UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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 0-26372
CELLEGY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
California 82-0429727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1065 E. Hillsdale Blvd., Suite 418, Foster City, California 94404
(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code: (415) 524-1600
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock no par value
Common Stock Purchase Warrants
(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 Regulation 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-KSB or any amendment to
this Form 10-KSB.[X]
Registrant's revenues for the year ended December 31, 1996 were $647,660.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 1997 was $ 19,778,023 (based on the closing price for
the Common Stock on the Nasdaq SmallCap Market on such date). This calculation
does not include a determination that persons are affiliates or non-affiliates
for any other purpose.
The number of shares of common stock outstanding as of March 20, 1997 was
5,619,511.
Documents Incorporated By Reference
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the Company
to be held June 5, 1997, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1996.
Transitional Small Business Disclosure Format (Check one): Yes No XX
---- ----
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PART I
ITEM 1: BUSINESS
Overview
Cellegy Pharmaceuticals, Inc. ("Cellegy" or the "Company") is a
pharmaceutical company focused on the fields of skin biology and transdermal
drug delivery. The Company is engaged in the development of a proprietary
transdermal drug delivery system, as well as prescription pharmaceutical and
cosmeceutical products. Based on preclinical studies conducted to date, the
Company's drug delivery technology appears to open the skin barrier wider and
for longer periods of time than previously believed possible, permitting the
transdermal delivery of large-sized molecular or poorly soluble drugs while
reducing the risk of local reactions, such as skin irritation or inflammation.
The Company's product development focus is on three different medical
and/or cosmetic needs: (i) GlylorinTM, a topical cream for the treatment of
ichthyoses, a group of debilitating chronic skin diseases; (ii) a non-irritating
transdermal testosterone gel, used for the treatment of male andropause, a
condition which affects some five million males in the United States; and (iii)
a line of cosmeceutical products for the treatment of wrinkles. In addition,
based on its preclinical studies, the Company believes its other products may
have the potential to reverse signs and symptoms of irregular pigmentation, as
well as such skin conditions as acne, dermatitis, rosacea, psoriases and severe
dry skin.
The Company was incorporated in California in 1989. In 1991, Dr. Carl
R. Thornfeldt, co-founder and Chairman of the Board of the Company, recruited
Dr. Peter M. Elias to collaborate with Cellegy. Dr. Elias, Vice-Chairman of the
Department of Dermatology at University of California, San Francisco School of
Medicine ("UCSF") and a director of the Company, has over 20 years of basic
research dedicated to the understanding of the structure and biochemical
functions of the epidermis. In October 1993, the Company entered into a license
agreement with the University of California providing for an exclusive,
worldwide license for a use patent for skin barrier repair technology developed
by Dr. Elias with the assistance of Dr. Thornfeldt. In March 1994, the Company
entered into a second license agreement for two additional use patents defining
the technology relating to drug delivery by skin barrier disruption. See "--
Principal License Agreement."
The Company has also entered into license agreements with corporate
partners relating to its products. In April 1992, the Company entered into an
agreement with Neutrogena Corporation pursuant to which Neutrogena made a $5
million equity investment in the Company and licensed certain of the Company's
products, principally for consumer applications. Neutrogena also acquired the
royalty free rights to the Company's azelaic acid product for $1 million in
1994. Neutrogena was acquired by Johnson & Johnson in 1994.
In November 1996, the Company signed a license agreement with Glaxo
Dermatology ("Glaxo"), a division of Glaxo Wellcome, Inc., for worldwide rights
to Glylorin, Cellegy's lipid
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compound for the treatment of ichthyoses, a group of congenital severely
scaling, chronic diseases which the Company estimates afflicts one million
people in the United States. Glylorin is currently in Phase III clinical trials
for non-bullous congenital ichthyosiform erythroderma (n-CIE). The agreement
provides Glaxo with an exclusive license of patent rights and know-how covering
the Glylorin product in most of the world's major markets. In exchange for this
license, Cellegy received from Glaxo an initial payment and may receive future
milestone payments, as well as a royalty on net sales assuming successful
completion of product development and commercial marketing. The agreement also
provides that Glaxo will assume responsibility and the associated costs for all
future development and commercialization, including certain previously incurred
development costs. See "-- Principal License Agreements."
In the near term, Cellegy intends to enter into licensing and product
supply arrangements with pharmaceutical and consumer product companies for the
development and marketing of its products. From time to time in the future, the
Company's formulations will be evaluated by potential partners. However, there
can be no assurance that these evaluations will be successful or that the
Company will be able to enter into any such licensing or other arrangements.
The Company has not yet completed the development nor has it
commercialized any of its products. In addition, the Company's business involves
many risks and uncertainties that could affect the Company's future financial
position or results of operations. For further information regarding some of
those factors, see "Management's Discussion and Analysis or Plan of Operation --
Factors That May Affect Future Operating Results."
Core Technology
Cellegy's core technologies are based on two underlying premises: (1)
the outermost layer of the epidermis, the stratum corneum or barrier layer, is
metabolically active and plays a vital role in the skin's response to insults
and injuries; and (2) understanding the multiple mechanisms of these responses
may lead to the development of improved drug delivery systems, as well as
improved pharmaceutical and cosmeceutical products. This understanding formed
the basis for the development of two of the Company's products, Glylorin and
Azelaic Acid.
Until approximately 15 years ago, the stratum corneum was viewed as a
dead layer that played a passive role in skin functions and diseases. Thus, the
prior understanding was that skin processes, including inflammation, barrier
formation, hyperproliferation, and scaling are initiated by signals (biologic
response modifiers) which either arrive at the dermis via the blood or are
generated in the deeper dermis. This view is an "inside-out" perspective of the
activation of skin processes or function.
Cellegy's products are based on research findings initially developed
at the Dermatology Research Unit ("DRU") at the University of California, San
Francisco, that skin processes can be triggered by external stimuli that alter
the stratum corneum barrier, releasing biologic response modifiers. These
findings support the alternative "outside-in" view, in which modifiers migrate
internally from the surface to activate those abnormal signs deeper in the
epidermis and dermis. Cellegy's alternative view forms the basic foundation for
its research on the stratum corneum
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barrier and has impacted the Company's transdermal drug delivery and barrier
repair technologies and products.
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Product Opportunities
Drug Delivery
Of all the prescription drugs in the United States, less than ten are
currently approved by the United States Food and Drug Administration (the "FDA")
for transdermal delivery. A primary reason for the relatively limited number of
drugs approved by the FDA for transdermal delivery is that current drug delivery
systems have (i) the inherent limitations of molecular size and physiochemical
properties for drugs to be delivered across the skin barrier, and (ii) high
potential of inducing varying degrees of skin irritation.
Cellegy is engaged in developing a technology in the form of
pharmaceutically acceptable formulations, intended to overcome these inherent
limitations. This technology modulates the skin, with the result that the skin
barrier appears to be opened wider and stays open for a longer period of time,
which may allow for the transdermal and topical delivery of other therapeutic,
nutritional, and cosmetic molecules. In addition, the selective manipulation of
the barrier appears to reduce the potential of inducing skin inflammation, which
often accompanies use of traditional drug delivery technologies, such as patches
and iontophoresis.
The Company believes that there are a number of independent, market
driven factors which can further expand the worldwide transdermal drug delivery
market, including the following:
o Transdermal drug products can improve a patient's compliance
with instructions for taking medication. This is especially
true in the patient populations where non-compliance is a
serious issue, either due to the need for multiple-drug
therapy or the physical-psychological status of these
patients. Transdermal drug delivery offers a convenient, less
frequent dosing regimen and a less painful method of
delivering the drug in comparison with injections and many
other delivery methods.
o Patent expirations on currently marketed drugs have increased
the interest of many pharmaceutical companies in developing
transdermal drug delivery product forms for their proprietary
drugs. The Company's goal is to obtain additional protection
for the combination use of its potential transdermal delivery
method and the systemic drug, thus potentially extending the
duration of the product life cycle of a proprietary drug.
o Much of today's research by major pharmaceutical and
biotechnology companies is focused on the discovery of
genetically derived compounds which are generally larger-sized
molecules, such as human peptides and proteins. Because it is
difficult or impossible to deliver many of the new biological
products by traditional oral tablets or transdermal patches,
the Company believes that development of such compounds may
present a significant opportunity for its drug delivery
systems.
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In conducting experiments with various formulations based on its core
technologies, Cellegy scientists discovered significant anti-inflammatory and
anti-allergenic properties associated with its proprietary ingredients. Further
animal studies with these formulations have demonstrated efficacy equivalent to
currently marketed prescription and cosmeceutical products, but with reduced
irritation. Cellegy's resulting product development effort is focusing on
optimizing the unique characteristics of its proprietary ingredients to mitigate
the irritation of currently marketed products. Using its proprietary
ingredients, Cellegy's product development program is focusing on testosterone
and an anti-wrinkling product line.
Prescription Products
Cellegy further seeks to capitalize on the premise that the skin
processes accompanying several of the most serious and most common skin diseases
result from several of the following abnormal signs: scaling, skin infection,
inflammation, and excessive cell multiplication (hyperproliferation). It has
been shown that corticosteroids, antimicrobials, and retinoids, the three
largest dermatologic therapeutic classes of drugs based on sales, reverse only
one or two of these abnormal signs.
In order to effectively treat skin diseases resulting from the abnormal
signs described above, the patients often require use of a combination of drugs.
Such combination therapy may result in significant inconvenience to the patient,
causing a decreased level of patient compliance that may be inadequate to
successfully treat the disease. As a result, the Company believes its products
may decrease or eliminate the need for the current combination therapies, thus
providing cost and efficacy advantages in today's managed care environment.
Glylorin and Azelaic Acid are Cellegy's prime examples of this product approach.
Consumer and Cosmeceutical Products
Cellegy researchers are developing consumer and cosmeceutical products,
that fortify the protective function of the skin barrier and may improve the
skin's ability to protect against environmental and occupational skin damage,
thus preventing and/or reversing the signs of aging. Studies conducted to date
by Cellegy and its collaborators suggest that these products may help alleviate
inflamed skin conditions, as well as help reverse signs of photoaging, including
pigmentation and wrinkling.
Cellegy Drug Delivery Products -- Technology and Development Status
Technology
During the process of seeking approaches to effectively repair the skin
barrier, scientists at both UCSF and later at Cellegy discovered a unique and
proprietary "biochemical enhancer technology". This technology, utilizing the
skin as a portal for entry, comprises a variety of methods which manipulate the
key barrier lipids of the stratum corneum: cholesterol, ceramides, and free
fatty acids. The Company's researchers have demonstrated that normal barrier
function requires a specific critical ratio of all three lipids. Variations from
this ratio result in predictable alterations in barrier permeability. The result
is that the Company's drug delivery methods appear
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to be able to open the barrier wider and keep it open longer than existing
approaches. Based on the Company's limited studies to date, Cellegy's selective
opening of the barrier membrane has triggered less active repair mechanisms,
thus diminishing the risk of inflammation.
Cellegy has developed research data, including animal assays and
preclinical studies, that lead the Company to believe that therapeutic success
using its drug delivery technology may be achieved in humans. The data generated
to date include the testing of the following drugs: vasopressin, luteinizing
hormone releasing hormone (LHRH), testosterone, lidocaine, cimetidine, and
caffeine.
The Company has not conducted any human trials or studies regarding its
drug delivery technology, and there can be no assurance that research data,
trials or studies relating to animals are predictive of success in humans or
that any human trials will be successful.
Initial Application of Cellegy's Drug Delivery Program
The Company is initially focusing its drug delivery research on
developing topical/transdermal formulations for FDA approved drugs that can now
only be administered by oral or injectable routes. In addition, the candidate
drugs may have the potential to effectively treat more than one disease
indication. If so, Cellegy anticipates filing supplemental NDAs once approval
for the current indication is achieved. One of Cellegy's three drug delivery
patents, covering three of eight delivery methods, has been granted in the
United States. The other patent filings, covering the other five methods, are
still being examined. The Company also anticipates filing patents for
specifically designed formulations comprising certain delivery methods and the
active compound.
The first compound in the development path is transdermal testosterone
gel whose indications include male and female hormone replacement. Two
transdermal patch products are commercially available: one is applied to the
scrotum and the other consisting of two large patches. These products are
effective in delivering testosterone, but are associated with a significant
level of skin irritation. Based on studies conducted to date, Cellegy expects
that its topical testosterone gel will be significantly less irritating and more
cosmetically acceptable than the patch products, thereby offering the prospect
of greater market penetration. The side effects of current products limit usage
to about 5% of the five million males affected in this country.
Other compounds under study for transdermal delivery using the
Company's technology include (i) a compound which appears to effectively
ameliorate the symptoms of schizophrenia and anxiety disorders, improve
cognition and assist in cessation of addictive behavior, and (ii) a compound
approved for treatment of high blood pressure, that has the potential to
positively impact disorders of cognition and chronic renal failure, which may
decrease the number of patients requiring dialysis and kidney transplant. Both
of these product candidates are in the preclinical stage of development.
Cellegy Therapeutic and Consumer Products -- Technology and Development Status
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Therapeutic Products in Development
Glylorin. Data from preclinical and Phase II/III clinical studies
conducted to date suggest that this compound may inhibit the abnormal signs, as
well as other symptoms of ichthyoses, and may have the potential to alleviate
severe dry skin conditions.
In January 1996, the Company commenced a Phase III study with Glylorin
focusing on one of the most severe forms of ichthyoses, non-bullous congenital
ichthyosiform erythroderma ("n-CIE"). Phase III is the last clinical testing of
this product prior to the submission of a new drug application ("NDA") to the
FDA (assuming acceptable results). Based on current patient enrollment, the
Company expects to complete this study during the second half of 1997. Earlier,
Cellegy had successfully concluded three double-blind Phase II/III human
studies, which indicated that Glylorin appeared to treat two types of congenital
ichthyoses: congenial ichthyosiform erythroderma and neutral lipid storage
disease. Ichthyoses is a family of related, debilitating skin diseases
characterized by a thick surface layer of scales, that frequently affects the
entire body. Each of the three studies appeared to show that Glylorin reduced
the signs of the disease more than the placebo, and that the differences between
the active and placebo were statistically significant.
The FDA has granted orphan drug designation for the use of Glylorin to
treat the ten most severe types of congenial primary ichthyoses, for which there
is no approved prescription drug. A principal consideration for the Company's
decision to pursue such orphan drug designation was the desire to provide an
effective treatment for one of the most debilitating human skin diseases.
Victims of the disease are currently treated with greases, emollients, and
Lac-Hydrin, which all provide limited benefits, as well as with oral and topical
retinoids, which have a risk of toxicity.
In September 1996, Cellegy received an Orphan Drug Grant of up to
$400,000 from the FDA to further develop Glylorin for the treatment of
ichthyoses. In November 1996, the Company entered into a licensing agreement
with Glaxo for the further development and commercialization of Glylorin in most
of the world's major markets. See "-- Principal License Agreements." The Company
believes that the Glaxo collaboration has the potential to expedite Glylorin
approvals around the world for ichthyoses and other severe dry skin conditions,
such as those that occur in the elderly.
Consumer and Cosmeceutical Products in Development
Cellegy researchers have discovered that many currently available
moisturizers (products that increase water content of the skin) can actually
further damage an already compromised barrier and/or inhibit its normal repair
process, demonstrated by measuring increased water loss across the skin. In
addition, most anti-wrinkling products on the market cause varying degrees of
skin irritation. In order for these products to be effective, higher
concentrations of active ingredients, such as Alpha Hydroxy Acids ("AHA"), must
be included in the formulation, which in turn, results in increased irritation.
Cellegy's research to date suggests that the products utilizing Cellegy's
proprietary ingredients may not only reduce irritation, but also appear to
moisturize and accelerate restoration of the integrity of a comprised skin
barrier, whether it is disrupted by chemical or physical injury, skin disease or
photoaging. During a series of preclinical
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experiments, the Company's scientists discovered that in addition to these
capabilities, these proprietary ingredients show significant anti-allergenic
properties.
Anti-wrinkling Cosmeceutical Products. The Company is developing a line
of unique cosmetically elegant topical formulations based on anti-irritant and
anti-allergenic ingredients which are the subject of a patent application filed
by the Company. These metabolically active cosmetics are expected to produce
measurable visible changes of cosmetic parameters of the skin, i.e. roughness,
wrinkles, and laxity. Cellegy may also employ other compounds with
multifunctional mechanisms of action and proven safety. These compounds are not
normally utilized in commercially available cosmetics due to irritation. The
Company believes, however, that two or more of these compounds may be
synergistically combined. Cellegy is actively seeking proprietary protection for
these unique formulations.
Cellegy believes its first generation of anti-wrinkling products, which
will not incorporate AHA or retinoids, may potentially reverse the signs of
aging, including wrinkles, to a greater degree than either, yet without the skin
irritation that sometimes accompanies use of such compounds. However, the
Company's proprietary anti-irritant may also be out licensed for incorporation
into retinoid and AHA products. Cellegy's furture research efforts in aging skin
will use more unique and innovative technologies. The Company anticipates that
resulting products will be designed for specific skin sites, skin types and/or
age of the person.
Consumer Products for the Skin. The Company is also developing a line
of consumer skin care products, currently in late-phase formulation development.
These products contain a basic formulation of different compounds that are GRAS
(generally regarded as safe) ingredients, and function optimally at specific
ratios. Separate product formulations are being developed in the lip protection,
facial and body lotions, and moisturizing cleanser categories. To date, based on
test data from various assays, these products appear to outperform certain
commercial skin care products. Cellegy believes that these new products present
an opportunity to provide more effective consumer skin care for many different
areas of the body.
The Company's research and development expenses were $1,225,000
and $2,712,000 in 1995 and 1996, respectively. See "Management's Discussion
and Analysis."
Marketing Strategy
If successfully developed, Cellegy expects that most of its products
will be sold into major market segments, which would require large sales forces
and significant marketing support. Cellegy has had, and expects from time to
time in the future to have, discussions with third parties that have sufficient
experience and resources necessary to support the marketing of its products.
Cellegy intends to collaborate primarily with major pharmaceutical
companies and consumer companies through establishment of licensing and other
collaborations. Through these agreements, Cellegy believes it could receive
upfront and milestone payments, development funding for research, as well as
royalty streams from product sales. In the future, Cellegy may
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consider marketing some of its products directly to targeted markets, such as
dermatologists and related professionals.
Patents and Trade Secrets
The Company has nine granted U.S. patents, several issued foreign
patents and many foreign patent applications for the use of certain compounds to
treat the most common and/or severe inflammatory dermatologic diseases including
dermatitis, psoriasis, rosacea and acne, as well as disorders such as various
ichthyoses, wrinkling and skin aging and premalignant actinic keratoses. Three
pending patent applications relate to technology or products licensed from the
University of California. At least two more patent applications are being
prepared for filing but are currently protected by disclosure documents.
Corresponding patent applications for most of the Company's issued U.S. patents
have been filed in many countries of importance to the Company located in major
world markets, including certain countries in Europe, Australia, South Korea,
Japan, Mexico and Canada.
The Company's policy is to protect its technology by, among other
things, filing patent applications for technology that it considers important to
the development of its business. The Company intends to file additional patent
applications, when appropriate, relating to its technology, improvements to its
technology and to specific products that it develops. It is impossible to
anticipate the breadth or degree of protection that any such patents will
afford, or whether the Company can meaningfully protect its rights to its
unpatented trade secrets.
It is the Company's policy to require its employees to execute an
invention assignment and confidentiality agreement upon employment. Cellegy's
consultants are required to execute a confidentiality agreement upon the
commencement of their consultancy to the Company. Each agreement provides that
all confidential information developed or made known to the employee or
consultant during the course of employment or consultancy will be kept
confidential and not disclosed to third parties except in specific
circumstances. The invention assignment generally provides that all inventions
conceived by the employee shall be the exclusive property of the Company. In
addition, it is the Company's policy to require the collaborators and potential
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets.
Principal License Agreements
The Company entered into a License Option Agreement dated April 16,
1992 (the "License Option Agreement") with Neutrogena as part of Neutrogena's
purchase of 475,560 shares of the Company's Series C Preferred Stock for $5.0
million on June 12, 1992. Also as part of that stock purchase transaction, the
Company entered into an Azelaic Acid OTC License Agreement (the "Azelaic Acid
Agreement") and a Metabolic Moisturizer OTC License Agreement (the "Metabolic
Moisturizer Agreement"), each dated April 16, 1992, with Neutrogena.
The License Option Agreement requires the Company to notify Neutrogena
about potential consumer or prescription products about which it becomes aware
and about potential consumer products for which the Company has applied to
switch from prescription to consumer status. Certain products and
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technologies, including the Company's drug delivery products and technologies,
Glylorin, and products to be sold in the Japanese market, are excluded from the
scope of the License Option Agreement. The royalty-bearing agreement for
consumer products provides for a royalty of three percent of net sales for the
first two years and five percent of net sales thereafter, and for prescription
products provides for a royalty of five percent of net sales with a minimum
royalty of $25,000. For both consumer products and prescription products
Neutrogena pays out-of-pocket evaluation, development and marketing costs. As of
March 20, 1997, Neutrogena had not exercised its option to license any consumer
or prescription products about which it had been notified by the Company.
Neutrogena previously notified the Company that it has elected not to exercise
its option to acquire the Company's skin protectant products offered by the
Company in a notice to Neutrogena. The term of the agreement is 15 years.
The Metabolic Moisturizer Agreement, which includes barrier repair
technology, and the Azelaic Acid Agreement each granted to Neutrogena an
exclusive, worldwide royalty-bearing license. The Metabolic Moisturizer
Agreement relates to the Company's barrier repair technology and contains the
same royalty and other material terms as the standard royalty-bearing license
agreement described above for consumer products. The Azelaic Acid Agreement was
terminated and replaced by a Patent License Agreement effective June 1, 1994
(the agreement as amended, the "Neutrogena Agreement") between the Company and
Neutrogena. Pursuant to the Neutrogena Agreement, Neutrogena paid the Company
$1.0 million for an exclusive, worldwide, royalty-free license for azelaic acid
for both prescription and consumer products. The Metabolic Moisturizer Agreement
and Neutrogena Agreement will terminate upon the earlier of (a) mutual consent
by the Company and Neutrogena or (b) material breach by a party, provided the
breaching party is given written notice of the breach and does not cure within
thirty days.
On October 26, 1993, the Company entered into a license agreement with
the University of California (the "Licensor") providing for an exclusive,
worldwide, royalty bearing license, subject to customary government rights, for
two use patents for Barrier Repair Formulations, the rights to which are jointly
held by the Licensor and the Company, in consideration of the issuance to the
Licensor of 9,513 shares of Series A Preferred and the payment by the Company of
an additional $20,000 licensing fee. The license agreement requires the Company
to pay royalties on net product sales equal to the greater of $25,000 annually
or 2% of net sales of consumer products, and 5% of net sales of prescription
products with a minimum of $25,000 annually. The Company has the right to grant
sublicenses to third parties. Pursuant to the license agreement, the Company is
required to submit progress reports related to development and testing of all
licensed products. If the Company fails to achieve certain milestones, the
Licensor has the right to terminate the license agreement upon 60 days written
notice. The term of the license agreement is the longer of (i) the expiration of
the last to expire patent or (ii) 20 years from the date of the agreement.
On March 4, 1994, the Company entered into a second exclusive,
worldwide, royalty bearing license agreement with the Licensor for two patents,
the rights to which are jointly held by the Licensor and Cellegy, for "Drug
Delivery By Skin Barrier Disruption," in consideration of the payment by the
Company of a $15,000 license fee, and a $10,000 annual maintenance fee payable
each year until the Company is commercially selling a licensed product. The
license requires the Company to pay royalties equal to 1% of net sales of
licensed consumer products and 2.5% of net sales of licensed prescription
products, with a minimum of $25,000 annually. The Company has
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the right to grant sublicenses to third parties. The Company is required to
provide written progress reports related to development and testing of licensed
products. If the Company fails to achieve certain milestones, the Licensor has
the right to terminate the license agreement upon 60 days written notice. The
license agreement's term is until the longer of (i) the expiration of the last
to expire patent or (ii) 20 years from the date of the agreement.
Certain of the milestone dates in the two agreements with the Licensor
described above have passed without being satisfied. The Company is, however,
currently in discussions with the Licensor concerning an extension of certain
milestones relating to both of the above agreements. The Company believes it
will be able to negotiate an extension with the Licensor on satisfactory terms.
However, there can be no assurances that this will be the case. Failure to
negotiate satisfactory extensions, if required, could have a material adverse
affect on the Company.
During the first half of 1996, Cellegy entered into research agreements
with Yamanouchi Europe B.V. and Bausch & Lomb relating to its skin protectant
technology. Both agreements involved testing of Cellegy's skin protectant
formulations. Although results of testing were consistent with the Company's
expectations, Cellegy decided not to enter into an agreement with either
company, since acceptable business terms could not be negotiated.
In November 1996, the Company entered into an agreement with Glaxo for
the worldwide licensing rights to Glylorin, Cellegy's lipid compound for the
treatment of ichthyoses. Under the terms of the agreement, Cellegy provided
Glaxo with an exclusive license of patent rights and know-how covering the
Glylorin product in most of the world's major markets. In exchange for this
license, Cellegy received from Glaxo an initial payment and could potentially
receive future milestone payments (if all milestones specified in the agreement
are satisfied) totaling, with the initial payment, $8.7 million, as well as a
royalty on net sales assuming successful completion of product development and
market launch. In addition to milestone payments, Glaxo will assume
responsibility and the associated costs for all future development and
commercialization, including certain development costs incurred prior to the
date of the agreement. For the year ended December 31, 1996, the Company
recognized revenue of approximately $560,000 for licensing fees and development
funding revenue.
Government Regulation
Overview of FDA Drug Approval Process. The following discussion
summarizes certain aspects of the process of developing, testing and seeking FDA
approval of a topical dermatologic drug. This overview should be read in
connection with the more detailed discussion appearing below.
The development path for a topical dermatologic drug involves
formulation, preclinical and clinical testing, and establishing a manufacturing
source for the product that satisfies the FDA's current good manufacturing
practice ("GMP") requirements. Preclinical testing involves studies in the
laboratory and in animal model systems to gain preliminary information on the
drug's pharmacology and toxicology and to identify any potential safety problems
that would preclude testing in people.
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Phase I protocols are then prepared to test the irritancy,
sensitization and/or phototoxicity potential of the product in humans. These
proposed protocols are submitted to the FDA along with the results of
preclinical evaluations, and chemistry and manufacturing information. The
information is submitted to the FDA in the form of an Investigational New Drug
Application ("IND"), which involves a 30-day waiting period before Phase I
clinical studies may begin unless the FDA approves the IND before then.
If Phase I studies establish a reasonable safety profile, a Phase II
clinical study is conducted to evaluate effectiveness and to find the optimal
routes, dose and treatment schedule of the drug for the targeted disease. If the
outcome of the Phase II program is positive, Phase III clinical trials are
conducted in a larger patient population in an effort to definitely determine
safety and effectiveness. If the Phase III data warrant proceeding further, an
NDA containing comprehensive chemistry, manufacturing, formulation, preclinical
and clinical data, is submitted to the FDA for review and approval. The FDA may
require submission of additional information and resubmission of the NDA.
FDA Requirements for Drug Compounds. The preclinical and clinical
testing, manufacture, distribution, marketing, and advertising of pharmaceutical
compounds are extensively and intensely regulated by government agencies,
primarily the FDA under the Federal Food, Drug and Cosmetic Act. The packaging
and labeling of all drug compounds are also subject to extensive FDA
regulations.
After FDA approval of an IND, clinical trials to support NDAs are
typically conducted in three sequential phases, but the phases may overlap. In
Phase I, the initial introduction of the drug into healthy human subjects, the
drug is tested for safety, dosage tolerance, metabolism, distribution, excretion
and pharmacodynamics (clinical pharmacology). Phase II involves studies in a
limited patient population to (i) evaluate the effectiveness of the drug for
specific, targeted indications, (ii) determine dosage tolerance and optimal
dosage and (iii) identify possible short-term adverse effects and safety risks.
When a compound is found to have an effect and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to further
evaluate clinical effectiveness and to further test for safety within an
expanded patient population at geographically dispersed clinical study sites.
Phase III trials are usually designed to provide the substantial evidence of
effectiveness and the evidence of safety required to obtain FDA approval for
marketing. There can be no assurance that Phase I, Phase II or Phase III testing
will be completed successfully within any specified time period, if at all, with
respect to any of the Company's products subject to such testing. The FDA
closely monitors all three phases of clinical testing and may, at its
discretion, re-evaluate, alter, suspend (place on clinical hold), or terminate
the testing based on the data that have been accumulated to that point and its
assessment of the risk/benefit ratio to the patient.
New and Abbreviated New Drug Applications. After successful completion
of the required clinical testing, generally an NDA is submitted to the FDA
(assuming acceptable test results). FDA approval of the NDA (or, in the
alternative an Abbreviated New Drug Application ("ANDA"), as described below) is
required before marketing may begin in the United States.
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<PAGE>
The NDA must include the results of extensive clinical and other
testing and the compilation of data relating to the product's chemistry,
pharmacology and manufacture, the cost of all of which is substantial. The FDA
reviews all NDAs submitted before it accepts them for filing and may request
additional information rather than filing an NDA. In such an event, the NDA must
be resubmitted with the additional information and, again, is subject to review
before filing. Once the FDA accepts the NDA for filing, it is required to review
the NDA within 180 days of the filing. In the process of reviewing applications
the FDA again may request that additional information be submitted. The 180-day
post-filing review period begins anew when additional requested information is
submitted. The effect of such request and subsequent submission can
significantly extend the time for the NDA review process.
Several of the Company's mid and late term products utilize its drug
delivery technology formulated with an active drug ingredient already approved
by the FDA. In connection with obtaining FDA approval of such product, which
requires an NDA, it is possible in certain instances that clinical and
preclinical testing requirements may not be as extensive. Limited additional
data about the safety or effectiveness of the proposed new drug formulation,
along with chemistry and manufacturing information and public information about
the active ingredient, may be satisfactory for product approval.
Once patent and other statutory protections covering a drug approved
under an NDA have expired or have been demonstrated not to apply, a generic
equivalent to that drug may be approved under an ANDA. An ANDA is ordinarily
based upon bioequivalence data that demonstrate that the rate and extent of
absorption of the active drug ingredient of the generic drug, usually measured
in the blood stream, is equivalent to that of the drug approved under an NDA.
The demonstration of bioequivalence and, therefore, ANDA approval, generally
requires less time than safety and efficacy studies and NDA approval.
Until an NDA or ANDA is actually approved, there can be no assurance
that the information requested and submitted will be considered adequate by the
FDA to justify approval. It is impossible to anticipate the amount of time that
will be required to obtain approval from the FDA to market any product.
Even if FDA approval is obtained, a marketed drug product and its
manufacturer are subject to continual review and inspection, and later discovery
of previously unknown problems with the product or manufacturer may result in
restrictions or sanctions on such product or manufacturer, including withdrawal
of the product from the market, and other enforcement actions. The FDA may also
require postmarketing testing and surveillance programs to continuously monitor
the drug's usage and effects. Side effects resulting from the use of drug
products may prevent or limit the further marketing of products.
OTC Monograph. Most over-the-counter drugs and cosmeceuticals are
marketed in the United States without FDA prior approval under FDA regulations
that permit such OTC marketing if the FDA has issued an OTC monograph with
respect to that drug (including its indication(s)), and the product and its
labeling comply with that OTC monograph.
13
<PAGE>
The Company believes that whether a particular skin protectant blend is
covered by the FDA "skin protectant" OTC monograph will depend primarily on the
active ingredients, the kinds of claims made about the product and compliance
with applicable labeling requirements. The Company believes that its barrier
repair products and other potential consumer products described in this annual
report (other than skin protectant products) are not covered by OTC monographs
and therefore will be subject to prior review and approval by the FDA as new
drugs before they can be marketed. In addition, even if the Company seeks FDA
approval of a product for non-prescription consumer sales, the FDA could instead
require that the product be distributed first only by means of a prescription.
Such approval, which the Company believes is common where a company seeks
approval for a product involving a new compound or a compound previously
approved for other uses, could delay for several years, or indefinitely,
distribution of the Company's consumer products through the consumer
(non-prescription) channel.
Manufacturing. All manufacturing facilities, methods and controls used
for the manufacturing, processing, packing or holding of products for clinical
use or for sale must be operated in conformity with FDA's current good
manufacturing practice requirements. The Company intends to use contract
manufacturers that operate in conformance with these requirements to produce its
compounds and finished products in commercial quantities. See "Management's
Discussion and Analysis or Plan of Operation - Factors That May Affect Future
Operating Results - Government Regulation and Product Approvals."
Foreign Regulation of Drug Compounds. Whether or not FDA approval has
been obtained, approval of a product by comparable regulatory authorities may be
necessary in foreign countries prior to the commencement of marketing of the
product in such countries. The approval procedure varies among countries, can
involve additional testing, and the time required may differ from that required
for FDA approval. Although there are some procedures for unified filings for
certain European countries, in general each country has its own procedures and
requirements, many of which are time consuming and expensive. Thus, there can be
substantial delays in obtaining required approvals from both the FDA and foreign
regulatory authorities after the relevant applications are filed. The Company
expects to rely on corporate partners and licensees, along with Company
expertise, to obtain governmental approval in foreign countries of drug
formulations utilizing its compounds.
Cosmetics. Cosmetics do not require approval by the FDA for marketing
in the United States.
Orphan Drug Designation. Under the Orphan Drug Act, the FDA may grant
orphan drug designation to drugs intended to treat a "rare disease or
condition," which generally is a disease or condition that affects populations
of fewer than 200,000 individuals in the United States. Orphan drug designation
must be requested before submitting an NDA, and after the FDA grants orphan drug
designation, the generic identity of the therapeutic agent and its potential
orphans use are publicized by the FDA. Under current law, orphan drug
designation confers upon the first company to receive FDA approval to market
such designated drug United States marketing exclusivity for the designated drug
and indication for a period of seven years following approval of the NDA,
subject to certain limitations.
14
<PAGE>
Orphan drug designation does not convey any advantage in, or shorten
the duration of, the regulatory approval process. Although obtaining FDA
approval to market a product with an orphan drug designation can be
advantageous, there can be no assurance that the scope of protection or the
seven years of market exclusivity that is currently afforded by orphan drug
designation and marketing approval will remain in effect in the future.
Other Government Regulation. The Company is subject to regulation under
federal and state law regarding, among other things, occupational safety, the
use and handling of radioisotopes, environmental protection, hazardous substance
control. In connection with its research and development activities and any
manufacturing of clinical trial materials in which the Company may engage, the
Company is subject to federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials and wastes.
Although the Company believes that it has complied with these laws and
regulations in all material respects and has not been required to take any
action to correct any noncompliance, there can be no assurance that the Company
will not be required to incur significant costs to comply with environmental and
health and safety regulations in the future. The Company's research and
development involves the controlled use of hazardous materials, chemicals, and
various radioactive compounds. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
See "Management's Discussion and Analysis or Plan of Operation - Factors That
May Affect Future Operating Results - Risk of Product Liability; Limited Product
Liability Insurance; Environmental Matters."
Competition
In the development and marketing of topical prescription drugs,
cosmeceutical and skin care products, and drug delivery systems, Cellegy faces
intense competition from large pharmaceutical companies with established
dermatology and consumer product divisions, such as Glaxo Wellcome, Inc., Ortho
Pharmaceutical, Inc., a subsidiary of Johnson & Johnson, Schering-Plough,
Rhone-Poulenc Rorer Corp., Pharmacia & Upjohn, Inc., Westwood Pharmaceuticals, a
subsidiary of Bristol-Myers Squibb Company, Procter and Gamble, L'Oreal, Estee
Lauder, and Whitehall-Robbins, a subsidiary of American Home Products. These and
other companies have substantially greater financial, technical, production,
marketing, and regulatory experience and resources than Cellegy in developing
and commercializing drug and skin care products.
The Company also competes with universities developing drug delivery
technologies and with several companies which have been formed to develop unique
delivery systems such as ALZA Pharmaceuticals, Cygnus, Inc., Novavax, Inc.,
Penederm, Inc., Macrochem Corp., and Thera-Tech, Inc. In addition, these
companies and academic and research institutions compete with Cellegy in
recruiting and retaining highly qualified scientific and management personnel.
15
<PAGE>
Competition in the dermatology market is generally based on performance
characteristics and, to a lesser extent, price. There can be no assurance that
the Company's products under development will be able to compete successfully
with existing or new commercial products.
Employees
As of March 20, 1997, the Company had twelve full-time and one
part-time personnel. None of the Company's employees is represented by a labor
union. The Company has experienced no work stoppages and believes that its
employee relations are good.
ITEM 2: PROPERTIES
Cellegy's principal administrative facilities are located in Foster
City, California, approximately 20 miles south of San Francisco. The Company
occupies this space under a lease expiring July 31, 2001. The annual base rent
payment, excluding operating expenses, insurance, property taxes, and
assessments, was initially set at $9,009 per month. Over the life of the lease
the monthly rent payment will increase to approximately $10,550. The Company
believes that the administrative offices will be adequate for at least the next
two years.
Cellegy's research laboratory is located in San Carlos, California,
approximately 30 miles south of San Francisco. The Company occupies this space
under a lease expiring May 31, 1997. According to the terms of the contract, the
Company can extend the lease three times, up to a total of 18 months, without an
increase of monthly rent expense. The current monthly base rent is $8,992.
Approximately 25% of the laboratory space is being sublet to a third party on a
month-to-month basis, as the total space has been exceeding the Company's
current needs. Cellegy intends to cancel the sublease agreement in the near
future, as the Company's research programs will require the entire leased
laboratory facility in order to function productively.
The Company has no plans to acquire the equipment or facilities
necessary for manufacturing its products. See "Risk Factors -- Manufacturing
Limitations; Suppliers." All material capital equipment purchases over the past
year have been funded by a capital lease agreement. Cellegy intends to continue
to use this type of funding for material capital equipment purchases in the
foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of the year ended December 31, 1996.
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ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
MANAGEMENT
The executive officers, directors, and other significant employees of
the Company are as follows:
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
K. Michael Forrest 53 President, Chief Executive Officer, and
Director
Carl R. Thornfeldt, M.D. 45 Medical Director and
Chairman of the Board
Michael L. Francoeur, Ph.D. 44 Vice President, Research and Development
A. Richard Juelis 48 Vice President, Finance and
Chief Financial Officer
Vivien H.W. Mak, Ph.D. 40 Vice President, Cutaneous Research
Jack L. Bowman (1) 64 Director
Denis R. Burger, Ph.D. (2) 53 Director
Peter M. Elias, M.D. 55 Director
Tobi B. Klar, M.D. 42 Director
Alan A. Steigrod (1) 59 Director
Larry J. Wells (2) 54 Director
<FN>
- -----------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</FN>
</TABLE>
Directors hold office until the next annual meeting of shareholders and
until their respective successors have been elected and qualified. Executive
officers are chosen by and serve at the discretion of the Board of Directors,
subject to any written employment agreements with the Company. Outside directors
receive a fee of $1,000 for each meeting of the Board attended.
K. Michael Forrest. Mr. Forrest became President, CEO, and a director
in December 1996. From January 1996 to November 1996, he was a consultant to
biotechnology companies. From November 1994 to December 1995, he was President
and CEO at Mercator Genetics, a biotech firm located in Menlo Park, California.
From March 1991 to June 1994, he was President and CEO at Transkaryotic
Therapies, Inc., a publicly traded gene activation company located in Cambridge,
Massachusetts. From 1968 to 1991, Mr. Forrest held a series of domestic and
international positions first with Pfizer, Inc., and thereafter senior
management positions with American Cyanamid, culminating as Vice President of
the company's $950 million Lederle International Group. He is a director of
AlphaGene Inc. and The American Social Health Association. Mr. Forrest holds a
B.S. in business administration from Georgetown University.
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<PAGE>
Carl R. Thornfeldt, M.D. Dr. Thornfeldt is the Chairman of the Board of
Directors and a co-founder of the Company, as well as a physician, board
certified in dermatology. He has been Medical Director of the Company since its
inception. Due to the unexpected death of the Company's then CEO, Mr. William
Bliss, in July 1996, Dr. Thornfeldt accepted the position of acting CEO through
December 1996, at which time Mr. Forrest was hired as CEO of the Company. In
addition, Dr. Thornfeldt served as Vice President, Research and Development from
October 1994 until May 1996, at which time Dr. Francoeur was hired due to the
growth of the Company. Since 1983, Dr. Thornfeldt has maintained a private
dermatology practice and is an Assistant Clinical Professor in Dermatology at
the University of Oregon Health Sciences Center. Dr. Thornfeldt received his
M.D. from the University of Oregon and his B.S. from Oregon State University.
His dermatology residency was performed at University of California, San Diego.
Michael L. Francoeur, Ph.D. Dr. Francoeur became Vice President,
Research and Development in June 1996. From March 1994 to May 1996, he was
founder, Chairman and Chief Technical Officer of De Novo, Inc., a dermal
therapeutics company. From September 1992 to March 1994, Dr. Francoeur held
senior executive positions with Pharmetrix, Inc., a drug delivery company, where
he led research and development. From February 1983 to August 1992, he was
employed by Pfizer, Inc., where he held various research and management
positions in product development, drug delivery, and drug discovery. Dr.
Francoeur holds a Ph.D. and M.S. in pharmaceutical chemistry and a B.S. in
pharmacy from the University of Kansas.
A. Richard Juelis. Mr. Juelis became Vice President, Finance and Chief
Financial Officer in March 1996. From November 1994 until March 1996, he worked
as a financial consultant to the Company, as well as with other health care and
telecommunications companies during that period. From January 1993 to September
1994 he was Vice President, Finance and Chief Financial Officer for VIVUS, Inc.,
a drug delivery company. From October 1990 to December 1992 he was Vice
President, Finance and Chief Financial Officer at XOMA Corporation, a
biotechnology company. He received a B.S. in Chemistry from Fordham University
and a M.B.A. from Columbia University.
Vivien H.W. Mak, Ph.D. Dr. Mak became Vice President, Cutaneous
Research in January 1996, after joining the Company as a research consultant in
October 1995. From January 1994 to September 1995, she was Vice President,
Research for De Novo, Inc., a dermal therapeutics company. From October 1992 to
December 1993, she was Director of Biopharmaceutical Sciences at Pharmetrix
Corporation, a developer of drug delivery systems. From January 1989 to
September 1992 she held research scientist positions in the Dermal Therapeutics
Group of Pfizer, Inc. Dr. Mak received B.S. and M.S. degrees in chemistry from
Chun-Yuan University, Taiwan, and Baylor University, respectively. She holds a
Ph.D. in medicinal chemistry from Purdue University.
Jack L. Bowman. Mr. Bowman became a director in December 1996. He is
currently a director of NeoRx Corp., CytRx Corp. and Cell Therapeutics, Inc. In
addition, he consults to the pharmaceutical and biotechnology industry groups.
From August 1987 to January 1994, he was Group Chairman at Johnson & Johnson,
where he managed its $2 billion global pharmaceutical business. Before then, Mr.
Bowman held executive positions with CIBA-Geigy and American Cyanamid, where he
had responsibility for worldwide pharmaceutical, medical device, and
18
<PAGE>
consumer product divisions. He received a Bachelor's degree from Western
Washington University.
Denis R. Burger, Ph.D. Dr. Burger became a director in October 1995.
Currently, he is Chief Executive Officer at AntiVirals Inc., a biotechnology
company, and is a general partner of Sovereign Partners LLC, a biotechnology
consulting and merchant banking partnership, both located in Portland, Oregon.
He is a director of SuperGen, Inc. and Trinity Biotech, plc. He was a co-founder
of Epitope, Inc. and its Chairman from 1981 to 1990. During the 1970s, Dr.
Burger was a research scientist and a professor of microbiology and immunology
at the Oregon Health Sciences University in Portland, Oregon. He holds M.S. and
Ph.D. degrees in these scientific disciplines.
Peter M. Elias, M.D. Dr. Elias is a board certified dermatologist and
became a director of the Company in April 1995. He also serves as Co-Chairman of
the Scientific Advisory Board of the Company. He is an expert in the stratum
corneum barrier, as well as epidermal structure, function and lipid metabolism.
Dr. Elias is currently the Vice-Chairman, Department of Dermatology, University
of California, San Francisco. He received his M.D. from University of
California, San Francisco, and performed his dermatology residency at Harvard
University Medical Center.
Tobi B. Klar, M.D. Dr. Klar became a director of the Company in June
1995. She is a physician, board certified in dermatology. Since 1986, Dr. Klar
has maintained a private dermatology practice, is Co-Chairperson of the
Department of Dermatology at New Rochelle Hospital Medical Center, New Rochelle,
New York, and is Associate Clinical Professor in dermatology at Albert Einstein
Medical Center in New York City. She performed her dermatology residency at
State University of New York, Downstate Medical Center, where she also obtained
her medical degree. She holds a B.A. from Brown University.
Alan A. Steigrod. Mr. Steigrod became a director in July 1996, and has
been a biotechnology industry consultant since December 1995. From March 1993 to
November 1995, he was President and CEO of Cortex Pharmaceuticals, Inc., a
California-based biotechnology company. From February 1991 to February 1993, he
worked as a consultant to the industry. From March 1981 through February 1991,
Mr. Steigrod held a series of executive positions with Glaxo, Inc., serving as
Chairman of Glaxo's operating committee, as well as on the company's Board of
Directors. As Executive Vice President he managed five divisions, including
Glaxo Pharmaceuticals and Glaxo Dermatology Products. Prior to Glaxo, Mr.
Steigrod held a number of senior management positions with Boehringer Ingelheim,
Ltd. and Eli Lilly & Co. He is a director of Sepracor Inc. He received his B.S.
in pharmacy from Temple University, School of Pharmacy.
Larry J. Wells. Mr. Wells became a director of the Company in 1989. For
the past five years, he has been a venture capitalist. He is the founder of
Sundance Venture Partners, L.P. ("Sundance"), a venture capital fund, and is the
Chairman of the entity that acts as the manager of Sundance. Mr. Wells is a
director of Identix, Inc., Gateway Data Sciences and Telegen Corp. Mr. Wells
received his Bachelor's degree in economics and a M.B.A. from Stanford
University.
19
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Scientific Advisory Board
The Company has established relationships with a group of scientific
advisors with expertise in the fields of dermatology, drug delivery and skin
care. The Company's scientific advisors consult with management and key
scientific employees of the Company to assist the Company in identifying
scientific and product development opportunities, to review the progress of the
Company's specific projects, and to recruit and evaluate the Company's
scientific staff. The nature, scope and frequency of consultations between the
Company and each scientific advisor varies depending upon the Company's current
activities, the need for specific assistance and the individual scientific
advisor.
The Company's scientific advisors and consultants include the following
persons:
Carl R. Thornfeldt, M.D. Dr. Thornfeldt is Co-Chairman of the
Scientific Advisory Board. See "-- Executive Officers and Directors."
Peter M. Elias, M.D. Dr. Elias is Co-Chairman of the Scientific
Advisory Board. See "-- Executive Officers and Directors."
Kenneth R. Feingold, M.D. Dr. Feingold is a physician at the VAMC, San
Francisco and is also a professor of Medicine and Dermatology at the UCSF School
of Medicine. Dr. Feingold has performed extensive research in metabolism,
endocrinology and dermatology.
Richard Guy, Ph.D. Dr. Guy is the Director of Scientific Affair at
Pharmapeptides, an inter-university research center between University of Geneva
and University of Lyon. Prior to this, he was a full professor of pharmacy and
pharmaceutical chemistry and Vice-Chairman of the Department of Pharmacy at the
UCSF. He has published over 200 papers and has given numerous lectures in the
field of transdermal drug delivery, including iontophoresis, passive drug
delivery and cutaneous metabolism. As a fellow of the Royal Society of
Chemistry, American Association for the Advancement of Sciences and American
Association of Pharmaceutical Scientists, he is also the recipient of Young
Investigator Award from Controlled Release Society and the British
Pharmaceutical Conference Science Award.
Jim E. Riviere, D.V.M., Ph.D. Dr. Riviere is the Burroughs Wellcome
Fund Distinguished Professor of Veterinary Pharmacology and Director, Cutaneous
Pharmacology and Toxicology Center, College of Veterinary Medicine, North
Carolina State University. Dr. Riviere is a member of the U.S. Pharmacopeia
1195-2000 Committee of Revision, Society of Toxicology, American Association of
Pharmaceutical Scientist, American Board of Forensic Examiners, the American
Veterinary Medical Association and the American Medial Writers Association. He
has published over 235 research papers and chapters, presented over 140 research
abstracts, authored/co-authored 7 books and is the holder of 2 U.S. Patents. His
current research interests relate to pharmacokinetics and transdermal drug
delivery, risk assessment of chemical mixtures, and studying the mechanisms of
pesticide absorption and metabolism across the skin.
Mary L. Williams, M.D. Dr. Williams is currently an associate Professor
at the UCSF School of Medicine in the fields of dermatology and pediatrics. In
addition, Dr. Williams is a
20
<PAGE>
member and was previously Chairman of the Medical Advisory Board of FIRST and
was Chairman of the Task Force on Genetics of the American Academy of
Dermatology.
21
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Cellegy's Common Stock has been traded on the Nasdaq SmallCap Market
under the Nasdaq symbol "CLGY" since the Company's initial public offering in
August 1995. Prior to August 1995, there was no established public trading
market for the Company's common stock. The high and low closing sales prices set
forth below are as reported on the Nasdaq SmallCap Market for the period from
August 17, 1995 through December 31, 1996.
1995
-------------------------
High Low
---------- ---------
Third Quarter*.................. 7 1/4 4 7/8
Fourth Quarter.................. 6 1/4 4
1996
-------------------------
High Low
---------- ---------
First Quarter................... 6 3/4 5 1/8
Second Quarter.................. 9 1/8 5 3/4
Third Quarter................... 8 5/8 4 3/4
Fourth Quarter.................. 6 4 3/8
- ---------------
* Commencing August 17, 1995.
Holders
As of March 20, 1997, there were approximately 96 shareholders of
record, however, many of these shareholders hold shares in nominee or street
name. The Company estimates it has at least 1,250 beneficial owners of its
shares.
Dividend Policy
The Company has never paid cash or declared dividends on its common
stock. Cellegy anticipates that it will continue to retain its earnings to
finance the growth of its business and therefore does not anticipate that it
will declare or pay cash dividends on its common stock in the foreseeable
future.
22
<PAGE>
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company commenced operations in 1989 to engage in the research,
development and commercialization of proprietary products for the skin including
drug delivery products using the skin as the portal of entry, consumer and
cosmeceutical products to repair and protect damaged skin and prescription
therapeutic products for skin disorders. Since its inception, the Company has
engaged entirely in research and development activities, and intends to continue
research and development of its drug delivery products, and the preclinical and
clinical testing of its pharmaceutical and consumer products.
General
On July 10, 1996, the Company announced the deaths of William E. Bliss,
its President and Chief Executive Officer, and Lionel N. Simon, Ph.D., its Vice
President, Corporate Development, in an automobile accident. This event was
reported on a Form 8-K filed on July 25, 1996. Dr. Carl Thornfeldt, the
Company's Chairman of the Board, was named Acting Chief Executive Officer. Dr.
Thornfeldt, Dr. Denis Burger, a director, Alan Steigrod, a director, Dr. Michael
Francoeur, Vice President of Research and Development, and Richard Juelis, Vice
President, Finance and Chief Financial Officer, served on a transition committee
responsible for the Company's corporate development and operational activities.
The Company hired K. Michael Forrest as Mr. Bliss' successor as of December 1,
1996.
During 1996, the Company advanced its intellectual property position
associated with its core technologies. Two important achievements were the
granting of a U.S. patent for Cellegy's drug delivery system and a Japanese
patent for the Company's anti-wrinkling treatment.
In September 1996, the Company received an Orphan Drug grant from the
United States FDA of up to $400,000 over a two year period beginning September
30, 1996. The grant will cover part of the Company's Phase III study costs to
evaluate the safety and efficacy of the topical drug Glylorin for the treatment
of ichthyoses.
In November 1996, Cellegy signed a license agreement with Glaxo for the
worldwide rights to Glylorin, currently in Phase III clinical trials for the
treatment of ichthyoses. The contract is described in more detail under
"Business".
Results of Operations
Revenues. The Company recorded revenues of $648,000 and $1,000,000 in
1996 and 1995, respectively. In 1996, revenues consisted primarily of
approximately $560,000 associated with the Glaxo license agreement and
approximately $74,000 resulted from Orphan Drug grant payments. Revenues in 1995
of $1,000,000 were associated with the expiration in May 1995 of a Cellegy
option to reacquire rights to azelaic acid for prescription products that were
originally purchased by Neutrogena Corporation in 1994. Revenues from the
licensing agreement with Glaxo are expected to exceed $500,000 in 1997, assuming
the FDA's acceptance of certain testing results, submitted to the FDA by the
Company. Cellegy expects to record revenues in
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<PAGE>
excess of $100,000 from the Orphan Drug grant from the FDA during 1997. The
Company is pursuing other licensing and product supply agreements which, if
entered into, may result in additional contract revenues or product sales in
1997. However, there can be no assurances regarding when, or if, such revenues
will occur.
Research and Development Expenses. Research and development expenses
increased by $1,487,000 from $1,225,000 in 1995 to $2,712,000 in 1996, primarily
due to a toxicology study and Phase III clinical trial expenses, both related to
Glylorin. Other contributing factors for the increased expenses were personnel
costs associated with the addition of key internal scientists, as well as
certain contracted research related to its drug delivery technology.
Additionally, the Company occupied and equipped a new laboratory in San Carlos,
California during the first half of 1996, which contributed to the spending
increase. During 1996, the Company recorded a non-cash charge of approximately
$109,000 to research and development expenses for the extension of certain stock
option exercise periods. No such expenses were recorded in 1995.
The Company expects to increase its research spending during 1997,
continuing to focus on the identification and testing of compounds using the
Company's drug delivery methods. In addition, testing of consumer product
formulations and an anti-wrinkling product line are expected to continue to
increase over the next several quarters. Although the Company's expenses related
to Glylorin are expected to decrease significantly as Glaxo will be paying for
product development costs, Cellegy's research expenses are expected to increase
in the future as preclinical and clinical trial activity associated with its
other research programs increases. The Company plans to selectively add
personnel in research and development, in order to accomplish its goals.
General and Administrative Expenses. General and administrative
expenses increased by $324,000 from $1,310,000 in 1995 to $1,634,000 in 1996,
primarily due to increased professional fees, as well as personnel and related
expenses. The Company's general and administrative expenses are expected to
continue to increase in the future in support of its research and product
commercialization efforts. The rate of increase in general and administrative
expenses is expected to be less than the growth rate of research and development
spending. During 1996, the Company recorded a non-cash charge of approximately
$159,000 to general and administrative expenses for the extension of certain
stock option exercise periods. No such expenses were recorded in 1995.
Interest Income and Expense. The Company recognized $330,000 in
interest income for 1996, compared with $135,000 for 1995. The additional
interest income earned in 1996 was due to a higher investment balance during the
1996 period caused by proceeds from a preferred stock financing transaction
completed in April 1996. The Company incurred no interest expense during 1996.
In 1995, interest expense was $752,000 which reflected the interest and
amortization of the discount on the notes issued in connection with a bridge
financing transaction, which were repaid in August 1995. Interest income is
expected to decrease during 1997, in line with the anticipated reduction of cash
balances associated with the Company's cash burn rate.
Net Loss. The net loss applicable to common shareholders was $4,782,000
or $1.11 per share in 1996, compared with a net loss of $2,152,000 or $0.67 per
share in 1995. The net loss in
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1996 was impacted by two significant non-cash charges. As described above,
operating expenses for 1996 included a total of $268,000 associated with the
extension of certain stock option exercise periods. In addition, there was a
non-cash preferred dividend charge of $1,414,000 due to a one-time conversion
discount of 15% and an ongoing dividend rate of 8% associated with the issuance
of convertible Series A Preferred Stock. (See - "Notes to Financial Statements"
on page F-14.) Excluding these non-cash expenses, the net loss was $3,100,000 in
1996. This total more appropriately reflects the net loss component of the
Company's cash burn rate in 1996.
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from
operations each year since its inception. Through December 31, 1996, the Company
had incurred a cumulative net loss of $14.9 million and had consumed cash from
operations of $12.2 million. Prior to the completion of its initial public
offering, the Company had financed its operations primarily from sales of debt
and equity securities, raising net proceeds of approximately $7.3 million.
Subsequently the Company raised approximately $6.5 million in net proceeds from
its initial public offering in August 1995, followed by approximately $6.8
million in net proceeds from a preferred stock financing ("Series A Preferred
Financing") in April 1996.
The Company's cash, short-term, and long-term investments were $7.3
million and $3.8 million at December 31, 1996 and 1995, respectively. The
increase of $3.5 million during 1996 was due principally to the proceeds from
the Series A Preferred Financing, offset by net cash used in operating
activities. As of March 20, 1997, over 90% of the preferred stock was converted
into Common Stock. Based on the market price of the Common Stock at March 20,
1997, approximately 150,000 shares of Common Stock would be issuable upon
conversion of the remaining preferred stock. While no assurances are possible,
the Company believes that such conversions will not have a material impact on
the market price of the Common Stock. As of March 20, 1997, approximately
1,636,000 shares of Common Stock have been issued in conjunction with the
conversion of the perferred stock.
The Company's future expenditures and capital requirements will depend
on numerous factors, but will mainly be affected by the progress of its research
and development programs, its preclinical and clinical testing, and its ability
to complete additional corporate partnership agreements. Although the Company
expects to have cash inflow related to the Glaxo agreement, as well as the
Orphan Drug Grant, these funds are expected to comprise less than one-quarter of
expected research and development expenses in 1997. The Company's cash needs are
expected to continue to increase significantly over at least the next two years
in order to fund the additional expenses the Company will incur as it expands
its current research and development programs, particularly in the drug
delivery, consumer, and cosmeceutical product areas.
In the course of its development activities, the Company has incurred
significant losses and expects to incur substantial additional development
costs. As a result, the Company will require substantial additional funds to
fund operations and may seek private or public equity investments and future
collaborative arrangements with third parties to meet such needs. There is no
assurance that such additional funds will be available for the Company to
finance its operations on acceptable terms, if at all. Insufficient funding may
require the Company to delay, reduce, or
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eliminate some or all of its research and development activities, planned
clinical trials, and administrative programs. Based upon the Company's current
plan, the Company believes that its existing resources will satisfy its
anticipated cash requirements through at least April 30, 1998.
As of December 31, 1996, the Company had federal and state income tax
net operating loss carryforwards of approximately $12.8 million and $4.7
million, respectively, which expire between 2004 - 2011, and 1997 - 2001,
respectively. The Company also had federal and state research tax credit
carryforwards of approximately $262,000 and $95,000, respectively. The federal
credits expire between 2006 and 2011; the state credits have no expiration date.
Pursuant to the "change in ownership" provisions of the Tax Reform Act
of 1986, utilization of the Company's net operating loss and research and
development tax credit carryforwards may be limited, if a cumulative change of
ownership of more than 50% occurs within any three-year period.
Factors That May Affect Future Operating Results
This Annual Report includes forward looking statements. Words such as
"believes," "anticipates," "expects," "intends" and similar expressions are
intended to identify forward looking statements, but are not the exclusive means
of identifying such statements. These forward looking statements concern matters
that involve risks and uncertainties, including, but not limited to, those set
forth below, that could cause actual results to differ materially from those in
the forward looking statements. The matters set forth below should be carefully
considered when evaluating the Company's business and prospects.
Early Stage of Product Development. Cellegy has not yet completed the
development of any products or sought regulatory approval for the marketing of
products and, accordingly, has not begun to market or generate revenues from the
commercialization of products. Development of products will require significant
additional research and development, including process development, extensive
clinical testing and market research. All of the Company's product development
efforts are based upon technologies and therapeutic approaches that have not
been widely tested or used. Moreover, the Company's beliefs regarding the
therapeutic and commercial potential for its potential products, including
without limitation its drug delivery and cosmeceutical products, are based on
preliminary assays or studies, and later studies may not support the Company's
current beliefs. In addition, results of the Company's tests and studies have
not been published in medical journals or reviewed by independent third parties
(other than the third parties that in some instances conducted the studies on
behalf of the Company), and as a result have not been subjected to the same
degree of scrutiny as results that have been published or subjected to review by
independent parties. To the Company's knowledge, no company has yet completed
human clinical trials for the regulatory approval process, or undertaken
successfully commercial manufacture, of products that are based on the Company's
proprietary technologies, and it is extremely difficult to predict whether or
when the Company's products will meet with regulatory approval, can be
manufactured successfully, or will be accepted in the marketplace.
As a result, the Company's potential products are subject to the risks
of failure inherent in the development of products based on new technologies.
These risks include the possibilities that
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the Company's therapeutic approaches will not be successful; that the results
from future clinical trials may not correlate with any safety or effectiveness
results from prior clinical studies conducted by the Company or others; that
some or all of the Company's potential products will not be successfully
developed or will not be found to be safe and effective by the United States
Food and Drug Administration, or otherwise will fail to meet applicable
regulatory standards or receive necessary regulatory clearances; that the
products, if safe and effective, will be difficult to manufacture in commercial
quantities at reasonable costs or will be uneconomical to market; that
proprietary rights of third parties will preclude the Company from
commercializing such products; or that third parties will market superior or
equivalent products. In addition, the failure of the Company's most advanced
clinical compound, Glylorin, to successfully complete its current Phase III and
future clinical testing, including toxicology studies, could have a material
adverse effect on the Company. There can be no assurance the Company's research
and development activities will result in any commercially viable products.
The timetable for the completion of the various milestone events that
must occur in order for the Company's products to be approved and marketed is
very uncertain. Pharmaceutical research and development is frequently
characterized by scientific and regulatory delays and disappointments. Although
the Company may set target dates for the completion of various milestone events,
the uncertainties and risks in the Company's product development and testing
efforts mean that decisions on whether to invest in the Company should not
assume that the targets will be met.
The evaluation of animal and human clinical test results involves
making judgments about data and other information that often are not conclusive.
Later testing may show those judgments to have been erroneous. For example, the
Company's beliefs regarding the potential comparative therapeutic benefits of
its products compared to currently marketed products may be erroneous, or the
FDA may not agree with the Company's conclusions regarding such matters.
Furthermore, due to the independent and blind nature of certain human clinical
testing, there will be extended periods during the testing process when the
Company will have only limited, or no, access to information about the status or
results of the tests. Other pharmaceutical companies have believed that their
products performed satisfactorily in early tests, only to find their performance
in later tests, including Phase III clinical trials, to be inadequate or
unsatisfactory, or that FDA Advisory Committees have declined to recommend
approval of the drugs, or that the FDA itself refused approval, with the result
that such companies' stock prices have fallen precipitously.
Competition and Technological Change. The pharmaceutical industry is
subject to rapid and significant technological change. Competitors of the
Company in the United States and abroad are numerous and include, among others,
major pharmaceutical, chemical, consumer, and biotechnology companies,
specialized firms, universities and other research institutions. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any which are being
developed by the Company or that would render the Company's technology and
potential products obsolete and noncompetitive. Many of these competitors have
substantially greater financial and technical resources and production and
marketing capabilities than the Company. In addition, many of the Company's
competitors have significantly greater experience than the Company in
preclinical testing and human clinical trials of pharmaceutical products and in
obtaining FDA and other regulatory
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approvals of products for use in health care. There can be no assurance that the
Company's products under development will be able to compete successfully with
existing products or products under development by other companies, universities
and other institutions or that they will obtain regulatory approval in the
United States or elsewhere.
Accumulated Deficit; Anticipated Gains or Losses. The Company had an
accumulated deficit of $14,937,317 at December 31, 1996. The Company incurred
losses applicable to common shareholders for the fiscal years ended December 31,
1996 and 1995, of $4,781,861 and $2,151,877, respectively. The Company expects
to incur net losses for at least the next few years, the amount of which is
highly uncertain. There can be no assurance that the Company will ever be able
to generate product revenues or achieve or sustain profitability. The Company
will be required to conduct significant research, development, testing and
regulatory compliance activities that, together with projected general and
administrative expenses, are expected to result in significant operating losses
for at least the next few years. The Company's ability to achieve profitability
depends upon its ability to successfully complete, either alone or with others,
development of its potential products, successfully conduct clinical trials,
obtain required regulatory approvals, find appropriate third party manufacturers
and market its products or enter into license agreements on acceptable terms. In
the event the Company enters into any future license agreements, such license
agreements may adversely affect the Company's profit margins on its products.
Future Capital Needs; Uncertainty of Additional Funding. The Company's
operations to date have consumed substantial amounts of cash. The Company has no
current source of ongoing revenues or capital beyond existing cash. In order to
complete the research and development and other activities necessary to
commercialize its products, additional financing will be required. The Company's
capital requirements depend on numerous factors, including without limitation
the progress of its research and development programs, the progress of
preclinical and clinical testing, the time and costs involved in obtaining
regulatory approvals, the costs of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing
research relationships, the ability of the Company to establish collaborative
arrangements, the development of commercialization activities and arrangements,
and the purchase of capital equipment.
In April 1996, the Company completed a private placement of 750 shares
of Series A Preferred Stock resulting in net proceeds of approximately $6.8
million. The Company believes that its existing resources will satisfy its
anticipated cash requirements through at least April 30, 1998, based upon the
Company's current plan. However, the Company will require substantial additional
capital to fund its operations, continue research and development programs and
preclinical and clinical testing of its potential products and conduct its
business. The Company may seek any required additional funding through equity
offerings, private financings and collaborative or other arrangements with third
parties. There can be no assurance that additional funds will be available on
acceptable terms. If additional funds are raised by issuing equity securities,
further substantial dilution to existing shareholders may result. If adequate
funds are not available, the Company may be required to delay, scale back or
eliminate one or more of its research and development programs, or to obtain
funds through entering into arrangements with
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third parties that may require the Company to relinquish rights to certain of
its technologies or potential products that the Company would not otherwise
relinquish.
Limits on Secondary Trading; Liquidity of Trading Market. Under the
blue sky laws of most states, public sales of Common Stock and the publicly
traded class of warrants issued in the Company's initial public offering (the
"IPO Warrants") by persons other than the Company in "non-issuer transactions"
must either be qualified under applicable blue sky laws, or exempt from such
qualification requirements. Blue sky authorities in California or other states
may impose other restrictions on the secondary trading of Common Stock or IPO
Warrants in those states. Certain additional restrictions may exist in
California with respect to secondary trading of certain shares of Common Stock
issued or issuable to certain investors, although these restrictions do not
apply to any of the shares sold to the public in the Company's initial public
offering. Moreover, in many states, secondary trading of the Common Stock or IPO
Warrants is permitted only by virtue of an exemption so long as information
about the Company is published in a recognized manual published by Standard &
Poor's Corporation. As a result of these or other restrictions that might be
imposed, shareholders may be restricted or prohibited from selling Common Stock
or IPO Warrants in particular states as a result of applicable blue sky laws.
These restrictions may have the effect of reducing the liquidity of the Common
Stock or IPO Warrants and could adversely affect the market price of the Common
Stock or IPO Warrants.
The Common Stock and the IPO Warrants are listed on the Nasdaq SmallCap
Market. If the Company should be unable to maintain the standards for continued
quotation on the Nasdaq SmallCap Market, the Common Stock and the IPO Warrants
could be subject to removal from the Nasdaq SmallCap Market. Trading, if any, in
the Common Stock and the IPO Warrants would then be conducted in the
over-the-counter market on an electronic bulletin board established for
securities that do not meet the Nasdaq SmallCap Market listing requirements or
in what are commonly referred to as the "pink sheets." As a result, an investor
would find it more difficult to dispose of, or to obtain accurate quotations as
to the price of, the Company's securities. In addition, depending on several
factors including the future market price of the Common Stock, the Company's
securities could become subject to the so-called "penny stock" rules that impose
additional sales practice and market making requirements on broker-dealers who
sell and/or make a market in such securities, which could affect the ability or
willingness of broker-dealers to sell and/or make a market in the Company's
securities and the ability of purchasers of the Company's securities to sell
their securities in the secondary market.
Government Regulation and Product Approvals. The research, testing,
manufacture, labeling, distribution, marketing and advertising of products such
as the Company's products and its ongoing research and development activities
are subject to extensive regulation by governmental regulatory authorities in
the United States and other countries. See "Business -- Government Regulations."
The rigorous preclinical and clinical testing requirements and regulatory
approval process of the FDA in the United States and of certain foreign
regulatory authorities can take five to ten years or more and require the
expenditure of substantial resources. There can be no assurance that the Company
will be able to obtain the necessary approvals for clinical testing or for the
marketing of products. Moreover, additional government regulations may be
established that could prevent or delay regulatory approval of the Company's
products. Delays in obtaining regulatory approvals could have a material adverse
effect on the Company.
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Even if regulatory approval of a product is granted, such approval may include
significant limitations on the indicated uses of the product or the manner in
which or conditions under which the product may be marketed. For example, even
if the Company seeks FDA approval of a cosmeceutical product for
non-prescription consumer sales, the FDA could instead require that the product
be distributed by means of a prescription before considering approval for
distribution as a non-prescription product. Prescription only approval, which
the Company believes is common where a company seeks approval for a product
involving a new compound or a compound previously approved for other uses, could
delay for several years, or indefinitely, distribution through the consumer
(non-prescription) channel of the Company's consumer products which are subject
to premarket review and approval by the FDA. Moreover, failure to comply with
regulatory requirements could subject the Company to regulatory or judicial
enforcement actions, including, but not limited to, product recalls or seizures,
injunctions, civil penalties, criminal prosecution, refusals to approve new
products and withdrawal of existing approvals, as well as potentially enhanced
product liability exposure. Sales of the Company's products outside the United
States will be subject to regulatory requirements governing clinical trials and
marketing approval. These requirements vary widely from country to country and
could delay introduction of the Company's products in those countries.
Patents and Proprietary Technology. The Company's success depends, in
part, on its ability to obtain patent protection for its products and methods,
both in the United States and in other countries. Several of the Company's
products are based on existing compounds with a history of use in humans but
which are being developed by the Company for new therapeutic use for skin
diseases unrelated to the systemic diseases for which the compounds were
previously approved. The Company cannot obtain composition patent claims on all
formulations that include these compounds, and will instead need to rely on
patent claims, if any, directed to use of the compound to treat certain
conditions. The Company will not be able to prevent a competitor from using that
formulation or compound for a different purpose. No assurance can be given that
any additional patents will be issued to the Company, that the protection of any
patents that may be issued in the future will be significant, or that current or
future patents will be held valid if subsequently challenged. There is a
substantial backlog of patent applications at the United States Patent and
Trademark Office ("USPTO").
The patent position of companies engaged in businesses such as the
Company's business generally is uncertain and involves complex legal and factual
questions. Further, issued patents can later be held invalid by the patent
office issuing the patent or by a court. There can be no assurance that any
patent applications relating to the Company's products or methods will issue as
patents, or, if issued, that the patents will not be challenged, invalidated, or
circumvented or that the rights granted thereunder will provide a competitive
advantage to the Company. In addition, other entities may currently have, or may
obtain in the future, legally blocking proprietary rights, including patent
rights, in one or more products or methods under development or consideration by
the Company. These rights may prevent the Company from commercializing
technology, or may require the Company to obtain a license from the entity to
practice the technology. There can be no assurance that the Company will be able
to obtain any such licenses that may be required on commercially reasonable
terms, if at all, or that the patents underlying any such licenses will be valid
or enforceable. Moreover, the laws of certain foreign countries do not protect
intellectual property rights relating to U.S. patents as extensively as those
rights are
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protected in the United States. As with other companies in the pharmaceutical
industry, the Company is subject to the risk that persons located in such
countries will engage in development, marketing or sales activities of products
that would infringe the Company's patent rights if such activities were in the
United States.
The agreements with UCSF pursuant to which the Company has exclusive
license rights to certain barrier repair and drug delivery technology contain
certain development and performance milestones which the Company must satisfy in
order to retain such rights. Certain milestone dates have passed with the
development or performance milestone not being satisfied. The Company is
currently in discussions with the University concerning negotiations of new
milestones and milestone dates, but no agreement has yet been reached. While the
Company currently believes it will be able to negotiate satisfactory extensions,
a loss of rights to such technology could have a material adverse effect on the
Company.
Limited Staff; Third Party Relationship. In view of the early stage of
the Company and its research and development programs, the Company has
restricted hiring to research and development scientists and a small
administrative staff and has made limited or no investment in marketing, product
sales and regulatory compliance resources. The Company has certain key academic
collaborations relating to the research, development and commercialization of
its potential products. Therefore, the Company may be dependent upon the
subsequent success of these outside parties in performing their
responsibilities. In addition, the Company may enter into additional
arrangements with corporate and academic collaborators and others to research,
develop or commercialize potential products. There can be no assurance that the
Company will be able to establish any such arrangements or that they will be
successful. Failure to enter into any such arrangements that in the future might
be necessary could have a material adverse effect on the Company's business.
Risk of Product Liability; Limited Product Liability Insurance;
Environmental Matters. The testing, marketing and sale of human health care
products entails an inherent risk of allegations of product liability, and there
can be no assurance that substantial product liability claims will not be
asserted against the Company. The Company has obtained limited amounts of
insurance relating to its clinical trials. There can be no assurance that the
Company will be able to obtain or maintain insurance on acceptable terms for its
clinical and commercial activities or that any insurance obtained will provide
adequate protection against potential liabilities. Moreover, the Company is
subject to federal, state and local laws and regulations governing the use,
generation, manufacture, storage, handling and disposal of certain materials and
wastes. The Company's research and development processes involve the limited,
controlled use of hazardous and radioactive materials. The Company believes its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, but the risk of accidental
contamination or injury to the Company's employees or others from these
materials cannot be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result, and any such liability could
exceed the resources of the Company. Although the Company believes it is in
compliance in all material respects with applicable environmental laws and
regulations and currently does not expect to make material capital expenditures
for environmental control facilities in the near-term, there can be no assurance
that the Company will not be required to incur significant costs to comply with
environmental laws and regulations in the
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future, or that the operations, business or assets of the Company may not be
materially adversely affected by current or future environmental laws or
regulations.
Dependence Upon Key Employees and Consultants. The success of the
Company is dependent upon the efforts of its senior management team, including
Dr. Carl R. Thornfeldt, Chairman of the Board of Directors and Medical Director
of the Company, and K. Michael Forrest, Chief Executive Officer of the Company.
A change in the association of these individuals or other officers and directors
of the Company could adversely affect the Company if suitable replacement
personnel could not be employed. The success of the Company also depends upon
its ability to continue to attract and retain qualified scientific and technical
personnel. There is intense competition for qualified personnel in the areas of
the Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain the qualified personnel necessary for the
development or expansion of its business.
Anti-Takeover Provisions. Certain provisions of the Company's Amended
and Restated Articles of Incorporation, as well as the California General
Corporation Law, could discourage a third party from attempting to acquire, or
make it more difficult for a third party to acquire, control of the Company
without approval of the Company's Board of Directors. Such provisions could also
limit the price that certain investors might be willing to pay in the future for
shares of the Common Stock. Certain of such provisions allow the Board of
Directors to authorize the issuance of preferred stock with rights superior to
those of the Common Stock. The Company is also subject to the provisions of
Section 1203 of the California General Corporation Law which requires that a
fairness opinion be provided to the Company's shareholders in connection with
their consideration of any proposed "interested party" reorganization
transaction.
Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. In addition, the market price
of the Common Stock and the IPO Warrants, like the stock prices of many
publicly-traded pharmaceutical, chemical, consumer, and biotechnology companies,
may prove to be highly volatile. Announcements of technological innovations or
new commercial products by the Company or its competitors, developments or
disputes concerning patent or proprietary rights, publicity regarding actual or
potential medical results relating to products under development by the Company
or its competitors, regulatory developments in both the United States and
foreign countries, public concern as to the safety of pharmaceutical products,
sales of a large number of shares of Common Stock in the market, and economic
and other external factors, as well as period-to-period fluctuations in
financial results, among other factors, may have a significant impact on the
market price of the Common Stock and the IPO Warrants.
Shares Eligible for Future Sale. Although federal and state laws may,
in certain instances, limit secondary trading by certain shareholders of certain
shares of Common Stock that they hold, in general most of the Company's
securities may be publicly resold. Sales of shares of Common Stock or IPO
Warrants could have an adverse effect on the price of the Common Stock.
State Blue Sky Registration Required to Exercise the IPO Warrants.
Holders of IPO Warrants will be able to exercise those warrants only if a
current prospectus relating to the
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Common Stock underlying such Warrants is then in effect, and only if such Common
Stock is qualified for sale or exempt from qualifications under applicable state
securities law of the state in which such holders of the IPO Warrants reside.
Although the Company has undertaken to maintain the effectiveness of a current
prospectus covering the Common stock underlying the IPO Warrants, there can be
no assurance that the Company will be able to do so. The IPO Warrants may be
deprived of any value if a current prospectus covering the Common Stock issuable
upon exercise of the IPO Warrants is not kept effective, or if such Common Stock
is not qualified or exempt from qualification in the states in which the holders
of IPO Warrants reside.
The IPO Warrants are separately listed and tradable on the Nasdaq
SmallCap Market. Purchasers may buy IPO Warrants in the after market in, or may
move to, jurisdictions in which the shares underlying the IPO Warrants are not
so registered or qualified during the period that the IPO Warrants are
exercisable. In this event, the Company would be unable to issue shares to those
persons desiring to exercise their IPO Warrants, and holders of IPO Warrants
would have no choice but to attempt to sell the IPO Warrants in a jurisdiction
where such sale is permissible or allow them to expire unexercised.
ITEM 7: FINANCIAL STATEMENTS
The financial statements and supplementary data required by item 7 are
set forth below on pages F-1 through F-21 of this report.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 may be
found in the sections captioned "Election of Cellegy Directors" and "Compliance
under Section 16(a) of the Securities Exchange Act of 1934" appearing in the
definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders expected to be held on June 5, 1997. Such
information is incorporated herein by reference. Information required by this
Item with respect to executive officers may be found in Part I hereof in the
section captioned "Executive Officers of the Registrant."
ITEM 10: EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section
captioned "Executive Compensation" appearing in the definitive Proxy Statement
to be delivered to shareholders in connection with the Annual Meeting of
Shareholders expected to be held on June 5, 1997. Such information is
incorporated herein by reference.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section
captioned "Security Ownership of Certain Beneficial Owners and Management"
appearing in the definitive Proxy Statement to be delivered to Shareholders in
connection with the Annual Meeting of Shareholders expected to be held on June
5, 1997. Such information is incorporated herein by reference.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section
captioned "Executive Compensation -- Certain Transactions" appearing in the
definitive Proxy Statement to be delivered to Shareholders in connection with
the Annual Meeting of Shareholders expected to be held June 5, 1997. Such
information is incorporated herein by reference.
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PART IV
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(a) The following exhibits are attached hereto or incorporated
herein by reference.
Exhibit
Number Exhibit Title
- ----------- --------------
3.1 Amended and Restated Articles of Incorporation of the
Company. (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form SB-2 (Registration
No. 33-93288 LA) declared effective on August 11, 1995 (the
"SB-2")).
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit
3.3 to the SB-2).
4.1 Specimen Common Stock Certificate. (Incorporated by reference
to Exhibit 4.1 to the SB-2).
4.2 Specimen Warrant Certificate. (Incorporated by reference to
Exhibit 4.2 to the SB-2).
4.3 Form of Warrant Agreement Between the Company and First
Interstate Bank of California. (Incorporated by reference to
Exhibit 4.3 to the SB-2).
4.4 Form of Representatives' Warrant Agreement. (Incorporated by
reference to Exhibit 27.2 to the SB-2).
4.5 Certificate of Determination, as amended, relating to the
Series A Preferred Stock. (Incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-QSB
for the three months ended March 31, 1996 (the "Q1 1996 Form
10-QSB")).
4.6 Securities Subscription Agreement dated April 1996 relating
to the Series A Preferred Stock. (Incorporated by reference
to Exhibit 4.2 to the Q1 1996 Form 10-QSB).
4.7 Registration Rights Agreement dated April 18, 1996 relating
to the Series A Preferred Stock. (Incorporated by reference
to Exhibit 4.3 to the Q1 1996 Form 10-QSB).
10.1 License Option Agreement, dated April 16, 1992, between the
Company and Neutrogena. (Incorporated by reference to Exhibit
10.1 to the SB-2).
10.2 Azelaic Acid Agreement, dated April 16, 1992, between the
Company and Neutrogena. (Incorporated by reference to Exhibit
10.2 to the SB-2).
35
<PAGE>
Exhibit
Number Exhibit Title
- ----------- -------------
10.3 Metabolic Moisturizer OTC License Agreement, dated April 16,
1992, between the Company and Neutrogena. (Incorporated by
reference to Exhibit 10.3 to the SB-2).
10.4 Patent License Agreement, effective June 1, 1994, between the
Company and Neutrogena. (Incorporated by reference to Exhibit
10.4 to the SB-2).
10.5 Barrier Repair Formulations License Agreement, dated October
26, 1993 between the Company and the University of
California. (Incorporated by reference to Exhibit 10.5 to the
SB-2).
10.6 License Agreement, dated March 4, 1994, regarding Drug
Delivery by Skin Barrier Disruption, between the Company and
University of California. (Incorporated by reference to
Exhibit 10.6 to the SB-2).
*10.7 Employment Agreement, dated as of January 21, 1996, between
the Company and Dr. Carl Thornfeldt. (Incorporated by
reference to Exhibit 10.7 to the Company's Form 10-KSB for
fiscal year ended December 31, 1995 (the "1995 Form
10-KSB")).
10.8 Founder's Agreement, dated April 2, 1992, between the Company
and Dr. Peter M. Elias. (Incorporated by reference to Exhibit
10.9 to the SB-2).
10.9 Amended and Restated Registration Rights Agreement dated
April 10, 1992. (Incorporated by reference to Exhibit 10.11
to the SB-2).
*10.10 1992 Stock Option Plan. (Incorporated by reference to Exhibit
10.12 to the SB-2).
10.11 Secured Debenture and Warrant Purchase Agreement dated as of
February 10, 1995. (Incorporated by reference to Exhibit
10.13 to the SB-2).
10.12 Amended and Restated Registration Rights Agreement dated as
of February 10, 1995. (Incorporated by reference to Exhibit
10.14 to the SB-2).
10.13 Warrant Agreement dated as of February 10, 1995.
(Incorporated by reference to Exhibit 10.15 to the SB-2).
10.14 Agency Agreement dated as of February 10, 1995. (Incorporated
by reference to Exhibit 10.16 to the SB-2).
*10.15 1995 Equity Incentive Plan (Incorporated by reference to
Exhibit 10.17 to the 1995 Form 10-KSB).
36
<PAGE>
Exhibit
Number Exhibit Title
- ----------- -------------
*10.16 1995 Directors' Stock Option Plan (Incorporated by reference
to Exhibit 10.18 to the 1995 Form 10-KSB.)
10.17 Standard Industrial Lease dated April 6, 1992, between the
Company and H&H Management. (Incorporated by reference to
Exhibit 10.20 to the 1995 Form 10-KSB).
*10.18 Employment Agreement dated December 6, 1995, between the
Company and William E. Bliss. (Incorporated by reference to
Exhibit 10.21 to the 1995 Form 10-KSB).
*10.19 Employment Agreement dated November 20, 1996, between the
Company and K. Michael Forrest.
10.20 Exclusive Licensing Agreement for Glylorin between the
Company and Glaxo Wellcome, Inc. dated November 11, 1996.
(Confidential treatment has been requested with respect to
the information contained within the ["**"] markings. Such
marked portions have been omitted from this filing and have
been filed separately with the Securities and Exchange
Commission ).
*10.21 Consulting Agreement between the Company and Dr. Peter M.
Elias dated May 1, 1996
11.01 Statement re: Computation of Pro Forma Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (See signature page).
27.1 Financial Data Schedule
- ----------------
* Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of the year for which this report is filed.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Foster City, State of California, on the 28th day of March, 1997.
CELLEGY PHARMACEUTICALS, INC.
By: /s/ K. MICHAEL FORREST
--------------------------------------
K. Michael Forrest
President and Chief Executive Officer
Each person whose signature appears below constitutes and appoints K.
Michael Forrest and A. Richard Juelis, jointly and severally, his true and
lawful attorneys-in-fact, each with the power of substitution, for him in any
and all capacities, to sign amendments to this Report on Form 10-KSB, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
conforming all that said attorneys-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue thereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
<CAPTION>
Name Title Date
<S> <C> <C>
Principal Executive Officer:
/s/ K. MICHAEL FORREST President, Chief Executive Officer and March 28, 1997
- --------------------------------------------------- Director
K. Michael Forrest
Principal Financial Officer
and Principal Accounting Officer:
/s/ A. RICHARD JUELIS Vice President, Finance, Chief Financial March 28, 1997
- --------------------------------------------------- Officer and Secretary
A. Richard Juelis
Directors:
/s/ CARL R. THORNFELDT, M.D. Chairman of the Board of Directors March 28, 1997
- ---------------------------------------------------
Carl R. Thornfeldt, M.D.
/s/ JACK L. BOWMAN Director March 28, 1997
- ---------------------------------------------------
Jack L. Bowman
/s/ DENIS R. BURGER, PH.D. Director March 28, 1997
- ---------------------------------------------------
Denis R. Burger, Ph.D.
/s/ PETER M. ELIAS, M.D. Director March 28, 1997
- ---------------------------------------------------
Peter M. Elias, M.D.
/s/ TOBI B. KLAR, M.D. Director March 28, 1997
- ---------------------------------------------------
Tobi B. Klar, M.D.
/s/ ALAN A. STEIGROD Director March 28, 1997
- ---------------------------------------------------
Alan A. Steigrod
/s/ LARRY J. WELLS Director March 28, 1997
- ---------------------------------------------------
Larry J. Wells
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
EXHIBITS
to
Form 10-KSB
Under
THE SECURITIES EXCHANGE ACT OF 1934
----------
CELLEGY PHARMACEUTICALS, INC.
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
-------- ------------
3.1 Amended and Restated Articles of Incorporation of the
Company. (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form SB-2 (Registration
No. 33-93288 LA) declared effective on August 11, 1995 (the
"SB-2")).
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit
3.3 to the SB-2).
4.1 Specimen Common Stock Certificate. (Incorporated by reference
to Exhibit 4.1 to the SB-2).
4.2 Specimen Warrant Certificate. (Incorporated by reference to
Exhibit 4.2 to the SB-2).
4.3 Form of Warrant Agreement Between the Company and First
Interstate Bank of California. (Incorporated by reference to
Exhibit 4.3 to the SB-2).
4.4 Form of Representatives' Warrant Agreement. (Incorporated by
reference to Exhibit 27.2 to the SB-2).
4.5 Certificate of Determination, as amended, relating to the
Series A Preferred Stock. (Incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-QSB
for the three months ended March 31, 1996 (the "Q1 1996 Form
10-QSB")).
4.6 Securities Subscription Agreement dated April 1996 relating
to the Series A Preferred Stock. (Incorporated by reference
to Exhibit 4.2 to the Q1 1996 Form 10-QSB).
4.7 Registration Rights Agreement dated April 18, 1996 relating
to the Series A Preferred Stock. (Incorporated by reference
to Exhibit 4.3 to the Q1 1996 Form 10-QSB).
10.1 License Option Agreement, dated April 16, 1992, between the
Company and Neutrogena. (Incorporated by reference to Exhibit
10.1 to the SB-2).
10.2 Azelaic Acid Agreement, dated April 16, 1992, between the
Company and Neutrogena. (Incorporated by reference to Exhibit
10.2 to the SB-2).
<PAGE>
Exhibit
Number Description
-------- ------------
10.3 Metabolic Moisturizer OTC License Agreement, dated April 16,
1992, between the Company and Neutrogena. (Incorporated by
reference to Exhibit 10.3 to the SB-2).
10.4 Patent License Agreement, effective June 1, 1994, between the
Company and Neutrogena. (Incorporated by reference to Exhibit
10.4 to the SB-2).
10.5 Barrier Repair Formulations License Agreement, dated October
26, 1993 between the Company and the University of
California. (Incorporated by reference to Exhibit 10.5 to the
SB-2).
10.6 License Agreement, dated March 4, 1994, regarding Drug
Delivery by Skin Barrier Disruption, between the Company and
University of California. (Incorporated by reference to
Exhibit 10.6 to the SB-2).
*10.7 Employment Agreement, dated as of January 21, 1996, between
the Company and Dr. Carl Thornfeldt. (Incorporated by
reference to Exhibit 10.7 to the Company's Form 10-KSB for
fiscal year ended December 31, 1995 (the "1995 Form
10-KSB")).
10.8 Founder's Agreement, dated April 2, 1992, between the Company
and Dr. Peter M. Elias. (Incorporated by reference to Exhibit
10.9 to the SB-2).
10.9 Amended and Restated Registration Rights Agreement dated
April 10, 1992. (Incorporated by reference to Exhibit 10.11
to the SB-2).
*10.10 1992 Stock Option Plan. (Incorporated by reference to Exhibit
10.12 to the SB-2).
10.11 Secured Debenture and Warrant Purchase Agreement dated as of
February 10, 1995. (Incorporated by reference to Exhibit
10.13 to the SB-2).
10.12 Amended and Restated Registration Rights Agreement dated as
of February 10, 1995. (Incorporated by reference to Exhibit
10.14 to the SB-2).
10.13 Warrant Agreement dated as of February 10, 1995.
(Incorporated by reference to Exhibit 10.15 to the SB-2).
10.14 Agency Agreement dated as of February 10, 1995. (Incorporated
by reference to Exhibit 10.16 to the SB-2).
*10.15 1995 Equity Incentive Plan (Incorporated by reference to
Exhibit 10.17 to the 1995 Form 10-KSB).
41
<PAGE>
Exhibit
Number Description
-------- ------------
*10.16 1995 Directors' Stock Option Plan (Incorporated by reference
to Exhibit 10.18 to the 1995 Form 10-KSB).
10.17 Standard Industrial Lease dated April 6, 1992, between the
Company and H&H Management. (Incorporated by reference to
Exhibit 10.20 to the 1995 Form 10-KSB).
*10.18 Employment Agreement dated December 6, 1995, between the
Company and William E. Bliss. (Incorporated by reference to
Exhibit 10.21 to the 1995 Form 10-KSB).
*10.19 Employment Agreement dated November 20, 1996, between the
Company and K. Michael Forrest.
10.20 Exclusive Licensing Agreement for Glylorin between the
Company and Glaxo Wellcome, Inc. dated November 11, 1996.
(Confidential treatment has been requested with respect to
the information contained within the ["**"] markings. Such
marked portions have been omitted from this filing and have
been filed separately with the Securities and Exchange
Commission).
*10.21 Consulting Agreement between the Company and Dr. Peter M.
Elias dated May 1, 1996.
11.01 Statement re: Computation of Pro Forma Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (See signature page).
27.1 Financial Data Schedule
- ----------------
* Represents a management contract or compensatory plan or arrangement.
42
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Index to Financial Statements
Page
----
Report of Ernst & Young LLP, Independent Auditors ........................ F- 2
Balance Sheets ........................................................... F- 3
Statements of Operations ................................................. F- 4
Statements of Shareholders' Equity (Deficit) ............................. F- 5
Statements of Cash Flows ................................................. F- 8
Notes to Financial Statements ............................................ F-10
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cellegy Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Cellegy
Pharmaceuticals, Inc. (a development-stage company) as of December 31, 1996 and
1995, and the related statements of operations, shareholders' equity (deficit)
and cash flows for the years then ended, and for the period from June 26, 1989
(inception) through 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 referred to above present
fairly, in all material respects, the financial position of Cellegy
Pharmaceuticals, Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended, and for the period from
June 26, 1989 (inception) through December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
February 5, 1997
F-2
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
<TABLE>
Balance Sheets
<CAPTION>
December 31,
---------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................................................... $ 36,453 $ 2,320,130
Short-term investments .................................................................. 5,255,668 1,500,000
Other current assets .................................................................... 350,561 149,040
------------ ------------
Total current assets ....................................................................... 5,642,682 3,969,170
Property and equipment, net ................................................................ 31,281 58,665
Long-term investments ...................................................................... 2,022,499 --
------------ ------------
$ 7,696,462 $ 4,027,835
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities ................................................ $ 270,013 $ 192,232
Accrued research fees ................................................................... 21,000 --
Accrued compensation and related expenses ............................................... 17,958 187,266
------------ ------------
Total current liabilities .................................................................. 308,971 379,498
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; Series A
convertible preferred stock; 1,100 shares designated; 195 shares issued and
outstanding at December 31, 1996 and no shares issued or outstanding at
December 31, 1995 (Aggregate liquidation preference at December 31, 1996:
$2,062,832) ........................................................................... 2,161,271 --
Common stock, no par value; 20,000,000 shares authorized;
5,152,752 shares issued and outstanding at December 31,
1996, and 3,777,075 shares issued and outstanding at
December 31, 1995 ..................................................................... 20,141,370 13,803,793
Unrealized gain on investments .......................................................... 22,167 --
Deficit accumulated during the development stage ........................................ (14,937,317) (10,155,456)
------------ ------------
Total shareholders' equity .............................................................. 7,387,491 3,648,337
------------ ------------
$ 7,696,462 $ 4,027,835
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
<TABLE>
Statements of Operations
<CAPTION>
Period from
June 26, 1989
(inception)
Year ended December 31, through
----------------------------------- December 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Licensing and contract revenue
from affiliate ...................................... $ 15,000 $ 1,000,000 $ 1,145,373
Licensing, milestone and development
funding ............................................. 559,157 -- 559,157
Government grants ...................................... 73,503 -- 73,503
------------ ------------ ------------
Total revenues ............................................. 647,660 1,000,000 1,778,033
Operating expenses:
Research and development ............................... 2,712,008 1,224,841 9,122,229
General and administrative ............................. 1,633,917 1,310,144 6,182,230
------------ ------------ ------------
Total operating expenses ................................... 4,345,925 2,534,985 15,304,459
------------ ------------ ------------
Operating loss ............................................. (3,698,265) (1,534,985) (13,526,426)
Interest expense ........................................... -- (752,391) (863,740)
Interest income and other, net ............................. 330,169 135,499 866,614
------------ ------------ ------------
Net loss ................................................... (3,368,096) (2,151,877) (13,523,552)
Non-cash preferred dividends ............................... 1,413,765 -- 1,413,765
------------ ------------ ------------
Net loss applicable to common
shareholders ........................................... $ (4,781,861) $ (2,151,877) $(14,937,317)
============ ============ ============
Pro forma net loss per share
applicable to common shareholders ...................... $ (1.11) $ (0.67)
============ ============
Shares used in calculation of pro forma
net loss per share ..................................... 4,306,550 3,205,696
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-4
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
<TABLE>
Statements of Shareholders' Equity (Deficit)
<CAPTION>
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
----------------------- ------------------------ ----------------------
Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for cash, through
December 31, 1994 ......... -- $ -- -- $ -- -- $ --
Issuance of common stock
for services rendered
through December 31,
1994 ...................... -- -- -- -- -- --
Issuance of common stock
in connection with
merger with Pacific
Pharmaceuticals, Inc.
in April 1992 ............. -- -- -- -- -- --
Issuance of Series A
convertible
preferred stock for
cash through December 31,
1994 ...................... 26,899 48,500 -- -- -- --
Issuance of Series A
convertible preferred stock
and warrants to purchase
14,191 shares of Series A
convertible preferred stock
in exchange for convertible
promissory notes and
accrued interest, net of
issuance costs of
$21,500 through
December 31, 1994 ......... 625,845 1,199,536 -- -- -- --
Issuance of Series A
convertible preferred
stock for services
rendered through
December 31, 1994 ......... 40,597 73,198 -- -- -- --
Issuance of Series A
convertible preferred
stock in exchange for
license agreement ......... 9,513 100,000 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Deficit
Unrealized Accumulated Total
Common Stock Gain During the Shareholders'
------------------------ on Development Equity
Shares Amount Investments Stage (Deficit)
--------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
for cash, through
December 31, 1994 ......... 835,857 $ 83,464 $ -- $ -- $ 83,464
Issuance of common stock
for services rendered
through December 31,
1994 ...................... 269,116 24,261 -- -- 24,261
Issuance of common stock
in connection with
merger with Pacific
Pharmaceuticals, Inc.
in April 1992 ............. 97,062 8,750 -- -- 8,750
Issuance of Series A
convertible
preferred stock for
cash through December 31,
1994 ...................... -- -- -- -- 48,500
Issuance of Series A
convertible preferred stock
and warrants to purchase
14,191 shares of Series A
convertible preferred stock
in exchange for convertible
promissory notes and
accrued interest, net of
issuance costs of
$21,500 through
December 31, 1994 ......... -- -- -- -- 1,199,536
Issuance of Series A
convertible preferred
stock for services
rendered through
December 31, 1994 ......... -- -- -- -- 73,198
Issuance of Series A
convertible preferred
stock in exchange for
license agreement ......... -- -- -- -- 100,000
</TABLE>
F-5
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
<TABLE>
Statements of Shareholders' Equity (Deficit)--(Continued)
<CAPTION>
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
----------------------------- -----------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Issuance of Series B
convertible preferred
stock in exchange for
convertible promissory
notes in 1992 ........ -- -- 12,750 114,000
Issuance of Series C
convertible preferred
stock for cash through
December 31, 1994 .... -- -- -- --
Repurchase of common
shares in 1992 ....... -- -- -- --
Net loss for the period
June 26, 1989
(inception) through
December 31, 1994 .... -- -- -- --
---------- ---------- ---------- ----------
Balances, December 31,
1994 ................. 702,854 1,421,234 12,750 114,000
Exercise of options to
purchase common stock -- -- -- --
Issuance of warrants in
connection with notes
payable financing .... -- -- -- --
Conversion of preferred
stock to common stock
in connection with IPO (702,854) (1,421,234) (12,750) (114,000)
Issuance of common stock
in connection with IPO -- -- -- --
Issuance of common stock
in exchange for notes
payable .............. -- -- -- --
Net loss - 1995 ......... -- -- -- --
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Series C Convertible Unrealized Accumulated Total
Preferred Stock Common Stock Gain During the Shareholders'
------------------------- ------------------------ on Development Equity
Shares Amount Shares Amount Investments Stage (Deficit)
---------- ---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series B
convertible preferred
stock in exchange for
convertible promissory
notes in 1992 ........ -- -- -- -- -- -- 114,000
Issuance of Series C
convertible preferred
stock for cash through
December 31, 1994 .... 477,081 4,978,505 -- -- -- -- 4,978,505
Repurchase of common
shares in 1992 ....... -- -- (3,586) (324) -- -- (324)
Net loss for the period
June 26, 1989
(inception) through
December 31, 1994 .... -- -- -- -- -- (8,003,579) (8,003,579)
---------- ---------- ---------- ---------- ------ ---------- ----------
Balances, December 31,
1994 ................. 477,081 4,978,505 1,198,449 116,151 -- (8,003,579) (1,373,689)
Exercise of options to
purchase common stock -- -- 20,481 34,285 -- -- 34,285
Issuance of warrants in
connection with notes
payable financing .... -- -- -- 487,333 -- -- 487,333
Conversion of preferred
stock to common stock
in connection with IPO (477,081) (4,978,505) 1,192,685 6,513,739 -- -- --
Issuance of common stock
in connection with IPO -- -- 1,322,500 6,383,785 -- -- 6,383,785
Issuance of common stock
in exchange for notes
payable .............. -- -- 42,960 268,500 -- -- 268,500
Net loss - 1995 ......... -- -- -- -- -- (2,151,877) (2,151,877)
---------- ---------- ---------- ---------- ------ ---------- ----------
</TABLE>
F-6
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
<TABLE>
Statements of Shareholders' Equity (Deficit)--(Continued)
<CAPTION>
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
------------------------ ------------------ -------------------
Shares Amount Shares Amount Shares Amount
------- ------------ -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1995 ................. -- -- -- -- -- --
Issuance of Series A
convertible preferred
stock, net of issuance
costs ................ 750 6,753,230 -- -- -- --
Conversion of preferred
stock, including
dividends, to common
stock ................ (555) (6,005,724) -- -- -- --
Exercise of warrants to
purchase common stock -- -- -- -- -- --
Exercise of options to
purchase common stock -- -- -- -- -- --
Compensation expense
related to the
extension of option
exercise periods ..... -- -- -- -- -- --
Unrealized gain on
investments ......... -- -- -- -- -- --
Non-cash preferred
dividends ........... -- 1,413,765 -- -- -- --
Net loss - 1996 ......... -- -- -- -- -- --
------- ------------ -------- ------- -------- ---------
Balances, December 31,
1996 ................. 195 $ 2,161,271 -- -- -- --
======= ============ ======== ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Unrealized Accumulated Total
Common Stock Gain During the Shareholders'
--------------------------- on Development Equity
Shares Amount Investments Stage (Deficit)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, December 31,
1995 ................. 3,777,075 13,803,793 -- (10,155,456) 3,648,337
Issuance of Series A
convertible preferred
stock, net of issuance
costs ................ -- -- -- -- 6,753,230
Conversion of preferred
stock, including
dividends, to common
stock ................ 1,234,077 6,005,724 -- -- --
Exercise of warrants to
purchase common stock 135,256 51,814 -- -- 51,814
Exercise of options to
purchase common stock 6,344 11,553 -- -- 11,553
Compensation expense
related to the
extension of option
exercise periods ..... -- 268,486 -- -- 268,486
Unrealized gain on
investments .......... -- -- 22,167 -- 22,167
Non-cash preferred
dividends ............ -- -- -- (1,413,765) --
Net loss - 1996 ......... -- -- -- (3,368,096) (3,368,096)
------------ ------------ ------------ ------------ ------------
Balances, December 31,
1996 ................. 5,152,752 $ 20,141,370 $ 22,167 $(14,937,317) $ 7,387,491
============ ============ ============ ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-7
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
<TABLE>
Statements of Cash Flows
<CAPTION>
Period from
June 26, 1989
(inception)
December 31, through
----------------------------------- December 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities
Net loss ................................................... $ (3,368,096) $ (2,151,877) $(13,523,552)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization .......................... 35,384 27,726 246,638
Compensation expense related to the
extension of option exercise periods ................ 268,486 -- 268,486
Loss on sale of property and equipment ................. -- 3,724 3,724
Amortization of discount on
notes payable and deferred
financing costs ..................................... -- 562,748 567,503
Issuance of common shares
for services ........................................ -- -- 24,261
Issuance of Series A convertible preferred
stock for services rendered ......................... -- -- 73,198
Issuance of Series A convertible
preferred stock for interest ........................ -- -- 67,720
Issuance of Series A convertible preferred
stock for license agreement ......................... -- -- 100,000
Changes in operating assets and liabilities:
Other current assets ................................... (201,521) (138,811) (350,561)
Accounts payable and accrued liabilities ............... 77,781 (149,813) 270,013
Accrued research fees .................................. 21,000 -- 21,000
Accrued compensation and related
expenses ............................................ (169,308) 136,554 17,958
Deferred revenue ....................................... -- (1,000,000) --
------------ ------------ ------------
Net cash used in operating activities ...................... (3,336,274) (2,709,749) (12,213,612)
Investing activities
Purchase of property and equipment ......................... (8,000) (22,794) (172,893)
Purchases of investments ................................... (9,576,000) (1,500,000) (16,622,520)
Sales and maturities of investments ........................ 3,820,000 21,681 9,366,520
------------ ------------ ------------
Net cash used in investing activities ...................... (5,764,000) (1,501,113) (7,428,893)
</TABLE>
F-8
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
<TABLE>
Statements of Cash Flows--(Continued)
<CAPTION>
Period from
June 26, 1989
(inception)
December 31, through
------------------------------------ December 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Financing activities
Proceeds from notes payable ................................ $ -- $ 1,749,800 $ 3,547,424
Repayment of notes payable ................................. -- (2,017,300) (2,110,608)
Net proceeds from issuance of
common stock ............................................ 63,367 6,418,070 6,564,901
Repurchase of common stock ................................. -- -- (324)
Issuance of convertible preferred stock,
net of issuance costs ................................... 6,753,230 -- 11,757,735
Deferred financing costs ................................... -- -- (80,170)
------------ ------------ ------------
Net cash provided by financing
activities .............................................. 6,816,597 6,150,570 19,678,958
------------ ------------ ------------
Net increase in cash ....................................... (2,283,677) 1,939,708 36,453
Cash, beginning of period .................................. 2,320,130 380,422 --
------------ ------------ ------------
Cash, end of period ........................................ $ 36,453 $ 2,320,130 $ 36,453
============ ============ ============
Supplemental disclosure of non-cash transactions:
Conversion of preferred stock to
common stock ............................................ $ 4,997,390 $ 6,513,739 $ 11,511,129
============ ============ ============
Issuance of common stock for notes
payable ................................................. $ -- $ 268,500 $ 268,500
============ ============ ============
Issuance of warrants in connection
with notes payable financing ............................ $ -- $ 487,333 $ 487,333
============ ============ ============
Issuance of Series A convertible
preferred stock for notes payable ....................... $ -- $ -- $ 1,153,316
============ ============ ============
Issuance of Series B convertible
preferred stock for notes payable ....................... $ -- $ -- $ 115,000
============ ============ ============
Issuance of common stock for Pacific
Pharmaceuticals, Inc. ................................... $ -- $ -- $ 8,750
============ ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-9
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements
1. Accounting Policies
Description of Business
The Company commenced operations in 1989 to engage in the research,
development, and commercialization of proprietary products for the skin,
including transdermal drug delivery products, prescription therapeutic products
for skin disorders, and non-prescription over-the-counter consumer products to
repair and protect damaged skin. The Company is in the development stage.
Basis of Presentation
In the course of its development, the Company has incurred significant
losses and will continue to incur additional losses during its development
phase. As a result, the Company will require substantial additional funds for
its operational activities and may seek private or public equity financings, and
future collaborative arrangements with third parties to meet its cash needs.
There is no assurance that such additional funds will be available on acceptable
terms, or available at all. Insufficient funding may require the Company to
delay, reduce, or eliminate some or all of its research and development, planned
clinical trials, and administrative programs.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenues and Research and Development Expenses
Revenues related to cost reimbursement provisions under development
contracts are recognized as the costs associated with the projects are incurred.
Revenues related to milestones specified under development contracts are
recognized as the milestones are achieved. Research and development costs are
expensed as incurred.
The Company receives certain United States government grants which
support the Company's research effort in defined research projects. These grants
generally provide for reimbursement of approved costs incurred as defined in the
various grants. Revenues associated with these grants are recognized as costs
under each grant are incurred.
Cash, Cash Equivalents and Investments
Cash equivalents consist of highly liquid financial instruments, with
original maturities of three months or less.
F-10
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
The Company accounts for its investments in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115"). Under FAS 115, management classifies
investments as available-for-sale or held-to-maturity at the time of purchase
and periodically reevaluates such designations. Investments in marketable equity
securities and debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost with corresponding
premiums or discounts amortized to interest income over the life of the
investment. Debt securities, not classified as held-to-maturity, are classified
as available-for-sale and are reported at fair market value. Unrealized gains or
losses on available-for-sale securities are included in shareholders' equity
until their disposition. Realized gains or losses and declines in value judge to
be other than temporary on available-for-sale securities are included in other
income or expense.
While the Company's intent is to hold debt securities to maturity, they
are classified as available-for-sale because the sale of such securities may be
required prior to maturity.
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful life of five
years, using the straight-line method.
Stock-Based Compensation
The Company accounts for its stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and has elected to
follow the disclosure only alternative prescribed by FASB Statement No. 123,
"Accounting for Stock-Based Compensation."
Pro forma Net Loss Per Share Applicable to Common Shareholders
Net loss per share applicable to common shareholders is computed using
the weighted average number of shares of common stock outstanding. Common
equivalent shares are excluded from the computation as their effect is
anti-dilutive, except that, pursuant to Securities and Exchange Commission Staff
Accounting Bulletins, common and common equivalent shares issued (stock options
and warrant grants) at prices below the public offering price during the twelve
month period prior to the initial public offering have been included in the
calculation as if they were outstanding for all periods through March 31, 1995,
using the treasury stock method. The net loss per share applicable to common
shareholders, computed on this basis, was $(1.11) and $(0.86) for the years
ended December 31, 1996 and 1995, respectively. Shares used in the net loss per
share calculation were 4,306,550 and 2,509,963 for the years ended December 31,
1996 and 1995, respectively.
F-11
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
The pro forma net loss per share applicable to common shareholders
presented in the statements of operations is computed as described above and
also gives effect for all periods presented to the conversion of all outstanding
shares of convertible preferred stock into common stock that took place upon the
closing of the Company's initial public offering in August 1995.
2. Investments
<TABLE>
At December 31, 1996, investments consist of the following:
<CAPTION>
Unrealized Unrealized Estimated
Cost gains losses fair value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Short-term:
Corporate Notes ...................... $ 2,000,000 $ 8,280 $ -- $ 2,008,280
U.S. Government Notes ................ 2,400,000 310 (1,886) 2,398,424
Time Deposits ........................ 500,000 -- -- 500,000
Commercial Paper ..................... 356,000 -- (7,036) 348,964
----------- ----------- ----------- -----------
5,256,000 8,590 (8,922) 5,255,668
Long-term:
U.S. Government Notes ................ 2,000,000 22,499 -- 2,022,499
----------- ----------- ----------- -----------
Total ................................ $ 7,256,000 $ 31,089 $ (8,922) $ 7,278,167
=========== =========== =========== ===========
</TABLE>
The cost and estimated fair market value of investments in debt
securities at December 31, 1996, by contractual maturity, were as follows:
Fair
Market
Cost Value
---------- ----------
Due in 1 year or less .................. $5,256,000 $5,255,668
Due in 1-3 years ....................... 2,000,000 2,022,499
---------- ----------
Total investments ...................... $7,256 000 $7,278,167
========== ==========
At December 31, 1995, short-term investments consisted of a U.S.
government obligation that matured in May 1996. There have been no net realized
gains or losses on the sale of securities for the years ended December 31, 1996
and 1995.
F-12
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
3. Property and Equipment
Property and equipment consists of the following:
December 31,
----------------------------
1996 1995
--------- ---------
Furniture and fixtures ..................... $ 49,702 $ 41,702
Office equipment ........................... 39,142 39,142
Laboratory equipment ....................... 65,310 65,310
Leasehold improvements ..................... 3,610 3,610
--------- ---------
157,764 149,764
Less accumulated depreciation .............. (126,483) (91,099)
--------- ---------
$ 31,281 $ 58,665
========= =========
4. Notes Payable
In a December 1994 private placement, the Company issued $536,000
principal amount of 10% convertible subordinated debentures and warrants to
acquire 107,200 shares of common stock at an exercise price of $7.81. The value
ascribed to the warrants for financial statement purposes was not material.
In February 1995 and June 1995 private placements, the Company issued
$1,749,800 principal amount of 10% convertible secured debentures ("Notes") and
warrants ("Warrants") to acquire units ("Units"), each Unit consisting of one
share of common stock and one common stock purchase warrant ("Unit Warrant"). In
connection with the February 1995 transaction, all investors who acquired notes
and warrants in December 1994 exchanged the securities acquired in December 1994
for an equal principal amount of Notes and Warrants on the same terms as the
other investors. The Warrants were valued by an outside valuation firm for
financial statement purposes at approximately $487,000, which amount was
recorded as an addition to common stock with a corresponding discount on the
notes payable. The discount was amortized using the interest method. The Notes
were convertible at the option of the noteholder into Units consisting of one
share of common stock and one warrant ("Conversion Warrant") to purchase one
share of common stock. The exercise price of the Warrants is $.01 per unit. The
exercise price of the Unit Warrants is $7.81 per share.
In August 1995, in connection with the close of its initial public
offering, the Company repaid Notes totaling approximately $2,017,000 and accrued
interest totaling approximately $100,000. Notes totaling $268,500 were converted
into 42,960 shares of common stock and warrants to acquire 42,960 shares of
common stock. The warrants were exercisable beginning February 1996 at an
exercise price of $5.19 per share and will expire December 31, 1999.
F-13
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
5. Lease Commitments
The Company leases its facilities and equipment under non-cancelable
operating leases. Future minimum lease payments at December 31, 1996, are as
follows:
1997 .............................................. $ 331,803
1998 .............................................. 238,480
1999 .............................................. 243,285
2000 .............................................. 198,826
2001 .............................................. 77,051
----------
$1,089,445
==========
Rent expense was $209,715 and $67,959 for the years ended December 31,
1996 and 1995, respectively. For the year ended December 31, 1996, such rent
expense included $63,836 of equipment lease expense.
6. Shareholders' Equity
Initial Public Offering
In August 1995, the Company completed an initial public offering of
661,250 units, with each unit consisting of two shares of common stock and one
common stock purchase warrant with an exercise price of $9.375 per share. The
Company received net proceeds of approximately $6.4 million. In connection with
the initial public offering, Series A, B, and C preferred stock, then
outstanding, converted into 1,192,685 shares of common stock.
In July 1995, the Company's Board of Directors also approved a
.746-for-one reverse stock split of issued and outstanding common and preferred
shares and commensurate adjustments of outstanding options and warrants
(including purchase prices and exercise prices). All share amounts in the
accompanying financial statements have been retroactively adjusted to reflect
this reverse stock split.
Convertible Series A Preferred Stock Offering
On April 19, 1996, the Company completed a $7,500,000 private placement
of 750 shares of convertible Series A Preferred Stock ("Series A Preferred") or
("Preferred Stock Financing"). Net proceeds were approximately $6,753,230. The
shares are convertible, at the option of the holder, into common stock. The
number of shares of common stock issuable on conversion of a share of Series A
Preferred is calculated based on the lower of $6.6275 or a variable conversion
price of 85% of the average market price of the common stock on the five trading
days proceeding the conversion date.
F-14
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
If the variable conversion price is lower than the fixed conversion
price, a greater number of shares will be issued upon conversion. Two years
after issuance, any remaining unconverted preferred shares are automatically
converted into common stock. A conversion premium accrues at the rate of 8
percent per annum and is payable upon conversion, in shares of common stock.
Cellegy has redemption rights under certain circumstances. As of December 31,
1996, 1,234,077 shares of common stock have been issued in conjunction with the
conversion of Series A Preferred. The holders of the Series A preferred have no
voting rights, except as required by applicable California law.
For the year ended December 31, 1996, in accordance with SEC Rules and
Regulations, the Company accrued non-cash preferred dividends of $1,125,000
reflecting the 15% discount to common stock variable conversion price of the
Series A preferred stock, and non-cash preferred dividends of $288,765
reflecting the 8% per annum mandatory preferred dividends of the Series A
preferred stock.
In the event of any liquidation, the Series A Preferred Shareholders
are entitled to receive a preferential amount equal to $10,000 per share plus
the 8% per annum accrued dividends. If, upon liquidation, the assets to be
distributed to each holder of the Series A Preferred are insufficient to permit
the payment of the full preferred preference, then the entire assets and funds
of the Company will be distributed pro rata to each holder of the Series A
Preferred based on their aggregate preferred preference. Any remaining assets of
the Company would be distributed among the holders of the common stock according
to their respective shares.
Preferred Stock
The Company's Articles of Incorporation provide that the Company may
issue shares of Preferred Stock in one or more Series. The Board of Directors is
authorized to establish from time to time the numbers of shares to be included
in, and the designation of, any such shares, to determine or alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any wholly
unissued Series of Preferred Stock, and to increase or decrease the number of
shares of any such Series without any further vote or action by the
Shareholders.
<TABLE>
Warrants
The Company has the following warrants outstanding to purchase common
stock at December 31, 1996:
<CAPTION>
Exercise Price per
Number of Shares Share Date Issued Expiration Date
---------------- ------------------- ----------- ---------------
<S> <C> <C> <C>
35,496 $ 4.51 October 1994 December 31, 1999
258,528 0.01 February 1995 December 31, 1999
365,728 7.81 February 1995 December 31, 1999
44,604 9.02 March 1995 December 31, 1999
42,960 5.19 August 1995 December 31, 1999
115,000 10.31 August 1995 August 11, 2000
57,500 15.47 August 1995 August 11,2000
661,250 9.375 August 1995 August 11, 2000
86,005 7.23 April 1996 April 18, 2001
7,000 6.25 April 1996 April 24, 1998
---------
1,674,071
=========
</TABLE>
F-15
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
Included in the table above, are warrants to acquire 661,250 shares of
common stock at a price of $9.375 per share which were issued in connection with
the Company's initial public offering. The warrants are exercisable at any time,
unless previously redeemed until August 11, 2000. The Company may redeem the
warrants, in whole or in part, at any time upon at least thirty days prior
written notice to the warrant holders at a price of $.05 per warrant, provided
that the closing price of the common stock has been at least $12.50 for at least
10 consecutive trading days ending on a date within 30 days before the date of
the notice of redemption. No warrants have been redeemed through December 31,
1996.
Stock Option Plans
In 1995, the Company adopted the Equity Incentive Plan to provide for
the issuance of incentive stock options and non-statutory stock options. When
the Plan was established, the Company reserved 700,000 shares for issuance. In
1996, an additional 300,000 shares were reserved for issuance under the Plan.
Under the Plan, incentive stock options may be granted at a price per share not
less than the fair market value of common stock on the date of grant.
Nonqualified options may be granted at a price per share not less than 85% of
fair market value on the date of grant. Options are exercisable to the extent
vested. Vesting is established by the Compensation Committee.
Activity under the Plan is summarized as follows:
Weighted-
Shares Average
Under Price range Exercise
Option per share Price
---------- ------------ ---------
Balance at December 31, 1994......... 136,295 $ 0.45-4.50 $1.64
Granted.......................... 619,382 2.09-6.66 3.48
Canceled......................... (84,511) 1.81-4.50 1.92
Exercised........................ (20,481) 0.50-1.81 1.67
--------- ----------
Balance at December 31, 1995......... 650,685 $ 0.45-6.66 3.35
Granted.......................... 605,447 4.56-8.25 5.43
Canceled......................... (253,443) 1.39-6.38 4.49
Exercised........................ (6,344) 1.81-2.09 1.82
--------- ----------
Balance at December 31, 1996......... 996,345 $ 0.45-8.25 $4.34
--------- ----------
At December 31, 1996, options to purchase 441,840 shares of common
stock were vested and exercisable at exercise prices ranging from $0.45 to $8.25
per share. At December 31, 1996, options to purchase 91,500 shares of common
stock at exercise prices ranging from $4.56 to $7.25 per share, vest in the year
of 2001, but are subject to earlier vesting if certain performance criteria are
met. At December 31, 1996 no options to purchase shares of common stock were
available for future option grants under the Plan.
F-16
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
<TABLE>
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1996:
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- -------------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Price at December 31, 1996 Contractual Life Exercise Price at December 31, 1996 Exercise Price
- ------------------ -------------------- ---------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.45 to 3.07 277,170 5.4 years $2.10 183,643 $2.00
4.38 to 5.75 579,975 8.2 4.76 218,447 4.68
6.25 to 8.25 139,200 8.0 7.02 39,750 6.78
------- -------
Total 996,345 7.4 years $4.34 441,840 $3.76
======= =======
</TABLE>
In February 1995, the Company adopted the Directors' Stock Option Plan.
The Company reserved 100,000 shares of common stock for issuance under the Plan.
The Plan provides for the automatic annual grant of an option to acquire 1,000
shares of common stock, to each non-employee then serving as a director, at an
exercise price equal to the fair value of the common stock on the date of grant.
The Plan also provides for an initial option grant ("Initial Option") to acquire
20,000 shares of common stock, to each current and future non-employee director
of the Company, at an exercise price equal to the fair value of the common stock
on the date of grant. Vesting generally occurs over four years from the date of
grant, except that 25% of the shares subject to the Initial Option generally
become exercisable on the grant date. Pursuant to the Plan, one option to
purchase 20,000 shares of common stock at an exercise price of $5.00 per share
was granted during the year ended December 31, 1995. During the year ended
December 31, 1996, options were granted to purchase a total of 50,000 shares of
common stock at exercise prices ranging from $4.50 to $8.50. Options to purchase
18,750 shares of common stock at exercise prices ranging from $4.50 to $5.50
were vested and exercisable at December 31, 1996. At December 31, 1996 options
to purchase 30,000 shares of common stock were available for future option
grants under the Plan.
<TABLE>
The following table summarizes information about stock options
outstanding and exercisable related to the Directors' Stock Option Plan at
December 31, 1996:
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- -------------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Price at December 31, 1996 Contractual Life Exercise Price at December 31, 1996 Exercise Price
- ------------------ -------------------- ---------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 4.50 to 5.50 65,000 9.5 years $4.97 18,750 $5.00
8.50 5,000 9.4 8.50 -- --
------ ------
Total 70,000 9.5 years $5.22 18,750 $5.00
====== ======
</TABLE>
F-17
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options since, as discussed below,
the alternative fair market value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), requires use of
option valuation models that were not developed for use in valuing stock
options. Under APB 25, if the exercise price of the Company's stock options is
equal to the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its stock options granted subsequent to
December 31, 1994 under the fair market value method. The fair market value for
options granted in 1995 prior to the IPO was estimated at the date of the grant
using the Minimum Value Method. The fair market value for options granted in
1995 after the IPO, as well as in 1996, was estimated at the date of the grant
using a Black-Scholes option pricing model. The Company valued its options using
the following weighted-average assumptions for the years ended December 31, 1995
and 1996:
Year ended December 31,
----------------------
1996 1995
------- -----
Risk-free interest rate ........................ 6.23% 6.37%
Dividend yield ................................. 0% 0%
Volatility ..................................... .517 .235
Expected life of options in years .............. 4.8 4.0
The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair market value of its stock options.
F-18
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information follows:
1996 1995
-------- -------
Pro forma net loss applicable
to common shareholders ............... $(5,494,675) $(2,235,129)
Pro forma net loss per share applicable
to common shareholders ............... $ (1.29) $ (0.70)
The weighted average grant date fair value of options granted during
the years ended December 31, 1996 and 1995 was $2.79 and $1.17, respectively.
As a result of FAS 123 only being applicable to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until the year ending December 31, 1999.
7. License Agreements
Neutrogena
The Company entered into a License Option Agreement dated April 16,
1992 (the "License Option Agreement"), with Neutrogena Corporation
("Neutrogena") as part of Neutrogena's purchase of 475,560 shares of the
Company's Series C preferred stock, which was later converted to common stock
upon the completion of the initial public offering, for $5.0 million on June 12,
1992. Also as part of that stock purchase transaction, the Company entered into
an Azelaic Acid OTC License Agreement (the "Azelaic Acid Agreement"), and a
Metabolic Moisturizer OTC License Agreement (the "Metabolic Moisturizer
Agreement"), each dated April 16, 1992, with Neutrogena.
The License Option Agreement requires the Company to notify Neutrogena
about potential consumer or prescription products about which it becomes aware
and about potential consumer products for which the Company has applied to
switch from prescription to consumer status. Certain products and technologies,
including the Company's drug delivery products and technologies, Glylorin and
products sold in the Japanese market, are excluded from the scope of the License
Option Agreement. After notification, Neutrogena has a license option period and
an "Evaluation License" to investigate the potential product to determine
whether to enter into an agreed-upon form of royalty-bearing exclusive worldwide
license with the Company for the product. The royalty-bearing license for
consumer products provides for a royalty of 3% of net sales of the first two
years and 5% of net sales thereafter with a minimum annual royalty of $25,000.
The royalty-bearing license for prescription products provides for a royalty of
5% of net sales with a minimum annual royalty of $25,000. Both royalty-bearing
license agreements for consumer products and prescription products provide for
Neutrogena to pay out-of-pocket evaluation, development and marketing costs for
a product. Revenues related to expenses eligible for reimbursement totaled
$130,373 for the period from inception to December 31, 1995, and none for the
year ended December 31, 1996. Neutrogena has not exercised its option to license
any consumer or prescription products about which it has been notified by the
Company. The term of the agreement is 15 years.
F-19
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
The Metabolic Moisturizer Agreement and the Azelaic Acid Agreement each
granted to Neutrogena an exclusive, worldwide royalty-bearing license. The
Metabolic Moisturizer Agreement relates to the Company's barrier repair
technology and contains the same royalty and other material terms as the
standard royalty-bearing license agreement described above for consumer
products.
The Azelaic Acid Agreement was terminated and replaced by a Patent
License Agreement effective June 1, 1994 (the "Neutrogena Agreement") between
the Company and Neutrogena. Pursuant to the Neutrogena Agreement, Neutrogena
paid the Company $1.0 million for an exclusive, worldwide, royalty-free license
for Azelaic Acid for both prescription and consumer products. The Company had an
option to limit this license to consumer products, and effectively reacquire
rights to prescription Azelaic Acid products by paying Neutrogena $1.0 million.
The $1.0 million paid by Neutrogena was recorded as deferred revenue and
concurrent with the option expiration, the Company recognized $1 million of
license revenue in the year ended December 31, 1995. The Neutrogena Agreement
requires Neutrogena to pay all out-of-pocket evaluation, development and
marketing costs, including Azelaic Acid patent prosecution costs, for consumer
and prescription Azelaic Acid products.
Neutrogena was acquired by Johnson and Johnson in 1994.
Glaxo Wellcome, Inc.
In November 1996, the Company entered into an agreement with Glaxo
Wellcome, Inc. for the worldwide licensing rights to Glylorin, Cellegy's lipid
compound for the treatment of ichthyoses. Under the terms of the agreement,
Cellegy provided Glaxo with an exclusive license of patent rights and know-how
covering the Glylorin product in most of the world's major markets. In exchange
for this license, Cellegy received from Glaxo an initial payment and may receive
future milestone payments, as well as a royalty on net sales assuming successful
completion of product development and market launch. In addition to milestone
payments, Glaxo will assume responsibility and the associated costs for all
future development and commercialization, including certain development costs
incurred prior to the date of the agreement. For the year ended December 31,
1996, the Company recognized revenue of approximately $560,000 for licensing
fees and development funding revenue.
8. Related Party Transactions
The Company has entered into consulting agreements with certain
shareholders of the Company. The total consulting fees paid to these
shareholders was $52,250 and $129,000 for the years ended December 31, 1996 and
1995, respectively. One of these consulting agreements requires a shareholder to
provide consulting services through May 1999 in exchange for monthly payments of
approximately $3,500.
F-20
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development-stage company)
Notes to Financial Statements--(Continued)
9. Income Taxes
At December 31, 1996, the Company has net operating loss carryforwards
of approximately $12,805,000 and $4,666,000 for federal and state purposes,
respectively. The federal net operating loss carryforwards expire between the
years 2004 and 2011. The state net operating loss carryforwards expire between
the years 1997 and 2001. At December 31, 1996, the Company also has research and
development credit carryforwards of approximately $262,000 and $95,000 for
federal and state purposes, respectively. The federal credits expire between the
years 2006 and 2011. The state credits have no expiration date.
Pursuant to the "change in ownership" provisions of the Tax Reform Act
of 1986, utilization of the Company's net operating loss and research and
development tax credit carryforwards may be limited, if a cumulative change of
ownership of more than 50% occurs within any three-year period.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows:
December 31,
-----------------------------
1996 1995
----------- -----------
Deferred tax assets:
Net operating loss carryforwards ......... $ 4,634,000 $ 3,500,000
Credit carryforwards ..................... 357,000 258,000
Capitalized research and development
costs .................................. 251,000 139,000
Capital loss carryforwards ............... 39,000 39,000
Capitalized license fee .................. 50,000 50,000
Other .................................... 17,000 33,000
----------- -----------
Total deferred tax assets .................... 5,348,000 4,019,000
Valuation allowance .......................... (5,315,000) (3,980,000)
----------- -----------
Net deferred tax assets ...................... 33,000 39,000
Deferred tax liabilities ..................... $ (33,000) $ (39,000)
----------- -----------
Net deferred tax assets ...................... -- --
=========== ===========
F-21
================================================================================
EXCLUSIVE LICENSING AGREEMENT FOR "GLYLORIN(TM)"
BETWEEN
GLAXO WELLCOME INC.
AND
CELLEGY PHARMACEUTICALS, INC.
CONFIDENTIAL
================================================================================
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
ARTICLE 1 DEFINITIONS................................................................................... 1
1.1 "Affiliate".................................................................................. 1
1.2 "Agreement".................................................................................. 2
1.3 "Compound"................................................................................... 2
1.4 "Dollars" or "$"............................................................................. 2
1.5 "Effective Date"............................................................................. 2
1.6 "Europe"..................................................................................... 2
1.7 "Central America"............................................................................ 2
1.8 "North America".............................................................................. 2
1.9 "Asia"....................................................................................... 2
1.10 "Regions".................................................................................... 2
1.11 "FDA"........................................................................................ 2
1.12 "FD&C Act"................................................................................... 2
1.13 "Field"...................................................................................... 2
1.14 "IND"........................................................................................ 2
1.15 "Know-How"................................................................................... 2
1.16 "Licensed Product"........................................................................... 3
1.17 "n-CIE"...................................................................................... 3
1.18 "NDA"........................................................................................ 3
1.19 "Net Sales".................................................................................. 3
1.20 "Patent Rights".............................................................................. 3
1.21 "Proof of Principal Study"................................................................... 4
1.22 "Project No. 86530".......................................................................... 4
1.23 "Publication Study".......................................................................... 4
1.24 "Registration"............................................................................... 4
1.25 "Territory".................................................................................. 4
1.26 "Third Party"................................................................................ 4
1.27 "Trademark".................................................................................. 4
1.28 "Valid Claim"................................................................................ 4
1.29 "Royalty Rate"............................................................................... 5
1.30 "Sublicensee"................................................................................ 5
ARTICLE 2 REPRESENTATIONS AND WARRANTIES................................................................ 5
2.1 "Representations and Warranties of Cellegy".................................................. 5
2.2 "Representations and Warranties of GW"....................................................... 7
2.3 "Disclaimer of Warranties"................................................................... 7
ARTICLE 3 GRANT OF LICENSE.............................................................................. 8
3.1 "Grant"...................................................................................... 8
3.2 "Covenant Not To Sue"........................................................................ 8
3.3 "Covenant Not To Compete".................................................................... 8
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<PAGE>
Table of Contents (Cont'd)
<TABLE>
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<S> <C>
3.4 "Notice"..................................................................................... 8
3.5 "Addition to the Territory".................................................................. 8
ARTICLE 4 LICENSE FEE AND MILESTONE PAYMENTS............................................................ 8
4.1 "License Fee"................................................................................ 8
4.2 "Product Development Payments"............................................................... 9
4.3 "Milestone Payments"......................................................................... 9
4.4 "Toxicity Approval Payment".................................................................. 10
4.5 "Annual Sales Based Milestone Payments"...................................................... 11
4.6 "Fee Conditions"............................................................................. 12
ARTICLE 5 ROYALTIES..................................................................................... 13
5.1 "Royalties in General"....................................................................... 13
5.2 "Accrual of Royalties"....................................................................... 13
5.3 "Third Party Royalties"...................................................................... 13
5.4 "Compulsory Licenses"........................................................................ 14
5.5 "Commercial Hardship"........................................................................ 14
5.6 "Reduction in Royalty Due to Competing Product".............................................. 14
5.7 "Reduction in Royalty Due with Respect to DiCarb Compounds".................................. 14
5.8 "Reduction in Royalties"..................................................................... 15
ARTICLE 6 ROYALTY REPORTS AND ACCOUNTING................................................................ 15
6.1 "Royalty Reports; Records"................................................................... 15
6.2 "Payment Due Dates".......................................................................... 16
6.3 "Right to Audit"............................................................................. 16
6.4 "Confidentiality of Records"................................................................. 17
ARTICLE 7 DEVELOPMENT AND MARKETING PROGRAM............................................................. 17
7.1 "Diligence Obligations"...................................................................... 17
7.2 "Development Program"........................................................................ 17
7.3 "Fulfillment"................................................................................ 17
7.4 "Progress Reports"........................................................................... 19
ARTICLE 8 PATENT RIGHTS................................................................................. 19
8.1 "Patent Prosecution and Maintenance"......................................................... 19
8.2 "Status of Patent Rights".................................................................... 20
8.3 "Ownership of Future Inventions"............................................................. 20
ARTICLE 9 INFRINGEMENT.................................................................................. 21
9.1 "Applicability".............................................................................. 21
9.2 "Third Party Infringement"................................................................... 21
9.3 "Reduction in Payments Due to Infringement".................................................. 22
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<PAGE>
Table of Contents (Cont'd)
<TABLE>
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<S> <C>
ARTICLE 10 CONFIDENTIALITY.............................................................................. 22
10.1 "Treatment of Confidential Information"...................................................... 22
10.2 "Right to Disclose".......................................................................... 22
10.3 "Release From Restrictions".................................................................. 23
10.4 "Confidentiality of Agreement"............................................................... 23
10.5 "Return of Confidential Information"......................................................... 24
ARTICLE 11 TRANSFERS AND ACCESS......................................................................... 24
11.1 "Transfer of Know-How"....................................................................... 24
11.2 "Transfer of IND"............................................................................ 24
11.3 "Transfer of Trademark"...................................................................... 24
11.4 "Tranfer of Clinical Trial Material"......................................................... 24
11.5 "Access to Key Individuals".................................................................. 25
ARTICLE 12 TERM; TERMINATION............................................................................ 25
12.1 "Term"....................................................................................... 25
12.2 "Bilateral Termination Rights"............................................................... 25
12.3 "Cellegy's Right to Terminate"............................................................... 25
12.4 "GW's Right to Terminate".................................................................... 26
12.5 "Rights Upon Termination or Expiration"...................................................... 26
ARTICLE 13 INDEMNIFICATION.............................................................................. 29
13.1 "Indemnification by GW"...................................................................... 29
13.2 "Indemnification by Cellegy"................................................................. 30
13.3 "Indemnification Procedures With Respect to Third Party Claims".............................. 30
ARTICLE 14 NOTIFICATION AND AUTHORIZATION UNDER DRUG PRICE COMPETITION AND PATENT TERM RESTORATION ACT.. 31
14.1 "Notices Relating to the Act"................................................................ 31
14.2 "Authorizations Relating to Patent Term Extension"........................................... 31
ARTICLE 15 REGISTRATION OF LICENSE...................................................................... 32
15.1 "Registration"............................................................................... 32
ARTICLE 16 GENERAL PROVISIONS........................................................................... 32
16.1 "Force Majeure".............................................................................. 32
16.2 "Further Assurances"......................................................................... 32
16.3 "Severability"............................................................................... 32
16.4 "Notices".................................................................................... 33
16.5 "Assignment"................................................................................. 33
16.6 "Amendment".................................................................................. 33
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<PAGE>
Table of Contents (Cont'd)
<TABLE>
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<S> <C>
16.7 "Entire Agreement"........................................................................... 33
16.8 "Waiver"..................................................................................... 34
16.9 "No Implied Licenses"........................................................................ 34
16.10 "Injunctions"................................................................................ 34
16.11 "Independent Contractors".................................................................... 34
16.12 "No Third Party Beneficiaries"............................................................... 34
16.13 "Governing Law".............................................................................. 34
16.14 "Headings"................................................................................... 34
16.15 "Counterparts"............................................................................... 35
SIGNATURES ............................................................................................. 35
EXHIBIT A PATENTS AND PATENT APPLICATIONS............................................................... A
EXHIBIT B-1 LIST OF GLYLORIN TRADEMARKS AND
TRADEMARK APPLICATIONS AND THEIR STATUS............................................................... B-1
EXHIBIT B-2 TRADEMARK ASSIGNMENT FOR THE UNITED STATES.................................................. B-2
EXHIBIT C ORPHAN DRUG DESIGNATION LETTER................................................................ C
EXHIBIT D THE DICARB COMPOUNDS.......................................................................... D
EXHIBIT E DEVELOPMENT COSTS............................................................................. E
EXHIBIT F INDEPENDENT REGIONS........................................................................... F
-iv-
CONFIDENTIAL
</TABLE>
<PAGE>
EXCLUSIVE LICENSE AGREEMENT
THIS AGREEMENT effective as of this 11th day of November, 1996, between
Glaxo Wellcome Inc., a corporation organized and existing under the laws of the
State of North Carolina, with its principal place of business at Five Moore
Drive, Research Triangle Park, North Carolina 27709 (hereinafter, "GW") and
Cellegy Pharmaceuticals, Inc., a corporation organized and existing under the
laws of the State of California, with its principal office at 1065 East
Hillsdale Boulevard, Suite 418, Foster City, California, 94404 (hereinafter,
"Cellegy").
W I T N E S S E T H:
WHEREAS, Cellegy owns or possesses certain patent rights, potential
patent rights, know-how and regulatory filings with respect to the Compound (as
hereinafter defined);
WHEREAS, GW desires to obtain an exclusive license to certain rights to
the Compound under such patent rights and know-how;
WHEREAS, Cellegy owns or possesses certain rights pertaining to the
Trademark (as hereinafter defined), and GW desires to obtain all such rights;
and
WHEREAS, Cellegy is willing to grant an exclusive license to GW under
such patent rights and know-how, and is willing to assign the Trademark to GW,
all as more particularly described in, and subject to the terms and conditions
of, this Agreement.
NOW THEREFORE, in consideration of the foregoing and of the
mutual covenants hereinafter set forth and other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties mutually
agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Agreement, the following terms, whether used in the
singular or the plural, shall have the following meanings:
1.1 "Affiliate" means any corporation or non-corporate business entity
which controls, is controlled by, or is under common control with a party to
this Agreement. A corporation or non-corporate business entity shall be regarded
as in control of another corporation if it owns or directly or indirectly
controls at least forty percent (40%) of the voting stock of the other
corporation, or (a) in the absence of the ownership of at least forty percent
(40%) of the voting stock of a corporation, or (b) in the case of a
non-corporate business entity, if it possesses, directly or indirectly, the
power to direct or cause the direction of the management and policies of the
corporation or non-corporate business entity, as applicable, whether through the
ownership or control of voting securities, by contract or otherwise.
CONFIDENTIAL -1-
<PAGE>
1.2 "Agreement" means this Exclusive License Agreement.
1.3 "Compound" means the substances for which Valid Claims are made
under the Patent Rights (other than dicarboxylic acids, including, but not
limited to, azelaic acids), including but not limited to the monoglyceride ester
of lauric acid and other glycerol esters of carboxylic fatty acids, and the
pharmaceutically acceptable salts and esters thereof.
1.4 "Dollars" or "$" means United States dollars.
1.5 "Effective Date" means the date set forth at the beginning of
this Agreement.
1.6 "Europe" means all countries which are Member States, from
time to time, of the European Union.
1.7 "Central America" shall mean those countries which are south
of Mexico and north of Columbia.
1.8 "North America" shall mean the countries of the United States,
Canada, Mexico and all of the countries of the Caribbean.
1.9 "Asia" shall mean all of the countries generally included within
the continent of Asia, including but not limited to the countries of Japan,
Korea, India, Pakistan, Philippines, Turkey, Russia, China, and excluding (for
the avoidance of doubt) the countries of Australia, New Zealand or any country
in the territory generally known as the Middle East.
1.10 "Regions" shall mean those sections of the Territory as listed and
described in Exhibit F attached hereto.
1.11 "FDA" means the United States Food and Drug Administration, or
any successor entity thereto.
1.12 "FD&C Act" means the Federal Food, Drug and Cosmetic Act, as
amended.
1.13 "Field" means the topical treatment of dermatological diseases
and conditions in humans.
1.14 "IND" means an Investigational New Drug Application or its
equivalent.
1.15 "Know-How" means all data, information, methods, procedures,
processes and materials, which is or comes to be possessed, acquired, licensed
or owned by Cellegy as of the Effective Date of this Agreement and within the
one hundred and eighty (180) day period subsequent to the Effective Date of this
Agreement, to the extent that such data, information, methods, procedures,
processes and materials specifically relates to the manufacture, development,
testing or use of a Compound or a Licensed Product, including but not limited
to,
<PAGE>
CONFIDENTIAL -2-
biological, chemical, biochemical, toxicological, pharmacological, metabolic,
formulation, clinical, analytical and stability information and data (other than
such Know-How which is the subject of a patent or of a provisional or filed
patent application), and for which Cellegy has the right to license, disclose
or provide to GW.
1.16 "Licensed Product" means any finished pharmaceutical product
containing a Compound, in a form ready for therapeutic use, which is covered by
a Valid Claim or which incorporates Know-How.
1.17 "n-CIE" means non-bullous congenital ichthyosiform
erythroderma.
1.18 "NDA" means a New Drug Application or its equivalent, as
defined under Section 505 of the FD&C Act.
1.19 "Net Sales" with respect to any Licensed Product containing a
Compound as the sole active ingredient, means the gross sales of such Licensed
Product that is due, or otherwise received by, GW, or its Affiliates or its
Sublicensees from Third Party customers for such Licensed Product, less:
(i) reasonable credited allowances to such Third
Party customers for spoiled, damaged, rejected, recalled,
outdated and returned Licensed Product and for reasonable
retroactive price reductions,
(ii) the amounts of reasonable trade and cash
discounts actually allowed, to the extent such trade and cash
discounts are specifically allowed on account of the purchase
of such Licensed Product,
(iii) sales taxes, excise taxes, use taxes and
import/export duties actually due or incurred in connection
with the sales of the Licensed Product to any Third Party, and
(iv) reasonable allowances, adjustments,
reimbursements, discounts, chargebacks and rebates granted to
Third Parties, including, but not limited to, rebates given to
health care organizations or other Third Parties, and any bona
fide payment made in respect of any sales of Licensed Product
to any governmental or quasi-governmental body or agency,
whether during the actual royalty period or not.
The parties agree that should GW or its Affiliates or Sublicensees desire to
produce or market a Licensed Product which includes other active ingredients in
addition to the Compound, the parties shall negotiate in good faith appropriate
modifications to be made to the royalty rate, which such modifications shall be
mutually agreeable to each party.
1.20 "Patent Rights" means the rights under United States Patent No.
5,057,500, United States Patent No. 5,231,087 and United States Patent No.
4,885,282 (the "282 Patent"),
CONFIDENTIAL -3-
<PAGE>
and related foreign patents and foreign patent applications, including any and
all current or future United States or foreign reissues, extensions,
substitutions, confirmations, registrations, revalidations, renewals,
supplementary protection certificates, additions, continuations,
continuations-in-part or divisions thereof; provided, however, that with respect
to the 282 Patent and foreign counterpart patents and patent applications
thereto, the term Patent Rights shall not include any use claimed in the 282
Patent, or any foreign patent or patent applications related thereto, for: (i)
dicarboxylic acids for the use as a treatment for wrinkling, or (ii) azelaic
acids. The currently existing United States and foreign patents and patent
applications containing claims within the Patent Rights are listed in Exhibit A
hereto.
1.21 "Proof of Principle Study" means a clinical study in human
subjects of the Compound carried out by or under the control of GW, with a
design and success criteria acceptable to both parties, which is intended to
allow preliminary evaluation of the possible efficacy of the Compound as a
treatment for dermatological conditions or indications covered by a Valid Claim.
The term "completion" of a Proof of Principle Study, shall mean the date on
which the final report with respect to such Proof of Principle Study is
completed in final form.
1.22 "Project No. 86530" means the toxicity study being conducted for
the purpose of investigating the potential toxicity of the Compound in mice
pursuant to dermal administration of the Compound for twenty-six (26) weeks.
1.23 "Publication Study" means a clinical study in human subjects of
the Compound carried out by or under the control of GW, which is intended to be
published in a peer-reviewed journal with the view towards allowing readers of
such journal to become aware of the possible efficacy of the Compound as a
treatment for dermatological conditions or indications covered by a Valid Claim.
The term "completion" of a Publication Study, shall mean the date on which the
final report with respect to such Publication Study is completed in final form.
1.24 "Registration" in relation to any Licensed Product means such
approvals by government authorities in a country of or community or association
of countries included in the Territory (including, where applicable, price
approvals) as may be legally required before such Licensed Product may be
commercialized in such country.
1.25 "Territory" means North America, Europe, Asia, Central America,
South Africa, Australia, Argentina, Brazil, Bolivia, Chile, Columbia, Ecuador,
Peru, Paraguay, Uruguay and Venezuela.
1.26 "Third Party" means any party other than Cellegy or GW, or GW's
Affiliates or Sublicensees.
1.27 "Trademark" means those trademarks and trademark applications
which are further described in Exhibit B-1, attached hereto.
1.28 "Valid Claim" means a claim contained in an issued and unexpired
patent included within the Patent Rights which has not been held unenforceable,
unpatentable or invalid
CONFIDENTIAL -4-
<PAGE>
by a decision of a court or other governmental agency of competent jurisdiction,
unappealable or unappealed within the time allowed for appeal, and which has not
been admitted to be invalid or unenforceable through abandonment, reissue,
disclaimer or otherwise.
1.29 "Royalty Rate" means the percentage as provided under Article
5.1(a), and may be modified in accordance with this Agreement, by which Net
Sales in a given country are to be multiplied to determine the amount of royalty
payment due Cellegy.
1.30 "Sublicensee" means (i) with respect to GW, any person to whom GW
sublicenses the rights, or any portion thereof, granted GW pursuant to Section
3.1 hereof, (ii) with respect to Cellegy, any person to whom Cellegy sublicenses
the rights, or any portion thereof, granted GW pursuant to Section 12.5(h)
hereof.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of Cellegy. Cellegy hereby
represents and warrants to GW that:
(a) Cellegy is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of California, with
the corporate power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all requisite corporate action on the part of Cellegy. This Agreement has
been duly executed and delivered by Cellegy and constitutes the valid, binding
and enforceable obligation of Cellegy, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting creditors'
rights generally from time to time in effect and to general principles of
equity.
(b) Cellegy is not subject to, or bound by, any provision of:
(i) any articles or certificates of incorporation or
by-laws;
(ii) any mortgage, deed of trust, lease, note,
shareholders' agreement, bond, indenture, license, permit,
trust, custodianship, or other instrument, agreement or
restriction; or
(iii) any judgment, order, writ, injunction or decree
of any court, governmental body, administrative agency or
arbitrator,
that would prevent, or be violated by, or under which there would be a default
as a result of, nor is the consent of any person required for, the execution,
delivery and performance by Cellegy of this Agreement and the obligations
contained herein, including without limitation, the grant to GW of the license
described in Article 3.1 hereof.
CONFIDENTIAL -5-
<PAGE>
(c) To the best of its knowledge, Cellegy is the exclusive
owner of all right, title and interest in the Patent Rights. To the best of
Cellegy's knowledge, the claims in the patents included in the Patent Rights are
valid and enforceable, and the patent applications included in the Patent Rights
have been duly filed. Attached hereto as Exhibit A is a complete and accurate
list of all patents and patent applications included in the Patent Rights as of
the Effective Date.
(d) To the best of its knowledge, Cellegy is the exclusive
owner of all right, title and interest in the Trademark in the territories in
which registration has been sought, and has taken those measures reasonably
necessary to secure its interests in the Trademark. Attached hereto as Exhibit
B-1 is a complete and accurate list of all trademarks and trademark applications
included in the Trademark, and their status, as of the Effective Date.
(e) To the best of its knowledge, Cellegy has taken reasonable
measures to protect the confidentiality of the Know-How. On occasions where
Cellegy has granted access to Third Parties with respect to material elements of
either the Know-How or the confidential information concerning the Compound, to
the best of Cellegy's knowledge, such access has been granted pursuant to an
enforceable confidentiality agreement containing restrictions on the use of such
information with a term of at least three (3) years.
(f) To the best of Cellegy's knowledge, as of the Effective
Date, neither the manufacture, use or sale of the Compound or the practice of
any of the inventions included in the Patent Rights nor the use of the Know-How
by GW as contemplated by this Agreement infringes upon any Third Party's
know-how, patent or other intellectual property rights in the Territory, other
than as disclosed in Exhibit B-1. Cellegy shall promptly notify GW upon learning
that the manufacture, use, sale of the Compound or the practice of any
inventions covered by one or more claims included in the Patent Rights or the
use of any Know-How licensed hereunder may infringe any rights of a Third Party.
(g) To the best of Cellegy's knowledge, other than as
disclosed in Exhibit B-1, there is no Third Party using or infringing any or all
of the Patent Rights or the Trademark in derogation of the rights granted to GW
in this Agreement or in the Trademark Assignment.
(h) To the best of its knowledge, Cellegy has obtained the
assignment of all interests and all rights of any and all Third Parties
(including, but not limited to Cellegy's employees) with respect to the Patent
Rights and, other than as disclosed in Exhibit B-1, to the Trademark. To the
best of Cellegy's knowledge, Cellegy has obtained all interests and all rights
of any and all Third Parties (including, but not limited to Cellegy's employees)
with respect to confidential or proprietary portions of the Know-How.
(i) To the best of Cellegy's knowledge, other than as
disclosed in Exhibit B-1, there is no interference or opposition actions or
litigations pending or any communication which threatens interference or
opposition actions, or other litigation before any patent and
CONFIDENTIAL -6-
<PAGE>
trademark office, court, or any other governmental entity in any jurisdiction in
regard to the Patent Rights or the Trademark.
(j) Cellegy represents and warrants that, to the best of its
knowledge, it has furnished or will furnish (in accordance with the terms of
this Agreement) to GW all of the Know-How which Cellegy owns or possesses.
(k) Attached hereto as Exhibit C, is a true and correct copy
of the letter from the FDA conferring Orphan Drug Designation with respect to
the Compound. Such Orphan Drug Designation has not been revoked, withdrawn or
modified by the FDA as of the Effective Date.
(l) Cellegy's total assets, as reflected in the balance sheet
dated September 30, 1996, which such balance sheet is the last regularly
prepared balance sheet of Cellegy, are less than Ten Million Dollars
($10,000,000).
(m) Nothing has come to the attention of Cellegy which would
indicate the existence of any material side effect, toxicity effect,
carcinogenicity effect, adverse effect or any instances of deleterious physical
effects or reactions resulting from, or alleged to result from, the Compound,
which are not identified in the Know-How delivered to GW under this Agreement,
or which has not been otherwise disclosed to GW by Cellegy.
2.2 Representations and Warranties of GW. (a) GW hereby represents and
warrants to Cellegy that GW is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of North Carolina, with the
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all requisite corporate action on the part of GW. This Agreement has been
duly executed and delivered by GW and constitutes the valid, binding and
enforceable obligation of GW, subject to applicable bankruptcy, reorganization,
insolvency, moratorium and other laws affecting creditors' rights generally from
time to time in effect and to general principles of equity.
(b) GW represents and warrants the compliance of its
Affiliates, and Sublicensees with this Agreement and obligations such Affiliates
and Sublicensees may have to Cellegy, including, but not limited to payment of
any fees or royalties.
2.3 Disclaimer of Warranties. CELLEGY MAKES NO REPRESENTATION OR
WARRANTY OTHER THAN THOSE EXPRESSLY PROVIDED HEREUNDER AND CELLEGY HEREBY
DISCLAIMS ALL SUCH OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTIES OF MERCHANTABILITY, OR THE FITNESS FOR A PARTICULAR
PURPOSE OF THE COMPOUNDS THE LICENSED PRODUCTS OR THE KNOW-HOW. CELLEGY MAKES NO
REPRESENTATION OR WARRANTY THAT THE COMPOUND OR ANY LICENSED PRODUCT ARE OR WILL
BE SHOWN TO BE SAFE OR EFFECTIVE FOR ANY INDICATION.
CONFIDENTIAL -7-
<PAGE>
ARTICLE 3
GRANT OF LICENSE
3.1 Grant. Cellegy hereby grants to GW an exclusive license, with a
right to sublicense, under the Patent Rights and Know-How to make, have made,
use and sell Licensed Products in the Field, within the Territory.
3.2 Covenant Not To Sue. Cellegy hereby covenants and agrees that, for
the term of this Agreement, Cellegy shall not assert or cause to be asserted
against GW (or its Affiliates, Sublicensees or purchasers of Licensed Products)
a claim for infringement of any patent invented or owned by Cellegy which
specifically relates to the Compound, or a method of making or using the
Compound, due to any manufacture, use or sale of Licensed Products in accordance
with this Agreement within the Territory and Field, and which are the same, in
form and method of manufacture as the Licensed Product described in the NDA
first submitted to FDA, exclusive of any supplements or amendments thereto.
3.3 Covenant Not To Compete. Cellegy hereby covenants and agrees that,
for the term of this Agreement, Cellegy shall not, nor shall it permit any of
its officers, employees, or wholly owned subsidiaries, nor authorize any of its
Affiliates, directors, or Sublicensees to, individually or jointly with other
persons, manufacture, develop, test, sell, market or distribute any product
within the Territory which contains dicarboxylic acids (other than azelaic
acids) or pharmaceutically acceptable salts or esters thereof, for the treatment
of the diseases or conditions of Seborrheic Dermatitis, severe dry skin or any
form of Ichthyoses. During the term of this Agreement, Cellegy shall not use or
file applications for the Trademark in the countries within the Territory for
which GW's rights have not been terminated.
3.4 Notice. Cellegy hereby covenants and agrees to provide GW with
prompt written notice in the event that Cellegy executes a license agreement,
development agreement or other collaboration agreement with respect to the
development of the dicarboxylic acid compounds currently owned by Cellegy and
listed on Exhibit D hereto (the "DiCarb Compounds").
3.5 Addition to the Territory. Cellegy, with GW's consent, may add to
the Territory other countries and their respective territories and
principalities.
ARTICLE 4
LICENSE FEE AND MILESTONE PAYMENTS
4.1 License Fee. As partial consideration of the rights granted to GW
by Cellegy under Article 3 hereof, GW shall pay to Cellegy a license fee of [**]
within thirty (30) days after the execution of this Agreement by both parties.
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the
Securities and Exchange Commission.
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4.2 Product Development Payments. (a) Within thirty (30) days after the
execution of this Agreement by both parties, GW shall reimburse Cellegy for the
direct out-of-pocket costs of manufacture, development, regulatory affairs
support, professional fees, clinical studies and other testing of the Compound
incurred by Cellegy since August 1, 1996, in the amounts specified on Exhibit E
hereto (hereinafter, the "Development Costs"). GW will pay to Cellegy for 90% of
such costs estimated for October, in the amount of [**] as described in Exhibit
E. An adjusted final payment by GW, or refund by Cellegy, will be made by
December 1 based on the actual October development costs incurred by Cellegy. It
is understood and agreed that Development Costs shall not include any costs
incurred by Cellegy with respect to its employees, and furthermore, GW shall not
have any obligation to reimburse Cellegy for Development Costs to the extent
such amounts exceed the amounts stated in Exhibit E.
(b) GW will be responsible for all on-going and new
development costs of the Compound incurred on or after November 1, 1996. There
is currently anticipated to be a transition period after the Effective Date of
the agreement where Cellegy, at the direction of GW, may continue to coordinate
and pay for certain development costs. GW will reimburse Cellegy for the
reasonable out-of-pocket costs incurred by Cellegy in connection with such
payments made by Cellegy.
4.3 Milestone Payments. GW shall pay to Cellegy a milestone payment in
the particular amounts specified below (each a "Milestone Payment") no later
than thirty (30) days after the occurrence of the corresponding event designated
in Articles 4.3 (a) below, and no later than sixty (60) days after the
occurrence of the corresponding event designated in Articles 4.3 (b), (c), (d)
and (e) below:
(a) Upon the date of first commercial sale of a Licensed
Product in any country of the Territory, GW shall pay to Cellegy the sum of
[**], it being understood and agreed that such payment shall be made no more
than one time;
(b) Upon the completion (i) of a Proof of Principle Study (A)
in which the Compound is shown to have met the established success criteria for
the indication of Ichthyosis Vulgaris or (B) results in the continued
development of the Compound for such indication (as evidenced by the initiation
of Phase III clinical trials of the Compound for such indication) or (ii) of a
Publication Study for such indication; GW shall pay to Cellegy the sum of [**];
(c) Upon the completion (i) of a Proof of Principle Study (A)
in which the Compound is shown to have met the established success criteria for
the indication of Seborrheic Dermatitis or (B) results in the continued
development of the Compound for such indication (as evidenced by the initiation
of Phase III clinical trials of the Compound for such indication) or (ii) of a
Publication Study for such indication; GW shall pay to Cellegy the sum of [**];
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the
Securities and Exchange Commission.
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(d) Upon the completion (i) of a Proof of Principle Study (A)
in which the Compound is shown to have met the established success criteria for
the indication of Acquired Ichthyosis or (B) results in the continued
development of the Compound for such indication (as evidenced by the initiation
of Phase III clinical trials of the Compound for such indication) or (ii) of a
Publication Study for such indication; GW shall pay to Cellegy the sum of [**];
(e) Upon the completion (i) of a Proof of Principle Study (A)
in which the Compound is shown to have met the established success criteria for
any other indication GW selects to study or (B) results in the continued
development of the Compound for such indication (as evidenced by the initiation
of Phase III clinical trials of the Compound for such indication) or (ii) of a
Publication Study for such indication; GW shall pay to Cellegy the sum of [**]
for each such indication.
4.4 Toxicity Approval Payment. (a) If within the seventy (70) day
period following receipt by GW of the final report with respect to the
completion of Project No. 86530 (such period, hereinafter referred to as the
"Toxicity Review Period"), FDA does not indicate to either GW or Cellegy that
carcinogenicity studies or additional toxicity studies are required with respect
to obtaining the approval of the n-CIE indication for the Compound, GW shall pay
to Cellegy the sum of [**] (the "Toxicity Approval Payment"), provided, however,
that if within the Toxicity Review Period, FDA requires a carcinogenicity study,
the parties agree that GW shall not pay the Toxicity Approval Payment to Cellegy
unless and until such time as FDA finally agrees that no further carcinogenicity
studies are required with respect to obtaining the approval of the n-CIE
indication for the Compound.
(b) If, at any time, FDA requires a carcinogenicity study or
an additional toxicity study with respect to the Compound for the n-CIE
indication, the direct cost of such required study or studies shall be deducted
from the Toxicity Approval Payment paid to Cellegy, and in the event that GW has
paid the Toxicity Approval Payment to Cellegy, Cellegy shall reimburse GW for
the direct cost to GW of such study or studies; provided, however, that (i) the
amounts to be deducted or reimbursed, as the case may be, solely with respect to
additional toxicity studies shall be capped at [**] (the "Toxicity Cap"), (ii)
the amounts to be deducted or reimbursed, as the case may be, solely with
respect to carcinogenicity studies shall be capped at the [**], and (iii) the
total amount to be deducted or reimbursed, as the case may be, under this
provision in the aggregate shall be capped at the [**] (the "Aggregate Cap"). In
addition, the parties agree that the Toxicity Cap shall be (i) reduced to [**]
upon the earlier of September 30, 1997 or five days subsequent to the first
Pre-NDA meeting with FDA with respect to a Licensed Product; (ii) reduced to
[**] upon submission by GW of the first NDA to FDA with respect to a Licensed
Product; and (iii) reduced to [**] upon FDA's first approval of an NDA with
respect to a Licensed Product.
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the
Securities and Exchange Commission.
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(c) The parties agree that the direct costs to GW of
performing additional carcinogenicity studies required by FDA with respect to
the n-CIE indication (but not toxicity studies) which exceed the amount of the
Aggregate Cap (such amount hereinafter referred to as the "Excess Amount") shall
be borne equally by the parties; provided, however, that GW shall directly pay
all Excess Amounts, and Cellegy's portion of the Excess Amount shall be deducted
by GW from (i) the royalty payments otherwise due to Cellegy under this
Agreement, and (ii) the Annual Sales Based Milestone Payments (as defined
below); provided, further that the amount to be deducted by GW from any royalty
payment pursuant to this provision, shall be limited to fifty percent (50%) of
such royalty payment, and that the amount to be deducted by GW from any Annual
Sales Based Milestone Payment pursuant to this provision, shall be limited to
fifty percent (50%) of such Annual Sales Based Milestone Payment; provided,
further, that the aggregate amount to be paid or reimbursed by Cellegy, or
deducted by GW (including both the Aggregate Cap and Cellegy's share of the
Excess Amount), as the case may be, pursuant to this Article shall be limited to
[**].
4.5 Annual Sales Based Milestone Payments. GW shall pay to Cellegy a
milestone payment in the particular amounts specified below (each an "Annual
Sales Based Milestone Payment") upon the dates specified below.
(a) On or by February 28th of the calendar year subsequent to
the first calendar year in which annual Net Sales of the Licensed Products in
the United States of America exceed Five Million Dollars ($5,000,000), GW shall
pay to Cellegy the sum of [**], it being understood and agreed that such payment
shall be made no more than one time;
(b) On or by February 28th of the calendar year subsequent to
the first calendar year in which annual Net Sales of the Licensed Products in
the United States of America exceed Ten Million Dollars ($10,000,000), GW shall
pay to Cellegy the sum of [**], it being understood and agreed that such payment
shall be made no more than one time;
(c) On or by February 28th of the calendar year subsequent to
the first calendar year in which annual Net Sales of the Licensed Products in
the United States of America exceed Twenty Million Dollars ($20,000,000), GW
shall pay to Cellegy the sum of [**], it being understood and agreed that such
payment shall be made no more than one time;
(d) On or by February 28th of the calendar year subsequent to
the first calendar year in which annual Net Sales of the Licensed Products in
the United States of America exceed Thirty Million Dollars ($30,000,000), GW
shall pay to Cellegy the sum of [**], it being understood and agreed that such
payment shall be made no more than one time;
(e) On or by February 28th of the calendar year subsequent to
the first calendar year in which annual Net Sales of the Licensed Products in
the United States of America
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the
Securities and Exchange Commission.
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exceed Fifty Million Dollars ($50,000,000), GW shall pay to Cellegy the sum of
[**], it being understood and agreed that such payment shall be made no more
than one time;
(f) On or by February 28th of the calendar year subsequent to
the first calendar year in which annual Net Sales of the Licensed Products in
the United States of America exceed Seventy-Five Million Dollars ($75,000,000),
GW shall pay to Cellegy the sum of [**], it being understood and agreed that
such payment shall be made no more than one time;
(g) On or by February 28th of the calendar year subsequent to
the first calendar year in which annual Net Sales of the Licensed Products in
the United States of America exceed One Hundred Million Dollars ($100,000,000),
GW shall pay to Cellegy the sum of [**], it being understood and agreed that
such payment shall be made no more than one time;
(h) On or by March 31st of the calendar year subsequent to the
first calendar year in which annual Net Sales of the Licensed Products in all of
the countries of the Territory other than the United States of America exceed
Ten Million Dollars ($10,000,000), GW shall pay to Cellegy the sum of [**], it
being understood and agreed that such payment shall be made no more than one
time;
(i) On or by March 31st of the calendar year subsequent to the
first calendar year in which annual Net Sales of the Licensed Products in all of
the countries of the Territory other than the United States of America exceed
Twenty-Five Million Dollars ($25,000,000), GW shall pay to Cellegy the sum of
[**], it being understood and agreed that such payment shall be made no more
than one time;
(j) On or by March 31st of the calendar year subsequent to the
first calendar year in which annual Net Sales of the Licensed Products in all of
the countries of the Territory other than the United States of America exceed
Fifty Million Dollars ($50,000,000), GW shall pay to Cellegy the sum of [**], it
being understood and agreed that such payment shall be made no more than one
time;
(k) On or by March 31st of the calendar year subsequent to the
first calendar year in which annual Net Sales of the Licensed Products in all of
the countries of the Territory other than the United States of America exceed
One Hundred Million Dollars ($100,000,000), GW shall pay to Cellegy the sum of
[**], it being understood and agreed that such payment shall be made no more
than one time.
4.6 Fee Conditions. Except as provided in Article 4.4 hereof, each and
every License Fee, Milestone Payment, Annual Sales Based Milestone Payment, and
milestone extension payments made under Article 7.3(b) hereof, shall be
independent, cumulative, non-refundable, and shall not be considered an advance
or credit on any royalties or other obligation received or owed.
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
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<PAGE>
ARTICLE 5
ROYALTIES
5.1 Royalties in General. (a) In consideration of the exclusive license
granted to GW hereunder, GW shall pay or cause to be paid to Cellegy a royalty
equal the following:
(i) [**] of the Net Sales of a Licensed Product in a
country of the Territory so long as the manufacture, sale or
use of such Licensed Product in such country would, but for
the license granted herein, infringe a Valid Claim; or
(ii) [**] of the Net Sales of Licensed Product in a
country of the Territory for sales or uses of such Licensed
Product other than those described in clause (i) of this
Article 5.1 for a period of ten (10) years commencing on the
date of first commercial sale of the first Licensed Product
sold in such country.
Notwithstanding the foregoing, with respect to Europe only, GW's obligation to
pay royalties payable on Net Sales of a given Licensed Product by virtue of
clause (ii) of Article 5.1 shall cease as of the date on which the Know-How
embodied in such Licensed Product becomes published or generally known to the
public through no fault on the part of GW or its Affiliates or Sublicensees.
(b) The parties acknowledge and agree that GW shall have no
obligation to pay Cellegy any royalties for Net Sales accruing after the
expiration of the applicable periods referred to in Article 5.1 hereof.
5.2 Accrual of Royalties. No royalty shall be payable on a Licensed
Product made or used for tests or development purposes or distributed as
samples, and for which no payment is received by GW, or its Affiliates or
Sublicensees. No royalties shall be payable on sales among GW, its Affiliates or
its Sublicensees, but royalties shall be payable on subsequent sales by GW, its
Affiliates or its Sublicensees to a Third Party. No multiple royalty shall be
payable under this Agreement because the manufacture, use or sale of a Licensed
Product is covered by more than one Valid Claim or is subject to both Know-How
and a Valid Claim.
5.3 Third Party Royalties. In the event that (i) a Licensed Product is
deemed by a court of applicable jurisdiction to infringe a valid claim of
another patent in any given country of the Territory, or (ii) GW, its Affiliates
or its Sublicensees determine, at their reasonable discretion, that it is
necessary to pay royalties or other fees to any Third Party to obtain a license
to practice any Third Parties rights in order to market or develop a Licensed
Product in any given country of the Territory, then in such event, GW may deduct
such royalties due to Third Parties (or such amounts expended in settlement of
such claim, or for securing such rights) from royalties thereafter due to
Cellegy with respect to Net Sales of such Licensed Product in such country, but
in no event shall the royalty rate be reduced by more than one-half of the
otherwise
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
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<PAGE>
applicable royalty rate, and provided, that, that the right to reduce the amount
of royalties payable to Cellegy hereunder shall not exist unless the legally
enforceable property rights of such Third Party read on the Patents Rights
covering the Licensed Product in such country.
5.4 Compulsory Licenses. Should a compulsory license be granted to a
Third Party under the applicable laws of any country in the Territory under the
Patent Rights licensed hereunder to GW, the royalty rate payable hereunder for
sales of Licensed Products in such country shall be adjusted to match any lower
royalty rate granted to such Third Party for such country, with respect to the
sales of such Licensed Products, and during such periods, for which such Third
Parties sell under the compulsory license material quantities of articles that
compete with the Licensed Products then marketed and sold by GW, or is
Affiliates or Sublicensees, in that country.
5.5 Commercial Hardship. If in any country of the Territory GW can
demonstrate to Cellegy that for any reason beyond GW's, or its Affiliates' or
Sublicensees' control the royalty payable hereunder by GW causes or may cause GW
a significant reduction in its or their sales of Licensed Product in that
country, or otherwise causes or may cause hardship in the promotion or sale of
Licensed Product in a country, the parties shall meet and in good faith endeavor
to agree on a reduction in the royalty rate payable in that country. The
negotiated royalty rate will be one which places GW, or its Affiliates or
Sublicensees, in a position to market competitively the Licensed Product in such
country, but in no event shall the royalty rate be reduced by more than one-half
of the otherwise applicable royalty rate.
5.6 Reduction in Royalty Due to Competing Product. The parties agree
that during any period in which a Third Party engages in commercial sale in any
country or countries of the Territory of a product which contains the Compound
as its active ingredient and is sold as (i) a Therapeutic Cosmetic (as defined
below) or as (ii) a prescription pharmaceutical product which has been approved
for an indication in the Field, then in such event, the Royalty Rate applied
hereunder with respect to Net Sales for such country or countries shall be
reduced by an amount which is in proportion to the percentage of unit sales,
calculated on equivalent product gram unit basis held by such competing product
on the date of determination as compared to the unit sales for the total market
for the products described in clauses (i) and (ii) above, but in no event shall
the royalty rate be reduced to less than five percent (5%). For purposes of this
Article 5.6, the term "Therapeutic Cosmetic" shall mean any topical
dermatological cosmetic with greater than nine percent (9%) of its composition
being the Compound; provided, however that the reduction in the Royalty Rate
shall only apply to such Licensed Products, and during such periods, for which
such Third Parties unit sales exceed 5% of the total market for such articles
that compete with the Licensed Products then marketed and sold by GW, or its
Affiliates or Sublicensees, in that country.
5.7 Reduction in Royalty Due with respect to DiCarb Compounds. The
parties agree that during the period that a Cellegy Sublicensee engages in the
commercial sale in any country of the Territory of a product for use in the
Field which contains the DiCarb Compounds (other than azelaic acid) as its
active ingredient, then in such event, the royalty rate specified in Article
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5.1(a)(i) hereunder with respect to such country shall be reduced to eight
percent (8%) for the annual Net Sales of Licensed Products in such country which
exceed [**]; provided, however, that no such royalty reduction shall be made
under this Article 5.7, unless the annual aggregate Net Sales of such competing
DiCarb Compounds (other than azelaic acid) exceed the greater of [**] or
twenty-five percent (25%) of the annual aggregate Net Sales of Licensed Products
in that country. Cellegy shall notify GW within 60 days of the end of any
calendar year for which Cellegy determines that the annual aggregate Net Sales
of all Sublicensees for DiCarb Compounds for use in the Field exceed the
threshold specified in this Article 5.7 for allowing such reductions to the
Royalty Rate. GW shall have the right to credit any overpayments shown to be
have been made under this Article 5.7 against future royalty payments due
Cellegy.
5.8 Reduction in Royalties. Notwithstanding anything to the contrary
herein, the royalty rate payable to Cellegy under this Agreement shall not be
reduced to less than one-half of the rate payable under Article 5.1(a)(i) for
any reason, regardless of whether reductions may be taken or allowed under one
or more provisions of this Agreement.
ARTICLE 6
ROYALTY REPORTS AND ACCOUNTING
6.1 Royalty Reports; Records. During the term of this Agreement after
commercial introduction of the first Licensed Product, GW shall furnish or cause
to be furnished to Cellegy on a quarterly basis a written report or reports (the
"Royalty Report") covering GW's fiscal quarter (currently ending on or about the
last day of March, June, September and December; each such fiscal quarter being
sometimes referred to herein as a "royalty period") showing:
(a) the Net Sales of all Licensed Products in each country of
the Territory during the royalty period;
(b) the royalties, payable in Dollars, which shall have
accrued hereunder in respect to such Net Sales;
(c) withholding taxes, if any, required by law to be deducted
in respect of such sales; and
(d) the exchange rates used in determining the amount of
Dollars.
With respect to sales of Licensed Products invoiced in Dollars, the Net Sales
and royalty payable shall be expressed in Dollars. With respect to sales of
Licensed Products invoiced in a currency other than Dollars, the Net Sales and
royalty payable shall be expressed in the domestic currency of the country where
such sale was made together with the Dollar equivalent of the royalty payable,
calculated using the exchange rates normally used by GW in its management and
financial reporting, provided, however, that the exchange rates used by GW in
preparation of the
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
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<PAGE>
Royalty Report shall not be materially different from the exchange rates posted
in the Wall Street Journal published on the last day of such royalty period. GW,
or its Affiliates or Sublicensees shall furnish to Cellegy appropriate evidence
of payment of any withholding tax or other amount deducted from any royalty
payment. Royalty Reports shall be due on the forty-fifth (45th) day with respect
to the United States, and on the seventy-fifth (75th) day for the rest of the
Territory, following the close of each respective royalty period. GW, and its
Affiliates and Sublicensees shall keep contemporaneous, legible, verifiable and
accurate records in sufficient detail to enable the royalties payable hereunder
to be determined and substantiated. A final Royalty Report shall be due upon the
expiration or termination of this Agreement.
6.2 Payment Due Dates. Royalties shown to have accrued by each royalty
report provided for under Article 6 of this Agreement shall be due and payable
on the date such Royalty Report is due. Payment of royalties in whole or in part
may be made in advance of such due date. All royalty and other payments due to
Cellegy hereunder, shall be made in Dollars and delivered to the single account
specified by Cellegy from time to time.
6.3 Right to Audit. (a) Upon the written request of Cellegy, at
Cellegy's expense and not more than once in each GW fiscal year, GW and its
Affiliates shall permit an independent public accountants and auditors (the
"Auditor"), selected by Cellegy but not regularly employed by Cellegy and
reasonably acceptable to GW, to have access during normal business hours to
those records of GW and its Affiliates as may be reasonably necessary to verify
the accuracy of the Royalty Reports furnished by GW hereunder in respect of any
fiscal year ending not more than thirty-six (36) months prior to the date of
such request. Cellegy acknowledges that the Auditor shall conduct its audit in
such a manner so as to not unreasonably interfere with GW's or its Affiliates'
business.
(b) GW shall include in each written sublicense granted by it
pursuant to this Agreement a provision requiring the Sublicensee to keep and
maintain records of sales made pursuant to such Sublicense and to grant access
to such records by Cellegy's independent accountant subject to the same terms
and conditions as stated in Article 6.3(a) hereof.
(c) Upon the expiration of thirty-six (36) months following
the end of any GW fiscal year, the calculation of royalties payable with respect
to such year shall be binding and conclusive upon Cellegy, and except for fraud
or misrepresentation, GW and its Affiliates shall be released from any liability
or accountability with respect to royalties for such fiscal year.
(d) The report prepared by the Auditor, shall disclose only
the conclusions of the Auditor regarding the audit and the amount of any
underpayment or overpayment of royalties, if any, without disclosure of or
reference to supporting documentation. A copy of such report shall be sent or
otherwise provided to GW by the Auditor at the same time it is sent or otherwise
provided to Cellegy.
(e) If the Auditor's report shows any underpayment of
royalties, GW shall remit, or shall cause its Affiliates or Sublicensees to
remit, to Cellegy the amount of such underpayment within thirty (30) days after
Cellegy's receipt of the Auditor's report. In the event
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that the amount of any underpayment of royalties is in excess of eight percent
(8%) of the total royalties due to Cellegy with respect to the period covered by
the Auditor's report, GW shall reimburse Cellegy for the cost of the audit in
which the underpayment was discovered. In addition, in the event that the amount
of any underpayment of royalties is in excess of twelve percent (12%) of the
total royalties due to Cellegy with respect to the period covered by the
Auditor's report, GW shall reimburse Cellegy for the cost of the next subsequent
audit. Any overpayment of royalties shall be fully creditable against future
royalties payable in subsequent royalty periods. In the event this Agreement is
terminated or expires before such overpayment is fully credited, Cellegy shall
pay GW the portion of such overpayment not credited within thirty (30) days
after such termination or expiration hereof, less any payment due Cellegy
hereunder.
6.4 Confidentiality of Records. Cellegy agrees that all information
subject to review under this Article 6 or under any sublicense agreement is
confidential and that Cellegy and the Auditor shall retain all such information
in confidence. Cellegy agrees that the Auditor shall sign a confidentiality
agreement, with terms reasonably acceptable to Cellegy, with GW before the
commencement of the audit.
ARTICLE 7
DEVELOPMENT AND MARKETING PROGRAM
7.1 Diligence Obligations. Subject to the provisions of Article 7.2
below and in complete fulfillment of its development and marketing obligations
hereunder and any such obligations implied by law, GW will undertake the
activities set forth in this Article 7.
7.2 Development Program. GW shall, at its expense, use its continuous
best efforts (a) to conduct a development program in the United States relating
to the use of a Licensed Product for treatment of at least one indication (the
"Development Program"); (b) if the results of the Development Program so
justify, to seek Registration for such Licensed Product in the United States,
and (c) to commercially market, sell and distribute Licensed Products throughout
the Territory. For purposes of this Article, "best efforts" shall mean that GW
shall use reasonable efforts no less than those efforts used by GW in its
development projects with its own compounds and products having comparable
commercial potential. The Development Program shall include such product
development work as GW may, in its sole discretion, consider necessary for
Registration of a Licensed Product.
7.3 Fulfillment. (a) GW's best efforts obligations set forth in this
Article 7 and implied by law shall be deemed to require fulfillment of the
following:
(i) submitting an NDA to FDA (and which is filed by FDA) for
registration of a Licensed Product in the United States by [**];
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
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(ii) commencing marketing such Licensed Product in
the United States within six (6) months following approval of
such NDA by the FDA (it being understood that receipt of an
"approvable letter" with respect to an NDA is not an
"approval" of that NDA);
(iii) completing one Proof of Principle Study or a
Publication Study with respect to any indication for the
Compound, within eighteen (18) months from the Effective Date;
(iv) submitting Registration application(s) for
European marketing of a Licensed Product within the earlier of
[**], or six (6) months of the first submission of an NDA, or
an NDA amendment or NDA supplement for an indication other
than n-CIE;
(v) commencing marketing of a Licensed Product in at
least three EU member states within six (6) months of first
obtaining approval of an application for Registration of a
Licensed Product for such EU member states.
(vi) completing one additional Proof of Principle
Study or a Publication Study with respect to any indication
for the Compound, within twenty-four (24) months from the
Effective Date; and
(vii) delivering to Cellegy, within twelve (12)
months of the Effective Date of the Agreement, a development
plan describing the events and timelines with respect to
development activities to be conducted by GW with respect to
the commercialization of Licensed Products in the Territory
with the exception of the United States.
(each of such events described above being hereinafter referred to as a
"Development Milestone").
(b) The time period specified in clause (i) of Article 7.3(a)
hereof, shall be subject to one (1) six (6) month extension at GW's election, by
payment to Cellegy of [**], while the time periods specified in clauses (ii)
through (vi) of Article 7.3(a) hereof, shall each be subject to up to two (2)
four (4) month extensions at GW's election, by payment to Cellegy of [**] for
each such extension, such payments to be made within thirty (30) days of
election of each such extension.
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
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<PAGE>
(c) Notwithstanding the provisions of Articles 7.2, 7.3(a) and
7.3(b) above, in the event that FDA requires a carcinogenicity study or an
additional toxicology study, the time periods specified in Articles 7.3(i)
through (v), except for 7.3(iii) hereof, shall be tolled from the date that FDA
requires such carcinogenicity study or additional toxicity study until the date
of completion of the final report with respect to such study. The time periods
specified in Articles 7.3(i) through (v), except for 7.3(iii) shall also be
tolled to the extent that any delay in meeting such Development Milestones is
caused by the FDA's requirement, if any, for GW to take action to mitigate any
deficiency now known with respect to the Drug Master File for monolaurin or for
such actions by GW, if any, that may be required by FDA on account of the test
results for ethanol concentration in stability batch number 273-403,
manufactured December 06, 1994, of Licensed Products made and tested on behalf
of Cellegy.
7.4 Progress Reports. (a) During the term of this Agreement, GW will
provide annual progress reports to Cellegy (the "Progress Report"), summarizing
in reasonable detail GW's activities related to the development and
commercialization of Licensed Products throughout the Territory and the securing
of the requisite marketing approvals during the annual period covered by such
Progress Report, and the activities to be undertaken during the subsequent
period. Progress Reports shall be submitted to Cellegy by the end of the first
quarter of each calendar year, with the first Progress Report being due on March
31, 1998.
(b) With respect to the calendar year 1997, GW agrees to
schedule and attend one meeting or telephonic conference call per calendar
quarter, in which GW shall verbally update the person designated by Cellegy with
respect to the Development Program being conducted by GW and its Affiliates and
Sublicensees.
ARTICLE 8
PATENT RIGHTS
8.1 Patent Prosecution and Maintenance. (a) Cellegy shall use its best
efforts, subject to Article 8.1(b), to prosecute any patent applications within
the Patent Rights, to obtain patents thereon and to maintain all patents
included in the Patent Rights using patent counsel of its choice after due
consultation with GW.
(b) Cellegy shall use reasonable efforts to amend any patent
applications included in the Patent Rights to include claims or arguments
reasonably requested by GW. Cellegy shall keep GW fully informed of the progress
of the prosecution of each patent application included within the Patent Rights
and shall promptly provide GW with copies of all correspondence and filings
related thereto. Notwithstanding the foregoing, Cellegy shall have the right to
discontinue the prosecution of such patent application or to abandon any such
patent, or any claims therein. If Cellegy decides to abandon or allow to lapse
any patent application or patent within the Patent Rights in any country of the
Territory, Cellegy shall inform GW at least thirty (30) days prior to such
abandonment or lapse and GW shall be given the opportunity to prosecute such
patent application and/or maintain such patent at its expense.
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<PAGE>
(c) During the term of this Agreement, beginning on the Effective Date,
GW shall reimburse Cellegy for the reasonable out-of-pocket expenses (including
attorneys and expert fees) for the preparation, filing, prosecution and
maintenance costs associated with U.S. Patent No. 5,057,500 and U.S. Patent No.
5,231,087 (and excluding U.S. Patent No. 4,885,282), their respective foreign
counterpart applications and patents, and any reissues, reexaminations,
registrations, substitutions, renewals, additions, extensions and oppositions
thereof within the Territory. Such reimbursement shall be paid within ninety
(90) days of presentation to GW by Cellegy of an invoice for such fees and
expenses.
8.2 Status of Patent Rights. Within thirty (30) days after the
Effective Date and each anniversary thereof, Cellegy shall advise GW as to the
current status of any patent applications and patents included within the Patent
Rights and, to the extent it has not previously done so, shall provide GW with
relevant documentation relating to such patent applications and patents
including, but not limited to, copies thereof.
8.3 Ownership of Future Inventions. Patentable inventions conceived by
Cellegy personnel in direct connection with either their assisting with the
transfer of the Know-How or their providing services to GW under this Agreement,
either alone or in connection with GW personnel, shall be the sole property of
GW. Cellegy shall provide reasonable assistance in conferring assignment to GW
from Cellegy's representatives and provide reasonable assistance, at GW's
expense, in the preparation, filing and prosecution of any such patent
applications as may be desired by GW. Cellegy shall retain for the duration of
this Agreement a fully paid-up non-exclusive, worldwide right to practice such
inventions within the Field. Such non-exclusive license shall not include the
right to grant sublicenses. All other inventions made by Cellegy personnel shall
be the sole and exclusive property of Cellegy. In addition, during the term of
this Agreement, and to the extent that Cellegy is permitted to do so, GW shall
have a right of first refusal to negotiate a license with Cellegy on mutually
acceptable terms with respect to any invention made and owned by Cellegy, to the
extent that such invention specifically applies to the manufacture, use or sale
of a Licensed Product under this Agreement. Provided, however, that such right
of first refusal shall apply only to such inventions that Cellegy reasonably
believes in good faith to be specifically applicable to the sale, manufacture or
use of Licensed Product under this Agreement, in which case, Cellegy shall
provide GW with a written notice of the opportunity to license Cellegy's
invention upon Cellegy's filing of a patent application for such invention. GW's
right of first refusal shall expire 120 days from delivery of Cellegy's notice
("Negotiation Period"), unless GW earlier enters into a binding and mutually
acceptable agreement to license such invention or an option to obtain such
license. If the parties do not enter into such a license or option within the
Negotiation Period, Cellegy shall be free to seek other licenses for its
inventions; provided, however, that Cellegy shall not for six months following
the expiration of the Negotiation Period offer or accept an offer to license the
invention on terms which taken together are materially less favorable to Cellegy
than were last offered by GW during the Negotiation Period. However, GW shall
have the burden of demonstrating by clear and convincing evidence that the terms
of any such license taken together, are materially less favorable to Cellegy
than those terms last offered by GW. Cellegy shall provide GW with a summary of
the material terms of any Agreement subject to this Article 8.3 which is entered
into within six months following the expiration of the Negotiation Period.
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<PAGE>
ARTICLE 9
INFRINGEMENT
9.1 Applicability. Except as otherwise provided in Article 14, the
provisions of this Article 9 shall govern the parties' rights and obligations,
as between themselves, with respect to actions against Third Parties for
infringement of the Patent Rights or Know-How licensed under this Agreement.
9.2 Third Party Infringement. (a) In the event that either GW or
Cellegy becomes aware of any product made, used, or sold in the Territory which
it believes to infringe a Valid Claim or misappropriation of Know-How, such
party (the "Notifying Party") shall promptly advise the other party of all the
relevant facts and circumstances known by the Notifying Party in connection with
the infringement or misappropriation.
(b) The parties agree that Cellegy shall have the right, at
its own expense, to enforce such Patent Rights against such infringement. GW and
its Affiliates shall fully cooperate with Cellegy with respect to the
investigation and prosecution of such alleged infringement or misappropriation
including the joining of GW and its Affiliates as parties to such action, as may
be required by the law of the particular forum where enforcement is being
sought.
(c) GW shall have the right (at its own expense) to enforce,
and Cellegy does hereby grant to GW the right to enforce, such Patent Rights
against such infringement, if:
(i) Cellegy shall fail, within sixty (60)
days after learning of such infringement, (a) to
terminate such infringement or (b) to take reasonable
action to investigate such alleged infringement and,
if such infringement is reasonably demonstrated, to
institute an action to abate such alleged
infringement and, thereafter, to prosecute such
action diligently, or
(ii) Cellegy earlier notifies GW that
Cellegy does not plan to terminate the infringement
or institute such action, Cellegy shall fully
cooperate with GW in such effort including being
joined as a party to such action, if necessary.
Cellegy and its Affiliates shall fully cooperate with GW with respect to the
investigation and prosecution of such alleged infringement or misappropriation
including the joining of Cellegy and its Affiliates as a party to such action,
as may be required by the law of the particular forum where enforcement is being
sought.
(d) Cellegy shall be entitled to keep any damages or costs
recovered by Cellegy in connection with any action filed by Cellegy hereunder,
after first reimbursing GW for any out-of-pocket costs and expenses in assisting
Cellegy, at Cellegy's request, hereunder. GW shall be entitled to keep any
damages or costs recovered by GW in connection with any action
CONFIDENTIAL -21-
<PAGE>
filed by GW hereunder, after first reimbursing Cellegy for any out-of-pocket
costs and expenses in assisting GW hereunder. In the event that the parties
agree to prosecute such infringement jointly, any damages, costs or settlement
proceeds received by the parties will be split between the parties in proportion
to the expenses incurred by each in prosecuting such infringement, after first
reimbursing each party for any such expenses. Such expenses shall include, but
not be limited to, the parties out of pocket expenses and internal costs
incurred in prosecuting such infringement.
9.3 Reduction in Payments Due to Infringement. Notwithstanding the
provisions of Article 5.1, in the event of any infringement by a Third Party and
notice by GW pursuant to Article 9.2, if such infringement is reasonably
demonstrated and (i) Cellegy shall fail within sixty (60) days either to
terminate such infringement or to institute reasonable legal actions to prevent
continuation thereof and thereafter to prosecute such action diligently, and
(ii) if unit sales of the product being sold by such Third Party, in the
aggregate, equal or exceed (A) five percent (5%) of the unit sales of the
Licensed Product by GW and its Affiliates (hereinafter, "GW Unit Sales") in such
country for any two (2) consecutive GW fiscal quarters, or (B) ten percent (10%)
of GW Unit Sales in such country for any one (1) GW fiscal quarter, then in such
event, the Royalty Rate applicable to the Net Sales in such country or countries
shall be reduced by twenty-five percent (25%) if the unit sales by such Third
Party is five percent (5%) to twenty-five percent (25%) of GW Unit Sales or the
Royalty Rate applicable to the Net Sales in such country or countries shall be
reduced by fifty percent (50%) if a unit sales by such Third Party is over
twenty-five percent (25%) of GW Unit Sales until the earlier of Cellegy's
initiation of such actions as are required under Article 9.2 or the termination
of such infringement; provided, however, that the Royalty Rate applicable to
such Net Sales shall not be reduced below five percent (5%). Upon Cellegy's
initiation of such actions as are required under Article 9.2 or the termination
of such infringement, the otherwise applicable Royalty Rate shall apply to all
Net Sales in such country or countries. GW shall not be obligated to repay
Cellegy for the reduction in royalty payments rightfully made under this Article
9.3; provided, however, that any such settlement or damages award received shall
be handled as provided by Article 9.2(d).
ARTICLE 10
CONFIDENTIALITY
10.1 Treatment of Confidential Information. Except as otherwise
provided in this Article 10, during the term of this Agreement and for a period
of five (5) years thereafter, GW and its Affiliates will retain in confidence
and use only for purposes of this Agreement any information, data, and materials
supplied by Cellegy or on behalf of Cellegy to GW and its Affiliates under this
Agreement, and Cellegy will retain in confidence and use only for purposes of
this Agreement any information, data, and materials supplied by GW or on behalf
of GW to Cellegy under this Agreement. For purposes of this Agreement, all such
information and data which a party is obligated to retain in confidence shall be
called "Confidential Information."
10.2 Right to Disclose. To the extent it is reasonably necessary or
appropriate to fulfill its obligations or exercise its rights under this
Agreement or any rights which survive termination or expiration hereof, GW may
disclose Confidential Information to its Affiliates, Sublicensees,
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<PAGE>
consultants, outside contractors, clinical investigators or other Third Parties
on condition that such entities or persons agree in writing (a) to keep the
Confidential Information confidential for the same time periods and to the same
extent as GW is required to keep the Confidential Information confidential and
(b) to use the Confidential Information only for such purposes as GW is entitled
to use the Confidential Information. Each party or its Affiliates or
Sublicensees may disclose such Confidential Information to government or other
regulatory authorities to the extent that such disclosure (i) is reasonably
necessary to obtain patents or authorizations to conduct clinical trials with
and to market commercially the Licensed Products provided such party is
otherwise entitled to engage in such activities under this Agreement; or (ii) is
otherwise legally required.
10.3 Release From Restrictions. The foregoing obligations in respect of
disclosure and use of Confidential Information shall not apply to any part of
such Confidential Information that the non-disclosing party, or its Affiliates
(all collectively referred to as the "Receiving Party") can demonstrate by
contemporaneously prepared written evidence:
(a) is or becomes part of the public domain other than by acts
of the Receiving Party in contravention of this Agreement;
(b) is disclosed to the Receiving Party or its Affiliates or
Sublicensees by a Third Party, provided such Confidential Information was not
obtained by such Third Party directly or indirectly from the other party under
this Agreement;
(c) prior to disclosure under this Agreement, was already in
the possession of the Receiving Party or its Affiliates or Sublicensees,
provided such Confidential Information was not obtained, directly or indirectly,
from the other party under this Agreement; or
(d) results from research and development by persons who have
not had access to the disclosures made to Receiving Party under this Agreement,
including any information obtained through the testing, manufacturing regulatory
approval, or distribution of the Compounds or Licensed Products, or other
activities undertaken in connection with this Agreement by the Receiving Party.
10.4 Confidentiality of Agreement. Except as otherwise required by law
or the terms of this Agreement or mutually agreed upon by the parties hereto,
each party shall treat as confidential the terms, conditions and existence of
this Agreement, except that Cellegy and GW may disclose such terms and
conditions and the existence of this Agreement to its Affiliates and
Sublicensees, and that Cellegy may disclose the terms to its shareholders to the
extent required by the federal securities laws, and provided, that Cellegy shall
seek confidential treatment of the key business terms contained in this
Agreement, including but not limited to the Royalty Rates, the License Fee, the
Milestone Payments, the Toxicity Approval Payments and the Annual Sales Based
Milestone Payments. Upon the execution of this Agreement, the parties shall
draft a joint press release, the text of such shall be mutually agreeable to
each party, announcing the execution of the Agreement.
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<PAGE>
10.5 Return of Confidential Information. Upon termination of this
Agreement with respect to the entire Territory by GW pursuant to Article 12.4
hereof, or upon termination of this Agreement with respect to the entire
Territory by Cellegy pursuant to Article or 12.2 or 12.3 hereof, GW and its
Affiliates shall return all Cellegy Confidential Information, in their
possession along with a certification that they no longer possess any such
Cellegy Confidential Information; provided, however, that GW may retain a single
archival copy of the Cellegy Confidential Information in its legal department
solely for the purpose of determining the extent of disclosure of Confidential
Information by Cellegy hereunder. In addition, in the event of any termination
of a country or Region within the Territory, GW shall promptly disclose and
provide to Cellegy all such Confidential Information, data and other information
disclosed or developed under this Agreement, but only to the extent necessary to
fulfill the obligations and rights under Article 12.5(h).
ARTICLE 11
TRANSFERS AND ACCESS
11.1 Transfer of Know-How. Within ninety (90) days following the
Effective Date and as far as it has not already done so, Cellegy shall provide
GW with all Know-How, and shall transfer to GW all documents containing
Know-How. In addition, Cellegy agrees to provide such technical assistance as GW
may reasonably request to enable it to utilize the Know-How and continue ongoing
work; provided, however, that GW shall at Cellegy's request reimburse Cellegy
for the reasonable out-of-pocket expenses incurred by Cellegy in providing such
assistance. Cellegy may retain a single archival copy of the documents
containing Know-How in its legal department solely for the purpose of
determining the extent of disclosure of Know-How hereunder.
11.2 Transfer of IND. Cellegy shall transfer to GW, all INDs and Orphan
Drug Designations related to the Compound, including but not limited to, IND #
41,553. Cellegy agrees to perform within sixty (60) days of the Effective Date
all such acts, and execute such further instruments, documents or certificates,
as may be required to more effectively transfer the INDs referred to above. Upon
such date that Cellegy transfers to GW each IND referred to above, GW agrees to
undertake all regulatory responsibilities related to such IND. Upon such date
that Cellegy transfers the Orphan Drug Designation related to the Compound, GW
agrees to undertake all regulatory responsibilities related to the Orphan Drug
Designation.
11.3 Transfer of Trademark. Concurrently with the execution of this
Agreement, Cellegy shall transfer its interests in the Trademark in the United
States to GW pursuant to the form(s) of Trademark Assignment attached hereto as
Exhibit B-2. After the execution of this Agreement, Cellegy agrees to execute
such other documents as may be reasonably necessary to transfer its interests in
the Trademark in Germany, France and the United Kingdom. Cellegy acknowledges
that after the Effective Date of this Agreement GW may file its own United
States application with respect to the Trademark.
11.4 Transfer of Clinical Trial Material. Within sixty (60) days
following the Effective Date, Cellegy shall transfer to GW, or its designee, all
quantities of the Compound and other materials related to the Compound without
further consideration by GW. GW agrees to
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<PAGE>
undertake all regulatory responsibilities related to the provision and handling
of the Compound, including but not limited to stability and GMP retention sample
handling and documentation.
11.5 Access to Key Individuals. Cellegy shall make reasonably available
to GW, its key employees, officers and directors (including but not limited to
Dr. Peter Elias and Dr. Carl Thornfeldt) for purposes of assisting GW in the
testing and commercialization of the Compound and the procuring of the
Registration of the Licensed Products; provided, however, that GW shall at
Cellegy's request reimburse Cellegy for the reasonable out-of-pocket expenses
incurred by Cellegy in providing such assistance.
ARTICLE 12
TERM; TERMINATION
12.1 Term. Unless terminated sooner pursuant to Articles 12.2, 12.3 or
12.4 below, this Agreement shall become effective as of the Effective Date and
shall continue in full force and effect until the expiration of GW's obligation
to pay royalties to Cellegy hereunder. The parties acknowledge and agree that GW
shall have no obligation to pay Cellegy any royalties after the expiration of
the applicable periods referred to in Article 5.1 hereof for Net Sales accruing
after such periods.
12.2 Bilateral Termination Rights. Either party may terminate this
Agreement upon the occurrence of any of the following:
(a) Upon or after the bankruptcy of the other party; or
(b) Upon or after the material breach of any provision of this
Agreement by the other party (other than an actual or claimed breach of Article
7 by GW, which shall instead be governed by the provisions of Article 12.3
hereof) if such material breach is not cured within ninety (90) days after
written notice thereof to the party in default.
12.3 Cellegy's Right to Terminate. (a) If GW, and its Affiliates and
Sublicensees, fail to fulfill or achieve a Development Milestone required under
Article 7 hereof in accordance with the applicable time period provided in
Article 7.3 hereof (including any extensions allowed in accordance with Article
7.3(b)), or use their best efforts to commercialize the Licensed Products
throughout the Territory except for the United States and such other countries
for which performance of Articles 7.3(a)(iv) & (v) are completed, (all
collectively referred to as "Development Obligation Breach") and subject to the
terms and conditions provided in Article 7.3 hereof, then in such event, Cellegy
may, in its sole discretion, waive or defer action on such Development
Obligation Breach, or alternatively Cellegy may give written notice to GW of the
Development Obligation Breach (such notice to be hereinafter referred to as a
"Development Obligation Breach Notice"). A Development Obligation Breach Notice
shall state with specificity the Development Obligation Breach asserted by
Cellegy. GW shall have ninety (90) days from the date of the Development
Obligation Breach Notice to cure such Development Obligation Breach which was
the subject of the Development Obligation Breach Notice, or provide Cellegy with
reasonable written assurance that GW will cure such Development
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<PAGE>
Obligation Breach within a reasonable period, such period not to exceed one
hundred eighty (180) days from the receipt of the Development Obligation Breach
Notice. In the event that GW fails to cure such Development Obligation Breach
which was the subject of the Development Obligation Breach Notice or provide
written assurance within such ninety (90) day period, Cellegy may, at its
option, waive the Development Obligation Breach or terminate this Agreement;
provided, that such termination shall be effective only with respect to those
Regions of the Territory containing countries to which the Development
Obligation Breach which was the subject of the Development Obligation Breach
Notice specifically relates. In lieu of the termination remedy provided above,
Cellegy may, at its sole discretion, by written notice to GW convert the
exclusive rights granted to GW hereunder to a non-exclusive license, but such
conversion shall be only with respect to those Regions of the Territory
containing countries to which the Development Obligation Breach which was the
subject of the Development Obligation Breach Notice specifically relates. Except
for the GW's willful commitment of a Development Obligation Breach, the
foregoing remedies shall be Cellegy's sole and exclusive remedy for GW's failure
to meet the diligence obligations specified in Article 7 hereof. It is
understood and agreed that Cellegy's exercise of its rights under this Article
12.3(a) with respect to a country or Region, or for any particular Development
Obligation Breach, shall not affect or be construed to be a waiver of Cellegy's
rights under this Article 12.3(a) with respect to any other country or Region or
any other Development Obligation Breach.
(b) If Cellegy demonstrates by clear and convincing evidence,
that GW, or its Affiliates or Sublicensees, has committed a material violation
of law with respect to the manufacturing, testing, marketing, distributing, or
selling of the Compounds or Licensed Products that materially impairs the value
of the Patent Rights, Know-How or Trademark licensed or assigned under this
Agreement, Cellegy shall have the right to terminate this Agreement, in
accordance with Article 12.3(a) with respect to the territory to which such
violation pertains or occurred.
12.4 GW's Right to Terminate. GW may terminate this Agreement at any
time upon at least ninety (90) days prior written notice to Cellegy. Such
termination may be made with respect to one or more Regions of the Territory
without affecting the rest of this Agreement or the licenses granted hereunder
in any other Region of the Territory.
12.5 Rights Upon Termination or Expiration. Upon expiration or
termination of this Agreement, the rights and obligations of the parties shall
cease, except as follows:
(a) Upon expiration or termination for any reason, the
obligations of confidentiality and use of Confidential Information under Article
10 shall survive for the period provided therein;
(b) Upon expiration or termination for any reason, Articles
12, 13, and 16 of this Agreement shall survive for the maximum duration
permitted by law;
(c) Articles 4, 5, 6.1 and 6.2 shall survive until all
outstanding payment obligations and reporting obligations of GW and its
Affiliates and Sublicensees have been
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<PAGE>
fulfilled, and Article 6.3 shall survive for three fiscal years following the
year in which such or expiration became effective;
(d) Upon expiration or termination for any reason other than a
termination by GW pursuant to Article 12.4 hereof, or upon a complete
termination of this Agreement by Cellegy pursuant to Article 12.2 or 12.3
hereof, the right of GW to continue to use the Know-How to which it is licensed
under this Agreement shall survive;
(e) Upon termination by GW pursuant to Article 12.2, all
license rights of GW shall survive, subject to the fulfillment of all of its
royalty and other obligations hereunder, if any;
(f) Expiration or termination of this Agreement shall not
relieve the parties of any other obligation accruing prior to such termination;
and
(g) Upon expiration of this agreement no royalties shall be
due on any Net Sales accruing after the date of expiration; provided, however
that such sales do not infringe upon or otherwise violate the patents, know-how,
trademarks or other intellectual property owned or licensed by Cellegy.
(h) Upon termination of this Agreement, either for the entire
Territory or any particular Region within the Territory, by GW pursuant to
Article 12.4 hereof, or by Cellegy pursuant to Article 12.2 or 12.3 hereof:
(ix) All rights licensed to GW pursuant to this
Agreement shall immediately cease with respect to the Region
or Regions so terminated; provided, however, that GW, it's
Affiliates, and Sublicensees shall be permitted to sell or
dispose of any finished goods inventory or work-in-process
inventory of the Compound or Licensed Product as of the date
of termination of the Region or Regions so terminated, subject
to the compliance with the terms of this Agreement, including
any payment of royalties or other payments that would be due
on account of the Net Sales of such finished or
work-in-process inventory but for such termination;
(x) Cellegy shall be granted an exclusive (with
respect to the Region or Regions so terminated), perpetual,
sublicensable right to reference or use any data or other
information contained in or referenced by any GW, or GW
Affiliates or Sublicensees, IND, NDA, Drug Master File, Orphan
Drug Designation or approval, any supplements or amendments
thereto, or other Registration documents relating to the n-CIE
indication for the Compound or Licensed Products which are
filed with a regulatory agency as of the date of such
termination, but only to the extent necessary to permit the
sale, use, marketing and distribution of Licensed Products for
the n-CIE indication in the Region or Regions so terminated;
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<PAGE>
(xi) Cellegy shall be granted an exclusive (with
respect to the Region or Regions so terminated), perpetual,
sublicensable right to reference or use any data or other
information contained in or referenced by any GW, or GW
Affiliates or Sublicensees, IND, NDA, Drug Master File, Orphan
Drug Designation or approval, any supplements or amendments
thereto, or other Registration documents relating to any
indication other than the n-CIE indication for the Compound or
Licensed Products which are filed with a regulatory agency as
of the date of such termination, but only to the extent
necessary to permit the sale, use, marketing and distribution
of Licensed Products in the Region or Regions so terminated.
If, however, Cellegy elects to exercise the right of reference
in this Section 12.5(h)(iii), then in such case, Cellegy shall
pay to GW a royalty equal to three percent (3%) of Net Sales
of any Licensed Product sold by Cellegy, its Affiliates or
Sublicensees in the countries so terminated and for which the
right to reference or use such data, or other information is
required, for a period of ten (10) years commencing on the
date of termination of the Region or Regions so terminated;
(xii) GW shall assign, or cause to be assigned, to
Cellegy all rights, if any, which GW, or its Affiliates or
Sublicensees, may own or possess with respect to the
Trademark, or its counterparts, in the Region or Regions so
terminated;
(xiii)If, as of the effective date of termination, a
Licensed Product is actually being sold by GW in a Region or
Regions so terminated under any trademark (other than the
Trademark or its counterparts) owned by GW, or its Affiliates
or Sublicensees, GW shall exclusively and perpetually license,
or cause to be licensed, such trademark to Cellegy with
respect to the Region or Regions so terminated, and in such
case, Cellegy shall pay to GW a royalty equal to one percent
(1%) of Net Sales of any Licensed Product sold by Cellegy, its
Affiliates or Sublicensees, in the countries of the Regions so
terminated and which are covered by such trademark for a
period of ten (10) years commencing on the date of termination
of Region containing such country;
(xiv) Cellegy shall be granted an exclusive (with
respect to the Region or Regions so terminated), perpetual,
license with respect to any issued patents or patent
applications (other than the Patent Rights) owned or licensed
by GW or its Affiliates or Sublicensees as of the date of such
termination, to the extent necessary to make, use and sell
Licensed Products for or in the Region or Regions so
terminated, and in such case, Cellegy shall pay to GW a
royalty equal to five percent (5%) of Net Sales of any
Licensed Product sold by Cellegy, its Affiliates or
Sublicensees, in the countries of the Region so terminated and
which are covered by valid claims in such issued patents, for
a period of ten (10) years commencing on the date of
termination of the Region or Regions containing such
terminated country, provided, however, that the obligation of
Cellegy to pay royalties under this Section 12.5(h)(vi) shall
not extend past the expiration of the last to expire patent so
licensed to Cellegy pursuant to this provision; and
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<PAGE>
(xv) GW shall provide to Cellegy (to the extent that
GW is permitted) a list of GW's suppliers with respect to the
manufacture and supply of the Licensed Product. Furthermore,
GW shall not interfere with the negotiation, execution or
delivery of agreements between Cellegy and a GW supplier for
the manufacture and supply of Licensed Product with respect to
the Region or Regions so terminated. In the event that GW, or
its Affiliates or Sublicensees, is the manufacturer of the
Licensed Products, GW and Cellegy shall, at Cellegy's
election, negotiate in good faith a supply agreement on
commercially reasonable terms for the Regions which are
terminated.
Notwithstanding anything in this subsection to the contrary herein, Cellegy
shall not be required to pay an aggregate royalty rate to GW pursuant to this
Section 12.5(h) which is greater than five percent (5%). Furthermore, it is
understood and agreed that, in the event of a termination of the Regions of
Argentina, Australia, Bolivia, Chile, Columbia, Ecuador, Peru, Paraguay, Uruguay
and Venezuela, Cellegy shall be entitled to all of the rights referred to above
in Section 12.5(h), without any obligation to pay GW a royalty with respect to
such Regions. In the event of an exercise of the rights and obligations
contained in this Section 12.5(h), the parties shall in good faith negotiate and
deliver such documents or instruments necessary to consummate more effectively
the transactions contemplated by such exercise.
ARTICLE 13
INDEMNIFICATION
13.1 Indemnification by GW. Subject to Article 13.3 hereof, GW hereby
agrees to defend, indemnify and hold harmless Cellegy and its Affiliates,
directors, officers and employees from and against any liabilities, losses,
fines, penalties, damages, expenses (including reasonable attorney's fees and
expenses incurred in connection with the enforcement of this provision),
actions, or claims brought or threatened after the Effective Date of this
Agreement and which arise out of injuries occurring after the Effective Date,
including but not limited to, any actions in contract (including breach of
warranty) or tort (including negligence, strict liability or commercial torts)
to the extent that such liabilities, losses, fines, penalties, damages, expenses
(including reasonable attorney's fees and expenses incurred in connection with
the enforcement of this provision), actions, or claims arise, result from, or
relate to:
(i) any breach of any of the representations or
warranties of GW contained in Article 2.2 hereof, or
(ii) any manufacture, use, sale, development,
testing, distribution, marketing or disposal of the Compound
or the Licensed Products by GW, its Affiliates or Sublicensees
Provided, however, that GW shall have no obligation to indemnify Cellegy to the
extent that such liabilities, losses, fines, penalties, damages or expenses are
caused by Cellegy's breach of Article 2.1(m).
CONFIDENTIAL -29-
<PAGE>
13.2 Indemnification by Cellegy. Subject to Article 13.3 hereof,
Cellegy hereby agrees to indemnify and hold harmless GW and its Affiliates,
Sublicensees, directors, officers and employees from and against any
liabilities, losses, fines, penalties, damages, expenses (including reasonable
attorney's fees and expenses incurred in connection with the enforcement of this
provision), actions, claims brought or threatened, to the extent that they are
caused by any breach of any of the representations or warranties of Cellegy
contained in Article 2.1 hereof, or to the extent that they arise out of
injuries occurring before the Effective Date including but not limited to, any
actions in contract (including breach of warranty) or tort (including
negligence, strict liability or commercial torts).
13.3 Indemnification Procedures With Respect to Third Party Claims. A
party which intends to seek indemnification under this Article 13 (such party
hereinafter referred to as the "Indemnitee") in respect to a liability, loss,
fine, penalty, damage, expense, action, or claim brought against such Indemnitee
by a Third Party (such claim hereinafter referred to as a "Third Party Claim"),
shall promptly give written notice thereof to the party from whom
indemnification is sought (such other party hereinafter referred to as the
"Indemnitor") within a reasonable period of time after the assertion of such
Third Party Claim by such Third Party; provided, however, that the failure to
provide written notice of such Third Party Claim within a reasonable period of
time shall not relieve the Indemnitor of any of its obligations hereunder,
except to the extent that the Indemnitor is prejudiced by such failure. The
Indemnitor shall have the right to assume the complete control of the defense,
compromise or settlement of any Third Party Claim (provided that no settlement
of any Third Party Claim shall include any admission of wrongdoing on the part
of an Indemnitee, without the prior written consent of such Indemnitee, which
such consent shall not be unreasonably withheld), including, at its own expense,
employment of legal counsel, and at any time thereafter the Indemnitor shall be
entitled to exercise, on behalf of the Indemnitee, any rights which may mitigate
the extent or amount of such Third Party Claim; provided, however, that if the
Indemnitor shall have exercised its right to assume control of such Third Party
Claim, the Indemnitee (i) may, in its sole discretion and at its own expense,
employ legal counsel to represent it (in addition to the legal counsel employed
by the Indemnitor) in any such matter, and in such event legal counsel selected
by the Indemnitee shall be required to confer and cooperate with such counsel of
the Indemnitor in such defense, compromise or settlement for the purpose of
informing and sharing information with the Indemnitor; (ii) shall, at its own
expense, make available to Indemnitor those employees, officers and directors or
Indemnitee whose assistance, testimony or presence is necessary or appropriate
to assist the Indemnitor in evaluating and in defending any such Third Party
Claim; provided, however, that any such access shall be conducted in such a
manner as not to interfere unreasonably with the operations of the businesses of
Indemnitee; and (iii) shall otherwise fully cooperate with the Indemnitor and
its legal counsel in the investigation and defense of such Third Party Claim.
CONFIDENTIAL -30-
<PAGE>
ARTICLE 14
NOTIFICATION AND AUTHORIZATION UNDER DRUG
PRICE COMPETITION AND PATENT TERM RESTORATION ACT
14.1 Notices Relating to the Act. Cellegy shall notify GW of (a) the
issuance of each U.S. patent and of each patent issued in a country of the
European Union included within the Patent Rights, giving the date of issue and
patent number for each such patent and (b) each notice pertaining to any patent
included within the Patent Rights which Cellegy receives as patent owner
pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984
(hereinafter called the "Act"), including but not necessarily limited to,
notices pursuant to ss.ss. 101 and 103 of the Act from persons who have filed an
abbreviated NDA ("ANDA") under ss. 505(j) of the FD&C Act or a "Paper NDA" filed
under ss. 505(b)(2) of the FD&C Act. Such notices shall be given promptly, but
in any event within ten (10) days of each such patent's date of issue or receipt
of each such notice pursuant to the Act, whichever is applicable.
14.2 Authorizations Relating to Patent Term Extension. Cellegy hereby
authorizes GW:
(a) to include in any NDA for a Licensed Product, as GW may
deem appropriate under the Act, a list of patents included within the Patent
Rights that relate to such Licensed Product and such other information as GW in
its reasonable discretion believes is appropriate to be filed pursuant to the
Act;
(b) to commence suit according to the provisions of Article 9
for any infringement of the Patent Rights under ss. 271(e)(2) of Title 35 of the
United States Code occasioned by the submission by a Third Party of an ANDA or a
Paper NDA for a Licensed Product pursuant to ss.ss. 101 or 103 of the Act; and
(c) in consultation with Cellegy, to exercise any rights that
may be exercisable by Cellegy as patent owner under the Act to apply for an
extension of the term of any patent included within the Patent Rights, as GW in
its discretion deems appropriate.
In the event that applicable law in any other country of, or community or
associations of countries in, the Territory hereafter provides for the extension
of the term of any patent included in the Patent Rights in such country, upon
request by GW, Cellegy shall obtain such extension or, in lieu thereof,
authorize GW or, if requested by GW, its Sublicensees to apply for such
extension, in consultation with Cellegy. Cellegy agrees to cooperate with GW or
its Sublicensees, as applicable, in the exercise of the authorization granted
herein or which may be granted pursuant to this Article 14.2 and will execute
such documents and take such additional action as GW may reasonably request in
connection therewith, including, if necessary, permitting itself to be joined as
a proper party in any suit for infringement brought by GW under clause (b)
above. Legal counsel shall be selected by GW. In the event GW decides not to
commence suit for infringement under clause (b) above, GW will notify Cellegy of
its decision within thirty (30) days so that Cellegy may institute such
litigation itself, if it wishes, at its own cost and expense.
CONFIDENTIAL -31-
<PAGE>
ARTICLE 15
REGISTRATION OF LICENSE
15.1 Registration. GW may, at its expense, register the exclusive
license granted under this Agreement in any country of, or community or
association of countries in, the Territory where the use, sale or manufacture of
a Licensed Product in such country would be covered by a Valid Claim and Cellegy
shall reasonably cooperate in such registration at GW's expense. Upon request by
GW, Cellegy agrees promptly to execute any "short form" licenses developed in a
form reasonably acceptable to both GW and Cellegy and reasonably submitted to it
by GW from time to time in order to effect the foregoing registration in such
country.
ARTICLE 16
GENERAL PROVISIONS
16.1 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, other than an obligation to make payments hereunder, when such
failure or delay is caused by or results from fire, floods, embargoes,
government regulations, prohibitions or interventions, war, acts of war (whether
war be declared or not), insurrections, riots, civil commotions, strikes,
lockouts, acts of God or any other cause beyond the reasonable control of the
affected party to anticipate, prevent, avoid or mitigate (a "Force Majeure
Event"); provided, however, that any failure or delay in fulfilling a term of
this Agreement shall not be considered a result of a Force Majeure Event if it
arises from a failure of GW or Cellegy to comply with applicable laws and
regulations.
16.2 Further Assurances. Each party hereto agrees to perform such acts,
execute such further instruments, documents or certificates, and provide such
cooperation in proceedings and actions as may be reasonably requested by the
other party in order to carry out the intent and purpose of this Agreement,
including without limitation the registration or recordation of the rights
granted hereunder; provided, however that if any party hereto desires to notify
this Agreement under Article 85(3) of the Treaty of Rome establishing the
European Economic community, such party shall give the other party ninety (90)
days prior written notice of such notification and if during such period a party
shall reasonable object to such notification, the objecting party need not
cooperate in such notification and such notification shall not be implemented.
16.3 Severability. Both parties hereby expressly acknowledge and agree
that it is the intention of neither party to violate any public policy,
statutory or common law, rules, regulations, treaty or decision of any
government agency or executive body thereof of any country or community or
association of countries and specifically agree that if any word, sentence,
paragraph, clause or combination thereof in this Agreement is found by a court
or executive body with judicial powers having jurisdiction over this Agreement
or any of the parties hereto in a final unappealed order, to be in violation of
any such provisions in any country or community or association of countries,
then in such event such words, sentences, paragraphs, clauses or combination
shall be inoperative in such country or community or association of countries
and the remainder of this Agreement shall remain binding upon the parties
hereto.
CONFIDENTIAL -32-
<PAGE>
<TABLE>
<CAPTION>
16.4 Notices. Any notice required or permitted to be given hereunder
shall be in writing and shall be deemed to have been properly given if delivered
in person, or if mailed by registered or certified mail (return receipt
requested) postage prepaid, or by a nationally recognized overnight courier, or
by facsimile (and promptly confirmed by registered, certified mail or overnight
courier), to the addresses given below or such other addresses as may be
designated in writing by the parties from time to time during the term of this
Agreement. Any notice sent by registered, certified mail or overnight courier as
aforesaid shall be deemed to have been given when mailed.
<S> <C>
In the case of Cellegy: With a required copy to:
Cellegy Pharmaceuticals, Inc. Fenwick & West LLP
1065 East Hillsdale Boulevard, Suite 418 Two Palo Alto Square, Suite 700
Foster City, California 94404 Palo Alto, CA 94306
Attention: A. Richard Juelis Attention: Kevin Kelso, Esq.
Telephone No.: (415) 524-1600 Telephone No.: (415) 494-0600
Facsimile No.: (415) 524-1616 Facsimile No.: (415) 494-1417
In the case of GW: With a required copy to:
Glaxo Wellcome Inc. Glaxo Wellcome Inc.
Five Moore Drive Five Moore Drive
Research Triangle Park, NC 27709 Research Triangle Park, NC 27709
Attention: Kenneth R. Lowry Attention: General Counsel
Vice President, Dermatology
Telephone No.: (919) 483-3755 Telephone No.: (919) 483-2505
Facsimile No.: (919) 483-4315 Facsimile No.: (919) 483-0265
</TABLE>
16.5 Assignment. This Agreement may not be assigned or otherwise
transferred by either party without the written consent of the other party;
provided, however, that either party may, without such consent, assign this
Agreement in connection with the transfer or sale of all or substantially all of
its business related to this Agreement or in the event of the merger or
consolidation of such party with another corporation, or in the case of GW, in
the event of a sale by GW of all or substantially all of the dermatology
business; and further provided that Cellegy may assign, transfer or pledge its
rights to receive any payments due Cellegy hereunder without GW's consent;
provided, however, that GW's consent shall be required for any payments due to
Cellegy under this Agreement that are to be divided among separate entities. Any
purported assignment in violation of the preceding sentence shall be void. Any
permitted assignee shall assume all obligations of its assignor under this
Agreement.
16.6 Amendment. The parties hereto may amend, modify or alter any of
the provisions of this Agreement, but only by a written instrument duly executed
by both parties hereto.
16.7 Entire Agreement. This Agreement (and the Trademark Assignment)
contains the entire understanding of the parties with respect to the subject
matter hereof. All express or implied agreements and understandings, either oral
or written, heretofore made are expressly merged in and made a part of this
Agreement.
CONFIDENTIAL -33-
<PAGE>
16.8 Waiver. The failure of a party to enforce at any time for any
period any of the provisions hereof shall not be construed as a waiver of such
provisions or of the rights of such party thereafter to enforce each such
provisions.
16.9 No Implied Licenses. Except as expressly and specifically provided
under this Agreement (and the Trademark Assignment), the parties agree that
neither party is granted any implied rights to or under any of the other party's
current or future patents, trade secrets, copyrights, moral rights, trade or
service marks, trade dress, or any other intellectual property rights.
16.10 Injunctions. The parties agree that any breach or threatened
breach by one party of the confidentiality provisions contained in this
Agreement will cause substantial harm to the other party that cannot be remedied
by monetary damages, and therefore each party agrees that either party shall be
have the right to obtain equitable remedies, without bond, including injunctions
and repossession of Confidential Information, to abate actual or threatened
breaches of this Agreement.
16.11 Independent Contractors. The parties agree that the relationship
of Cellegy and GW established by this Agreement (and the Trademark Assignment)
is that of independent licensee and licensor. Furthermore, the parties agree
that this Agreement (and the Trademark Assignment) does not, is not intended to,
and shall not be construed to, establish a partnership or joint venture, and nor
shall this Agreement (and the Trademark Assignment) create or establish an
employment, agency or any other relationship. Except as may be specifically
provided herein, neither party shall have any right, power or authority, nor
shall they represent themselves as having any authority to assume, create or
incur any expense, liability or obligation, express or implied, on behalf of the
other party, or otherwise act as an agent for the other party for any purpose.
16.12 No Third Party Beneficiaries. All rights, benefits and remedies
under this Agreement are solely intended for the benefit of Cellegy and GW, and
no Third Party shall have any rights whatsoever to (i) enforce any obligation
contained in this Agreement (ii) seek a benefit or remedy for any breach of this
Agreement, or (iii) take any other action relating to this Agreement under any
legal theory, including but not limited to, actions in contract, tort (including
but not limited to negligence, gross negligence and strict liability), or as a
defense, setoff or counterclaim to any action or claim brought or made by the
parties.
16.13 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of North Carolina, exclusive of its
choice-of-law rules, except that questions affecting the construction and effect
of any patent shall be determined by the laws of the country in which such
patent has been granted.
16.14 Headings. The Article and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
CONFIDENTIAL -34-
<PAGE>
<TABLE>
<CAPTION>
16.15 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same document.
IN WITNESS HEREOF, the parties have executed this Agreement as of the
Effective Date.
<S> <C>
GLAXO WELLCOME INC. CELLEGY PHARMACEUTICALS, INC.
By: /s/ Dean J. Mitchell By: /s/ Carl R. Thornfeldt
------------------------------------------- ----------------------------------
Dean J. Mitchell Carl R. Thornfeldt, M.D.
Vice-President-- Chairman and CEO
Business Development and Planning,
General Manager--
Specialty Divisions
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT A
PATENTS AND PATENT APPLICATIONS
=============== ============================== =======================================
U.S. Patent Status Grant Date (patents only)
=============== ============================== =======================================
4,885,282 Issued 05 Dec 1989
=============== ============================== =======================================
5,057,500 Issued 15 Oct 1991
=============== ============================== =======================================
5,231,087 Issued 27 July 1993
=============== ============================== =======================================
=============== =================================== ============= ===================== ================ ==================
U.S. Patent Current Foreign Counterpart Status App. No. or Patent Filing Date Grant Date
Patents and Patent Applications No. (Apps. Only) (patents only)
=============== =================================== ============= ===================== ================ ==================
4,885,282 Germany (thru EPO) Issued P3853558.0 12 Apr 95
----------------------------------- ------------- --------------------- ---------------- ==================
Germany (thru EPO) Issued P3855489.5 21 Aug 96
----------------------------------- ------------- --------------------- ---------------- ==================
France (thru EPO) Issued FR 0297436 12 Apr 95
----------------------------------- ------------- --------------------- ---------------- ==================
France (thru EPO) Issued FR 0588379 21 Aug 96
----------------------------------- ------------- --------------------- ---------------- ==================
U.K. (thru EPO) Issued GB 0297436 12 Apr 95
----------------------------------- ------------- --------------------- ---------------- ==================
U.K. (thru EPO) Issued GB 0588379 21 Aug 96
----------------------------------- ------------- --------------------- ---------------- ==================
Italy (thru EPO) Issued IT 0297436 12 Apr 95
----------------------------------- ------------- --------------------- ---------------- ==================
Italy (thru EPO) Issued 26747BE/96 21 Aug 96
----------------------------------- ------------- --------------------- ---------------- ==================
Japan Pending 6-28599 25 Feb 94
----------------------------------- ------------- --------------------- ---------------- ==================
Japan Issued 2538516 8 July 96
- --------------- ----------------------------------- ------------- --------------------- ---------------- ==================
5,057,500 Australia Issued 644552 16 May 94
----------------------------------- ------------- --------------------- ---------------- ==================
Canada Issued 2074493 3 Oct 95
----------------------------------- ------------- --------------------- ---------------- ==================
Europe (Austria, Belgium, Pending 91904824.9 11 Feb 91
Denmark, France, Germany, Greece,
Italy, Netherlands, Spain,
Sweden, Switzerland, Luxembourg,
U.K.)
----------------------------------- ------------- --------------------- ---------------- ==================
Japan Pending 3-505562 11 Feb 91
----------------------------------- ------------- --------------------- ---------------- ==================
South Korea Issued 99229 9 May 96
- --------------- ----------------------------------- ------------- --------------------- ---------------- ==================
5,231,087 Australia Issued 641356 23 Mar 94
----------------------------------- ------------- --------------------- ---------------- ==================
Canada Issued 1317884 18 May 93
----------------------------------- ------------- --------------------- ---------------- ==================
Denmark Pending 1594/91 13 Mar 89
----------------------------------- ------------- --------------------- ---------------- ==================
Europe (Austria, Belgium, Pending 89905334.2 13 Mar 89
Switzerland, Germany, France,
U.K., Italy, Luxembourg,
Netherlands, Sweden)
----------------------------------- ------------- --------------------- ---------------- ==================
Japan Issued 2513877 30 Apr 96
----------------------------------- ------------- --------------------- ---------------- ==================
South Korea Pending 701107/91 13 Mar 89
----------------------------------- ------------- --------------------- ---------------- ==================
Mexico Issued 173667 22 Mar 94
- --------------- ----------------------------------- ------------- --------------------- ---------------- ==================
CONFIDENTIAL - EXHIBIT A -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT B-1
LIST OF GLYLORIN TRADEMARKS AND
TRADEMARK APPLICATIONS AND THEIR STATUS
<S> <C> <C> <C> <C>
- ------------ ------------------ -------------------- -------------------------- ============================================
Country App/Reg No. App/Reg Date Goods Status
- ------------ ------------------ -------------------- -------------------------- ============================================
France Reg. No 93464430 Reg. Date Pharmaceutical Registered/Renewal due 4/16/03
10/01/93 preparations for
treatment of skin
diseases in Int'l Class 5
- ------------ ------------------ -------------------- -------------------------- --------------------------------------------
Germany App. No. C44 App. Date All goods in Class 5 Published 1/31/94 and opposed by Schering
953/5 Wz 04/13/93 AG on 4/25/94 on the basis of its
registration for GYNOVIN, German Reg. No.
974.849 for contraceptives & international
Reg. No. 444086. Priority Agreement
proposed as settlement on 6/20/96. No
agreement has been signed but German
Patent Office rejected Schering's
opposition on 6/13/96. Cellegy is still
considering the settlement to avoid future
problems.
- ------------ ------------------ -------------------- -------------------------- --------------------------------------------
United App. No. 1532505 App. Date Pharmaceutical Opposed by Bioglan Pharmaceuticals Ltd. on
Kingdom 04/14/93 preparations for 8/23/94 based on ownership of U.K. Reg.
treatment of skin No. 1380477 for the mark GLYTRIN. Bioglan
diseases in Int'l Class filed supporting Declaration on 1/30/96.
5. Cellegy applied for extension of time on
9/27/96 to file its counter evidence.
- ------------ ------------------ -------------------- -------------------------- --------------------------------------------
United App. No. App. Date. Pharmaceutical Intent to use Application published
States 75/044,863 01/18/96 preparations for 8/20/96.
treatment of skin mucous
membrane diseases in
Int'l Class 5.
- ------------ ------------------ -------------------- -------------------------- --------------------------------------------
CONFIDENTIAL - EXHIBIT B-1 -
</TABLE>
<PAGE>
EXHIBIT B-2
TRADEMARK ASSIGNMENT FOR THE UNITED STATES
THIS ASSIGNMENT is made and delivered by Cellegy Pharmaceuticals, Inc.,
a corporation organized and existing under the laws of the State of California,
with its principal place of business at 1065 East Hillsdale Boulevard, Suite
418, Foster City, California 94404 (herein, "Assignor"), in favor of Glaxo
Wellcome Inc., a corporation organized and existing under the laws of the State
of North Carolina, with its principal place of business at Five Moore Drive,
Research Triangle Park, North Carolina 27709 (hereinafter, "Assignee").
WHEREAS, Assignor owns, and has applied for federal registration in the
United States of, the trademark GLYLORIN for pharmaceutical preparations for
treatment of skin and mucous membrane diseases in International Class 5
(hereinafter, "Trademark") on the Principal Register in the U.S. Patent &
Trademark Office under an application filed January 18, 1996, Serial No.
75/044,863 (hereinafter, "Application S.N. 75/044,863"); and
WHEREAS, Assignor wishes to assign, transfer, convey and deliver the
Trademark to Assignee;
NOW, THEREFORE, in the United States, for good and valuable
consideration the receipt and sufficiency of which is hereby acknowledged,
Assignor does hereby assign, transfer, convey and deliver to Assignee, successor
to the portion of the business to which the Trademark pertains in the United
States, all rights, title and interest in and to the Trademark and to
Application S.N. 75/044,863, together with the goodwill symbolized by the
Trademark and that portion of the business which is ongoing and existing to
which the Trademark pertains.
Executed this 13th day of November, 1996.
CELLEGY PHARMACEUTICALS, INC.
By: /s/ Carl R. Thornfedlt
----------------------------
Name: Carl R. Thornfeldt, M.D.
Title: Chairman, CEO
Acknowledged by:
GLAXO WELLCOME INC.
By: /s/ Dean J. Mitchell
----------------------------
Name: Dean J. Mitchell
Title: Vice President, General Manager
CONFIDENTIAL - B-2 -
<PAGE>
EXHIBIT C
ORPHAN DRUG DESIGNATION LETTER
ATTACHED
CONFIDENTIAL - C -
<PAGE>
EXHIBIT C
ORPHAN DRUG DESIGNATION LETTER
DEPARTMENT OF HEALTH & HUMAN SERVICES Public Health Services
- --------------------------------------------------------------------------------
Office of Orphan Products Development (HF 35)
Food and Drug Administration
5500 Fishers Lane
Rockville, MD 20857
April 29, 1993
Cellegy Pharmaceuticals, Incorporated
Attention: Ms. Mary C. Levins
Vice President, Regulatory Affairs and Quality Assurance
371 Bel Marin Keys, Suite 210
Novato, CA 94949
Dear Ms. Levins:
Reference is made to your orphan drug application of November 10, 1992 submitted
pursuant to Section 526 of the Federal Food, Drug and Cosmetic Act for the
designation of Glylorin(TM) (monolaurin) as an orphan drug (application
#92-718). We also refer to your amendment submitted February 24, 1993.
We have completed the review of this application and have determined that
monolaurin qualifies for orphan designation for the treatment of congenital
primary ichthyosis. Please note that it is the active ingredient and not the
formulation that has received orphan designation.
Prior to marketing approval, sponsors of designated orphan products are
requested to submit written notification to this Office of their intention to
exercise orphan drug exclusivity if they are the first sponsor to obtain such
approval for the drug. This notification will assist FDA in assuring that
approval for the marketing of the same drug is not granted to another firm for
the statutory period of exclusivity. Also please be advised that if monolaurin
were approved for an indication broader than the orphan designation, your
product might not be entitled to exclusive marketing rights pursuant to Section
527 of the FFDCA. Therefore, prior to final marketing approval, sponsors of
designated orphan products are requested to compare the designated orphan
indication with the proposed marketing indication and to submit additional data
to amend their orphan designation prior to marketing approval if warranted.
In addition, please inform this office annually as to the status of the
development program, and at such time as a marketing application is submitted to
the FDA for the use of monolaurin as designated. If you need further assistance
in the development of your product for marketing, please feel free to contact
Dr. Carnot Evans at (301) 443-4718.
Please refer to this letter as official notification of designation and
congratulations on obtaining your orphan drug designation.
Sincerely yours,
/s/ Marlene E. Haffner
Marlene E. Haffner, M.D., M.P.H
Director
CONFIDENTIAL - C -
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT D
THE DICARB COMPOUNDS
<S> <C> <C>
Azelaic Acid (nonanedioic acid) 1,7-heptane dicarboxylic acid
Suberic Acid (octanedioic acid) 1,6-hexane dicarboxylic acid
Sebacic Acid (decanedioic acid) 1,8-octane dicarboxylic acid
Pimelic Acid (heptanedioic acid) 1,5-pentane dicarboxylic acid
Esters of dicarboxylic acid Include:
Both monoesters and diesters
Preferred esters, particularly monoglycerides and sucrose monoesters
for the dicarboxylic acids
* As identified in Claims 39 thru 46 and Claims 55 through 58 of US Patent
Number: 4,885,282, and foreign counterpart patents and patent applications
thereof.
</TABLE>
CONFIDENTIAL - D -
<PAGE>
EXHIBIT E
DEVELOPMENT COSTS
14-Oct-96
[**]
** Confidential treatment has been requested with respect to the information
contained within the "[**]" markings. Such marked portions have been
omitted from this filing and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL - E -
<PAGE>
EXHIBIT F
INDEPENDENT REGIONS
1. United States
2. Canada
3. Mexico
4. All Caribbean countries and other islands and Bermuda
5. Central America (as defined in Article 1.7 hereof)
6. Argentina
7. Brazil
8. Bolivia, Chile, Columbia, Ecuador, Peru, Paraguay, Uruguay and Venezuela.
9. Europe (as defined in Article 1.6 hereof)
10. South Africa
11. Japan
12. Korea
13. India
14. Pakistan
15. Philippines
16. Turkey
17. All Asia (as defined in Article 1.9 hereof),
other than Japan, Korea, India, Pakistan, Philippines, and Turkey
18. Australia
19. All other countries not included in a Region described above, but within
the Territory.
CONFIDENTIAL - F -
November 20, 1996
K. Michael Forrest
1065 E. Hillsdale Blvd. #418
Foster City, CA 94404
Re: Your Employment With Cellegy Pharmaceuticals, Inc.
Dear Mike,
This letter will set forth the binding agreement of employment ("the
Agreement"), effective as of December 1, 1996 ("the Effective Date"), between
you and Cellegy Pharmaceuticals, Inc., a California corporation ("Cellegy" or
the "Company").
1. EMPLOYMENT AND DUTIES
(a) Employment. During the Employment Term (as defined in Section 3
below), the Company agrees to employ you, and subject to Section 3 below, you
agree to serve, as President and Chief Executive Officer of Cellegy. You will
have such duties and authority as are customary for, and commensurate with, such
position, including general management and direction of the Company, and such
other reasonable duties and authority as the Board of Directors of Cellegy (the
"Board") prescribes from time to time. You will also be nominated for election
as a director of Cellegy at the next Board meeting, scheduled for December 5,
1996.
(b) Exclusive Service. Except for your current consulting assignment
with Alphagene, Inc., which will be completed on January 31, 1997 or sooner, you
agree to devote your full time and efforts to this employment and apply all your
skill and experience to the performance of your duties and advancing the
Company's interests in accordance with your experience and skills. In addition,
during the Employment Term you will not act as a member of the Board of
Directors for any other corporation or engage in any other consulting activity
without the prior written approval of Company (which approval shall not be
withheld unreasonably) unless so directed by the Company, and you will otherwise
do nothing inconsistent with the performance of your duties hereunder.
2. COMPENSATION
(a) Salary. For your services under this Agreement, Cellegy will pay as
salary to you the amount of $22,083.33 per month (an annualized salary of
$265,000.00) during each of the calendar years of the Employment Term, as
defined in Section 3 below, pro rated for any year in
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K. Michael Forrest
November 20, 1996
Page 2
which this Agreement is in effect for only a portion of the calendar year. Your
salary will be paid in conformity with Cellegy's normal payroll period. The
Board (or the compensation committee thereof) shall, in its discretion, review
your salary and other compensation at least annually. From the Effective Date
through the end of your current consulting assignment, your Cellegy salary will
be adjusted based on the number of business days spent pro-rata on non-Cellegy
activities.
(b) Signing Bonus. You will receive a signing bonus of $50,000 payable
60 days after the Effective Date. You will repay such bonus if your employment
with Cellegy is terminated during a one-year period after the Effective Date for
any reason (including without limitation your voluntary termination) other than
termination Without Cause or termination due to death or disability.
(c) Other Benefits. You will be entitled to participate in and receive
benefits under Cellegy's standard company benefits plans as in effect from time
to time which currently includes: medical, dental and health insurance, a
SEP-IRA (or 401K) savings plan (subject to current contribution restrictions), a
long-term disability plan currently available to Cellegy employees (maximum
coverage $150,000 annually), life insurance (maximum coverage of one times
salary up to $250,000), two weeks per year of vacation time (subject to
applicable company "carry over" policies). You will also be entitled to
participate in the Company's employee stock option and equity incentive plans
which are generally available to executive employees.
(d) Expenses. During the term of your employment under this Agreement,
you will be entitled to receive prompt reimbursement from Cellegy for all
reasonable business-related expenses incurred by you, in accordance with
Cellegy's policies and procedures as in effect from time to time, provided that
such expenses are properly documented and accounted for in accordance with the
requirements of the Internal Revenue Service.
(e) Deductions and Withholding. All amounts payable or which become
payable under any provisions of this Agreement will be subject to any deductions
authorized in writing by you and any deductions and withholdings required by
law.
3. TERM OF EMPLOYMENT
(a) Term. This Agreement will continue in full force and effect from
and including the Effective Date through and including four years from the
Effective Date unless sooner terminated pursuant to the provisions of this
Agreement. Thereafter, the term of this Agreement shall automatically be renewed
for a maximum of two additional successive one-year terms on each anniversary of
the Effective Date (so that the maximum term is six years from the Effective
Date), unless either party gives notice of the non-renewal of such annual term
at least 30 days before commencement of the next annual term. The term of this
Agreement, unless terminated or extended as hereinafter provided will be
referred to as the "Employment Term."
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K. Michael Forrest
November 20, 1996
Page 3
(b) Extension of Term. The term of this Agreement may be extended by a
written amendment to this Agreement signed by both parties.
(c) Termination Without Cause. Your employment with Cellegy under this
Agreement may be terminated by Cellegy at any time during the Employment Term by
a majority vote of the Board, for any reason or for no reason, such termination
to be effective upon delivery of written notice by Cellegy of termination
Without Cause. For purposes of this Agreement, a termination Without Cause shall
not include termination of your employment for "Cause" or termination by reason
of your death or disability or your voluntary termination of your employment.
Termination other than for Cause shall be deemed to include termination by
reason of the non-renewal of the term of this Agreement.
(d) Termination for Cause. Your employment may be terminated for Cause
by a majority vote of the Board, immediately upon delivery of termination notice
thereof to you. For the purposes of this Agreement, "Cause" for your termination
will exist at any time after the happening of one or more of the following
events, as determined by the Company in its reasonable judgment: (i) your
willful and deliberate failure or a refusal (not resulting from your incapacity
due to physical or mental illness) to comply in any material respect with the
legal, ethical and reasonable policies, standards or regulations of the Company
of which you have or reasonably should have had prior knowledge, and provided
that written notice, in reasonable detail as to the alleged failure or refusal,
has been given to you by the Board and, if the failure is capable of cure, you
have had a reasonable opportunity to cure such failure; (ii) your willful and
deliberate failure or a refusal (not resulting from your incapacity due to
physical or mental illness) in any material respect, faithfully or diligently,
to perform your legal, ethical and reasonable duties, determined by the Company
in accordance with this Agreement or the customary duties of your employment of
which you have or reasonably should have had prior knowledge, and provided that
written notice, in reasonable detail as to the alleged failure or refusal, has
been given to you by the Board and, if the failure is capable of cure, you have
had a reasonable opportunity to cure such failure; (iii) your deliberate
concealment from the Board of any action by the Company in violation of any
legal, ethical and reasonable policy standard or regulation set by the Board;
(iv) your deliberate failure to obtain Board approval for any Company act
requiring Board approval; (v) any unprofessional, unethical or fraudulent
conduct that is demonstrably injurious and materially discredits the Company or
is materially detrimental to the reputation, character or standing of the
Company; (vi) dishonest conduct or a deliberate attempt to do injury to the
Company; (vii) your material breach of this Agreement; or (viii) your conviction
of a felony or other crime involving embezzlement, fraud or any offense
involving the money or property of the Company; provided, however, that with
respect to clauses (i) and (ii) above, if your failure or refusal was the result
of a reasonable good faith objection by you, which you set forth to the Board of
Directors of the Company, that such compliance or performance would not be in
the best interests of the Company and its shareholders or would violate an
applicable law or regulation or ethical duty, then any such termination by the
Board as a result of such failure or refusal shall be deemed to be a termination
other than for Cause.
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K. Michael Forrest
November 20, 1996
Page 4
(e) Termination Due to Death or Disability. Your employment under this
Agreement will terminate immediately upon your death. In the event that for any
reason of injury, illness or to the physical or mental impairment you are (i)
completely unable to perform your services under this Agreement for more than
two consecutive months, or (ii) unable in the good faith judgment of the
majority of the Board to perform your services under this Agreement for fifty
percent or more of the normal working day during each day of three consecutive
months, then Cellegy may terminate your employment under this Agreement by
delivery to you of written notice of such termination.
4. PAYMENTS AND BENEFITS AFTER TERMINATION OF EMPLOYMENT.
(a) Upon termination of this Agreement under Section 3(d) of this
Agreement ("Termination for Cause"), Section 3(e) ("Termination Due to Death or
Disability") or your voluntary termination of employment, all salary, benefits
and stock option vesting under this Agreement will cease immediately. Upon
termination pursuant to Section 3(c) of this Agreement ("Termination Without
Cause") after the Effective Date, including without limitation termination of
employment other than for Cause upon or after the occurrence of a merger or
acquisition of the business of Cellegy by another person or entity (whether such
transaction is structured as a merger, third party purchase of equity from
Cellegy or from its shareholders, or a sale by Cellegy of all or substantially
all of its assets or otherwise in which Cellegy is not the continuing or
surviving corporation), you will be paid severance pay by Cellegy in the form of
a continuation of your salary for a period of twelve (12) months from and after
the date of such termination even if you have secured other employment (pro
rated for the first and last month of such twelve-month period if your
employment is terminated other than at the end of a calendar month and less any
applicable amounts required to be withheld). At your option, six months of this
severance pay may be taken in one lump sum upon termination with the remainder
being paid monthly in equal increments over the severance period. In addition,
during the period that you are receiving severance payments and as long as you
have not secured full-time employment with another employer (such period
referred to as the "Eligibility Period"), to the extent permitted by applicable
Company plans and policies and unless prohibited by law, your medical and
dental, disability, and life insurance benefits will be continued. If any such
benefit cannot be continued, the Company will pay you the equivalent amount of
premiums for such benefit, and shall also pay you an additional sum to cover any
federal or state income or employment tax due on such amounts. Your SEP-IRA (or
401K) and vacation accrual will cease on the termination date. During the period
of payment of severance pay you will cooperate with Cellegy in providing for the
orderly transition of your duties and responsibilities to other individuals, as
reasonably requested by Cellegy.
(b) Moreover, during the period you are receiving severance payments
even if you have secured other employment, the period during which you may
exercise the Option will (to the extent the Option is otherwise exercisable as
provided herein) be extended until thae termination of the severance period.
Except as provided herein, vesting of Option Shares shall cease as of the date
of employment termination. For the 150,000 Option Shares described under
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K. Michael Forrest
November 20, 1996
Page 5
Section 5(iv) below, in the event of a termination other than for Cause, a
number of additional Option Shares shall become exercisable in an amount equal
to 1/48 of such 150,000 Option Shares per month (based on the grant date) for
each month from the last annual option vesting date (or, if such termination is
within one year of the grant date of the Option, then from the grant date of the
Option) until (and including) the full month in which employment termination
occurs. In addition, if the termination other than for Cause occurs within the
first six months after the grant date of the Option, then a number of the 25,000
additional Option Shares referred to in Section 5(i) shall become exercisable in
an amount equal to 1/6 of such 25,000 Option Shares per month for each month
from the grant date until (and including) the full month in which the employment
termination occurs.
5. OPTIONS. As soon as possible after you become a full-time employee,
Cellegy will recommend to the Board (or the Compensation Committee thereof) that
the Board grant to you a stock option (the "Option"), under its 1995 Equity
Incentive Plan (the "Plan"), exercisable for a total of 245,000 shares of
Cellegy Common Stock. The option will, to the extent permitted by applicable
Internal Revenue Service ("IRS") regulations, be an incentive stock option. The
Option will have an exercise price equal to 100% of the closing price of the
Common Stock on the date the option is granted, as reported in the Wall Street
Journal (or similar publication). The Option will be exercisable (will "vest")
as follows:
(i) Of the shares subject to the Option ("Option Shares"), 50,000 of
the Option Shares will be subject to vesting (according to the provisions of the
Plan and your Option relating to termination of employment), as follows:
Shares Vesting
25,000 On Grant Date
25,000 6 months after Grant Date
(ii) Under applicable IRS rules and provisions of the Plan, where the
value of Option Shares that first become exercisable in a calendar year exceeds
$100,000, the incremental shares will not be considered Incentive Stock Options
("ISOs") but will be considered Non-Qualified Stock Options ("NSOs").
(iii) 45,000 of the Option Shares will vest if the Cellegy Common Stock
closing price is at or above $12.50 (taking into account any split of the Common
Stock) for ten consecutive trading days during the five year period beginning on
the Grant Date of the Option Shares. Notwithstanding the above, all 45,000
Option Shares (subject to the provisions of the Plan and your Option relating to
termination of employment) will vest five (5) years from the grant date.
(iv) 150,000 of the Option Shares will vest in equal annual
installments over a period of four years from the grant date.
6. OBLIGATIONS NOT TO COMPETE: NO SOLICITATION.
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K. Michael Forrest
November 20, 1996
Page 6
(a) Noncompetition. You hereby agree that while you are employed by
Company, you shall not engage in or provide services to any business that is
directly or indirectly competitive with or detrimental to any present or
contemplated business of the Company known to you. Each of the following
activities shall, without limitation, be deemed to constitute engaging in
business within the meaning of this Section: to engage in, work with, have an
interest or concern in, advise, lend money to, guarantee the debts or
obligations of, or permit one's name or any part thereof to be used in
connection with, an enterprise or endeavor, either individually, in partnership,
or in conjunction with any person or persons, firms, associations, companies, or
corporations, whether as a principal, agent, shareholder, employee, officer,
director, partner, consultant or in any other manner whatsoever; provided,
however, that you shall retain the right to invest in or have an interest in
entities traded on any public market or offered by any national brokerage house,
provided that said interest does not exceed five percent (5%) of the voting
control of said entity. In addition, you may make passive investments in
privately held entities that are determined by the Board of Directors of Company
not to be competitors of Company. You also agree that if you are terminated
Without Cause, for a period of one year after your termination you shall not
engage in, work with, provide service to, have an interest or concern in,
advise, lend money to, guarantee the debts or obligations of, or permit one's
name or any part thereof, to be used in conjunction with, three persons, firms,
associations, companies, corporations, partnerships, or entities selected by the
Company prior to or substantially contemporaneously with your termination and
directly or indirectly competitive with the present or contemplated business of
the Company.
(b) Nonsolicitation. You agree that as long as you are an employee of
the Company and for one year thereafter (the "Restricted Period"), (i) you shall
not directly or indirectly, either for yourself or for any other person or
entity, directly or indirectly, solicit, induce or attempt to induce any
employee of the Company to terminate his or her employment with the Company; and
(ii) you will not in any manner attempt to induce or assist others to attempt to
induce any customer or client of the Company to terminate his association with
the Company, nor do anything directly or indirectly to interfere with the
relationship between the Company and any such persons or concerns.
7. MISCELLANEOUS. This Agreement contains the entire understanding and
sole and entire agreement between us with respect to the subject matter of the
Agreement, supersedes any and all prior agreements, negotiations and discussions
between us with respect to the subject matter covered hereby and may only be
modified by an agreement in writing signed by Cellegy and you. If any provision
of the Agreement is held to be invalid or otherwise unenforceable, in whole or
in part, the remainder of such provision and the remainder of this Agreement
will not be affected thereby and will be enforced to the fullest extent
permitted by law. Neither this Agreement nor the rights or obligations under
this Agreement will be assignable by you. Cellegy may assign the Agreement to
any successor of Cellegy without your consent. This Agreement will be binding
upon our respective successors and assigns and upon your heirs, executors and
administrators. This Agreement will be governed by and constructed under the
laws of the State of California without regard to conflict of laws. Any notice,
request, demand or other
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K. Michael Forrest
November 20, 1996
Page 7
communication required or permitted under this Agreement will be deemed to be
properly given when personally served in writing, or two days after deposit in
the United States mail, postage pre-paid, or one business day after deposit with
a reputable national courier service for overnight delivery with confirmation of
receipt, addressed to Cellegy at its principal executive office, or to you at
the address shown at the beginning of this letter, or by facsimile upon
confirmation of receipt. Each of us may change our respective address for notice
purposes by written notice to the other in accordance with this Section.
8. ARBITRATION. Cellegy and you shall submit to mandatory binding
arbitration in any controversy or claim arising out of, or relating to, this
Agreement or any breach hereof or your employment relationship with the Company;
provided, however, that both you and the Company retain the right to seek or
obtain, and shall not be prohibited, limited or in any other way restricted from
seeking or obtaining, equitable relief from a court having jurisdiction over the
parties. Such arbitration shall be conducted in San Francisco in accordance with
the California Code of Civil Procedure Section 1280, et. seq., as amended,
including the rights of discovery under Code of Civil Procedure Section 1283.05,
and judgment upon the determination or award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. The parties shall each pay
one-half of all fees and costs of the arbitration.
9. ATTORNEY FEES. In any action arising out of or relating to this
Agreement, the non-prevailing party shall pay the reasonable attorney fees and
costs of the prevailing party.
10. BOARD COMPOSITION. With respect to the Company's next annual
meeting of shareholders (or, if you do not make a recommendation in connection
with that meeting, then at the next annual meeting thereafter), you have the
right to recommend up to two new Board members in addition to yourself, provided
you and they together do not account for 50% of
<PAGE>
K. Michael Forrest
November 20, 1996
Page 8
membership of the Board. Your selections are subject to the approval by the
Board and the shareholders at the annual meeting.
Sincerely,
CELLEGY PHARMACEUTICALS, INC.
By: /s/ Dr. Carl R. Thornfeldt
- ----------------------------
Dr. Carl R. Thornfeldt
Chairman of the Board
Cellegy Pharmaceuticals, Inc.
ACCEPTED AND AGREED:
/s/ K. Michael Forrest
- ----------------------
K. Michael Forrest
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is entered into by and
between Cellegy Pharmaceuticals, Inc., a California corporation (the "Company"),
and Peter M. Elias, M.D. ("Consultant"), and is effective as of May 1, 1996 (the
"Effective Date").
BACKGROUND
The Company and Consultant are parties to a Consulting Agreement dated
April 2, 1992 (the "Prior Consulting Agreement"). The term of the Prior
Consulting Agreement expires in April 1997. In light of the changes that have
occurred since the date of the Prior Consulting Agreement to the Company's
business and the work that Consultant has performed and intends to perform
relating to the Company's business, the parties desire to enter into a new
consulting agreement.
AGREEMENT
THE PARTIES AGREE AS FOLLOWS:
1. Consulting Services. During the term of this Agreement, Consultant
shall provide technical services to the Company and part-time consulting
services in the area of dermatologic therapeutics, skin care, transepithelial,
topical drug delivery (both passive and active transport) and all aspects of
epithelial structure, function, and metabolism, including without limitation
related to:
Modulation of Epithelial Barrier Function;
Pathogenesis, Prevention, and Treatment of Epithelial Disorders;
Regulation of Epithelial Differentiation/Proliferation;
Embryology, Maturation and Aging of Epithelial Membranes;
Epithelial Lipid/Protein Biochemistry, Biophysics, and Physiology; and
Signaling Pathways of Epithelial Functions (including without
limitation to interactions of ions, water, pH, cytokines, growth
factors, cellular membrane receptors/channels, soluble receptor,
antibodies, etc.).
The services rendered and work performed by, or under the supervision or control
of, Consultant pursuant to this Agreement shall be referred to as the
"Services." In addition, subject to the overall authority of the Board of
Directors of the Company to determine the membership of the Company's Scientific
Advisory Board (the "SAB"), Consultant shall also serve as Co-Chairman of the
SAB.
1.1 Personal Consultation. Consultant shall provide the
Services to the Company or its designees as reasonably requested from time to
time by the Company but in any event up to two (2 Days/Month) working days per
month on average, totaling twenty-four (24) working days annually during the
term of this Agreement. If the Company requests additional Services such that
Consultant is working more than 2 days per month on average, Consultant may
charge the Company additional per diem consulting fees in an amount pro-rated
based on
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the monthly compensation described in Section 2.1 of this Agreement (which is
based on 2 working days per month).
1.2 Clinical Trials. Consultant will assist in the
identification and recruitment of appropriate clinicians to perform, for the
Company or its designees, clinical trials of new compounds on appropriate
subject populations at study sites desired by Company, including for example,
and to the extent possible, the Veterans Administration Medical Center, San
Francisco ("VAMC") or the University of California Medical School ("UC-SF"). As
requested by Company, Consultant will provide advice and assistance on
contracting with the study sites future clinical studies and initiating and
conducting clinical studies.
1.3 Disclosure of Current and Future Relationships. Consultant
will keep the Chief Executive Officer and/or Vice President, Research and
Development, of the Company informed concerning the general nature of
Consultant's arrangements or agreements concerning any activities supported or
funded by third party entities which might conflict with Services provided by
him under this Agreement.
2. Compensation, Expenses and Payment. Following the Effective Date:
2.1 Compensation. For any and all Services the Consultant may
render pursuant hereto, during the term of this Agreement, the Company shall pay
the Consultant a consulting fee at the rate of Three Thousand Five Hundred
dollars ($3,500.00) per calendar month following the Effective Date, payable in
arrears on the fifth (5th) business day following the end of such calendar
month.
2.2 Reimbursement of Expenses. The Consultant shall be
reimbursed for reasonable out-of-pocket expenses incurred following the
Effective Date in connection with rendering of the Services to the extent
reasonably verified by receipts and other written evidence. No expenses of
Consultant in excess of Five Hundred Dollars ($500.00) shall be incurred without
the advance approval of the Chief Executive Officer of the Company.
3. Inventions and Assignment Thereof.
3.1 Assignment of Inventions. (a) To the extent not prohibited
by agreements or legally enforceable policies to which Consultant is a party or
by which Consultant is bound which were in existence before the date of this
Agreement (the "Prior Agreements") all Inventions (as defined in Section 3.4
hereof) conceived of or made by the Consultant, either alone or with others,
during the term of this Agreement, whether or not such Inventions are conceived
of or made during the Consultant's regular working hours while performing
Services or whether or not the Consultant is then actually rendering Services,
which (i) are developed, in whole or in part, in reliance upon any of the
Company's equipment or supplies (except for such Company equipment or supplies,
if any, which are located at the VAMC or UC-SF laboratories and which are used
in other research activities of Consultant for work under other Agreements with
Company), facilities or Confidential Information (as defined in Section 3
hereof), or (ii) result from any work performed by the Consultant for the
Company or its designees, are and shall be the sole property of the Company,
whether as "works for hire" or otherwise. Except to the
2
<PAGE>
extent the Consultant is expressly prohibited from doing so by the Prior
Agreements, the Consultant hereby irrevocably assigns and transfers to the
Company all of Consultant's right, title and interest in and to all such
Inventions, including any and all patent rights, copyrights or moral rights in
such Inventions, and the Consultant shall not disclose any such Inventions to
others without the express written consent of the Company.
(b) For the purpose of this Agreement, an Invention is
deemed to have been made during the term of this Agreement if, during such
period, the Invention was conceived or first actually reduced to practice; and
any patent applications filed by Consultant, either alone or with others, within
one (1) year following expiration of the term of this Agreement shall be
presumed to relate to an Invention with respect to which the Company has rights
pursuant to this Section 3.1, unless the Consultant can prove to the contrary by
a preponderance of the evidence. Notwithstanding anything to the contrary
contained herein, this Section 3 shall not apply to any Invention which fully
qualified under Section 2870 of the California Labor Code.
(c) Consultant represents and warrants to Company that he
has disclosed all such Prior Agreements to Company on Schedule A attached
hereto, including his Prior Agreements with the VAMC and UC-SF (which Company
hereby acknowledges), and that during the term of this Agreement, he shall
disclose to the Company his desire to enter into any other agreements which
might impair his obligations hereunder prior to entering into such other
agreements. Consultant represents and warrants that he will promptly disclose to
the Company any such inventions that might be subject to this Section 3.
3.2 Disclosure to the Company. Attached hereto as Schedule B
is a list identifying in detail, to the extent not prohibited by any Prior
Agreements, all Inventions actually conceived of, made or reduced to practice by
the Consultant, alone or with others, before the date of this Agreement, which
have not been previously disclosed on a Schedule to the Prior Consulting
Agreement or which has not previously been assigned to the Company pursuant to
the provisions of the Prior Consulting Agreement, and which are excluded from
this Section 3 except to the extent that the Company hereafter obtained rights
to such Inventions. Subject to his express obligations under the Prior
Agreements, the Consultant shall disclose promptly and in writing to the Board
of Directors of the Company all Inventions which the Consultant considers may be
patentable (whether the Consultant considers them to fully qualify under Section
2870 or not), or otherwise may be of value or interest to the Company, which the
Consultant, alone or with others, conceives or develops while performing within
the scope of the Agreement. The disclosure of such Invention shall be protected
by the Company by all reasonable technical and legal means, including without
limitation those steps which the Company takes to protect the Company's own
trade secrets.
3.3 Further Obligations. The Consultant shall, at any time
during the term of this Agreement and after it terminates for any reason, on
request of the Company and at its expense, execute and acknowledge specific
assignments in favor of the Company or its nominee of any or all of the
Inventions covered by this Section 3, as well as execute and acknowledge all
papers and perform all lawful acts the Company considers necessary or advisable
for the preparation, prosecution, issuance, procurement and maintenance of
patent applications and patents of the United States and foreign countries for
such Inventions, and for the transfer of any
3
<PAGE>
interest therein the Consultant may have, and shall execute and acknowledge any
and all papers and lawful documents required or necessary to vest title in the
Company or its nominee in all Inventions, patent application, patents and
interests. The Consultant shall execute all documents and assist, at the
Company's expense, in the preservation of all of the Company's interests,
arising under this Agreement.
3.4 Definition of "Inventions". For the purposes of this
Section 3, "Invention" means any new formulae, compound, know-how, techniques,
applications, reports, studies, analyses, combinations, machines, methods,
processes, algorithms, routines, subroutines, apparatuses, compositions of
matter, designs, uses, plans or configurations of any kind, discovered,
conceived, developed, made, created or produced, or any improvements or
derivatives of them, and shall not be limited to the definition of any invention
contained in the United States patent laws.
3.5 Cooperation. The Consultant, at the Company's expense and
to the extent not prohibited by any Prior Agreements, shall cooperate as
reasonably requested by the Company to protect the interests and proprietary
rights of the Company and its designees under the Agreement, whether through
litigation against third parties and otherwise, and to the extent legally
permitted shall not take any action or provide any testimony adverse to the
Company without its prior written consent to such action or testimony.
Consultant will acknowledge his relationship with the Company in meetings,
scientific conferences and poster exhibits as requested by the Company. When the
Company scientists have contributed to the information, the Company will be
appropriately credited by Consultant.
4. Confidential Information.
4.1 Definition. For purposes of this Agreement, "Confidential
Information" means any confidential or proprietary information relating to the
business or operations of the Company, trade secrets, Inventions, formulae,
know-how, testing procedures, data and interpretations, actual or proposed
products or business plans, marketing plans and financial data. Confidential
Information shall not include information which is or becomes publicly and
generally known without any breach of this Agreement, or which Consultant can
demonstrate through contemporaneously prepared written evidence to have known by
him prior to or other than through its disclosure by Company or development in
connection with his rendering Services to Company.
4.2 Confidentiality. Consultant agrees that the Confidential
Information developed by or for the Company, is proprietary and of significant
value to the Company and that the disclosure or unauthorized use thereof could
cause the Company material and irrevocable harm. Therefore, except only to the
extent the Consultant is expressly required to do so under the Prior Agreements,
Consultant shall not, without the prior written consent of the Company, disclose
to unauthorized persons, or use for any purpose (other than for the Company's
benefit) either during or after the term of this Agreement, any Confidential
Information. Consultant shall take all reasonable steps to protect Confidential
Information.
4
<PAGE>
4.3 Notes, Memoranda, etc. Except to the extent expressly
provided otherwise by the Prior Agreements, all notes, memoranda, reports,
drawings, materials, data and other papers and records of every kind, however
embodied, which were in or shall come into the Consultant's possession at any
time during the term of this Agreement and relating to any Confidential
Information or the Services, shall be the sole and exclusive property of the
Company, and shall (together with all copies, notes, portions, excerpts,
extractions or translations thereof) be surrendered to the Company upon
termination of this Agreement or upon request by the Company at any other time
either before or after the termination of this Agreement.
5. Non-Competition. During the term of this Agreement, the
Consultant shall not, without the prior written consent of the Company, directly
or indirectly, whether as a partner, employee, joint venturer, licensor,
officer, director or otherwise, engage in any activity of a business or
commercial nature to a business or other entity which competes, directly or
indirectly, with the actual or proposed business or research and development of
the Company. The Consultant may, however, (i) beneficially own interest of less
than five percent (5%) of the outstanding voting stock of publicly traded
companies, or of private companies that are not direct competitors of the
Company, (ii) conduct a private medical practice treating solely his personal
patients (but not for purposes of research or development), (iii) act as an
employee of VAMC or UC-SF consistent with his current employment, (iv) perform
scientific consulting activities for other entities (as contemplated by the
other provisions of this Agreement), (v) give or participate in lectures or
symposia presenting information (but not Confidential Information) for
educational purposes only, or (vi) seek other full-time or part-time employment
that is not directly or indirectly competitive with the actual or proposed
business or research and development of the Company. In addition to and without
limiting the generality of the foregoing, following the termination of this
Agreement, the Consultant shall not (i) solicit the services of any of the
Company's then-current employees, or (ii) solicit business directly or
indirectly from any of the Company's clients or customers on behalf of an entity
or person who competes, directly or indirectly, with the business of the Company
as conducted or proposed to be conducted so that such entity or person can
supply goods or services to the Company's clients or customers in addition to or
in lieu of the Company, but subject to Section 4 hereof, clause (ii) shall in no
way limit or restrict the Consultant from providing personal consulting services
to or for any person or entity following the termination of this Agreement.
6. No Conflicts with Rights of Third Parties. The Consultant
hereby represents and warrants to the Company that the Consultant is not a party
to or bound by any agreement, obligation or understanding which restricts or
limits in any way the Consultant's right to enter into this Agreement or the
Consultant's right or ability to perform his obligations under this Agreement,
including without limitation the Prior Agreements. Further, the Consultant
covenants to the Company that he shall not knowingly and recklessly use or
infringe the intellectual property rights, trade secrets, patents, copyrights,
or other proprietary rights of any third party in the performance of the
Consultant's obligations under this Agreement.
7. Termination, Survival of Provisions.
7.1 Term. This Agreement shall commence as of the Effective
Date and shall terminate at the close of business on the third anniversary of
the Effective Date (the "Initial
5
<PAGE>
Term"), unless terminated sooner as provided herein. The Company may, by notice
delivered to Consultant at least 30 days before the expiration of the Initial
Term, extend the term of the Initial Term, extend the term of this Agreement for
an additional one-year period.
7.2 Termination. Notwithstanding the provisions of Section
7.1, the Agreement shall terminate upon the first of the following:
(a) Death. Upon the Consultant's death or (at the
Company's option) permanent disability, as determined in good faith by the Board
of Directors of the Company;
(b) Consent. Upon the written request of one or both
parties;
(c) Breach. By either party upon the material breach of
the other party, provided the non-breaching party has provided the breaching
party with notice of the breach, and such breach has remained uncured for a
period of thirty (30) days;
(d) Liquidation, Etc. The liquidation, dissolution or
indefinite cessation of business operations of the Company; or
(e) General Assignment, Etc. The execution by the Company
of a general assignment for the benefit of creditors or the appointment of a
receiver or trustee to take possession of the property and assets of the
Company.
7.3 Survival of Provisions. The provisions of Sections 3, 4, 5
(last sentence only), and 6 shall survive expiration or termination of the
Agreement for any reason.
8. Miscellaneous.
8.1 Notices. Except as otherwise provided in the Agreement,
any notice or other communication required or permitted hereunder shall be in
writing and shall be deemed to have been duly given (i) on the date of delivery
if delivered personally, (ii) one business day after transmission by telex or
facsimile transmission, or (iii) four (4) days after mailing if mailed, by first
class mail, certified or registered with return receipt requested, postage
prepaid to the following addresses:
If to Consultant: If to Company:
Peter M. Elias, M.D. Attention: President
1065 E. Hillsdale Blvd. #418 Cellegy Pharmaceuticals, Inc.
Foster City, CA 94404 Foster City, CA
8.2 Damages, Service of Process. The Consultant acknowledges
that the Company will suffer substantial damages not readily ascertainable or
compensable in terms of money in the event of the breach of any of the
Consultant's obligations under Sections 3, 4, 5, or 6 of this Agreement. The
Consultant further agrees that services of process upon the Consultant in any
such action or proceeding may be made by first-class mail, certified or
registered, return receipt requested as provided for the giving of notices in
Section 8.1 of this Agreement.
8.3 Headings. The headings appearing at the beginning of the
several sections contained herein have been inserted for identification and
reference purposes and shall not by themselves determine the construction or
interpretation of this Agreement.
6
<PAGE>
8.4 Assignment. The Consultant has been retained by the
Company due to the Consultant's particular skill and expertise. Therefore, the
Consultant may not assign, delegate or subcontract any of the Consultant's
rights or obligations hereunder. The Company may assign this Agreement in its
discretion. This Agreement shall be binding upon and inure to the benefit of the
respective heirs, executors, administrators, successors, legal representatives
and assigns of the parties.
8.5 Enforcement. If any portion of this Agreement shall be
determined to be invalid or unenforceable, the remainder shall be valid and
enforceable to the maximum extent possible.
8.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts entered into between California residents and to be performed wholly
in California.
8.7 Entire Agreement and Modification. This Agreement and the
Exhibits and Schedules hereto (which are hereby incorporated by reference)
constitutes and contains the entire agreement of the parties respecting the
subject matter hereof and supersede any and all prior negotiations,
correspondence, understandings and agreements between the parties respecting the
subject matter hereof. This Agreement may only be modified by a written
instrument signed by the parties hereto. Commencing from the Effective Date,
this Agreement shall supersede the Prior Consulting Agreement with respect to
the subject matter of this Agreement; provided, however, that nothing in this
Agreement shall modify, limit or reduce the Company's rights with respect to the
Existing Products as defined in the Prior Consulting Agreement.
8.8 Other Instruments. The parties agree to execute such
further instruments and to take such further action as may reasonably be
necessary to carry out the intent of this Agreement.
8.9 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.
8.10 Independent Contractor. The Consultant enters into this
Agreement as, and shall continue to be, an independent contractor. Under no
circumstances shall the Consultant look to the Company as the Consultant's
employer. Neither party has any authority to bind the other party to any third
party or otherwise to act as the agent or representative of such other party.
The Consultant agrees to pay all federal, state and other income taxes due and
to properly file appropriate tax returns.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Consulting Agreement to be duly and validly executed and delivered as of the
date first above written.
Cellegy Pharmaceuticals, Inc. Peter M. Elias, M.D.
By: /s/ Dr. Carl Thornfeldt /s/ Peter M. Elias
----------------------------- ------------------------
Dr. Carl Thornfeldt Peter M. Elias, M.D.
Acting President & Chief Executive Officer
The undersigned, on behalf of the University of California and the Veterans
Administration Medical Center have reviewed this Agreement and hereby agree that
the obligations undertaken by Dr. Elias are not in conflict with his employment
agreements with our respective institutions.
University of California San Francisco Veterans Administration
Medical Center
By: By:
----------------------------- ---------------------
Date: Date:
--------------------------- -------------------
8
<PAGE>
<TABLE>
SCHEDULE A -- PRIOR AGREEMENTS
(SEE SECTION 3.1(C), USE ATTACHMENTS IF NEEDED)
<CAPTION>
<S> <C> <C>
- -------------------------------------------- ------------------------------------------- -------------------------------------------
Other Parties Effective and Termination Dates Nature of Relationship and Duties
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
SCHEDULE B -- INVENTIONS NOT PREVIOUSLY DISCLOSED
(SEE SECTION 3.2, USE ATTACHMENTS IF NEEDED)
- -------------------------------------------- ------------------------------------------- -------------------------------------------
Title of Invention Dates Conceived and Inventors, Nature of Invention, and Names of
Reduced to Practice Other Parties Possibly Having Rights in
Invention
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
- -------------------------------------------- ------------------------------------------- -------------------------------------------
</TABLE>
<TABLE>
Exhibit 11.01
Cellegy Pharmaceuticals, Inc.
Statement of Computation of Pro Forma Net Loss Per Share
<CAPTION>
Year ended December 31,
------------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Average common shares outstanding 4,306,550 2,967,321
Common stock, common stock options, convertible notes
payable, and warrants issued during the twelve-month period
prior to the initial public offering in accordance with Staff
Accounting Bulletin No. 83 238,375
----------- -----------
4,306,550 3,205,696
=========== ===========
Net loss (3,368,096) (2,151,877)
Non-cash preferred dividends 1,413,765 --
Net loss applicable to common shareholders $(4,781,861) $(2,151,877)
=========== ===========
Pro forma net loss per share
applicable to common shareholders $ (1.11) $ (0.67)
=========== ===========
</TABLE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-96384) pertaining to the 1992 Stock Option Plan, 1995
Equity Incentive Plan, and 1995 Directors' Stock Option Plan, and in the
Registration Statement (Form SB-2 No. 33-03401), and in the Registration
Statement (Form S-3 No. 33-11457) of Cellegy Pharmaceuticals, Inc. of our report
dated February 5, 1997, with respect to the financial statements of Cellegy
Pharmaceuticals, Inc. included in the Annual Report (Form 10-KSB) for the year
ended December 31, 1996.
ERNST & YOUNG LLP
San Jose, California
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 36
<SECURITIES> 7,278
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,643
<PP&E> 158
<DEPRECIATION> (127)
<TOTAL-ASSETS> 7,696
<CURRENT-LIABILITIES> 309
<BONDS> 0
<COMMON> 20,141
0
2,161
<OTHER-SE> (14,915)
<TOTAL-LIABILITY-AND-EQUITY> 7,696
<SALES> 0
<TOTAL-REVENUES> 648
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,346
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,368)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,368)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
