), and if SB determines that MPI knew
that such results were not positive prior to the EFFECTIVE DATE but did not
disclose such to SB, then SB shall so notify MPI in writing, and this AGREEMENT
shall be terminated on the date of MPI's receipt of such notice. Termination of
the AGREEMENT in accordance with this Paragraph shall not limit remedies which
may be otherwise available to SB in law or equity.
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15.5 MPI warrants and represents that it:
(a) has received all necessary consents and waivers, in
writing, which MPI requires from any other THIRD PARTY by virtue of the rights
granted to SB under this AGREEMENT;
(b) shall pay all royalties or other sums and other payments
which MPI may owe to any THIRD PARTY by virtue of this AGREEMENT, and shall
perform and observe all of the other obligations outlined in all present and
future agreements between MPI and any THIRD PARTY which are in any way related
to MPI's ability to grant the rights granted to SB under this AGREEMENT or to
MPI's ability to perform its obligations to SB under this AGREEMENT; and
(c) In the event that MPI receives notice from any such THIRD
PARTY that MPI has committed a breach of its obligations under any such
agreement, or if MPI anticipates such breach, such as may give rise to a right
by such THIRD PARTY to terminate or otherwise diminish MPI's rights to PATENTS
and/or KNOW-HOW and/or otherwise diminish MPI's ability to perform its
obligations to SB under this AGREEMENT, MPI shall immediately notify SB of such
situation, and MPI shall promptly cure such breach. However, if MPI is unable to
cure such breach, MPI shall, to the extent possible, permit SB to cure such
breach and to negotiate directly with such THIRD PARTY.
15.6 MPI warrants and represents that it will not knowingly engage in
any activity regarding development of PRODUCT outside of the FIELD, including,
but not limited to, publication of preclinical or clinical data related to
PRODUCT, which is or ought to be recognized by MPI as posing a present or
potential harm to the development of PRODUCT within the FIELD in any country of
the TERRITORY. MPI further warrants that it will require all of its
subdistributors of PRODUCT in the FIELD outside of the TERRITORY, and outside of
the FIELD throughout the world, to enter in a binding agreement with MPI which
contains the same warranty as outlined in this Paragraph.
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15.7 SB warrants and represents that it has the full right and
authority to enter into this AGREEMENT and that it is not aware of any
impediment which would inhibit its ability to perform the terms and conditions
imposed on it.
15.8 Each PARTY represents and warrant to the other PARTY:
(a) Corporate Power. Such PARTY is duly organized and validly
existing under the laws of the jurisdiction of its formation and has full
corporate power and authority to enter into this AGREEMENT and carry out the
provisions hereof.
(b) Due Authorization. Such PARTY is duly authorized to
execute and deliver this AGREEMENT and to perform its obligations hereunder.
(c) Binding Agreement. This AGREEMENT is a legal and valid
obligation of such PARTY and the execution, delivery and performance of this
AGREEMENT by such PARTY does not and will not conflict with any agreement,
instrument or understanding, oral or written, to which it is a PARTY or by which
it may be bound, nor violate any law or regulation of any court, governmental
body or administrative or other agency having authority over such PARTY.
15.9 MPI shall permit SB to participate, at SB's discretion, in
discussions with MPI, its AFFILIATES, licensees or distributors related to
counsel selection and strategy concerning any product liability claim related to
PRODUCT filed against MPI, its AFFILIATES, licensees or distributors outside of
the TERRITORY.
15.10 EXCEPT FOR THE EXPRESS WARRANTIES AND REPRESENTATIONS CONTAINED
IN THIS AGREEMENT, NEITHER SB NOR MPI MAKES ANY WARRANTIES OR REPRESENTATIONS,
EXPRESS OR IMPLIED, IN FACT OR IN LAW.
16. INDEMNIFICATION AND INSURANCE
16.1 SB shall defend, indemnify and hold harmless MPI, its AFFILIATES,
and its and their respective officers, directors, employees, agents, successors
and assigns from any loss, damage, or liability, including reasonable attorney's
fees, resulting from any claim, complaint, suit, proceeding or cause of action
against any of them alleging physical or other injury,
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including death, rising out of (a) the distribution of PRODUCT by SB, its
AFFILIATES (or its permitted subdistributor) under this AGREEMENT, or (b) any
misrepresentation or breach of any warranty or representation of SB contained in
this AGREEMENT, provided:
(a) SB shall not be obligated under this Paragraph if the
liability, if any, would arise by operation of law in the absence of any
negligence on the part of SB or if it is shown by evidence acceptable in a court
of law having jurisdiction over the subject matter and meeting the appropriate
degree of proof for such action, that the injury was the result of (i) the
negligence or willful misconduct of any employee or agent of MPI, its AFFILIATE,
its permitted sublicensee, its permitted distributor or its contractor, (ii) the
breach of any warranty or representation made by MPI in this AGREEMENT, (iii) a
patent infringement action brought by a THIRD PARTY related to SB's exercise of
its rights under this AGREEMENT, or (iv) the alleged release or threat of
release of a hazardous substance at either: (a) the place of manufacture of
PRODUCT, or (b) the place at which any waste, including but not limited to any
hazardous waste, generated at the time of manufacture of PRODUCT has been
treated, stored or disposed;
(b) SB shall have no obligation under this Paragraph unless
MPI (i) gives SB prompt written notice of any claim or lawsuit or other action
for which it seeks to be indemnified under this AGREEMENT, (ii) SB is granted
full authority and control over the defense, including settlement, against such
claim or lawsuit or other action, and (iii) MPI cooperates fully with SB and its
agents in defense of the claims or lawsuit or other action; and
(c) MPI shall have the right to participate in the defense of
any such claim, complaint, suit, proceeding or cause of action referred to in
this Paragraph utilizing attorneys of its choice, at its own expense, provided,
however, that SB shall have full authority and control to handle any such claim,
complaint, suit, proceeding or cause of action, including any settlement or
other disposition thereof, for which MPI seeks indemnification under this
Paragraph.
16.2 MPI shall defend, indemnify and hold harmless SB, its AFFILIATES,
and its and their officers, directors, employees, agents, successors and assigns
from any loss, damage, or liability, including reasonable attorney's fees,
resulting from any claim, complaint, suit, proceeding or cause of action against
any of them alleging physical or other injury, including
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death, rising out of (a) the administration, utilization and/or ingestion of
PRODUCT manufactured, sold or otherwise provided to the injured party by MPI,
its AFFILIATE, its permitted licensee, its permitted distributor, or its
contractor, (b) any misrepresentation or breach of any warranty or
representation of MPI contained in this AGREEMENT or in any exhibit or schedule
hereto, or in any other statement, certificate or document furnished or to be
furnished to SB pursuant hereto or in connection with the transactions
contemplated hereby provided, (c) any patent infringement action brought against
SB, its AFFILIATES or its subdistributors by a THIRD PARTY related to SB's
exercise of its rights under this AGREEMENT, or (d) the alleged release or
threat of release of a hazardous substance at either: (i) the place of
manufacture of PRODUCT or (ii) the place at which any waste, including but not
limited to any hazardous waste, generated at the time of manufacture of PRODUCT
has been treated, stored or disposed, provided:
(a) MPI shall not be obligated under this Paragraph if it is
shown by evidence acceptable in a court of law having jurisdiction over the
subject matter and meeting the appropriate degree of proof for such action, that
the injury was the result of the negligence or willful misconduct of any
employee or agent of SB or the breach of any warranty or representation made by
SB in this AGREEMENT;
(b) MPI shall have no obligation under this Paragraph unless
SB (i) gives MPI prompt written notice of any claim or lawsuit or other action
for which it seeks to be indemnified under this AGREEMENT, (ii) MPI is granted
full authority and control over the defense, including settlement, against such
claim or lawsuit or other action, and (iii) SB cooperates fully with MPI and its
agents in defense of the claims or lawsuit or other action; and
(c) SB shall have the right to participate in the defense of
any such claim, complaint, suit, proceeding or cause of action referred to in
this Paragraph utilizing attorneys of its choice, at its own expense, provided,
however, that MPI shall have full authority and control to handle any such
claim, complaint, suit, proceeding or cause of action, including any settlement
or other disposition thereof, for which SB seeks indemnification under this
Paragraph.
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16.3 Notwithstanding the provisions of Paragraphs 16.1 and 16.2, SB
and MPI agree and understand that, in the event of a claim, complaint, suit,
proceeding or cause of action containing allegations of liability based on
activities for which SB was responsible and activities for which MPI was
responsible, unless one party agrees to defend and indemnify the other, each
party shall control and bear financial responsibility for its own defense.
16.4 Immediately upon the first administration of a PRODUCT to a human
in the TERRITORY after the EFFECTIVE DATE, and for a period of fifteen (15)
years after the expiration of this AGREEMENT or earlier termination, MPI shall
obtain and/or maintain, at its sole cost and expense, product liability
insurance in amounts, which are reasonable and customary in the U.S.
pharmaceutical industry for companies which are of similar size to MPI, subject
always to a minimum limit of [**********] U.S. dollars (U.S. $[********]) per
occurrence (or claim) and in the aggregate annually. Such product liability
insurance shall insure against all liability, including product liability,
personal liability, physical injury or property damage. MPI shall provide
written proof of the existence of such insurance to SB upon request therefor.
17. DISPUTE RESOLUTION
17.1 Any dispute, controversy or claim arising out of or relating to
this AGREEMENT (hereinafter collectively referred to as "Dispute") shall be
attempted to be settled by the parties, in good faith, by submitting each such
Dispute to appropriate senior management representatives of each PARTY in an
effort to effect a mutually acceptable resolution thereof.
17.2 In the event no mutually acceptable resolution of such Dispute is
achieved in accordance with Paragraph 17.1 within a reasonable period of time,
then either PARTY shall be entitled to seek final settlement of such Dispute by
any administrative or judicial mechanism which may be available.
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18. MISCELLANEOUS
18.1 ASSIGNMENT
(a) This AGREEMENT shall not be assignable by either of the
PARTIES without the prior written consent of the other PARTY, except that either
PARTY without the consent of the other PARTY may assign this AGREEMENT to an
AFFILIATE or to a successor in interest or transferee of all or substantially
all of the portion of the business to which this AGREEMENT relates.
(b) Subject to the limitations on assignment herein, this
AGREEMENT shall be binding upon and inure to the benefit of the PARTIES and
their respective successors in interest and assigns of the PARTIES. Any such
successor or assignee of a PARTY's interest shall expressly assume in writing
the performance of all the terms and conditions of this AGREEMENT to be
performed by said PARTY and such assignments shall relieve the Assignor of any
of its obligations under this AGREEMENT.
18.2 ENTIRE AGREEMENT This AGREEMENT constitutes the entire AGREEMENT
among the PARTIES with respect to the subject matter hereof and supersedes all
prior agreements, understandings, and discussions, whether oral or written of
the PARTIES. Any modification of this AGREEMENT shall be effective only when in
writing and signed by the PARTIES, and specifically stating that it is an
amendment to this AGREEMENT.
18.3 NOTICES Any notice, request, approval or other document required
or permitted to be given under this AGREEMENT shall be in writing and shall be
deemed to have been given when delivered in person, or sent by overnight courier
service, postage prepaid, or sent by certified or registered mail, return
receipt requested, to the following addresses of the parties (or to such other
address or addresses as may be specified from time to time in a written notice).
Any notices given pursuant to this AGREEMENT shall be deemed to have been given
and delivered upon the earlier of (i) when received at the address set forth
below, or (ii) three (3) business days after mailed by certified or registered
mail postage prepaid and properly addressed, with return receipt requested, or
(iii) on the day when sent by facsimile as confirmed by certified or registered
mail.
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To MPI: Magainin Pharmaceuticals Inc.
5110 Campus Drive
Plymouth Meeting, PA 19462
Attention: CEO
Telephone No.: 610-941-4020
Fax No.: 610-941-5399
To SB: SmithKline Beecham Corporation
One Franklin Plaza (Mail Code FP1935)
P.O. Box 7929
Philadelphia, Pennsylvania 19101, U.S.A.
Attention: Senior Vice President and Director
Business Development
copies to:
SmithKline Beecham Corporation
One Franklin Plaza (Mail Code FP2225)
P.O. Box 7929
Philadelphia, Pennsylvania 19101, U.S.A.
Attention: Corporate Law-U.S.
18.4 SEPARABILITY If any provision(s) of this AGREEMENT are or become
invalid, are ruled illegal by any court of competent jurisdiction or are deemed
unenforceable under then current applicable law from time to time in effect
during the term hereof, it is the intention of the PARTIES that the remainder of
this AGREEMENT shall not be affected thereby provided that a PARTY's rights
under this AGREEMENT are not materially affected. It is further the intention of
the PARTIES that in lieu of each such provision which is invalid, illegal, or
unenforceable, there be substituted or added, as part of this AGREEMENT, a
provision which shall be as similar as possible in economic and business
objectives as intended by the PARTIES to such invalid, illegal or unenforceable
provision, but shall be valid, legal and enforceable. In the event a PARTY's
rights are materially affected as a result of a change in this AGREEMENT under
this Paragraph, the PARTIES will renegotiate the terms and conditions of this
AGREEMENT to resolve any inequities.
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18.5 GOVERNING LAW This AGREEMENT shall be deemed to have been made in
the Commonwealth of Pennsylvania, and its form, execution, validity,
construction and effect shall be determined in accordance with the laws of the
Commonwealth of Pennsylvania.
18.6 FORCE MAJEURE Neither PARTY shall be held liable or responsible to
the other PARTY nor be deemed to have defaulted under or breached this AGREEMENT
for failure or delay in fulfilling or performing any term of this AGREEMENT when
such failure or delay is caused by or results from causes beyond the reasonable
control of the affected PARTY, including, but not limited to, fire, floods,
embargoes, war, acts of war (whether war be declared or not), insurrections,
riots, civil commotions, strikes, lockouts or other labor disturbances, acts of
God or acts, omissions or delays in acting by any governmental authority or the
other PARTY, provided that nothing in this provision shall excuse MPI from using
its commercial best efforts to enforce all of its THIRD PARTY agreements related
to the supply of PRODUCT to SB in the TERRITORY.
18.7 WAIVER OF BREACH Any delay in enforcing a PARTY's rights under
this AGREEMENT or any waiver as to a particular default or other matter shall
not constitute a waiver of a PARTY's right to the future enforcement of its
rights under this AGREEMENT, excepting only as to an expressed written and
signed waiver as to a particular matter for a particular period of time.
18.8 EXECUTION IN COUNTERPARTS This AGREEMENT may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
18.9 NO INTELLECTUAL PROPERTY RIGHTS GRANTED No rights or licenses with
respect to a PARTY's patents, trademarks, know-how, technical information, or
other proprietary rights are granted or deemed granted to the other PARTY
hereunder or in connection herewith, other than those rights expressly granted
in this AGREEMENT.
18.10 RECORDING SB shall have the right, at any time, to record,
register, or otherwise notify this AGREEMENT in appropriate governmental or
regulatory offices anywhere in the TERRITORY, and MPI shall provide reasonable
assistance to SB in effecting such recording, registering or notifying.
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IN WITNESS WHEREOF, the parties, through their authorized officers,
have executed this AGREEMENT as of the EFFECTIVE DATE.
SMITHKLINE BEECHAM CORPORATION
By: /s/ Jean-Pierre Garnier
------------------------------
Chief Operating Officer
President, Pharmaceuticals and
Title: Consumer Healthcare
MAGAININ PHARMACEUTICALS INC.
By: /s/ Jay Moorin
------------------------------
Title: Chairman, President and CEO
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DEVELOPMENT, SUPPLY AND DISTRIBUTION AGREEMENT
MAGAININ PHARMACEUTICALS INC.-SMITHKLINE BEECHAM CORPORATION
APPENDIX A-PATENTS
[*********************]
[***************************************]
[***************************************************]
[***************************************************]
[***************************************************]
[***************************************************]
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<PAGE> 58
DEVELOPMENT, SUPPLY AND DISTRIBUTION AGREEMENT
MAGAININ PHARMACEUTICALS INC.-SMITHKLINE BEECHAM
CORPORATION
APPENDIX B-PRODUCT SPECIFICATIONS
TO BE COMPLETED BY THE PARTIES AFTER THE EFFECTIVE DATE IN
ACCORDANCE WITH PARAGRAPH 7.5
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<PAGE> 1
SELECTED FINANCIAL DATA Magainin Pharmaceuticals Inc.
(In thousands, except per share amounts) (a development stage company)
The following table summarizes certain selected financial data. The selected
financial data is derived from, and is qualified by reference to, the financial
statements of the Company.
<TABLE>
<CAPTION>
June 29, 1987
(inception) to
December 31,
Year Ended December 31, 1996 1995 1994 1993 1992 1996
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract and government grant $ 150 $ 2,056 $ 85 $ 273 $ 140 $ 2,983
Related party contract -- 280 326 319 260 1,527
-------- -------- -------- -------- -------- ---------
150 2,336 411 592 400 4,510
-------- -------- -------- -------- -------- ---------
Costs and expenses:
Research and development 22,326 18,160 11,258 11,455 6,626 78,681
General and administrative 3,488 3,137 3,468 2,630 2,640 20,512
Charge for stock issuance
relating to royalty buyout 7,080 -- -- -- -- 7,080
-------- -------- -------- -------- -------- ---------
32,894 21,297 14,726 14,085 9,266 106,273
-------- -------- -------- -------- -------- ---------
Loss from operations (32,744) (18,961) (14,315) (13,493) (8,866) (101,763)
Interest income 2,172 1,778 1,207 846 494 7,210
Interest expense (48) (32) (48) (64) (87) (690)
-------- -------- -------- -------- -------- ---------
Net loss $(30,620) $(17,215) $(13,156) $(12,711) $ (8,459) $ (95,243)
Net loss per share $(1.71) $(1.17) $(0.99) $(1.14) $(1.20)
-------- -------- -------- -------- --------
Weighted average shares
outstanding 17,938 14,696 13,301 11,108 7,076
December 31, 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and investments $ 33,340 $ 43,666 $ 25,921 $ 38,303 $ 8,915
Working capital 28,276 30,429 21,750 30,621 8,536
Total assets 36,376 45,727 28,050 40,460 11,162
Long-term liabilities 915 304 460 299 471
Total liabilities 6,433 4,534 4,137 3,451 982
Accumulated deficit (95,243) (64,623) (47,408) (34,252) (21,541)
Stockholders' equity 29,943 41,193 23,913 37,009 10,180
</TABLE>
4
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains, in addition to historical information, statements by the
Company with regard to its expectations as to financial results and other
aspects of its business that involve risks and uncertainties and may constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements reflect management's current
views and are based on certain assumptions. Actual results could differ
materially from those currently anticipated as a result of a number of factors,
including, but not limited to, the risks and uncertainties discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained herein and the following sections of Item 1 of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
as filed with the Securities and Exchange Commission: "Product Development and
Research Programs;" "Manufacturing;" "Research and Development Organization;"
"Collaborative Arrangements;" "Government Regulation;" "Reimbursement; Health
Care Reform;" "Patent and Proprietary Rights; Licensed Technology;"
"Competition" and "Product Liability and Insurance."
GENERAL
The Company is a biopharmaceutical company engaged in the development of
breakthrough medicines for serious diseases. The Company's lead product
development compound is Cytolex, a topical anti-infective intended for the
treatment of infection in diabetic foot ulcers. The Company is also conducting
preclinical research on an aminosterol class of compounds. One such compound,
squalamine, is being evaluated in cancer, and another such compound, MSI-1436,
is being evaluated in viral infection. The Company's newest research efforts are
in the genomics of asthma.
Since commencing operations in 1988, the Company has not generated any sales
revenue, and has received nominal amounts of revenue from contracts and grants.
The Company has funded operations primarily from the proceeds of public and
private placements of securities. The Company has incurred net losses in each
year since its inception, and expects to incur substantial additional losses for
the next several years. The Company expects that losses will fluctuate from
quarter to quarter, and that such fluctuations may be substantial. At December
31, 1996, the Company's accumulated deficit was approximately $95,243,000.
RESULTS OF OPERATIONS
REVENUES
The Company has received no revenue from product sales. Revenues recorded to
date have consisted principally of revenues recognized under collaborations with
corporate partners, and pursuant to Small Business Innovation Research ("SBIR")
grants. Contract revenues of $150,000 in 1996 consist of payments under a
collaborative arrangement with Abbott Laboratories ("Abbott") in the nutritional
field. The Company recorded revenues of $1,900,000 in 1995 relating to the
execution of an Agreement in Principle with Fisons plc in September 1995, and
the termination of this arrangement in November 1995. Related party contract
revenue consisted of funding received from Colgate-Palmolive Company pursuant to
an oral health care collaboration which concluded in January 1996. Government
grant revenues resulted from a Phase Two $500,000 SBIR grant to develop a
treatment for certain gastrointestinal ailments, which ended during 1994. The
Company anticipates that its revenues from operations will be limited for the
foreseeable future.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses have increased on an annual basis from 1994
through 1996 principally as a result of increases in clinical and preclinical
testing, manufacturing development expenses, personnel costs, and laboratory
supplies. In particular, these increases have been related to increasing costs
associated with the Company's lead product candidate, Cytolex. Expenses have
also increased due to preclinical activities associated with the Company's other
development programs, including its aminosterol and asthma programs.
In early 1994, the Company completed an unsuccessful Phase IIB/III clinical
trial of Cytolex for the treatment of impetigo. Also in 1994, the Company
initiated a pivotal clinical trial of Cytolex for the treatment of infection in
diabetic foot ulcers, and a second such trial was initiated in August 1995. The
Company contracts with third parties to conduct such trials, and such clinical
trial costs amounted to $4,005,000, $5,172,000 and $1,570,000 in 1996, 1995 and
1994, respectively.
In September 1996, the Company announced results of its initial pivotal trial of
Cytolex for the treatment of infection in diabetic foot ulcers, and in March
1997 the Company reported successful results from a second such pivotal trial.
The clinical trials conducted for Cytolex yielded substantial data. Such
additional data includes information relating to the primary endpoints for the
studies, as well as data relating to patient subgroup analysis, wound healing,
side effects, and secondary endpoints of the study, including microbiological
results. Although the Company believes its two pivotal trials of Cytolex yielded
successful results, there can be no assurance that the FDA will concur with the
Company's analysis in this regard. Furthermore, the submission to FDA of any
application for product approval, and the review by FDA of such application,
will require additional time to complete manufacturing activities and stability
studies, which additional time may be significant.
Significant development work is necessary to scale-up the manufacturing process
for the Company's products to those levels necessary for a profitable commercial
product. The Company contracts with third parties for these development
activities, and for the procurement of material for clinical and preclinical
testing, and such expenses, including those for Cytolex, amounted to $9,557,000,
$7,652,000 and $3,620,000 in 1996, 1995 and 1994, respectively.
5
<PAGE> 3
The Company is working with Abbott with regard to the manufacture of bulk
Cytolex. The Company's current arrangement with Abbott provides for the
development by Abbott of a chemical process to manufacture bulk Cytolex on a
commercial scale, for the production of bulk Cytolex, and for Abbott to perform
those activities necessary to submit a Drug Master File to the FDA in support of
any filing for marketing approval of Cytolex. The arrangement with Abbott
provides for cash payments by the Company through early 1998 aggregating
approximately $12,900,000, as well as the issuance by the Company to Abbott of
up to 500,000 shares of its common stock and the obligation to pay a royalty on
future sales of Cytolex. Through December 31, 1996, the Company has paid Abbott
approximately $8,600,000 under this arrangement. Stock issuances by the Company
to Abbott will result in a charge to earnings, representing the fair value of
the shares when issued. The Company issued 125,000 shares of common stock to
Abbott in October 1995, resulting in a charge to earnings of $1,250,000 in 1995.
Future stock issuances are related to the achievement by Abbott of contractual
performance milestones which could begin to occur in 1997. Substantial
additional funds will also be required to continue manufacturing development
efforts beyond the term of this current arrangement.
The level of research and development expenses in future periods will depend
upon the success of the development of Cytolex, and the progress of other
research programs at the Company. Expenses relating to the development of
Cytolex are expected to continue to be significant in future periods principally
as a result of the Company's ongoing manufacturing development program,
partially offset by a decline in clinical trial related costs as the Company's
second pivotal trial for Cytolex comes to a conclusion in early 1997. The
Company also expects increased preclinical and manufacturing development
expenses relating to its aminosterol and asthma programs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses have consisted principally of personnel
costs and professional fees, and have fluctuated year to year from 1994 through
1996 due largely to changes in professional fees expense. The Company expects
general and administrative expenses to increase in future periods as the
Company's level of activities increases.
OTHER EXPENSES/INCOME
The Company recorded in 1996 a non-cash charge to earnings of $7.1 million,
representing the fair value of 550,000 shares of common stock issued by the
Company in a buyout of royalties which the Company would otherwise have owed on
any sales of Cytolex.
The increases in interest income from 1994 through 1996 are due principally to
increasing investment balances and higher prevailing interest rates.
Interest expense has consisted primarily of the interest component of capital
leases for equipment. In the latter part of 1996, the Company borrowed
$1,000,000 under a credit facility, and as a result, interest expense is
expected to increase in future periods to reflect interest on such borrowing.
The Company expects to conduct, over the next several years, significant
research, preclinical development, clinical testing and manufacturing
development activities which, together with projected general and administrative
expenses, are expected to result in continued losses, particularly due to the
extended time period before the Company expects to commercialize any products.
FINANCIAL CONDITION, LIQUIDITY AND
CAPITAL RESOURCES
Cash and investments were approximately $33,340,000 at December 31, 1996 as
compared to $43,666,000 at December 31, 1995. The primary use of cash was to
finance the Company's operations. Cash used in operating activities was
$21,831,000, $14,953,000 and $11,741,000 in 1996, 1995 and 1994, respectively.
Since inception, the Company has funded its operations primarily from the
proceeds of public and private placements of securities, including $17,080,000
raised from its initial public offering in December 1991, $21,469,000 raised
from a public offering completed in February 1993, $18,023,000 raised from a
private placement of common stock completed in October 1993, $32,627,000 raised
from a public offering completed in August 1995, and $11,932,000 raised from a
private placement completed in August 1996, as well as contract and grant
revenues, interest income and lease and debt financing.
Capital expenditures increased to $1,655,000 in 1996, principally reflecting an
expansion of the Company's leased facility.
Accounts payable and accrued expenses increased to $5,145,000 at December 31,
1996 as compared to $4,080,000 at December 31, 1995, due principally to expenses
associated with manufacturing development efforts. The Company expects a
decrease in accounts payable and accrued expenses in future periods as certain
of these liabilities are satisfied.
During 1996, the Company borrowed $1,000,000 under a credit facility relating to
capital additions.
The Company believes that its existing capital resources will enable it to meet
operating needs into 1998. However, the Company's capital requirements may
change due to numerous factors, including, the progress of the Company's
research and development programs, regulatory approvals, competitive and
technological advances, the commercial viability of the Company's products, the
terms of collaborative arrangements, if any, entered into by the Company, and
other factors, many of which are beyond the Company's control. The Company will
require substantial additional funds to continue its research and development
programs and to commercialize potential products. The Company intends to seek
such funds through a combination of future offerings of securities and
collaborative arrangements with third parties, and regularly explores
alternatives in this
6
<PAGE> 4
regard. There can be no assurance that future funding will be available to the
Company or, if available, will be obtainable on terms favorable to the Company.
The receipt of funding from corporate partners, if any, will depend largely on
the progress of research and development programs. If the Company does not enter
into appropriate collaborations, or is not able to raise sufficient funds from
the periodic sale of securities, the Company will be required to delay or
eliminate expenditures for certain of its potential products, including Cytolex,
or to enter into collaborations with third parties to commercialize potential
products or technologies that the Company would otherwise seek to develop
itself, or to seek other arrangements.
In February 1997, the Company entered into a development, supply and
distribution agreement (the "Agreement") in North America with SmithKline
Beecham ("SB") for Cytolex. The Agreement provides for an upfront payment by SB
to the Company of $5 million, SB may make additional payments to Magainin of up
to $27.5 million upon the occurrence of certain product milestones. SB will also
fund a percentage of any development expenses for any additional indications for
Cytolex. Upon the commencement of commercial sales by SB, Magainin will be
responsible for the supply of Cytolex and SB will be responsible for the
marketing and sales of Cytolex. Magainin will receive certain percentages of SB
sales revenues under agreed upon terms. The Agreement also gives SB the right to
negotiate for rights to another Magainin product development candidate, under
certain terms and conditions.
The Company's capital expenditure requirements will depend upon numerous
factors, including the success of Cytolex and the progress of the Company's
other research and development programs, the time and cost required to obtain
regulatory approvals, the ability of the Company to enter into additional
collaborative arrangements, the demand for products based on the Company's
technology, if and when such products are approved, and possible acquisitions of
products, technologies and companies. The Company had no significant capital
commitments as of December 31, 1996.
The Company contracts with third parties for the manufacture of materials. There
are a limited number of companies currently able to produce materials on the
scale which the Company expects to require to commercialize its compounds. There
can be no assurance that qualified outside contractors will be available to
manufacture materials for the Company, or do so at costs which are affordable by
the Company. The Company is currently dependent upon Abbott for the production
of bulk Cytolex, and, as described above, Abbott is currently conducting certain
manufacturing development activities. The Company and Abbott have agreed that,
upon completion of such activities, they will negotiate in good faith a supply
agreement for the Company's worldwide supply needs of Cytolex. In the event that
this agreement is not entered into, or Abbott does not otherwise continue to
manufacture Cytolex, the Company's timeline to commercialize Cytolex would be
adversely affected, and the Company would need to spend substantial funds on
securing other manufacturing arrangements or building a manufacturing
infrastructure, and licensing applicable manufacturing related technology from
such contract manufacturer.
The Company also expects to conduct significant manufacturing development
activities for its other products under development.
Prior to marketing, any drug developed by the Company must undergo rigorous
preclinical and clinical testing and an extensive regulatory approval process
mandated by the FDA and similar foreign authorities. These processes can take
years to complete and require the expenditure of substantial resources. The time
required for completing such testing and obtaining such approvals is uncertain,
and ultimately, approval may not be obtained. Even if a product were to receive
marketing approval, there can be no assurance that the Company will be able to
successfully and profitably manufacture, market and distribute the product. To
attempt to limit risks in this process, the Company seeks to broaden its
technology base through internal basic research, collaborations and strategic
relationships.
The Company believes that patent and other proprietary rights are important to
its business, and in this regard, files applications as appropriate for patents
covering potential products and processes. The Company may be required to expend
substantial funds to protect any such patents against infringement or to
determine the priority of inventions in interference proceedings. If patents are
issued to other parties that contain claims that are interpreted to cover any of
the Company's proposed products, there can be no assurance that the Company
would be able to obtain licenses to such patents at a reasonable cost, if at
all, or be able to develop or obtain alternative technology. Failure by the
Company to obtain a patent on, or license to use, any technology required to
commercialize its proposed products would have a material adverse impact on the
Company.
Under license agreements, the Company will owe royalties on sales of certain of
its proposed products. Additionally, certain of these agreements also provide
that if the Company elects not to pursue the commercial development of any
licensed technology, or does not adhere to an acceptable schedule of
commercialization, then the Company's exclusive rights to such technology would
terminate.
7
<PAGE> 5
BALANCE SHEETS Magainin Pharmaceuticals Inc.
(In thousands, except per share amounts) (a development stage company)
<TABLE>
<CAPTION>
December 31, 1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,072 $ 1,880
Short-term investments 31,268 32,270
Prepaid expenses and other current assets 454 509
-------- --------
Total current assets 33,794 34,659
Fixed assets, net 2,506 1,476
Long-term investments -- 9,516
Other assets 76 76
-------- --------
Total assets $ 36,376 $ 45,727
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,145 $ 4,080
Note payable -- current 250 --
Equipment lease obligations -- current 123 150
-------- --------
Total current liabilities 5,518 4,230
Note payable -- long-term 750 --
Equipment lease obligations -- long-term 38 161
Deferred rent 127 143
-------- --------
Total liabilities 6,433 4,534
-------- --------
Commitments, contingencies and other matters
Stockholders' equity:
Preferred stock -- $.001 par value; shares authorized -- 9,211; none
issued
Common stock -- $.002 par value; shares authorized -- 45,000; shares
issued and outstanding -- 19,364 and 17,052 39 34
Additional paid-in capital 125,134 105,662
Unrealized gain on investments 13 120
Deficit accumulated during the development stage (95,243) (64,623)
-------- --------
Total stockholders' equity 29,943 41,193
-------- --------
Total liabilities and stockholders' equity $ 36,376 $ 45,727
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 6
STATEMENTS OF OPERATIONS Magainin Pharmaceuticals Inc.
(In thousands, except per share amounts) (a development stage company)
<TABLE>
<CAPTION>
June 29, 1987
(Inception) to
December 31,
Year Ended December 31, 1996 1995 1994 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Contract and government grant $ 150 $ 2,056 $ 85 $ 2,983
Related party contract -- 280 326 1,527
-------- -------- -------- ---------
150 2,336 411 4,510
-------- -------- -------- ---------
COSTS AND EXPENSES:
Research and development 22,326 18,160 11,258 78,681
General and administrative 3,488 3,137 3,468 20,512
Charge for stock issuance relating to
royalty buyout 7,080 -- -- 7,080
-------- -------- -------- ---------
32,894 21,297 14,726 106,273
-------- -------- -------- ---------
Loss from operations (32,744) (18,961) (14,315) (101,763)
Interest income 2,172 1,778 1,207 7,210
Interest expense (48) (32) (48) (690)
-------- -------- -------- ---------
Net loss $(30,620) $(17,215) $(13,156) $ (95,243)
======== ======== ======== =========
Net loss per share $(1.71) $(1.17) $(0.99)
======== ======== ========
Weighted average shares outstanding 17,938 14,696 13,301
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 7
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Magainin Pharmaceuticals Inc.
(In thousands, except per share amounts) (a development stage company)
<TABLE>
<CAPTION>
Common Stock Deficit Treasury
------------------------------- Accumulated Stock
Additional During --------- Unrealized
For the period from inception Number Paid in Development Number Gain (Loss) on
through December 31, 1996 of Shares Amount Capital Stage of Shares Investments
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued, $.002 per share
(inception) 374 $ 1 $ -- $ -- -- --
Common stock issued, $2.00 per share 1,750 3 3,496 -- -- --
Net loss -- -- -- (1,324) -- --
------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1988 2,124 4 3,496 (1,324) -- --
Acquisition of treasury shares, $.002 per
share -- -- -- -- 54 --
Common stock issued, $.002 to $.30 per share 2 -- -- -- -- --
Common stock issued, exercise of options 3 -- -- -- -- --
Common stock issued, $3.00 per share 1,000 2 2,998 -- -- --
Net loss -- -- -- (2,086) -- --
------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1989 3,129 6 6,494 (3,410) 54 --
Fair value of warrants issued as compensation -- -- 41 -- -- --
Common stock issued, $.002 to $.40 per share 5 -- 1 -- -- --
Common stock issued, $3.00 per share (net of
expenses) 70 -- 200 -- -- --
Common stock issued, $4.00 per share (net of
expenses) 1,000 2 3,972 -- -- --
Common stock issued, $6.50 per share (net of
expenses) 154 -- 986 -- -- --
Common stock issued, exercise of options 75 -- 13 -- -- --
Net loss -- -- -- (4,321) -- --
------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1990 4,433 8 11,707 (7,731) 54 --
Common stock issued, $4.00 per share 176 -- 702 -- -- --
Common stock issued, exercise of warrants and
options 394 1 1,958 -- -- --
Fair value of warrants issued -- -- 250 -- -- --
Retirement of treasury stock (54) -- -- -- (54) --
Common stock issued pursuant to initial public
offering, $9.00 per share (net of expenses) 2,000 4 16,212 -- -- --
Net loss -- -- -- (5,351) -- --
------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1991 6,949 13 30,829 (13,082) -- --
Common stock issued as compensation, $4.00 per
share 1 -- 2 -- -- --
Common stock issued pursuant to initial public
offering over-allotment, $9.00 per share
(net of expenses) 105 1 865 -- -- --
Common stock issued, exercise of options 54 -- 11 -- -- --
Net loss -- -- -- (8,459) -- --
------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1992 7,109 14 31,707 (21,541) -- --
Common stock issued pursuant to public
offering, $6.00 per share (net of expenses) 3,875 8 21,460 -- -- --
Common stock issued, exercise of options 76 -- 48 -- -- --
Common stock issued pursuant to private
placement, $8.75 per share (net of expenses) 2,200 5 18,019 -- -- --
Net loss -- -- -- (12,711) -- --
------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1993 13,260 27 71,234 (34,252) -- --
Common stock issued, exercise of options and
warrants 60 -- 29 -- -- --
Fair value of warrants issued to contract
manufacturer -- -- 200 -- -- --
Unrealized loss on investments -- -- -- -- -- (169)
Net loss -- -- -- (13,156) -- --
------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1994 13,320 27 71,463 (47,408) -- (169)
Common stock issued pursuant to public
offering, $10.00 per share (net of expenses) 3,500 7 32,620 -- -- --
Common stock issued, exercise of options 107 -- 329 -- -- --
Fair value of shares issued to contract
manufacturer $10.00 per share 125 -- 1,250 -- -- --
Carrying value adjustment -- -- -- -- -- 289
Net loss -- -- -- (17,215) -- --
------------------------------------------------------------------------------------------------------------------------------
Balance -- December 31, 1995 17,052 34 105,662 (64,623) -- 120
Common stock issued pursuant to private
placement, $7.71 per share (net of expenses) 1,557 3 11,929 -- -- --
Fair value of shares issued pursuant to
royalty buyout 550 1 7,059 -- -- --
Common stock issued, exercise of options and
warrants 205 1 484 -- -- --
Carrying value adjustment -- -- -- -- -- (107)
Net loss (30,620) -- --
------------------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 1996 19,364 $39 $125,134 $(95,243) -- $13
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 8
STATEMENTS OF CASH FLOWS Magainin Pharmaceuticals Inc.
(In thousands) (a development stage company)
<TABLE>
<CAPTION>
June 29, 1987
(Inception) to
December 31,
For the Years Ended December 31, 1996 1995 1994 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(30,620) $(17,215) $(13,156) $ (95,243)
Adjustments to reconcile net loss to net cash used
in operating activities:
Fair value of stock, options and warrants
issued 7,060 1,250 200 8,809
Depreciation and amortization 625 456 551 3,809
Deferred rent (16) (6) 7 127
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses
and other assets 55 (28) 25 (645)
Increase in accounts payable and accrued
expenses 1,065 590 632 5,145
-------- -------- -------- ---------
Net cash used in operating activities (21,831) (14,953) (11,741) (77,998)
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (28,019) (62,948) (20,856) (182,852)
Proceeds from maturities and sales of investments 38,430 44,821 33,884 151,595
Capital expenditures (1,655) (360) (149) (4,196)
-------- -------- -------- ---------
Net cash provided by (used in)
investing activities 8,756 (18,487) 12,879 (35,453)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,000 -- -- 1,000
Payments on capitalized equipment leases (150) (186) (352) (1,840)
Proceeds from sale of stock and exercise of
options and warrants 12,417 32,956 29 116,363
-------- -------- -------- ---------
Net cash provided by (used in)
financing activities 13,267 32,770 (323) 115,523
-------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents 192 (670) 815 2,072
Cash and cash equivalents at beginning of period 1,880 2,550 1,735 --
-------- -------- -------- ---------
Cash and cash equivalents at end of period $ 2,072 $ 1,880 $ 2,550 $ 2,072
======== ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $48 $32 $48 $439
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS Magainin Pharmaceuticals Inc.
(a development stage company)
NOTE A -- THE COMPANY:
Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29, 1987.
The Company is engaged in the development of break through medicines for serious
diseases. The Company isolates and develops compounds from the host-defense
systems of animals and uses molecular techniques such as gene identification to
understand the pathogenesis of disease. The Company's development efforts are
focused on anti-infectives, oncology and, pulmonary and allergic disorders.
The Company is in the development stage, and its efforts have been principally
devoted to research and development. The Company is subject to those risks
associated with development stage companies. Substantial financing will be
required by the Company to fund its research and development activities. There
is no assurance that such financing will be available when needed or that the
Company's research and development efforts will be successful.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
related notes. Actual results could differ from those estimates.
Cash and Cash equivalents -- The Company considers all highly liquid investment
instruments purchased with a maturity of three months or less to be cash
equivalents.
Investments -- Investments purchased with a maturity of more than three months,
and which mature less than twelve months from the balance sheet date, are
classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity, however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company classifies
its investments as available-for-sale as defined by Statement of Financial
Accounting Standards ("SFAS"), No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Available-for-sale securities are carried at market
value with unrealized gains and losses reported as a separate component of
Stockholders' Equity. Gross realized gains and losses on the sales of investment
securities are determined on the specific identification method and are included
in interest income.
Concentration of Credit -- The Company invests generally in securities of the
U.S. Treasury, U.S. government agencies, and U.S. government security-based
money market funds. The Company has not experienced any losses on its
investments.
Fixed Assets and Depreciation -- Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets. Equipment under capital leases and leasehold improvements are
amortized using the straight-line method over the term of the respective lease,
or their estimated useful lives, whichever is shorter. Expenditures for
maintenance and repairs are charged to expense as incurred.
Revenue recognition -- Any revenues from research and development arrangements
are recognized pursuant to the terms of the related agreements as work is
performed, or as milestones are achieved.
Research and development -- Research and development costs are expensed as
incurred.
Patent costs -- Patent-related costs are expensed as incurred.
Lease expense -- Expense related to the facility lease is recorded on a
straight-line basis over the lease term. The difference between rent expense
incurred and the amount paid is recorded as deferred rent and is amortized over
the lease term.
Income Taxes -- The Company accounts for income taxes using the liability method
as prescribed by Financial Accounting Standards Board ("FASB") Statement No.
109, "Accounting for Income Taxes". Deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits which are not expected to be realized. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted.
12
<PAGE> 10
Net loss per share -- Net loss per share is computed by dividing the net loss by
the weighted average number of shares of common stock outstanding during each
period. Outstanding options and warrants have not been considered because their
inclusion would have an antidilutive effect on net loss per share.
New Pronouncements -- In October 1995, the FASB issued SFAS 123 "Accounting for
Stock-Based Compensation Arrangements". SFAS 123 permits a company to choose
either a new fair value-based method of accounting for stock-based compensation,
or retaining the current intrinsic value-based method of accounting for
stock-based compensation provided for in APB Opinion 25. The statement requires
pro forma disclosures of net income and earnings per share computed as if the
fair value-based method had been applied in financial statements of companies
that continue to follow the intrinsic value-based method of accounting. The
Company has adopted SFAS 123 for disclosure purposes only, and as a result, the
adoption of SFAS 123 will not materially impact the Company's results of
operations.
Reclassification -- Certain reclassifications have been made to prior years'
financial statements to conform to the 1996 presentation.
NOTE C -- SHORT-TERM AND LONG-TERM INVESTMENTS:
The Company invests in U.S. Treasury and U.S. Government agency securities.
Excess cash is invested on a short-term basis in U.S. government based money
market funds. Unrealized gains at December 31, 1996 total $13,000. The Company
has not realized any losses on its investments.
NOTE D -- FIXED ASSETS:
Fixed assets are stated at cost and are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Laboratory and office equipment $3,766 $2,707
Leasehold improvements 2,433 1,837
------ ------
Total 6,199 4,544
Less accumulated depreciation and amortization 3,693 3,068
------ ------
$2,506 $1,476
====== ======
</TABLE>
NOTE E -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Accounts payable $ 176 $ 290
Clinical trial costs 720 1,333
Manufacturing development costs 3,426 1,865
Preclinical costs 269 --
Professional fees 200 334
Deferred contract income 87 87
Other 267 171
------ ------
$5,145 $4,080
====== ======
</TABLE>
13
<PAGE> 11
NOTE F -- EQUIPMENT LEASE OBLIGATIONS:
The Company leases equipment under various agreements with terms of 36 to 48
months and accounts for these leases as capital leases. Equipment purchases
under these leases were approximately $0, $0, $399,000 and $2,003,000 for the
years ended December 31, 1996, 1995, 1994 and the period June 29, 1987
(inception) through December 31, 1996, respectively. The net book value of the
equipment held under capital leases was approximately $149,000 and $293,000 at
December 31, 1996 and 1995, respectively.
Future lease payments as of December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Year Ending December 31,
1997 $131
1998 42
---
Total 173
Less amounts representing interest 12
---
Present value of future lease payments at end of year 161
Less amounts due within one year 123
----
Amounts due after one year $ 38
====
</TABLE>
NOTE G -- NOTE PAYABLE:
In April 1996, the Company entered into a credit arrangement with a commercial
bank under which up to $1,000,000 may be borrowed to finance the acquisition of
equipment and the costs of improvements to the Company's leased facilities.
Borrowings under this credit facility bear interest at a rate of 8.5% for the
three-year term of the loan. The loan provides for monthly interest payments,
with principal payments made in quarterly installments in the second and third
year after borrowings. Under this credit arrangement, the Company has agreed to
maintain, in an unrestricted investment account with the bank, an investment
balance not less than the outstanding loan balance. Any amounts outstanding
shall become immediately due and payable under certain circumstances, including
the failure of the Company to maintain (i) a certain minimum cash and investment
balance, and (ii) certain financial ratios.
As of December 31, 1996, the Company had borrowed $1,000,000 under this
facility.
The principal repayment obligations as of December 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31,
1997 $ 250
1998 $ 500
1999 $ 250
------
Total $1,000
</TABLE>
NOTE H -- STOCKHOLDERS' EQUITY:
In August 1995, the Company consummated a public offering of 3,500,000 shares of
common stock with proceeds to the Company (after underwriting discounts and
offering expenses) of approximately $32,627,000.
In October 1995, pursuant to an arrangement with a contract manufacturer, the
Company issued to such manufacturer 125,000 shares of common stock with a fair
value of $10 per share. In connection therewith, the Company recorded a non-cash
charge to earnings of $1,250,000.
In May 1996, the Company increased the number of its authorized common shares to
45,000,000.
In August 1996, the Company completed a private placement of 1,556,763 shares of
common stock, together with warrants as described below, with proceeds to the
Company (after offering expenses) of approximately $11,932,000.
In September 1996, pursuant to a buyout of a royalty arrangement, the Company
issued 550,000 shares of common stock with a fair value of $12.87 per share. In
connection, therewith, the Company recorded a non-cash charge to earnings of
$7,060,000.
14
<PAGE> 12
Warrants -- Under a 1991 credit agreement with certain stockholders, the Company
granted warrants to the lenders to purchase an aggregate of 250,000 shares of
common stock exercisable at $8 per share. These warrants expire in 2001. In
connection therewith, the Company recorded a non-cash charge to earnings of
$250,000 in 1991. At December 31, 1996 229,739 of these warrants are
outstanding.
In October 1994, pursuant to an arrangement with a contract manufacturer, the
Company granted to such manufacturer a warrant to purchase 300,000 shares of
common stock exercisable at $7.50 per share. The warrant expires in 1999. In
connection therewith, the Company recorded a non-cash charge to earnings of
$200,000 in 1994.
In August 1996, the Company completed a private placement of 1,556,763 shares of
common stock, together with warrants to purchase an aggregate of 1,011,896
shares of common stock. The warrants are exercisable at $8.48 per share, and
contain provisions to decrease the exercise price, and increase the issuable
shares, under certain circumstances. Such circumstances include the issuance of
shares of common stock by the Company for a consideration per share less than
the exercise price of the warrants, and the issuance by the Company of
securities convertible into shares of common stock for which the exercise or
conversion price is less than the exercise price of the warrants. The warrant
holders also have a one-time right, in the event the average price of the
Company's common stock in any month prior to August 1999 falls below a certain
level, to reduce the exercise price of the warrant to 110% of such average
price.
Stock option plans -- In May 1991, the stockholders approved the 1990 Stock
Option Plan (the "1990 Plan") which provides for the granting of options for the
purchase of up to 160,000 shares of common stock. In May 1996, the stockholders
approved the amended 1992 Stock Option Plan (the "1992 Plan") which provides for
the granting of options for the purchase of up to 2,500,000 shares of common
stock.
The plans provide for the granting of incentive stock options and nonqualified
stock options and are administered by a committee of the Board of Directors
(except as to options awarded to non-employee directors as described below). The
committee has the authority to determine the term during which an option may be
exercised (provided that no option may have a term of more than 10 years), the
exercise price of an option and the rate at which options may be exercised.
Incentive stock options may be granted only to employees of the Company.
Nonqualified stock options may be granted to employees, directors or consultants
of the Company. For nonqualified stock options under the 1992 Plan and incentive
stock options, the exercise price can not be less than the fair market value of
the underlying common stock on the date of the grant. The 1992 Plan also
provides for initial grants to nonemployee directors to purchase 15,000 shares
of common stock, and annual grants thereafter of options to purchase 5,000
shares of common stock.
In addition to the shares of common stock issuable upon exercise of options
granted under the Company's stock option plans, 734,383 shares of common stock
are issuable upon exercise of outstanding options granted to officers, employees
and consultants pursuant to other written agreements. The price for these
options was set by the Board of Directors, or a committee designated by the
Board, based upon an evaluation of the fair market value of the Company's common
stock. The options vest over various periods, not exceeding five years, and
expire no later than ten years from the date of grant.
During 1994, a number of outstanding options with higher exercise prices were
exchanged for fewer options with an exercise price equal to $3.75 per share.
Pursuant to this program, 499,975 option shares were exchanged for 431,724 new
option shares.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its options. Accordingly, no compensation cost has been recognized for its stock
option grants. Had compensation cost for the Company's stock option grants been
determined based on the fair value at the grant dates for awards consistent with
the method of SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in thousands, except
per share data):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C> <C>
Net Loss As reported $(30,620) $(17,215)
Pro forma $(31,816) $(17,410)
Net Loss Per Share As reported $ (1.71) $ (1.17)
Pro forma $ (1.78) $ (1.18)
</TABLE>
The resulting effect on pro forma net loss and net loss per share disclosed for
1996 and 1995 is not likely to be representative of the effects on net loss and
net loss per share on a pro forma basis in future years, because 1995 and 1996
pro forma results
15
<PAGE> 13
include the impact of only one and two years, respectively, of grants and
related vesting, while subsequent years will include additional years of grants
and vesting.
A summary of the status of the Company's stock options as of December 31, 1994,
1995 and 1996, and changes during the years ending on those dates is presented
below (in thousands, exept per share data):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- --------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------- ------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 2,048 $ 3.97 1,759 $3.07 1,563 $4.13
Granted 782 $10.56 504 $7.16 323 $5.49
Exercised (196) $ 2.56 (107) $3.08 (25) $1.14
Forfeited (168) $ 5.01 (108) $4.90 (102) $8.72
---- ---- -----
Outstanding at end of year 2,466 $ 6.07 2,048 $3.97 1,759 $3.07
Options exercisable at
year-end 1,203 $ 3.00 1,157 $2.39 926 $1.89
Weighted-average fair
value of options granted
during the year $7.54 $5.30 --
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Shares Weighted-Average Shares
Range Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
----------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.002-$.40 146 2 years $ .022 146 $ .022
$2.00-$3.75 1,062 6 years $ 2.75 867 $ 2.54
$5.25-$8.00 300 8 years $ 6.70 139 $ 6.35
$9.13-$11.63 943 9 years $10.38 43 $ 9.18
$16.75 15 8 years $16.75 8 $16.75
---- ------- ------ ----- -----
$002.-$16.75 2,466 7 years $ 6.07 1,203 $ 3.00
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: dividend yield of zero (.0%)
percent, expected volatility of eighty-two (82%) and seventy-nine (79%) percent;
respectively, risk-free interest rates ranging from 5.6% to 7.25%, and expected
life of six years.
NOTE I -- INCOME TAXES:
The Company has approximately $85,522,000 of net operating loss ("NOL")
carryforwards, and approximately $4,258,000 of research and development tax
credits, available to offset future federal income tax, subject to limitations
for alternative minimum tax. The NOL and research and development credit
carryforwards are subject to examination by the tax authorities and expire in
various years from 2003 through 2011. The NOL carryforward differs from the
accumulated deficit due principally to differences in the recognition of certain
research and development expenses for financial and federal income tax
reporting.
The Tax Reform Act of 1986 contains provisions that may limit the NOL and
research and development credit carryforwards available to be used in any given
year upon the occurrence of certain events, including significant changes in
ownership interest. A change in ownership of a company of greater than 50%
within a three-year period results in an annual limitation on that company's
ability to utilize its NOL carryforwards from tax periods prior to the ownership
change. The Company is subject to an annual limitation on the use of its NOL
carryforwards and research and development credits pursuant to these provisions.
The Company does not believe that such limitation will have a material adverse
impact on the utilization of its carryforwards.
16
<PAGE> 14
The Company's NOL, research and development tax credit carryforwards and
temporary differences represent a previously unrecognized tax benefit.
Recognition of these benefits requires future income. Because the attainment of
future income is uncertain, the Company has established a valuation allowance,
which increased by approximately $7,698,000 during 1996, for the entire amount
of the tax benefit.
Significant components of the Company's deferred tax assets as of December 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net operating loss carryforwards $ 29,077 $ 24,533
Research credits 4,258 3,451
Other (net) 3,213 866
-------- --------
Net deferred tax assets 36,548 28,850
Valuation allowance for deferred tax assets $(36,548) $(28,850)
-------- --------
Total deferred tax assets $ -- $ --
======== ========
</TABLE>
NOTE J -- COLLABORATIVE AGREEMENTS:
In 1990, the Company entered into a Research and License Agreement with
Colgate-Palmolive Company ("Colgate") pursuant to which the Company received
research funding of approximately $0, $280,000, $326,000, and $1,527,000 during
the years ended December 31, 1996, 1995 and 1994 and during the period from June
29, 1987 (inception) to December 31, 1996, respectively. This agreement has
expired, and the Company does not expect to receive any additional such funding.
In August 1994, the Company entered into a collaboration in the nutritional
field with Abbott Laboratories ("Abbott"). The Company recorded revenue of
$150,000, $150,000 and $62,500 in the years ended December 31, 1996, 1995 and
1994, respectively, under this arrangement.
The Company recorded revenues of $1.9 million in 1995 relating to the execution
of an agreement in principle with Fisons plc ("Fisons") in September 1995, and
the termination by Fisons of this arrangement in November 1995.
Under license agreements, the Company will owe royalties on sales of certain of
its proposed products. Additionally, certain of these agreements also provide
that if the Company elects not to pursue the commercial development of any
licensed technology, or does not adhere to an acceptable schedule of
commercialization, then the Company's exclusive rights to such technology would
terminate.
The Company maintains relationships with, and funds research at, a number of
institutions. These relationships typically provide the Company with an option
to license any results of the research. Generally, the Company would be
obligated to pay royalties based upon any revenue from the licenses.
NOTE K -- 401(K) PLAN:
The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. No such contributions have been made through December 31, 1996.
NOTE L -- COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
MANUFACTURING
The Company contracts with third parties for the manufacture of materials, and
is working with Abbott Laboratories with regard to the manufacture of bulk
Cytolex. The Company's current arrangement with Abbott provides for the
development by Abbott of a chemical process to manufacture bulk Cytolex on a
commercial scale, for the production of bulk Cytolex, and for Abbott to perform
those activities necessary to submit a Drug Master File to the FDA in support of
any filing for marketing approval of Cytolex. The arrangement with Abbott
provides for cash payments by the Company through early 1998 aggregating
approximately $12,900,000, as well as the issuance by the Company to Abbott of
up to 500,000 shares of its common stock and the obligation to pay a royalty on
future sales of Cytolex. Through December 31, 1996, the Company has paid Abbott
approximately
17
<PAGE> 15
$8,600,000 under this arrangement. Stock issuances by the Company to Abbott will
result in a charge to earnings, representing the fair value of the shares when
issued. The Company issued 125,000 shares of common stock to Abbott in October
1995, resulting in a charge to earnings of $1,250,000 in 1995. Future stock
issuances are related to the achievement by Abbott of contractual performance
milestones which could begin to occur in 1997. Substantial additional funds will
also be required to continue manufacturing development efforts beyond the term
of this current arrangement.
There are a limited number of companies which are currently able to produce
materials on the scale which the Company expects to require to commercialize its
compounds. There can be no assurance that qualified outside contractors will be
available to manufacture materials for the Company, or do so at costs which are
affordable by the Company. The Company is currently dependent upon Abbott for
the production of bulk Cytolex, and, as described above, Abbott is currently
conducting certain manufacturing development activities. The Company and Abbott
have agreed that, upon completion of such activities, they will negotiate in
good faith a supply agreement for the Company's worldwide supply needs of
Cytolex. In the event that this agreement is not entered into, or Abbott does
not otherwise continue to manufacture Cytolex, the Company's timeline to
commercialize Cytolex would be adversely affected, and the Company may need to
spend substantial funds on securing other manufacturing arrangements or building
a manufacturing infrastructure, and licensing applicable manufacturing related
technology from such contract manufacturer.
The Company also expects to conduct significant manufacturing development
activities for its other products under development.
RENT
The Company has entered into an operating lease for its laboratory and corporate
office facility. The lease provides for minimum annual rent payments through
1999 as follows (in thousands):
<TABLE>
<S> <C>
Year Ending December 31,
1997 $322
1998 335
1999 319
</TABLE>
The lease provides for escalations relating to increases in real estate taxes
and certain operating expenses.
Rent expense was approximately $310,000, $297,000, $291,000, and $1,978,000 for
the years ended December 31, 1996, 1995 and 1994, and for the period from June
29, 1987 (inception) to December 31, 1996, respectively.
18
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Magainin Pharmaceuticals Inc.
Plymouth Meeting, Pennsylvania
We have audited the accompanying balance sheets of Magainin Pharmaceuticals Inc.
(a development stage company) as at December 31, 1996, and December 31, 1995 and
the related statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996 and
for the period June 29, 1987 (inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Magainin Pharmaceuticals Inc. at
December 31, 1996 and December 31, 1995 and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1996 and for the period June 29, 1987 (inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
LOGO
/s/ RICHARD A. EISNER & COMPANY, LLP
- ------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
January 29, 1997
19
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Registration Nos. 33-52882, 33-61530, 33-71984,
33-82196, 33-96426 and 333-10889) and Forms S-3 (Registration Nos. 33-69544,
33-99528, 333-09927 and 333-14555), of our report dated on January 29, 1997 on
the financial statements included in the annual report on Form 10-K of Magainin
Pharmaceuticals Inc. as at and for the year ended December 31, 1996.
/s/ Richard A. Eisner, LLP
- --------------------------
New York, New York
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
AUDITED BALANCE SHEETS AS OF DECEMBER 31, 1996, AND THE AUDITED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FORM 10K PERIOD ENDED DECEMBER 31, 1996.
</LEGEND>
<RESTATED>
<CIK> 0000880431
<NAME> MAGAININ PHARMACEUTICALS INC.
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,072
<SECURITIES> 31,268
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,794
<PP&E> 6,199
<DEPRECIATION> 3,693
<TOTAL-ASSETS> 36,376
<CURRENT-LIABILITIES> 5,518
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 29,904
<TOTAL-LIABILITY-AND-EQUITY> 36,376
<SALES> 0
<TOTAL-REVENUES> 150
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 32,894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> (30,620)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,620)
<EPS-PRIMARY> (1.71)
<EPS-DILUTED> (1.71)
</TABLE>
