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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-21198
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ZONAGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0233274
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2408 TIMBERLOCH PLACE, SUITE B-4
THE WOODLANDS, TEXAS 77380
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(281) 367-5892
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
Common Stock, $.001 par value Pacific Exchange
Nasdaq National Market
SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $228,623,856 as of March 24, 1998, based on the
closing sales price of the registrant's common stock on the Nasdaq National
Market on such date of $22.375 per share. For purposes of the preceding
sentence only, all directors, executive officers and beneficial owners of ten
percent or more of the shares of the registrant's common stock are assumed to be
affiliates. As of March 24, 1998, 11,297,716 shares of the registrant's common
stock were outstanding.
Certain sections of the registrant's definitive proxy statement relating to
the registrant's 1998 annual meeting of stockholders, which proxy statement will
be filed under the Securities Exchange Act of 1934 within 120 days of the end of
the registrant's fiscal year ended December 31, 1997, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
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This Annual Report on Form 10-K contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"anticipate," "believe," "expect," "estimate," "project" and similar expressions
are intended to identify forward-looking statements. Such statements reflect
the Company's current views with respect to future events and financial
performance and are subject to certain risks, uncertainties and assumptions,
including those discussed in "Item 1. Description of Business -- Business
Risks." Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, estimated or projected.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Zonagen, Inc. ("Zonagen" or the "Company") is a biopharmaceutical company
engaged in the research, development and marketing of products which address
conditions and diseases associated with the human reproductive system. In 1997,
the Company completed two pivotal Phase 3 clinical trials in the United States
of its lead product candidate, Vasomax(TM), an oral treatment for male erectile
dysfunction, commonly referred to as impotence. Based upon clinical trial
results, the Company believes that Vasomax will improve the erectile function,
intercourse success rates and overall sexual experience of a significant
percentage of impotent men. In November 1997, the Company entered into
exclusive license agreements with affiliates of Schering-Plough Corporation
(including such affiliates, "Schering-Plough") with respect to the exclusive
worldwide license to market and sell the Company's Vasomax product for the
treatment of male erectile dysfunction. See " -- Collaborative and Licensing
Agreements."
The Company is also engaged in the research and preclinical development of a
therapy for female sexual dysfunction, a second-generation product for male
erectile dysfunction, new approaches to contraception, including zona pellucida-
based vaccines in collaboration with Schering AG, treatments for urological
diseases such as benign prostate hyperplasia ("BPH") and prostate cancer, and an
adjuvant to enhance the effectiveness of vaccines. In addition to its
proprietary development activities, the Company markets and distributes a
variety of third-party fertility-related products to obstetrics/gynecology,
urology and fertility specialists through its wholly-owned subsidiary, Fertility
Technologies, Inc. ("FTI").
The Company has completed two Phase 3 pivotal studies which demonstrated
clinical benefit in approximately 30% to 40% of patients tested, representing a
statistically significant improvement over placebo. Zonagen presently expects to
submit a New Drug Application (an "NDA") for Vasomax to the United States Food
and Drug Administration ("FDA") in the first half of 1998. There can be no
assurance, however, that the NDA will be filed on a timely basis or that it will
ultimately be approved by the FDA. The Company believes that Viagra will capture
the largest share of the market for oral therapies for male erectile
dysfunction. The Company believes, however, that Vasomax's safety profile and
fast-acting formulation will allow it to capture a significant share of a
potentially large and growing market. In September 1997, Pfizer, Inc. ("Pfizer")
submitted an NDA for Viagra(TM), its oral medication for the treatment of
erectile dysfunction, and was granted expedited review. Pfizer received
marketing approval for Viagra on March 24, 1998. See " -- Business Risks --
Uncertainties Related to Clinical Trial Results and FDA Approval" and -- "Male
Erectile Dysfunction --Current Competition and Products under Development."
MALE ERECTILE DYSFUNCTION
Background
Male erectile dysfunction, or impotence, has historically been defined as the
persistent inability to attain and maintain an erection adequate to permit
satisfactory sexual performance. More recently, however, a leading study (the
Massachusetts Male Aging Study) published in the Journal of Urology in 1994
determined that male erectile dysfunction is best defined using broader, more
flexible criteria, including an assessment of erectile difficulty during
intercourse,
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frequency of sexual activity and erection, and satisfaction with the quality of
the erection and the overall sexual experience.
The Massachusetts Male Aging Study (the "MMA Study") concluded that male
erectile dysfunction is a major health concern. The study found that 52% of men
studied between the ages of 40 and 70 suffered from erectile dysfunction,
suggesting that approximately 18 million American men in that age category
suffered from erectile dysfunction in 1990. More than 80% of those afflicted
were characterized as having mild to moderate dysfunction.
The health variable most strongly associated with erectile dysfunction is
age. According to the MMA Study, the overall prevalence of erectile dysfunction
increases from 40% at age 40 to 67% at age 70. Further, the MMA study found
that the probability of complete impotency triples, while the probability of
moderate erectile dysfunction doubles over that age range. Factors other than
age which may contribute to erectile dysfunction include heart disease,
hypertension and diabetes, certain therapeutic drugs and anger or depression.
Current aging trends suggest that the number and percentage of men in the United
States suffering from erectile dysfunction will increase.
Erectile dysfunction occurs when one or more of the underlying factors
results in (i) an inadequate supply of blood to the penis, (ii) a failure to
relax the smooth muscle tissue in the penis so that the penis can become
engorged with blood, (iii) a failure to retain blood in the penis or (iv) a
combination of these factors. Blood is carried to the penis in two large
arteries that terminate in a maze of blood vessels contained in three erectile
bodies of the penis: the corpus spongiosum, which surrounds the urethra, and
two corpora cavernosa. Smooth muscle tissue surrounds each individual blood
vessel in the erectile bodies. When the penis is flaccid, the smooth muscle
tissue is in a contracted state, which constricts the blood vessels resulting in
reduced blood flow. During stimulation, signals are sent to the nerve endings
in the penis that cause the smooth muscle tissues in the penis to relax which
allows the blood vessels to expand. This expansion allows arterial blood to
fill the erectile bodies and causes the penis to become engorged with blood and
erect. As the erectile bodies expand, the venous outflow of blood is restricted
so that the erection can be maintained.
Current Therapies
A number of products are currently available for the treatment of male
erectile dysfunction, including needle injection therapies, a urethral catheter
device, vacuum constriction devices, penile implants and oral medications.
However, most of these treatments are invasive, painful, inconvenient or result
in an erection the onset and duration of which is determined by the treatment
rather than by actual sexual stimulation. In addition, many currently available
therapies produce undesirable side effects and potential complications.
Needle injection therapy involves the direct injection into the penis of
vasoactive compounds such as alprostadil (prostaglandin E), phentolamine
mesylate and papaverine used on an off-label basis. These compounds may be
administered alone or in combination. Needle injection therapy has a relatively
high degree of efficacy in producing an erection of maximal rigidity within a
short period of time after administration. However, the erection is produced
regardless of actual sexual stimulation and maintained for a period of time
determined by the dose rather than by the normal course of sexual activity.
Needle injection therapy can also involve significant undesirable effects,
including the pain of the injection, local pain or aching and complications such
as hematomas, bleeding and nodule formation.
The currently available urethral catheter device administers a small pellet
of alprostadil directly into the penis by a catheter which is inserted through
the opening of the urethra, where the drug is then absorbed. Use of the device
produces an erection within a short period of time, regardless of actual sexual
stimulation. The erection produced is maintained for a period of time
determined by the dose rather than by the normal conduct of sexual activity.
This transurethral treatment can be used to treat a significant number of
impotent men, but may cause pain and some degree of urethral burning during and
after administration, as well as other systemic side effects.
A vacuum constriction device is a mechanical system that creates a vacuum
around the penis, causing the erectile bodies to fill with blood. A
constriction band is then placed around the base of the penis to impede blood
drainage and maintain the erection until the band is removed. This device can
be inconvenient to use, may cause the penis to become cold and discolored due to
the constriction of blood flow, and may produce such complications as pain
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and difficulty ejaculating. Prolonged periods of constricted blood flow may
produce permanent damage to tissue in the penis.
Penile implant therapy involves the surgical implantation of a semi-rigid,
rigid or inflatable device into the penile structure to mechanically simulate an
erection. In addition to the risks and scarring associated with the surgical
procedures, complications include infection and mechanical failure of the
device, which may necessitate a second surgical procedure. Penile implant
surgery is irreversible and involves substantial cost. Surgical implants
require the removal of tissue from the penis, effectively eliminating the
patient's ability to subsequently use other, less radical methods of treatment.
The currently available oral medication that is most frequently used to treat
erectile dysfunction is yohimbine, an extract from tree bark. Yohimbine is
available by prescription in a concentrated form or as a food supplement at
health food stores and other retailers. Yohimbine must be chronically
administered, may cause irritability, sweating, nausea and hypertension, and has
not demonstrated statistically significant performance compared to placebo.
Several oral therapies other than Vasomax are currently under development by
other companies, and an NDA has been submitted to the FDA with respect to one
such competing oral therapy.
The Company believes that many men do not seek treatment for erectile
dysfunction because of the invasiveness, pain, inconvenience and other
undesirable effects of the therapies that are currently available and that the
number of men with erectile dysfunction who seek treatment would increase if an
effective orally-administered therapy were available.
Current Competition and Products Under Development
In addition to currently available therapies, Vasomax faces competition from
new therapies for male erectile dysfunction, including new oral, injection and
topical therapies being developed by other companies. Some of the Company's
competitors, including Pfizer and TAP Pharmaceuticals, Inc. ("TAP"), are active
in the development of oral therapies to treat male erectile dysfunction. Pfizer
submitted a NDA in September 1997 and received expedited review for Viagra, its
oral medication for the treatment of erectile dysfunction. Viagra received
approval on March 27, 1998. The Company believes that Viagra will capture the
largest share of the market for oral therapies for erectile dysfunction. The
Company believes, however, that Vasomax's safety profile and fast acting
formulation will allow it also to capture a significant share of this market.
TAP is also developing an oral treatment for erectile dysfunction which is
currently in clinical development. The Company believes that TAP could submit an
NDA for this oral treatment to the FDA as early as late 1998.
The Company's other competitors include Vivus, Inc., which commenced
marketing of a urethral catheter device in the United States in January 1997,
Pharmacia & Upjohn Inc., which markets a penile injection therapy, and Schwarz
Pharma AG, which has received marketing approval for a penile injection therapy.
In addition, companies and research groups in addition to these discussed above
are developing oral, topical, injectable and other means of administration for
drugs to treat male erectile dysfunction. MacroChem Corp. is currently
developing a topical treatment for male erectile dysfunction that may compete
with Vasomax. The Company believes that Vasomax will compete effectively with
such competitive products on the basis of one or more factors, including
convenience of administration, speed of efficacy, duplication of normal sexual
function or reduced side effects, price and the availability of third-party
reimbursement. Marketing of competitive products and other products that treat
disease indications targeted by the Company could adversely affect the market
acceptance of the Company's products as a result of the established market
recognition and physician familiarity with the competing product. The presence
of directly competitive products could also result in more intense price
competition than might otherwise exist, which could have a material adverse
effect on the Company. The Company believes that competition will be intense
for all of its products. See "-- Competition."
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The Vasomax Solution
Vasomax is a fast-acting oral treatment for male erectile dysfunction that
systematically delivers phentolamine mesylate ("phentolamine"). Vasomax
produces an alpha-adrenergic block of relatively short duration, leading to
vasodilative effects on vascular smooth muscles. Phentolamine has been approved
by the FDA for the treatment of hypertension and in the diagnosis of certain
tumors of the adrenal gland, and has been used "off-label" by urologists, either
alone or in combination with other drugs, in penile needle injection therapies
for the treatment of male erectile dysfunction. The Company believes that due
to its mode of action, Vasomax will most benefit men with mild to moderate
erectile dysfunction.
Based on the Company's clinical trial results, Vasomax's expected benefits
and advantages include the following:
. Oral Administration. Vasomax is a tablet which is taken orally, and
therefore is painless, non-invasive, convenient and discreet for the user.
. Speed of Efficacy. Vasomax's fast-dissolving formulation enables an
erectile response within 15 to 30 minutes of administration.
. Normal Penile Response. Vasomax more closely duplicates normal
sexual function by enabling and maintaining an erection only in the presence
of actual sexual stimulation.
. Reduced Side Effects. Vasomax may produce fewer side effects than
many of the currently available treatments.
Vasomax Clinical Development
The Company completed two pivotal Phase 3 clinical trials of Vasomax in May
1997. These Phase 3 trials were designed to evaluate Vasomax's effectiveness in
treating men suffering from erectile dysfunction, using the Erectile Function
Domain of the International Index of Erectile Function ("IIEF"). The IIEF is a
statistical instrument that measures erectile dysfunction, developed and
validated by Dr. Ray Rosen, and is based on 15 questions answered by each
patient. The IIEF was used both by the Company in its Vasomax clinical trials
and by Pfizer in its clinical trials for Viagra.
The IIEF questions include inquiries regarding: the frequency with which the
participant achieved (i) an erection, (ii) an erection with sufficient firmness
to achieve vaginal penetration, (iii) vaginal penetration, and (iv) an erection
that was maintained following penetration; the participant's difficulty in
maintaining an erection to completion of intercourse; and the participant's
confidence regarding his ability to achieve and maintain an erection. The
answers to these questions were used to classify a participant's erectile
dysfunction as severe, moderate, mild to moderate, mild or not impotent.
Participants in the Company's Phase 3 clinical trials of Vasomax were considered
as responding to Vasomax if their endpoint IIEF domain score for erectile
dysfunction improved by at least one dysfunction class (mild, mild-to-moderate,
moderate, severe) and if they suffered from no greater than mild-to-moderate
erectile dysfunction with treatment.
The Company also measured endpoints in the Phase 3 trials in addition to the
primary IIEF endpoint which the FDA is expected to use in making its
determination regarding the efficacy of Vasomax. These secondary endpoints
included rates of successful intercourse (defined as intercourse involving the
achievement of an erection, vaginal penetration and the maintenance of the
erection through orgasm) and other measures of overall sexual experience. The
trials included men with a broad variety of medical conditions, including
cardiovascular conditions, diabetes and prostrate conditions, and men who took
other medications during the trials. Because the Company believes that an intact
nervous system is required for Vasomax to be effective, men with erectile
dysfunction caused by spinal cord injury or radical prostectomy were
intentionally excluded from the trials.
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The first of the Phase 3 clinical trials completed was a double-blinded,
placebo-controlled study involving 435 men at 20 centers across the United
States testing 40mg and 80mg doses of Vasomax against a placebo. Physician
diagnoses indicated that substantially all of the patients enrolled in the trial
suffered from erectile dysfunction with physiological causes, a majority of
which involved vasculogenic conditions; the erectile dysfunction of only 2% of
enrolled patients was classified as having purely psychogenic causes by the
attending physician. Based on preliminary results, Vasomax yielded a
statistically significant (p(less than)0.001) improvement over placebo using the
primary IIEF endpoint, with 40% of the men in the study responding to the 40mg
dose of Vasomax and 48% responding to the 80mg dose of Vasomax, as compared to
17% responding to placebo. Vasomax also yielded a statistically significant
(p(less than)0.001) improvement over placebo using successful intercourse as a
secondary endpoint, with 42% of the men in the study responding to the 40mg dose
of Vasomax and 39% responding to the 80mg dose of Vasomax, as compared to 22%
responding to placebo. The study included an in-office test dose of 80mg on all
of the men considered for participation in the study to assess side effects
before exposing men to at-home use of Vasomax. Although one patient exhibited
both an increase in heart rate and a decrease in blood pressure of greater than
30% and another patient experienced chest pain (both during the in-office 80mg
test), no other serious adverse events related to the drug were observed with
the in-office or at-home portions of the trial.
The second Phase 3 trial completed was a double-blinded, placebo-controlled
study involving 293 men at 14 centers across the United States, testing 40mg
doses of Vasomax against a placebo. Based on preliminary results, Vasomax
yielded a statistically significant (p(less than)0.01) improvement over placebo
using the primary IIEF endpoint, with 34% of the men in the study responding to
the 40mg dose of Vasomax as compared to 21% responding to placebo. The trial
included an in-office test dose of 40mg on all of the men considered for
participation in the study to assess side effects before exposing men to at-home
use of Vasomax. No serious adverse events were observed in either the in-office
or the at-home portions of the trial.
The Company, Schering-Plough and PPD Pharmaco are continuing to evaluate and
format the data from these two pivotal Phase 3 clinical trials in preparation
for an NDA submission for Vasomax to the FDA. The Company presently expects to
submit an NDA in the first half of 1998. There can be no assurance, however,
that the NDA will be filed on a timely basis or that it will ultimately be
approved by the FDA.
In addition to the two Phase 3 completed pivotal trials, the Company has also
completed (i) drug interaction studies in insulin and non-insulin dependent
diabetics and in cardiovascular patients being treated with ace inhibitors, beta
blockers, calcium channel blockers and alpha blockers and (ii) bioavailability
and food interaction studies with healthy individuals. The Company is also
currently conducting two long-term open label safety studies from which it
expects to submit final data after submission, and before approval, of an NDA
for Vasomax. The Company is also currently conducting a two-year Phase 4 rat
carcinogenicity study from which it expects to submit final data following
approval of the Vasomax NDA. Results from a six-month accelerated mouse
carcingenocity study showed no carcinogenic potential from phentolamine, and no
data to date has been developed suggesting that phentolamine produces long-term
toxic effects.
In March 1998, Schering-Plough filed a Product Registration Application in
Mexico for Vasomax for the treatment of male erectile dysfunction.
The foregoing expressions of the Company's expectations regarding the
completion of clinical trials and other studies, the filing of an NDA and other
matters relating to the clinical development of Vasomax are forward-looking
statements which are subject to certain risks and uncertainties, including those
described under "-- Business Risks -- Uncertainties Related to Clinical Trial
Results and FDA Approval" and "-- Business Risks -- Government Regulation; No
Assurances of Regulatory Approval."
BUSINESS STRATEGY
The Company's objective is to become a leading provider of innovative
products and services for the management of reproductive health. The Company's
strategy to achieve this goal incorporates the following key elements:
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Develop Proprietary and Acquired Technologies. The Company's development
activities are focused on providing a broad portfolio of proprietary products
for reproductive healthcare. In order to more rapidly expand its portfolio, the
Company augments its own research activities by acquiring and developing
technologies from third parties. For example, while certain of the Company's
contraceptive development programs were initiated in-house, the Company acquired
rights in 1994 to certain technology which formed the basis for the Company's
development of Vasomax.
Establish Collaborations with Corporate Partners. When appropriate, Zonagen
seeks to collaborate with corporate partners for the development and marketing
of certain technologies and products. In November 1997, the Company entered
into exclusive license agreements with affiliates of Schering-Plough with
respect to the exclusive worldwide license to market and sell the Company's
Vasomax product for the treatment of male erectile dysfunction. In addition to
providing an up-front payment and milestone payments, these agreements provide
for Schering-Plough to pay royalties on net sales to the Company. In December
1993, the Company entered into an agreement with Schering AG to jointly
research, develop and test contraceptive vaccines. In addition to providing
milestone payments and research funding to the Company, this agreement provides
for Schering AG to market the product and pay a royalty on net sales to the
Company. See "-- Collaborative and Licensing Agreements."
Expand Specialty Marketing Business. The Company believes that the highly
fragmented market for fertility-related products provides an opportunity for
consolidation and integration of a full range of services focused on the
management of reproductive health. The Company intends to expand FTI's business
by (i) expanding its product offerings through in-licensing and distribution
arrangements and selected acquisitions, (ii) entering into other markets served
by obstetrics/gynecology, urology and fertility specialists and (iii) marketing
certain of the proprietary products that may be developed by the Company. In
addition, the Company intends to draw on FTI's relationships with leading
reproductive health specialists to identify needs and opportunities for new
products. See " -- Fertility Technologies, Inc."
Expand Intellectual Property Portfolio. The Company will continue to seek
patent protection for its technologies and formulations in the United States and
key international markets. Zonagen currently owns a total of three issued
patents and 12 patent applications in the United States, and five issued patents
and 79 patent applications outside the United States. See "--Patents and
Proprietary Information."
PRODUCTS IN PRECLINICAL DEVELOPMENT
The Company has several product candidates in preclinical development in the
areas of sexual dysfunction, contraception, urological diseases and vaccine
adjuvants. The Company's preclinical product candidates are in an early stage
of development and have not been demonstrated to be safe or effective. Even if
the Company is able to successfully complete its development efforts with
respect to a particular product, there can be no assurance that regulatory
approvals will be obtained or that any such product can be successfully
manufactured and commercialized. Any products which may be developed from such
efforts are not expected to be commercially available for at least the next
several years, if at all. See "-- Business Risks -- Uncertainties Related to
Clinical Trial Results and FDA Approval," "-- Business Risks -- Substantial
Dependence on One Product; Early Stage of Development of Other Products" and " -
- - Government Regulation; No Assurances of Regulatory Approval."
Vasomax for Female Sexual Dysfunction
A study published in The New England Journal of Medicine evaluating couples
with sexual dysfunction revealed that 40% of the men studied had erectile
dysfunction, while 63% of the women studied had arousal or orgasmic dysfunction.
Similar to male sexual dysfunction, the prevalence of female sexual dysfunction
has been shown to increase with age and be associated with vascular risk
factors. Post-menopausal women and women with a history of vascular risk
factors have been shown to have significantly more complaints of self-reported
female vaginal and clitoral dysfunction than pre-menopausal women or women
without vascular risks.
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A study published in the International Journal of Impotence Research in 1997
suggests that the male and female reaction to sexual stimuli share similar
physiological characteristics. The study indicates that vasodilators which are
effective in treating male erectile dysfunction may also have application in
treating vasculogenic female sexual dysfunction.
During 1997, the Company completed a small pilot study involving six post-
menopausal women under its current Investigational New Drug application ("IND")
for Vasomax to preliminarily evaluate the potential utility of Vasomax in
treating this indication. The Company believes that the results of this study
appear promising and is presently evaluating the feasibility of commencing
continued clinical development in 1998.
Combination Therapies for Sexual Dysfunction
Combinations of drugs are often used on an off-label basis in penile needle
injection therapy to improve erectile response. These drugs are believed to
operate using different mechanisms of action, and therefore are administered in
combination with the objective of improving success rates over single-drug
treatments. Based on its evaluation of the mechanisms responsible for erectile
function, the Company believes that the use of Vasomax in combination with
certain other drugs which possess different mechanisms of action may yield
improved erectile response in some men. The Company completed a rising dose
study of a possible combination therapy in 10 healthy individuals in Mexico in
the fourth quarter of 1997. The Company intends to commence a 300 patient Phase
2 pilot clinical trial study in Mexico during 1998 to evaluate the safety and
potential efficacy of this combination therapy.
Contraceptives
Approximately 70 million women around the world use oral contraceptives on a
daily basis, and many other women employ alternative forms of contraception,
both reversible and irreversible. The Company believes that a variety of
factors, including the disadvantages of the hormones used in currently available
oral contraceptives and the rapidly growing populations of many developing
countries, present a significant opportunity for new contraceptive approaches.
The Company is developing contraceptive products for women based on
proprietary technology relating to the zona pellucida. The zona pellucida
surrounds the mammalian egg and is analogous to an eggshell. Based on the
Company's primate research to date, the Company believes that a vaccine based on
the unique proteins which comprise the zona pellucida may cause temporary
infertility or sterility in women.
The Company established a strategic alliance with Schering AG in 1993,
pursuant to which the Company and Schering AG agreed to jointly research,
develop and test zona pellucida-based human contraceptive vaccines. The Company
is primarily responsible for the development of a "lead compound" and is
presently evaluating such compound in primate studies. See " -- Collaborative
and Licensing Agreements -- Schering AG."
The Company is also conducting early stage studies in collaboration with the
Shanghai Institute of Planned Parenthood and Research Institute in China towards
the development of a recombinant human Chorionic Gonadrotropin ("hCG") vaccine,
employing an adjuvant developed by the Company, for use as a contraceptive
agent. Initial animal studies indicated that the Company's hCG vaccine produced
an immune response which prevented ovulation in rabbits in response to exogenous
hCG.
The Company has completed a pilot clinical trial of 10 women in Mexico
evaluating a topical contraceptive gel consisting of naturally-occurring
substances. The Company is considering additional clinical development of this
potential product.
Urological Diseases
The National Institutes of Health (the "NIH") estimates that approximately
two million men in the United States suffer from diseases of the prostate,
principally BPH and prostate cancer. BPH is a condition involving the
enlargement of the prostate as a result of cellular proliferation, causing
bladder and urinary tract problems. Although the causes of
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BPH are not well understood, the prevalence of the condition is strongly
correlated with age. More than 50% of men over age 60, and between 80% and 90%
of men over age 80, are affected by BPH. Current treatments for BPH include
surgery, balloon urethroplasty, transurethral microwave therapy and two approved
drugs, one of which inhibits production of a hormone that is involved in
prostate enlargement and the other of which relaxes the smooth muscle of the
prostate and bladder neck to improve urinary flow and reduce bladder outlet
obstruction.
Prostate cancer, which will afflict approximately one out of every five
American men in their lifetimes, is the most common cancer in American men other
than skin cancer. The American Cancer Society estimates that approximately
209,900 new cases of prostate cancer will be diagnosed, and that approximately
41,800 men will die of prostate cancer, in 1997. Current treatments for
prostate cancer include surgery (usually either radical prostatectomy or
transurethral resection of the prostate), radiation therapy, hormone therapy and
chemotherapy.
The Company is conducting early stage studies involving two small molecules
identified by the NIH which may be useful in treating BPH and prostate cancer.
These agents have been shown to reduce cellular proliferation and prostate size
in animal studies conducted by the Company. The Company has also identified two
potential immunological therapies, one of which is a recombinant vaccine which
neutralized the effects of gonadotropic releasing hormone ("GnRH") in animal
studies and the other of which is a recombinant prostate-specific antigen which
is currently being tested in vivo.
Vaccine Adjuvants
Adjuvants are substances used in conjunction with an antigen (i.e., a
substance that the body regards as foreign or potentially dangerous, and against
which it produces antibodies) to enhance an immune response. Adjuvants play an
important role in enhancing the effectiveness of vaccines. The Company believes
that adjuvants will be particularly important in developing the newer
generations of recombinant vaccines, which when administered alone may not
produce a sufficient immune response.
As a result of research conducted to develop an adjuvant that could be used
in conjunction with the Company's proposed zona pellucida-based contraceptive
vaccine, the Company believes that it has developed a new adjuvant formulation,
ImmuMax(TM), which may enhance the effectiveness of vaccines. In animal studies
conducted by the Company, ImmuMax has produced elevated immune responses
compared with other known adjuvants.
The Company believes that the primary advantages of ImmuMax include rapid
onset of immunity and an potential for reduced side effects. The Company
believes that ImmuMax may prove useful in a variety of vaccines and therefore
intends to out-license this technology on a non-exclusive basis to companies
that develop or market vaccines. The Company has made ImmuMax available to
several vaccine manufacturers for evaluation, but has not entered into any
license agreements with such manufacturers.
FERTILITY TECHNOLOGIES, INC.
Infertility is a physical condition that affects approximately 4.5 million
couples of reproductive age in the United States annually, of which
approximately two million couples seek some form of treatment. Industry sources
estimate that one in ten couples worldwide experience infertility problems and
that the United States market for fertility products totaled approximately $2.6
billion in 1996.
The Company markets and distributes a variety of third-party fertility-
related products to obstetrics/gynecology, urology and fertility specialists
through FTI, which it acquired in 1994. FTI's primary products currently
include diagnostic kits, analytical instruments and disposable products and
media for laboratory use. The Company operates a CLIA-certified ("Clinical
Laboratory Improvements Act" of 1967, as amended) laboratory for the analysis of
diagnostic test results and a pharmacy which sells specialized fertility-related
pharmaceutical products.
The Company believes that the highly fragmented market for fertility-related
products provides an opportunity for consolidation and integration of a full
range of services focused on the management of reproductive health. The
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Company intends to continue to expand FTI's business by (i) expanding its
product offerings in the fertility-related market through in-licensing and
distribution arrangements and selected acquisitions, (ii) entering into other
markets served by obstetrics/gynecology, urology and fertility specialists and
(iii) marketing certain of the proprietary products that may be developed by the
Company. In addition, the relationships with the leading obstetrics/gynecology,
urology and fertility specialists the Company has been able to establish through
FTI allow the Company to identify needs and opportunities for new products.
RESEARCH AND DEVELOPMENT
The Company's research and development expenditures have been used primarily
for clinical trials of Vasomax and the development of its preclinical products.
In 1995, 1996 and 1997, research and development expenses were $2.8 million,
$7.9 million and $22.3 million, respectively. The Company expects these
expenses to increase over the next several years as it continues the clinical
development of Vasomax and begins to advance certain of the Company's
preclinical product candidates into clinical trials.
COLLABORATIVE AND LICENSING AGREEMENTS
The Company seeks to collaborate with corporate partners for the development
and marketing of certain technologies and products and to in-license existing
and late-stage development products and technologies focused in the area of
human reproductive healthcare. In this regard, the Company has entered into the
collaborative and licensing agreements described below:
Schering-Plough
In November 1997, the Company entered into exclusive license agreements with
Schering-Plough (a major pharmaceutical company based in the United States) with
respect to the exclusive worldwide license to market and sell the Company's
Vasomax product for treatment of male erectile dysfunction. In addition, the
Company granted to Schering-Plough an option to acquire an exclusive worldwide
license to market and sell Vasomax and certain other products developed by the
Company for other indications. The Company will be entitled to receive certain
additional up-front payments, milestone payments and royalties in the event that
Schering-Plough exercises its options under the agreements. Under the
agreements, Schering-Plough paid Zonagen an aggregate up-front payment of $10
million and will make subsequent milestone payments as specified regulatory
goals are achieved. Schering-Plough will also pay to the Company escalating
royalties on all product sales.
Schering-Plough also has a right of first negotiation to enter into a license
agreement with Zonagen for the manufacture, marketing, distribution and sale of
certain additional products, which right of first negotiation is exercisable
only to the extent that Zonagen decides to enter into a collaborative
arrangement with a third party with respect to the manufacture, marketing,
distribution and sale of such additional products. In addition, under certain
conditions, Zonagen will have the right to co-promote Vasomax to urologists in
the United States.
The Schering-Plough agreements obligate the Company to manufacture, or
subcontract the manufacturing to a third party at its expense, the licensed
products (and certain components thereof) for a period of three years after the
first commercial sale by Schering-Plough and the licensed compounds for five
years. In turn, the agreements obligate Schering-Plough to purchase all of its
requirements of the licensed products from the Company or the Company's
designated third-party manufacturer during the same time period. Schering-Plough
has the right to assume the Company's manufacturing obligations for licensed
products (but not licensed compounds) with six months' prior notice to the
Company. The Company has contracted with the Synkem Division of Plasto S.A.
("Synkem") for the exclusive manufacture and supply of the Company's
requirements of phentolamine mesylate. See "--Manufacturing."
The licenses granted under the Schering-Plough agreements terminate on a
country-by-country basis on the expiration of the last patent relating to such
product in such country. The agreements are terminable
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by Schering-Plough in the event certain regulatory milestone goals are not met
or other specified events occur and are terminable by either party on the
occurrence of a breach that is not cured by the breaching party within a certain
time period after notice has been given to such breaching party.
Schering AG
In December 1993, the Company entered into an agreement with Schering AG (a
major pharmaceutical company based in Germany), pursuant to which the Company
and Schering AG agreed to jointly research, develop and test zona pellucida-
based human contraceptive vaccines. The Company granted to Schering AG an
exclusive license (including the right to grant sublicenses) in all countries of
the world except India and China to sell and distribute zona pellucida-based
human contraceptive vaccines developed under the agreement. Schering AG also
has a right of first negotiation to enter into an agreement with Zonagen for the
manufacture and sale of any contraceptive products developed by Zonagen outside
the field of zona pellucida-based contraceptive vaccines, under which the
Company may not offer terms to a third party more favorable than those offered
to Schering AG. The Company granted Schering AG the right to promote and market
such products in all countries of the world except India and China, while
retaining co-promotion and sales rights in the United States. Schering AG will
pay the Company 30% of net sales of all products sold by Schering AG, and the
Company is obligated to pay Schering AG 30% of the net sales attributable to
products sold by the Company. The license granted under the agreement
terminates on a country-by-country and product-by-product basis on the later of
(i) ten years after the first commercial sale of each product covered in each
such country or (ii) the expiration of the last patent relating to such product
in each such country. The agreement is terminable by Schering AG on 30 days
written notice before the commencement of Phase 1 clinical trials relating to
any covered product, and by either party on the occurrence of a breach that is
not cured within 60 days after notice thereof has been given to the other party.
If Schering AG terminates the agreement without the occurrence of a breach and
after commencement of Phase 1 clinical trials, Schering AG must transfer to the
Company ownership of any IND, orphan drug designation and other regulatory
rights relating to any jointly-developed products. The Company retained
manufacturing rights to produce products developed under the agreement, and the
Company must reimburse Schering AG for costs pursuant to the agreement.
The Company must bear all costs of the development of products under the
Schering AG agreement until the Company has developed a "lead compound" that
meets certain specified standards for use in clinical trials. Schering AG must
bear all costs of the development of the vaccine after formulation of the lead
compound, including all costs of preclinical studies and clinical trials, and
costs associated with obtaining regulatory approvals for sale of the vaccine in
the licensed territory. In addition, the Company must bear costs, until 30 days
after the filing of an NDA with the FDA, relating to stability studies, scale-
up and manufacturing process, obtaining validation of the manufacturing facility
and making other regulatory filings with the FDA. The agreement provides that
on the completion of certain research and development milestones, Schering AG
will make payments to the Company aggregating up to $12.5 million. The first
milestone payment of $500,000 is for the development of a "preliminary lead
compound" for a zona pellucida-based human female contraceptive. The Company
has not, to date, developed a "preliminary lead compound" that would satisfy the
criteria for the first milestone payment.
If Schering AG desires to retain its rights under the agreement beyond June
9, 1998, it must purchase $2.5 million of Common Stock on or before such date,
at a purchase price equal to the market price of the Common Stock at the time of
the exercise of the option. In the event its rights are terminated, Schering AG
will have no further obligations under the agreement with respect to milestone
payments or the further development of products. No assurance can be made that
Schering AG will elect to purchase such shares of Common Stock or that the
agreement will continue beyond June 9, 1998 on its current terms or at all.
Contract Research Organizations
During 1996, the Company established arrangements with two contract research
organizations, PPD Pharmaco and Affiliated Research Centers, Inc., relating to
the Company's United States clinical development of Vasomax. These companies
have collaborated with the Company in the design and conduct of the Company's
United States clinical trials, including the pivotal Phase 3 clinical trials of
Vasomax. In addition, these companies have been responsible for
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managing the conduct of and analyzing data from such clinical trials on behalf
of the Company. Either party may terminate these arrangements at any time. If
these companies were unable or unwilling to devote adequate resources to the
Company's projects and to provide services on a timely basis and on acceptable
terms, the Company would be required to establish relationships with other
contract research organizations or to develop internally the capacity to conduct
clinical trials. This could result in significant additional expense and delays
in the Company's clinical trials and could have a material adverse effect on the
Company. See "-- Business Risks--Reliance on Contract Research Organizations."
PATENTS AND PROPRIETARY INFORMATION
The Company's ability to compete effectively with other companies is
materially dependent on the proprietary nature of the Company's patents and
technologies. The Company actively seeks patent protection for its proprietary
technology in the United States and abroad. As of December 31, 1997, the
Company had rights to a total of two issued patents and 13 patent applications
in the United States and five issued patents and 79 patent applications outside
the United States. On March 24, 1998, the Company received a second patent in
the United States relating to its male erectile dysfunction technology.
The Company has two issued patents and two pending patent application in the
United States, two issued South African patents and 62 patent applications
outside the United States relating to its male erectile dysfunction technology.
The Company has rights to one issued patent in the United States and India and
two issued patents in Australia with respect to products and methods using
specific recombinant zona pellucida peptides. The Company has a total of seven
United States and ten foreign patent applications pending which relate to zona
pellucida proteins, their preparation and their use. The Company also has two
pending United States patent applications, a European regional patent
application, patent applications in Australia, Canada and Japan and a Patent
Cooperation Treaty application for ImmuMax.
The Company's ability to commercialize any products will depend, in part, on
its or its licensors' ability to obtain patents, enforce those patents and
preserve trade secrets and on its own ability to operate without infringing on
the proprietary rights of third parties. The patent positions of biotechnology
and pharmaceutical companies are highly uncertain and involve complex legal and
factual questions. There can be no assurance that any patent applications owned
by or licensed to the Company will result in issued patents, that patent
protection will be secured for any particular technology, that any patents that
have been or may be issued to the Company or its licensors will be valid or
enforceable, that any patents will provide meaningful protection to the Company,
that others will not be able to design around the patents, or that the Company's
patents will provide a competitive advantage or have commercial application. The
failure to obtain adequate patent protection would have a material adverse
effect on the Company and may adversely affect the Company's ability to enter
into, or the terms of, any arrangement for the marketing of any product.
One of the Company's issued United States patents relating to Vasomax is a
method-of-use patent rather than a composition-of-matter or formulations patent.
A method-of-use-patent encompasses the use of a composition to treat a specified
condition but does not encompass the composition or formulations, themselves. A
method-of-use patent may provide less protection than a composition-of-matter
patent if other companies market the composition for purposes other than that
encompassed by the method-of-use patent, because of the possibility of "off-
label" use of the composition. Phentolamine, the active ingredient in Vasomax,
is currently marketed in injectible form for the treatment of hypertension and
for use in the diagnosis of certain tumors of the adrenal gland, and has been
used "off-label" by urologists in penile injection therapies for the treatment
of erectile dysfunction. Although an oral formulation of phentolamine was
formerly marketed as a treatment for hypertension, it is no longer on the
market. The Company believes that the characteristics of this formerly available
formulation, which differs from the Vasomax formulation used in clinical trials,
would lack the advantages of the Vasomax formulation and have limited utility in
treating erectile dysfunction. The Company's second issued United States patent
relating to Vasomax, which issued on March 24, 1998, claims formulations as well
as the method of use of Vasomax.
There can be no assurance that patents owned by or licensed to the Company
will not be challenged by others. The Company could incur substantial costs in
proceedings, including interference proceedings before the United States Patent
and Trademark Office and comparable proceedings before similar agencies in other
countries. These proceedings
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could result in adverse decisions about the patentability of the Company's
inventions and products as well as about the enforceability, validity or scope
of protection afforded by the patents.
There can be no assurance that the manufacture, use or sale of the Company's
product candidates will not infringe patent rights of others. The Company may be
unable to avoid infringement of those patents and may be required to seek a
license, defend an infringement action, or challenge the validity of the patents
in court. There can be no assurance that a license will be available to the
Company, if at all, on terms and conditions acceptable to the Company or that
the Company will prevail in any patent litigation. Patent litigation is costly
and time-consuming, and there can be no assurance that the Company will have
sufficient resources to bring such litigation to a successful conclusion. If
the Company does not obtain a license under such patents, is found liable for
infringement, or is not able to have such patents declared invalid, the Company
may be liable for significant money damages, may encounter significant delays in
bringing products to market, or may be precluded from participating in the
manufacture, use or sale of products or methods of treatment requiring such
licenses. The Company does not believe that the commercialization of its
products will infringe on the patent rights of others. However, there can be
no assurance that the Company has identified all United States and foreign
patents that pose a risk of infringement.
The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent the Company
relies on trade secrets and unpatented know-how to maintain its competitive
technological position, there can be no assurance that others may not
independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge, in part, through
confidentiality agreements with its employees, consultants, advisors,
collaborators and contractors. Nevertheless, these agreements may not
effectively prevent disclosure of the Company's confidential information and may
not provide the Company with an adequate remedy in the event of unauthorized
disclosure of such information. If the Company's employees, scientific
consultants or collaborators develop inventions or processes independently that
may be applicable to the Company's products, disputes may arise about ownership
of proprietary rights to those inventions and processes. Such inventions and
processes will not necessarily become the Company's property, but may remain the
property of those persons or their employers. Protracted and costly litigation
could be necessary to enforce and determine the scope of the Company's
proprietary rights. Failure to obtain or maintain patent and trade secret
protection, for any reason, would have a material adverse effect on the Company.
Several bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination, subject matter and enforceability. It
is not certain whether any of these bills will be enacted into law or what form
new laws may take. Accordingly, the effect of legislative change on the
Company's intellectual property is uncertain.
SALES AND MARKETING
The Company has entered into agreements with Schering-Plough for the
marketing and sale of Vasomax for the treatment of male erectile dysfunction,
and may seek similar agreements with one or more pharmaceutical companies having
established marketing and sales capabilities regarding its other proprietary
product candidates. If the Company fails to reach or elects not to enter into a
similar arrangement with respect to any of its other proprietary product
candidates, the Company will need to develop a sales and marketing force with
supporting distribution capability substantially in excess of the capability
currently possessed by FTI to be able to market such products directly. The
Company has limited experience in the sales, marketing and distribution of
pharmaceutical products. Significant additional expenditures would be required
for the Company to develop a sales and marketing force and supporting
distribution capability.
Any revenues the Company receives from Vasomax will depend on the efforts of
Schering-Plough. To the extent the Company enters into marketing or
distribution arrangements with others, any revenues the Company receives will
depend on the efforts of third parties. There can be no assurance that
Schering-Plough or any other third party will devote significant resources to
the Company's products or market the Company's products successfully or that any
future third-party collaboration will be on terms favorable to the Company. If
Schering-Plough or any other marketing partner does not market a product
successfully, the Company would be materially adversely affected. There can be
no
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assurance that the Company will be able to establish sales, marketing and
distribution capabilities or that it or its collaborators will be successful in
gaining market acceptance for any products that the Company may develop. The
Company's failure to establish marketing capabilities or to enter into marketing
arrangements with third parties would have a material adverse effect on the
Company.
MANUFACTURING
The Company does not have any manufacturing facilities to manufacture
products in the quantities necessary for clinical trials or commercial sales and
does not expect to establish any significant manufacturing capacity in the near
future. On November 16, 1995, the Company entered into a development and
manufacturing services agreement with Synkem Division, a contract manufacturing
organization, for the manufacture and validation of bulk phentolamine for use in
clinical trials and for the purpose of supporting an IND application to permit
clinical testing of Vasomax. Synkem has filed a Drug Master File ("DMF") with
the FDA in connection with its manufacture of phentolamine, allowing the Company
to reference that information in its own regulatory submissions. On June 12,
1997, the Company and Synkem executed an exclusive supply agreement. This
initial supply agreement requires that the Company purchase all of its bulk
phentolamine from Synkem for a period of five years. The supply agreement
provides that it will automatically renew for consecutive one year periods until
terminated by either party. The supply agreement requires the Company to
purchase specified minimum order quantities and that Synkem manufacture
phentolamine exclusively for the Company. The Company also contracts out the
tableting and packaging of Vasomax.
Until three years following the first commercial sale of a licensed product
by Schering-Plough under the Company's license agreements with Schering-Plough,
the Company is required to manufacture, or subcontract the manufacture at its
expense, the Company's products and for a five-year period the compound used
therein to be marketed and sold by Schering-Plough pursuant to such agreements.
In turn, the agreements obligate Schering-Plough to purchase all of its
requirements of the licensed products from the Company or the Company's
designated third-party manufacturer during the same time period. Schering-Plough
has the right to assume the Company's manufacturing obligations with six months'
prior notice to the Company. See " -- Collaborative and Licensing Agreements --
Schering-Plough."
The Company presently produces all of the zona pellucida proteins necessary
for use in its research and development activities. The Company's agreement with
Schering AG requires that the Company have a facility with the capacity to
manufacture an immunocontraceptive product for worldwide sale by the time an IND
for such a product becomes effective.
The Company intends to rely on third parties for the manufacture and supply
of commercial quantities of Vasomax and for the manufacture and supply of other
products that it may develop. There can be no assurance that the Company will
be able to obtain supplies of its products from third-party suppliers on terms
or in quantities acceptable to the Company. Also, the Company's dependence on
third parties for the manufacture of its products may adversely affect the
Company's product margins and its ability to develop and deliver products on a
timely basis. Any such third-party suppliers or any manufacturing facility the
Company establishes will be required to meet FDA manufacturing requirements.
FDA certification, for compliance with current Good Manufacturing Practices
requirements, of manufacturing facilities for a drug are a prerequisite to
approval of an NDA for that drug. The Company may encounter significant delays
in obtaining supplies from third-party manufacturers or experience interruptions
in its supplies. The effects of any such delays or interruptions will be more
severe if the Company relies on a single source of supply, as is presently the
case with Vasomax. If the Company is unable to obtain adequate supplies, its
business would be materially adversely affected. See "-- Business Risks --
Manufacturing Uncertainties; Reliance on Third-Party Suppliers."
COMPETITION
The Company is engaged in pharmaceutical product development, an industry
which is characterized by extensive research efforts and rapid technological
progress. Many established biotechnology and pharmaceutical companies,
universities and other research institutions with resources significantly
greater than the Company's are marketing or may develop products that directly
compete with the Company's products. These entities may succeed
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in developing products that are safer, more effective or less costly than the
Company's products. Even if the Company's products should prove to be more
effective than those developed by other companies, other companies may be more
successful than the Company because of greater financial resources, greater
experience in conducting preclinical studies and clinical trials and obtaining
regulatory approval, stronger sales and marketing efforts, earlier receipt of
approval for competing products and other factors. If the Company commences
significant commercial sales of its products, the Company or its collaborators
will compete in areas in which the Company has little or no experience, such as
manufacturing and marketing. There can be no assurance that the Company's
products, if commercialized, will be accepted and prescribed by healthcare
professionals. See " -- Male Erectile Dysfunction -- Current Competition and
Products Under Development."
GOVERNMENTAL REGULATION
The Company's research and development activities, preclinical studies and
clinical trials, and ultimately the manufacturing, marketing and labeling of its
products, are subject to extensive regulation by the FDA and other regulatory
authorities in the United States and other countries. The United States federal
Food, Drug and Cosmetic Act (the "FDC Act") and the regulations promulgated
thereunder and other federal and state statutes and regulations govern, among
other things, the testing, manufacture, storage, record keeping, labeling,
advertising, promotion, marketing and distribution of the Company's products.
Preclinical study and clinical trial requirements and the regulatory approval
process take years and require the expenditure of substantial resources.
Additional government regulation may be established that could prevent or delay
regulatory approval of the Company's products. Delays or rejections in
obtaining regulatory approvals would adversely affect the Company's ability to
commercialize any product the Company develops and the Company's ability to
receive product revenues or royalties. If regulatory approval of a product is
granted, the approval may include significant limitations on the indicated uses
for which the product may be marketed or may be conditioned on the conduct of
post-marketing surveillance studies.
The standard process required by the FDA before a pharmaceutical agent may be
marketed in the United States includes: (i) preclinical tests; (ii) submission
to the FDA of an investigational new drug application ("IND") which must become
effective before human clinical trials may commence; (iii) adequate and well-
controlled human clinical trials to establish the safety and efficacy of the
drug for its intended application; (iv) submission of an NDA to the FDA; and (v)
FDA approval of the NDA prior to any commercial sale or shipment of the drug.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests are submitted to the FDA as
part of an IND and are reviewed by the FDA before the commencement of human
clinical trials. Unless the FDA objects to an IND, an IND will become effective
30 days following its receipt by the FDA. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials or that the lack of an objection to an IND means that the FDA will
ultimately approve an NDA.
Clinical trials involve the administration of the investigational new drug to
humans under the supervision of a qualified principal investigator. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety, and efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Also, each clinical trial must be
approved by and conducted under the auspices of an Institutional Review Board
("IRB"). The IRB will consider, among other things, ethical factors, the safety
of human subjects, and the possible liability of the institution conducting the
clinical trials.
Clinical trials are typically conducted in three sequential phases which may
overlap. In Phase 1, the initial introduction of the drug to humans, the drug
is tested for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and pharmacodynamics (clinical pharmacology). Phase 2
involves studies of a limited patient population to gather evidence about the
efficacy of the drug for specific targeted indications, dosage tolerance and
optimal dosage, and to identify possible adverse effects and safety risks. When
a product has shown evidence of efficacy and has an acceptable safety profile in
a Phase 2 evaluation, Phase 3 clinical trials are undertaken to evaluate
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clinical efficacy and to test for safety in an expanded patient population at
geographically dispersed clinical trial sites. There can be no assurance that
any of the Company's clinical trials will be completed successfully or within
any specified time period. The Company or the FDA may suspend clinical trials
at any time if, for example, safety issues arise or regulatory requirements are
not satisfied.
The Company has designed the protocols for its pivotal Phase 3 clinical
trials of Vasomax based on its analysis of its research, including various parts
of its German Phase 2 clinical trial and its Mexican product registration trial.
Although copies of its Phase 3 clinical trial protocol were submitted to the
FDA, there can be no assurance that the FDA, after the results of the Phase 3
clinical trials have been announced, will not find deficiencies in the design of
the Phase 3 clinical trial protocol. In addition, the FDA inspects and reviews
clinical trial sites, informed consent forms, data from the clinical trial
sites, including case report forms and record keeping procedures, and the
performance of the protocols by clinical trial personnel to determine compliance
with Good Clinical Practices. The FDA also evaluates whether there was any bias
in the conduct of clinical trials. The conduct of clinical trials in general
and the performance of the pivotal clinical trial protocols are complex and
difficult. There can be no assurance that the design or the performance of the
Phase 3 clinical trial protocols for Vasomax will be successful.
The results of preclinical studies and clinical trials, if successful, are
submitted in an NDA to seek FDA approval to market and commercialize the drug
product for a specified use. FDA approval of the NDA is required before
marketing may begin in the United States. 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 Company completed a standard animal carcinogenicity study in
1997 and is currently conducting a second animal carcinogenicity study, which it
expects to complete as a Phase 4 study. The FDA reviews all NDAs submitted
before it accepts them for filing and may request additional information rather
than accepting an NDA for filing. In such an event, the NDA must be resubmitted
with the additional information and, again, is subject to review before filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the NDA. The review process is often significantly extended by FDA requests for
additional information or clarification regarding information already provided
in the submission. The FDA may refer the application to the appropriate advisory
committee, typically a panel of clinicians, for review, evaluation and a
recommendation as to whether the application should be approved. The FDA is not
bound by the recommendation of an advisory committee. If FDA evaluations of the
NDA and the manufacturing facilities are favorable, the FDA may issue either an
approval letter or an approvable letter, which usually contains a number of
conditions that must be met in order to secure final approval of the NDA. When
and if those conditions have been met to the FDA's satisfaction, the FDA will
issue an approval letter, authorizing commercial marketing of the drug for
certain indications. As a condition of NDA approval, the FDA may require
postmarketing testing and surveillance to monitor the drug's safety or efficacy.
If the FDA's evaluation of the NDA submission or manufacturing facilities is not
favorable, the FDA may refuse to approve the NDA or issue a not approvable
letter, outlining the deficiencies in the submission and often requiring
additional testing or information. Notwithstanding the submission of any
requested additional data or information in response to an approvable or not
approvable letter, the FDA ultimately may decide that the application does not
satisfy the regulatory criteria for approval. Once granted, product approvals
may be withdrawn if compliance with regulatory standards is not maintained or
problems occur following initial marketing.
Even if regulatory approvals for the Company's products are obtained, the
Company, its products, and the facilities manufacturing the Company's products
are subject to continual review and periodic inspection. The FDA will require
post-marketing reporting to monitor the safety of the Company's products. Each
United States drug manufacturing establishment must be registered with the FDA.
Domestic manufacturing establishments are subject to biennial inspections by the
FDA and must comply with the FDA's requirements regarding Good Manufacturing
Practices. To supply drug products for use in the United States, foreign
manufacturing establishments must comply with the FDA's Good Manufacturing
Practices and are subject to periodic inspection by the FDA or by regulatory
authorities in those countries under reciprocal agreements with the FDA. In
complying with Good Manufacturing Practices, manufacturers must expend funds,
time and effort in the area of production and quality control to ensure full
technical compliance. The Company does not have any drug manufacturing
capability and must rely on outside firms for this capability. See "--
Manufacturing." The FDA stringently applies regulatory standards for
manufacturing.
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Identification of previously unknown problems with respect to a product,
manufacturer or facility may result in restrictions on the product, manufacturer
or facility, including warning letters, suspensions of regulatory approvals,
operating restrictions, delays in obtaining new product approvals, withdrawal of
the product from the market, product recalls, fines, injunctions and criminal
prosecution.
Before the Company's products can be marketed outside of the United States,
they are subject to regulatory approval similar to FDA requirements in the
United States, although the requirements governing the conduct of clinical
trials, product licensing, pricing, and reimbursement vary widely from country
to country. No action can be taken to market any drug product in a country
until an appropriate application has been approved by the regulatory authorities
in that country. FDA approval does not assure approval by other regulatory
authorities. The current approval process varies from country to country, and
the time spent in gaining approval varies from that required for FDA approval.
In some countries, the sale price of a drug product must also be approved. The
pricing review period often begins after market approval is granted. Even if a
foreign regulatory authority approves any of the Company's products, no
assurance can be given that it will approve satisfactory prices for the
products.
The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses, and various radioactive compounds.
Although the Company believes that its procedures for handling and disposing of
those materials comply with state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated.
If such an accident occurs, the Company could be held liable for resulting
damages, which could be material to the Company's financial condition and
business. The Company is also subject to numerous environmental, health and
workplace safety laws and regulations, including those governing laboratory
procedures, exposure to blood-borne pathogens, and the handling of biohazardous
materials. In addition, the Company's diagnostic laboratory operations are
required to be certified or licensed under the federal Clinical Laboratory
Improvement Act of 1967, as amended in 1988 ("CLIA"), the Medicare and Medicaid
programs and various state and local laws. Additional federal, state and local
laws and regulations affecting the Company may be adopted in the future. Any
violation of, and the cost of compliance with, these laws and regulations could
materially and adversely affect the Company. See "-- Business Risks --
Government Regulation; No Assurances of Regulatory Approval."
EMPLOYEES AND CONSULTANTS
Employees
At December 31, 1997, the Company had 39 full-time employees and utilized a
variety of consultants. Of the Company's full-time employees, 21 were engaged
in research, development, clinical research and regulatory affairs, ten were
engaged in sales and sales support and eight were engaged in finance and
administration. The Company relies on its employees to perform most research
and development activities, but also uses outside consultants as needed. The
Company believes its relationship with its employees is good.
Scientific Advisors and Consultants
The Company benefits from consultation with prominent scientists active in
fields related to the Company's technology. For this purpose, the Company has
consulting relationships with a number of scientific advisors. At the Company's
request, these advisors review the feasibility of product development programs
under consideration, advise concerning advances in areas related to the
Company's technology and aid in recruiting personnel. Certain of the
consultants receive cash or stock-based compensation for their services. All of
the advisors are employed by academic institutions or other entities and may
have commitments to or advisory agreements with other entities that may limit
their availability to the Company. The Company's consultants are required to
disclose and assign to the Company any ideas, discoveries and inventions they
develop in the course of providing consulting services. The Company also uses
consultants for various administrative needs. None of the Company's consultants
are otherwise affiliated with the Company. The Company's scientific advisors and
consultants include the following persons:
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<PAGE>
Deborah J. Anderson, Ph.D. Dr. Anderson is an Associate Professor of
Obstetrics, Gynecology and Reproductive Biology at Brigham and Women's Hospital
and Harvard Medical School. Dr. Anderson is also the Director of the Fearing
Research Laboratory.
M. Fathy El Etreby, D.V.M. Dr. Etreby was Director of Research and
Development at the Pharmaceutical Division of Schering in Berlin, Germany and at
Berlex Laboratories in Wayne, New Jersey for 25 years. Currently, Dr. Etreby is
Director of Clinical and Basic Research in the Section of Urology of the
Department of Surgery at the Medical College of Georgia.
David Ferguson, M.D., Ph.D. Dr. Ferguson has been involved in pharmaceutical
research and development since 1968. In 1993, he helped found Affiliated
Research Centers, Inc. ("ARC"), one of the first site management organizations,
and served as Senior Vice President for ARC until February 1997. The Company
engaged ARC to assist in the design and implementation of its United States
clinical trials. The Company engaged Dr. Ferguson as a consultant following his
departure from ARC. Dr. Ferguson also serves as a consultant to MacroChem Corp.
("MacroChem"), a company which is developing a topical treatment for male
erectile dysfunction that may compete with Vasomax.
Irwin Goldstein, M.D. Dr. Goldstein has been co-director of the Urology
Research Laboratory at Boston University School of Medicine since 1980. Dr.
Goldstein serves as a consultant to MacroChem, and has served as a consultant to
or clinical investigator for Pfizer and Vivus, Inc. relating to their products
for the treatment of male erectile dysfunction.
Joseph A. Hill, M.D. Dr. Hill is the Director of the Reproductive Medicine
Division and of the Reproductive Endocrinology Fellowship Program and Clinical
Director of the Reproductive Immunology Division at Brigham and Women's Hospital
and Harvard Medical School. Dr. Hill is an Associate Professor in the
Department of Obstetrics, Gynecology and Reproductive Biology at Brigham and
Women's Hospital and Harvard Medical School.
Vernon Knight, M.D. Dr. Knight was with the Baylor College of Medicine for
over 20 years as Professor and Chairman of the Department of Microbiology and
Immunology, Professor in the Infectious Disease Section of the Department of
Medicine and Director of Baylor's Center for Biotechnology. Dr. Knight is
currently Acting Chairman of the Department of Molecular Physiology and
Biophysics at Baylor College of Medicine.
Alfred Poindexter, M.D. Dr. Poindexter is Professor of Obstetrics and
Gynecology and Director of the Division of Contraceptive Development and
Research at Baylor College of Medicine. He is on the staff at St. Luke's
Episcopal Hospital and The Methodist Hospital in Houston, Texas. Dr. Poindexter
has conducted a clinical practice in reproductive endocrinology and research in
contraceptive technology for the past twenty years.
David W. Russell, Ph.D. Dr. Russell is the McDermott Distinguished Professor
in the Department of Molecular Genetics at the University of Texas Southwestern
Medical Center. His main research interests are cholesterol and steroid hormone
metabolism, reproductive biology, molecular genetics and gene regulation.
Anthony Sacco, Ph.D. Dr. Sacco is a Professor in the Department of
Obstetrics and Gynecology at Wayne State University School of Medicine and
Director of the Hutzel Hospital, Wayne State University In Vitro Fertilization
Laboratory. Dr. Sacco is an authority on the application of zona pellucida
proteins as infertility agents.
Robert S. Schenken, M.D. Dr. Schenken is Professor of Obstetrics and
Gynecology and Director of the Division of Reproductive Endocrinology and
Infertility at The University of Texas Health Science Center in San Antonio. He
has been a consultant for the Society of Reproductive Surgeons' Collaborative
Endometriosis Treatment Trial, and program chairman of the Annual Meeting of the
Society for Gynecologic Investigation and the American Society for Reproductive
Medicine. Dr. Schenken has received numerous national awards for his research
and has also served as principal investigator on research projects funded by the
NIH, World Health Organization and numerous pharmaceutical companies.
-17-
<PAGE>
Edward C. Yurewicz, Ph.D. Dr. Yurewicz is an Associate Professor in the
Department of Obstetrics and Gynecology and Associate Member of the Graduate
Faculty in the Department of Biochemistry and Molecular Biology at Wayne State
University School of Medicine. Dr. Yurewicz is a leading authority on zona
pellucida protein chemistry.
BUSINESS RISKS
Uncertainties Related to Early Stage of Development
The Company is a development stage company. Problems, delays, expenses and
complications are typically encountered by companies in the development stage,
many of which may be beyond the Company's control. These include, but are not
limited to, unanticipated problems and costs relating to the development,
testing, production and marketing of its products, regulatory approvals and
compliance, availability of adequate financing and competition. There can be no
assurance that the Company will be able to complete successfully the transition
from a development stage company to the successful introduction of commercially
viable products. The Company has generated only limited revenue from product
sales since its inception. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Consolidated Financial Statements.
Uncertainties Related to Clinical Trial Results and FDA Approval
The Company must obtain FDA approval of an NDA prior to commercializing
Vasomax or any other pharmaceutical product in the United States. Similar
approvals will be required from the regulatory authorities of other countries
prior to commercialization in such countries. The FDA and other regulatory
authorities generally require that the safety and efficacy of a drug be
supported by results from adequate and well-controlled Phase 3 clinical trials
before approval for commercial sale. The Company completed two pivotal Phase 3
clinical trials of Vasomax in May 1997, and none of the Company's other products
have yet entered into United States human clinical trials. The results of
preclinical studies and initial clinical trials of the Company's products are
not necessarily predictive of the results from large-scale clinical trials. If
the results of the Company's clinical trials do not demonstrate the safety and
efficacy of its products in the treatment of patients suffering from the
diseases for which such products are being tested, the Company will not be able
to submit an NDA to the FDA. Even if the Company believes the Phase 3 clinical
trials demonstrate the safety and efficacy of Vasomax or any other product in
the treatment of disease, the FDA and other regulatory authorities may not
accept the Company's assessment of the results. In either case, the Company may
be required to conduct additional clinical trials in an effort to demonstrate
the safety and efficacy of the product.
The Company must demonstrate through preclinical studies and clinical trials
that its products are safe and effective before the Company can obtain
regulatory approvals for the commercial sale of those products. These studies
and trials are very costly and time-consuming. The speed with which the Company
is able to enroll patients in clinical trials is an important factor in
determining how quickly clinical trials may be completed. Many factors affect
the rate of patient enrollment, including the size of the patient population,
the proximity of patients to clinical sites, and the eligibility criteria for
the study. Delays in patient enrollment in the trials may result in increased
costs, program delays, or both, which could have a material adverse effect on
the Company.
The administration of any product the Company develops may produce
undesirable side effects in humans. The occurrence of side effects could
interrupt or delay clinical trials of products and could result in the FDA or
other regulatory authorities denying approval of the Company's products for any
or all targeted indications. In addition, the Company, the FDA or other
regulatory authorities may suspend or terminate clinical trials at any time.
Even if the Company receives FDA and other regulatory approvals, the Company's
products may later exhibit adverse effects that limit or prevent their
widespread use or that necessitate their withdrawal from the market. There can
be no assurance that any of the Company's products will be safe for human use,
nor can there be any assurance that the Company will obtain regulatory approval
for the commercialization of Vasomax or any other product on a timely basis, or
at all. Without regulatory approval, the Company will not be able to
commercialize its products, which would have a material adverse effect on the
Company. Furthermore, delays in the approval process could have a material
adverse effect on the Company, even if regulatory approval is ultimately
obtained. See " -- Male Erectile Dysfunction -- The Vasomax Solution" and "--
Governmental Regulation."
-18-
<PAGE>
Substantial Dependence on One Product; Early Stage of Development of Other
Products
The Company has not completed the development of any proprietary product, and
substantially all of the Company's revenues currently are derived from sales by
FTI of products developed or manufactured by third parties. Revenues from FTI
will not be sufficient to fund the Company's planned operations. The Company has
dedicated a substantial portion of its resources over the last several years to
the development of Vasomax. Products, if any, resulting from the Company's
other research and development programs are not expected to be commercially
available for at least several years, if at all. As a result, the Company's
future prospects are substantially dependent on timely approval by the FDA and
the successful commercialization of Vasomax. Failure to obtain regulatory
approval and successfully commercialize Vasomax would have a material adverse
effect on the Company. The development or acquisition of commercially viable
products will require significant further investment, research, development,
preclinical studies, clinical testing and regulatory approvals, both foreign and
domestic. In addition, there can be no assurance that the Company will be able
to produce Vasomax or any other product at reasonable cost or market such
products successfully. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," " -- Male Erectile Dysfunction -
- - The Vasomax Solution" and "-- Products in Preclinical Development."
History of Operating Losses; Accumulated Deficit
The Company has experienced significant operating losses in each fiscal year
since its inception. As of December 31, 1997, the Company had an accumulated
deficit of approximately $39.6 million. The Company may incur substantial
additional operating losses over the next several years in connection with its
research and development and preclinical and clinical activities. The Company's
ability to achieve profitability will depend, among other things, on
successfully completing the development of its products, obtaining regulatory
approvals, establishing marketing, sales and manufacturing capabilities or
collaborative arrangements with others which possess such capabilities, and
raising sufficient funds to finance its activities. There can be no assurance
that the Company will be able to achieve profitability or that profitability, if
achieved, can be sustained. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 1 of Notes to
Consolidated Financial Statements.
Future Capital Needs; Uncertainty of Additional Funding
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company will continue to require substantial funds to continue
research and development, including preclinical studies and clinical trials of
its products, and to commence sales and marketing efforts if FDA and other
regulatory approvals are obtained. The Company believes that its existing
capital resources, together with the proceeds of its July 1997 public offering
and license fee from Schering-Plough, will be sufficient to fund its operations
through at least the end of 1999. The Company's capital requirements will
depend on many factors, including: the problems, delays, expenses and
complications frequently encountered by development stage companies; the
progress of the Company's preclinical and clinical activities; the progress of
the Company's collaborative agreements with Schering-Plough and any future
collaborative research, manufacturing, marketing or other funding arrangements;
the costs and timing of seeking regulatory approvals of the Company's products;
the Company's ability to obtain regulatory approvals; the success of the
Company's sales and marketing programs; the cost of filing, prosecuting and
defending and enforcing any patent claims and other intellectual property
rights; and changes in economic, regulatory or competitive conditions or the
Company's planned business. Estimates about the adequacy of funding for the
Company's activities are based on certain assumptions, including the assumption
that the development and regulatory approval of the Company's products can be
completed at projected costs and that product approvals and introductions will
be timely and successful. There can be no assurance that changes in the
Company's research and development plans, acquisitions or other events will not
result in accelerated or unexpected expenditures. To satisfy its capital
requirements, the Company may seek to raise additional funds in the public or
private capital markets. The Company's ability to raise additional funds in the
public or private markets will be adversely affected if the results of its
current or future clinical trials are not favorable. If adequate funds are not
available, the Company may be required to curtail significantly one or more of
its research or development programs, or it may be required to obtain funds
through arrangements with future collaborative partners or others that may
require the Company to relinquish rights to some or all of its technologies or
products. If the Company is successful in obtaining additional financing, the
terms
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<PAGE>
of such financing may have the effect of diluting or adversely affecting the
holdings or the rights of the holders of the Company's Common Stock. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Uncertainty of Protection for Patents and Proprietary Technology
The Company's ability to commercialize any products will depend, in part, on
its ability to obtain patents, enforce those patents and preserve trade secrets
and operate without infringing on the proprietary rights of third parties. See
"--Patents and Proprietary Information" for a discussion of the uncertainty of
protection for patents and proprietary technology.
Government Regulation; No Assurances of Regulatory Approval
The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are subject
to extensive regulation by the FDA and other regulatory authorities in the
United States. These activities are also regulated in other countries where the
Company intends to test and market its products.
Any drug developed by the Company must undergo an extensive regulatory
approval process before it may be marketed and sold. The regulatory process,
which includes preclinical studies and clinical trials of each compound to
establish its safety and efficacy, takes many years and requires the expenditure
of substantial resources. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent FDA regulatory approval. Although the FDA may have been consulted in
developing protocols for clinical trials, that consultation provides no
assurance that the FDA will accept the clinical trials as adequate or well-
controlled or accept the results of those trials as establishing safety or
efficacy. In addition, delays or rejections may be encountered based on changes
in FDA policy for drug approval during the period of product development and FDA
regulatory review of each submitted NDA. Similar delays and rejections may also
be encountered in foreign countries. There can be no assurance that, even after
such time and expenditures, regulatory approval will be obtained for any drugs
developed by the Company. Moreover, if regulatory approval of a drug is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed or may be conditioned on post-marketing surveillance studies.
Further, even if such regulatory approval is obtained, a marketed drug, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and later discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on the
product or manufacturer, including a withdrawal of the product from the market.
Failure to comply with the applicable regulatory requirements can, among other
things, result in warning letters, fines, suspensions or withdrawals of
regulatory approvals, product recalls or seizures, operating restrictions,
injunctions, civil penalties and criminal prosecution. Further, additional
government regulation may be established that could prevent or delay regulatory
approval of the Company's products. The United States Congress has been
considering legislation that would substantially reform FDA regulations,
including the requirements for NDA approval. It is not certain whether any such
legislation will be enacted into law, what form any new law will take, or what
effect any new law would have on the Company.
The Company's business is also subject to regulation under state and federal
laws regarding environmental protection, hazardous substances control, and
exposure to blood-borne pathogens. These laws include the federal
environmental laws, the Occupational Safety and Health Act, and the Toxic
Substance Control Act. In addition, the Company's diagnostic laboratory
operations are required to be certified or licensed under CLIA, the Medicare and
Medicaid programs and various state and local laws. Any violation of, and the
cost of compliance with, these laws and regulations could adversely affect the
Company. There can be no assurance that statutes or regulations applicable to
the Company's business will not be adopted that impose substantial additional
costs or otherwise materially adversely affect the Company's operations. See "
- -- Governmental Regulation."
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<PAGE>
Limited Sales and Marketing Experience; Dependence on Collaborators
The Company has limited experience in the sales, marketing and distribution
of pharmaceutical products, and its revenues from Vasomax and other products
that may be marketed by others will depend on the efforts of Schering-Plough and
such other collaborators. See " -- Sales and Marketing" for a discussion of the
risks associated with the Company's limited sales and marketing experience and
dependence on collaborators.
Manufacturing Uncertainties; Reliance on Third-Party Suppliers
The Company does not have any manufacturing facilities and does not expect to
establish any significant manufacturing capacity in the near future. See "--
Manufacturing" for a discussion of the risks associated with manufacturing and
the Company's reliance on third-party suppliers.
Competition and Technological Change
The Company is engaged in pharmaceutical product development, an industry
which is characterized by extensive research efforts and rapid technological
progress. See "--Competition" for a discussion of the risks associated with
competition and technological change.
Product Liability and Availability of Insurance
The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
use of the Company's product candidates in clinical trials may expose the
Company to product liability claims and possible adverse publicity. These risks
also exist with respect to the Company's product candidates, if any, that
receive regulatory approval for commercial sale. Clinical trials and commercial
sales, if any, of the Company's proposed female contraceptive products will
involve particularly significant product liability considerations, in light of
the substantial amount of current litigation involving female contraceptives and
other products affecting the female reproductive system. The Company currently
carries $10 million of product liability coverage for the clinical research use
of Vasomax and $2 million of product liability coverage for the operations of
FTI. There can be no assurance that such coverage is adequate or that it will
continue to be available in sufficient amounts or at acceptable costs. The
Company does not have product liability insurance for the commercial sale of
Vasomax or any of its other product candidates. There can be no assurance that
the Company will be able to obtain additional insurance coverage at acceptable
costs, or at all, or that the Company will not experience losses due to product
liability claims in the future. A product liability claim, product recall or
other claim, or claims for uninsured liabilities or for amounts exceeding the
limits of the Company's insurance, could have a material adverse effect on the
Company.
Reliance on Contract Research Organizations
During 1996, the Company established arrangements with two contract research
organizations, PPD Pharmaco and Affiliated Research Centers, Inc., relating to
the Company's United States clinical trials of Vasomax. The companies have
collaborated with the Company in the design and conduct of the Company's United
States clinical trials, including the pivotal Phase 3 clinical trials, of
Vasomax. In addition, these companies have been responsible for managing the
conduct of and analyzing data from such clinical trials on behalf of the
Company. These companies may terminate these arrangements at any time. If such
companies were to terminate these arrangements or were unable or unwilling to
devote adequate resources to the Company's projects or to provide services on
acceptable terms, the Company would be required to establish relationships with
other contract research organizations or to develop internally the capacity to
conduct clinical trials. This could result in significant additional expense
and delays in the Company's clinical trials, and could have a material adverse
effect on the Company. See " -- Collaborative and Licensing Agreements--
Contract Research Organizations."
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<PAGE>
No Assurance of Adequate Third-Party Reimbursement
The Company's ability to commercialize its products successfully will depend
in part on the extent to which appropriate reimbursement levels for the cost of
the products and related treatment are obtained from third-party payors,
including government authorities, private health insurers and other
organizations, such as health maintenance organizations ("HMOs"). Third-party
payors are increasingly challenging the prices charged for medical products and
services. Accordingly, if less costly treatments are available, third-party
payors may not authorize reimbursement for the Company's products even if they
offer advantages in safety or efficacy. Also, the trend toward managed
healthcare and government insurance programs significantly influences the
purchase of healthcare services and products, which could result in lower prices
and reduced demand for the Company's products. The cost containment measures
that healthcare providers are instituting and any healthcare reform could affect
the Company's ability to sell its products and may have a material adverse
effect on the Company. There can be no assurance that reimbursement in the
United States or foreign countries will be available for any of the Company's
products, that any reimbursement granted will be maintained, or that limits on
reimbursement available from third-party payers will not reduce the demand for,
or negatively affect the price of, the Company's products. The unavailability
or inadequacy of third-party reimbursement for the Company's products could have
a material adverse effect on the Company. The Company is unable to anticipate
what additional legislation or regulation relating to the healthcare industry or
third party coverage and reimbursement may be enacted in the future, or what
effect the legislation or regulation would have on the Company's business.
Dependence on Key Personnel
The success of the Company depends in large part on the Company's ability to
attract and retain highly qualified scientific and management personnel. The
Company faces competition for such personnel from other companies, research and
academic institutions, government entities and other organizations. There can
be no assurance that the Company will be successful in hiring or retaining key
personnel.
ITEM 2. PROPERTIES
The Company leases approximately 24,000 square feet of laboratory and office
space in The Woodlands, Texas under a lease which expires in May 2000. The
Company also leases approximately 2,000 square feet in Natick, Massachusetts
utilized by FTI under a lease which expires in May 2000. The Company believes
that its facilities will be adequate for its operations in the near future.
ITEM 3. LEGAL PROCEEDINGS
On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in the 270th
District Court of Harris County, Texas, naming Baylor College of Medicine
("BCM"), BCM Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands
Venture Capital Company and the Company as defendants (collectively, the "Dunbar
Defendants"). Dunbar is a cellular and molecular biologist who has been
employed by BCM as a teacher and research scientist since 1981. During the
course of her employment at BCM, Dunbar developed technologies relating to the
use of certain recombinant zona pellucida peptides, the intellectual property
rights to which were assigned to the Company in 1987. Dunbar claimed, among
other things, that her assignment of the patent rights was induced by statutory
and constructive fraud and a civil conspiracy on the part of the Dunbar
Defendants. The court granted partial summary judgement in favor of the Company
and the other Dunbar Defendants in connection with the action. As a result of
the rulings, Dunbar is unable to rescind the assignment of the patent rights and
is left only with ancillary claims regarding the Company's alleged conversion of
her ideas relating to endometriosis and ovarian cancer. Such ancillary claims
are subject to a motion to sever and abate pending Dunbar's appeal of the
court's orders granting the Company's motion for summary judgment. The Company
believes the ancillary claims are without merit.
Certain purported class action complaints alleging violations of Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder have been filed
against the Company and certain of its officers and directors. These complaints
were filed with the United States District Court for the Southern District of
Texas in Houston, Texas. The plaintiffs assert that the defendants made
materially false and misleading statements and failed to disclose material facts
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about the patents and patent applications of the Company relating to Vasomax and
ImmuMax and about the effectiveness and safety of Vasomax. As a result, the
complaints allege, the price of the Company's Common Stock was artificially
inflated during periods beginning as early as April 1, 1996 and ending on
November 18, 1997, when Asensio & Co. ("Asensio") issued a press release
alleging that the Company's Vasomax product was not covered by any issued patent
and was not patentable, or January 9, 1998, the date on which Asensio issued a
press release alleging patent misconduct and fraud with respect to ImmuMax. The
plaintiffs further allege that certain of the named individual defendants sold
Common Stock during the class period when they knew or should have known adverse
nonpublic information. Each plaintiff seeks a determination that its suit is a
proper class action, certification of the plaintiff as a class representative
and damages in an unspecified amount, together with costs of litigation,
including attorneys' fees. The Company and the individual defendants believe
that these actions are without merit and intend to defend against them
vigorously. No estimate of loss or range of estimate of loss, if any, can be
made at this time.
The Company is involved in certain other litigation matters which it believes
will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders in the
fourth quarter of 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is quoted on The Nasdaq National Market under the symbol
"ZONA" and on the Pacific Exchange under the symbol "ZNG." The following table
shows the high and low sale prices per share of Common Stock, as reported by The
Nasdaq National Market, during the periods presented.
<TABLE>
<CAPTION>
PRICE RANGE
----------------
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter $ 7.25 $ 4.25
Second Quarter 5.00 3.38
Third Quarter 5.25 3.38
Fourth Quarter 10.88 4.88
1996
First Quarter $18.25 $ 9.00
Second Quarter 11.50 8.63
Third Quarter 9.13 6.38
Fourth Quarter 11.50 7.75
1997
First Quarter $19.88 $ 9.13
Second Quarter 24.75 14.81
Third Quarter 39.75 21.50
Fourth Quarter 45.75 17.75
1998
First Quarter (through March 24, 1998) $25.50 $13.25
</TABLE>
All of the foregoing prices reflect interdealer quotations, without retail
mark-up, mark-downs or commissions and may not necessarily represent actual
transactions in the Common Stock.
On March 24, 1998, the last sale price of the Common Stock, as reported by
the Nasdaq National Market, was $22.375 per share. On March 24, 1998, there
were approximately 300 holders of record and more than 5,000 beneficial holders
of the Company's Common Stock.
The Company has never paid dividends on the Common Stock. The Company
currently intends to retain earnings, if any, to support the development of the
Company's business and does not anticipate paying dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data set forth below are
derived from the Company's audited consolidated financial statements as of and
for each of the years in the five-year period ended December 31, 1997. The
selected consolidated financial data set forth below should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- --------------
STATEMENTS OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C> <C>
Product sales $ -- $ 800,747 $ 2,838,532 $ 3,021,940 $ 3,455,876
Licensing fee -- -- -- -- 10,000,000
Interest income 101,079 161,171 115,843 270,906 1,960,445
----------- ----------- ----------- ----------- ------------
Total revenues 101,079 961,918 2,954,375 3,292,846 15,416,321
Expenses:
Cost of products sold -- 569,723 2,162,446 2,087,007 2,312,003
Research and development 1,512,331 2,702,464 2,794,928 7,936,188 22,299,099
Selling, general and
administrative 841,382 1,603,479 2,068,115 2,515,509 3,756,305
Interest expense and
amortization of intangibles 279,249 56,649 216,203 224,476 222,289
----------- ----------- ----------- ----------- ------------
Total costs and expenses 2,632,962 4,932,315 7,241,692 12,763,180 28,589,696
----------- ----------- ----------- ----------- ------------
Net loss $(2,531,883) $(3,970,397) $(4,287,317) $(9,470,334) $(13,173,375)
=========== =========== =========== =========== ============
Loss per share/(1)/ $(0.83) $(1.07) $(1.11) $(1.92) $(1.46)
=========== =========== =========== =========== ============
Shares used in loss per
share calculation 3,066,060 3,711,559 3,857,780 4,942,623 9,044,382
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 6,057 $ 2,478 $ 4,190 $ 11,075 $ 73,762
Total assets 6,567 5,274 6,652 13,712 76,940
Long-term obligations -- 83 66 17 3
Deficit accumulated during the
development stage (8,682) (12,653) (16,940) (26,410) (39,584)
Total stockholders' equity 6,457 4,248 5,425 11,577 70,976
</TABLE>
- -----------
/(1)/ See Note 2 of Notes to Consolidated Financial Statements for a description
of the computation of loss per share.
-25-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements reflect
the Company's current views with respect to future events and financial
performance and are subject to certain risks, uncertainties and assumptions,
including those discussed in "Business Risks." Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated in such
forward-looking statements.
OVERVIEW
Zonagen is a biopharmaceutical company in the development stage engaged in
the research, development and marketing of products which address conditions and
diseases associated with the human reproductive system. In addition to its
proprietary development activities, the Company markets and distributes a
variety of third-party fertility-related products to obstetrics/gynecology,
urology and fertility specialists through its wholly-owned subsidiary, FTI which
was acquired in 1994. The Company's objective is to become a leading provider
of innovative products and services for the management of reproductive health.
In 1997, the Company completed two pivotal Phase 3 clinical trials in the
United States of its lead product candidate, Vasomax, an oral treatment for male
erectile dysfunction. The Company has dedicated a substantial portion of its
resources over the last several years to the development of Vasomax. The
Company's future prospects are substantially dependent on favorable results of
the Phase 3 clinical trials, approval by the FDA and the successful
commercialization of Vasomax. See "Item 1. Business -- Business Risks --
Substantial Dependence on One Product; Early Stage of Development of Other
Products."
Substantially all of the Company's revenues are derived from sales of third-
party fertility-related products by FTI. The Company acquired FTI in 1994 to
enter the market for female reproductive healthcare products and services.
Revenues from FTI will not be sufficient to fund the Company's planned
operations.
As of December 31, 1997, the Company had an accumulated deficit of $39.6
million. There can be no assurance that the Company will be able to
successfully complete the transition from a development stage company to the
successful introduction of commercially viable products. The Company's ability
to achieve profitability will depend, among other things, on successfully
completing the development of its products, obtaining regulatory approvals,
establishing marketing, sales and manufacturing capabilities or collaborative
arrangements with others which possess such capabilities, and raising sufficient
funds to finance its activities. There can be no assurance that the Company
will be able to achieve profitability or that profitability, if achieved, can be
sustained. See "Item 1. Business -- Business Risks -- Uncertainties Related to
Early Stage of Development," "Item 1. Business -- Business Risks -- History of
Operating Losses; Accumulated Deficit" and Note 1 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
Comparison of Years ended December 31, 1997 and 1996
Revenues. Total revenues increased 367% to $15.4 million in 1997, as
compared with $3.3 million in 1996. License revenue increased from none in 1996
to $10.0 million in 1997. This increase was due to the Company's receipt of
payments under its agreements with Schering-Plough with respect to Vasomax.
Product sales, substantially all of which were derived from FTI, increased 17%
to $3.5 million in 1997, as compared with $3.0 million in 1996. The increase
was due primarily to increased sales and marketing efforts by FTI. Interest
income increased 638% to $2.0 million in 1997, as compared with $271,000 in
1996. The increase was due primarily to interest on proceeds from the Company's
secondary public offering completed in July 1997.
Cost of Products Sold. Cost of products sold increased 10% to $2.3 million
in 1997, as compared with $2.1 million in 1996. Gross profit as a percentage of
revenues from product sales increased to 33% of product sales in 1997
-26-
<PAGE>
as compared with 31% in 1996. The increase was due primarily to a shift in FTI's
product mix to higher margin products.
Research and Development Expenses. Research and development expenses
increased 182% to $22.3 million in 1997, as compared with $7.9 million in 1996.
The increase was due primarily to the additional costs associated with the
development of Vasomax. Expenses associated with the development of Vasomax
increased 230% to approximately $19.8 million in 1997, as compared with $6.0
million in 1996. The increase was due primarily to costs incurred in connection
with Phase 3 clinical trials in 1997. Other research and development expenses
were $2.5 million and $1.9 million in 1997 and 1996, respectively.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses increased 52% to $3.8 million in 1997 from $2.5 million
in 1996. This increase was primarily due to non-cash compensation expense
related to stock options and employee bonus awards.
Interest Expense and Amortization of Intangibles. Interest expense and
amortization of intangibles decreased slightly to $222,000 in 1997 from $224,000
in 1996.
Comparison of Years ended December 31, 1996 and 1995
Revenues. Total revenues increased 10% to $3.3 million in 1996, as compared
with $3.0 million in 1995. Product sales increased 7% to $3.0 million in 1996,
as compared with $2.8 million in 1995. The increase was due primarily to
increased sales and marketing efforts by FTI in the second half of 1996.
Interest income increased 134% to $271,000 in 1996, as compared with $116,000 in
1995. The increase was due primarily to interest on proceeds from the Company's
private placement completed in October 1996.
Cost of Products Sold. Cost of products sold decreased slightly to $2.1
million in 1996, as compared with $2.2 million in 1995. Gross profit as a
percentage of revenues from product sales increased to 31% of product sales in
1996, as compared with 24% in 1995. The increase was due primarily to a shift in
FTI's product mix to higher margin products in the second half of 1996, as well
as the costs associated with the disposal of inventory of discontinued products
in 1995.
Research and Development Expenses. Research and development expenses
increased 182% to $7.9 million in 1996, as compared with $2.8 million in 1995.
The increase was due primarily to the additional costs associated with the
development of Vasomax. Expenses associated with the development of Vasomax
increased 745% to approximately $6.0 million in 1996, as compared with $710,000
in 1995. Other research and development expenses were $2.0 million and $2.1
million in 1996 and 1995, respectively.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses increased 19% to $2.5 million in 1996 from $2.1 million
in 1995. A substantial portion of this increase was due to reduced levels of
expenditures in the second half of 1995 as the Company took steps to conserve
cash.
Interest Expense and Amortization of Intangibles. Interest expense and
amortization of intangibles increased slightly to $224,000 in 1996 from $216,000
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily with
proceeds from the private placement and public offering of equity securities.
In April 1993, the Company received net proceeds of approximately $7.0 million
from its initial public offering. In December 1993, the Company received net
proceeds of $2.5 million from the sale of Common Stock to an affiliate of
Schering AG in connection with the Company's collaboration with Schering AG. In
October 1995, the Company received net proceeds of $5.3 million from the private
placement of Series A Preferred Stock. In September and October 1996, the
Company received aggregate net proceeds of $14.4 million from the private
placement of Series B Preferred Stock. In July 1997, the Company received net
proceeds of
-27-
<PAGE>
approximately $72.2 million from a public offering of Common Stock. In December
1997, the Company received a $10.0 million up-front license fee from Schering-
Plough for the right to market and sell Vasomax for the treatment of male
erectile dysfunction.
The Company used net cash of $8.3 million for operating activities in the
year ended December 31, 1997, as compared with $8.0 million for the year ended
December 31, 1996. The Company had cash and cash equivalents of $73.8 million
at December 31, 1997. The increased use of cash for the year ended December 31,
1997 was primarily due to the increase in expenses related to the clinical
development of Vasomax. The Company spent approximately $19.8 million in
connection with its clinical development program for Vasomax during 1997.
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company will continue to require substantial funds to continue
research and development, including preclinical studies and clinical trials of
its products, and to commence sales and marketing efforts if FDA and other
regulatory approvals are obtained. The Company believes that its existing
capital resources will be sufficient to fund its operations through at least the
end of 1999. The Company's capital requirements will depend on many factors,
including: the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
clinical and preclinical activities; the progress of the Company's collaborative
agreements with Schering-Plough and costs associated with any future
collaborative research, manufacturing, marketing or other funding arrangements;
the costs and timing of seeking regulatory approvals of the Company's products;
the Company's ability to obtain regulatory approvals; the success of the
Company's sales and marketing programs; the cost of filing, prosecuting and
defending and enforcing any patent claims and other intellectual property
rights; and changes in economic, regulatory or competitive conditions or the
Company's planned business. Estimates about the adequacy of funding for the
Company's activities are based on certain assumptions, including the assumption
that the development and regulatory approval of the Company's products can be
completed at projected costs and that product approvals and introductions will
be timely and successful. There can be no assurance that changes in the
Company's research and development plans, acquisitions or other events will not
result in accelerated or unexpected expenditures. To satisfy its capital
requirements, the Company may seek to raise additional funds in the public or
private capital markets. The Company's ability to raise additional funds in the
public or private markets will be adversely affected if the results of its
current or future clinical trials are not favorable. The Company may seek
additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any such funding will be available to
the Company on favorable terms or at all. If adequate funds are not available,
the Company may be required to curtail significantly one or more of its research
or development programs, or it may be required to obtain funds through
arrangements with future collaborative partners or others that may require the
Company to relinquish rights to some or all of its technologies or products. If
the Company is successful in obtaining additional financing, the terms of such
financing may have the effect of diluting or adversely affecting the holdings or
the rights of the holders of the Company's Common Stock.
The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair market value of the Common Stock at the time of
grant. In October 1997, options to purchase an aggregate of 50,000 shares were
granted to certain employees at a weighted average exercise price of $30.00.
The Company recorded deferred compensation in the amount of $162,500 relating to
these options. The deferred compensation will be amortized and recorded as
compensation expense over the five-year vesting period of the options. In
December 1996, the Company established a new nonemployee director stock option
plan and granted options under the plan entitling the Company's nonemployee
directors to purchase an aggregate of 175,000 shares of Common Stock at an
exercise price of $8.38 per share. For purposes of determining the amount of any
deferred compensation, such options were deemed grant on stockholder approval,
which was received at the Company's Annual Meeting of Stockholders on June 18,
1997. The Company recorded non-cash deferred compensation of $2.4 million in
the quarter ending June 30, 1997 based on the difference between the fair market
value of the Common Stock of $22.25 per share (the last sale price of the Common
Stock on the Nasdaq National Market) on the deemed grant date and the exercise
price of the options. The deferred compensation, as adjusted for applicable
forfeitures, is being amortized and recorded as compensation expense over the
five-year vesting period beginning December 1996. In addition, options to
purchase an aggregate 12,500 shares granted to an employee and a consultant at a
weighted average exercise price of $6.64 per share vest based on the achievement
of certain
-28-
<PAGE>
performance criteria. The Company recorded compensation of $109,000 based on
the difference in the fair market value of such options at the time of grant and
at the time such performance criteria were met. The deferred compensation will
be amortized and recorded as compensation expense over the five-year vesting
period. See Note 9 of Notes to Consolidated Financial Statements.
The Company's primary use of cash to date has been in operating activities to
fund research and development, including preclinical studies and clinical
trials, and general and administrative expenses. Cash of $8.3 million, $8.0
million and $3.2 million was used in operating activities during 1997, 1996 and
1995, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS
The financial statements required by this item are presented following Item
14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-29-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the caption "Election of Directors" in the Company's proxy
statement (the "Proxy Statement") for its annual meeting of stockholders. Such
Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 120 days of the end of the Company's fiscal year ended December
31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to the management of the Company is
hereby incorporated by reference from the information appearing under the
captions "Executive Compensation" and "Election of Directors--Director
Compensation" in the Company's Proxy Statement. Notwithstanding the foregoing,
in accordance with the instructions to Item 402 of Regulation S-K, the
information contained in the Company's proxy statement under the sub-heading
"Report of the Compensation Committee of the Board of Directors" and
"Performance Graph" shall not be deemed to be filed as part of or incorporated
by reference into this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item as to certain business
relationships and transactions with management and other related parties of the
Company is hereby incorporated by reference from the information appearing under
the caption "Certain Transactions" in the Company's Proxy Statement.
-30-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report
1. Financial Statements
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
-------------------- ----
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 and (unaudited)
from Inception (August 20, 1987) through December 31, 1997 F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 and (unaudited) from Inception
(August 20, 1987) through December 31, 1997 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
All schedules are omitted because they are not applicable, not
required, or because the required information is included in the
financial statements or the notes thereto.
2. Exhibits
Exhibits to the Form 10-K have been included only with the copies
of the Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Upon request to the Company and payment of a reasonable
fee, copies of the individual exhibits will be furnished.
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
-------------- -------------------------
<C> <S>
3.1 -- Restated Certificate of Incorporation. Exhibit 3.3 to the Company's Registration Statement on
Form SB-2 (No. 33-57728-FW), as amended (the "Registration Statement"), is incorporated
herein by reference.
3.2 -- Restated Bylaws of the Company. Exhibit 3.4 to the Company's Registration Statement is
incorporated herein by reference.
4.1 -- Specimen Certificate of Common Stock, $.001 par value, of the Company. Exhibit 4.1 to the
Company's Registration Statement is incorporated herein by reference.
4.2 -- Representative's Warrant Agreement dated March 25, 1993. Exhibit 4.3 to the Company's
Registration Statement is incorporated herein by this reference.
4.3 -- Certificate of Designation for the Company's Series A Convertible Preferred Stock. Exhibit 4.1
to the Company's Current Report on Form 8-K dated October 19, 1995 is incorporated herein by
reference.
4.4 -- Form of Subscription Agreement between the Company and purchases of the Company's Series
A Convertible Preferred Stock. Exhibit 4.2 to the Company's Current Report on Form 8-K dated
October 19, 1995 is incorporated herein by reference.
4.5 -- Form of Warrants issued to the designees of the placement agent for the Company's Series A
Convertible Preferred Stock. Exhibit 4.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 is incorporated herein by reference.
4.6 -- Certificate of Designation for the Company's Series B Convertible Preferred Stock. Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (the
"September 1996 10-Q") is incorporated herein by reference.
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
-------------- -------------------------
<C> <S>
4.7 -- Form of Subscription Agreement between the Company and purchases of the Company's Series B
Convertible Preferred Stock. Exhibit 4.2 to the Company's September 1996 10-Q is incorporated
herein by reference.
4.8 -- Form of Warrant issued to the Placement Agent for the Company's Series B Convertible Preferred
Stock. Exhibit 4.3 to the Company's September 1996 10-Q is incorporated herein by reference.
10.1 -- Confidentiality Agreement dated July 19, 1991, between the Company and the Regents of the
University of California. Exhibit 10.1 to the Company's Registration Statement is incorporated
herein by reference.
10.2 -- Agreement dated July 23, 1991, between the Company and Wayne State University. Exhibit 10.2
to the Company's Registration Statement is incorporated herein by reference.
10.3+ -- Amended and Restated 1993 Employee and Consultant Stock Option Plan. Exhibit 10.3 to the
Company's Registration Statement is incorporated herein by reference.
10.4 -- Lease Agreement dated March 22, 1990, between the Company and The Woodlands Equity
Partnership-89. Exhibit 10.4 to the Company's Registration Statement is incorporated herein by
reference.
10.5+ -- Employment Agreement between the Company and Joseph S. Podolski. Exhibit 10.5 to the
Company's Registration Statement is incorporated herein by reference.
10.6 -- Exclusive License Agreement dated as of September 11, 1992, between the Company and
Dainippon Pharmaceuticals Co., Ltd. Exhibit 10.7 to the Company's Registration Statement is
incorporated herein by reference.
10.7 -- Advisory Agreement dated March 25, 1993 between the Company and Reich & Co., Inc. Exhibit
10.8 to the Company's Registration Statement is incorporated herein by reference.
10.8 -- Extension, Modification and Ratification of Lease dated July 12, 1993, between the Company and
Woodlands Equity Partnership- 89. Exhibit 10.10 to the Company's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1993 (the "1993 Form 10-KSB") is incorporated
herein by reference.
10.9+ -- The Company's 1993 Non-Employee Director Stock Option Plan. Exhibit 10.11 to the
Company's 1993 Form 10-KSB is incorporated herein by reference
10.10+ -- Employment Agreement between the Company and Louis Ploth. Exhibit 10.12 to the Company's
1993 Form 10-KSB is incorporated herein by reference.
10.11 -- Stock Purchase Agreement dated December 6, 1993, between the Company and Schering Berlin
Venture Corporation. Exhibit 10.13 to the Company's 1993 Form 10-KSB is incorporated herein
by reference.
10.12 -- License, Research, Development and Regulatory Filing Agreement dated December 13, 1993,
between the Company and Schering AG. Exhibit 10.14 to the Company's 1993 Form 10-KSB
is incorporated herein by reference.
10.13 -- Agreement dated November 30, 1993, between the Company and the University of North
Carolina at Chapel Hill. Exhibit 10.15 to the Company's 1993 Form 10-KSB is incorporated
herein by reference.
10.14 -- Agreement between the Company and Reproductive Biotechnologies PVT., Ltd. Exhibit 10.16
to the Company's 1993 Form 10-KSB is incorporated herein by reference
10.15 -- Assignment Agreement dated April 13, 1994, among Zonagen, Inc., Gamogen, Inc. and Dr.
Adrian Zorgniotti. Exhibit 10.17 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994 is incorporated herein by reference.
10.16 -- Stock Exchange Agreement dated October 13, 1994, effective October 1, 1994, among Zonagen,
Inc., Fertility Technologies, Inc. and J. Tyler Dean. Exhibit 2.1 to the Company's Current Report
on Form 8-K dated October 13, 1994 is incorporated herein by reference.
10.17 -- Registration Rights Agreement dated October 13, 1994, effective October 1, 1994, among
Zonagen, Inc. and J. Tyler Dean. Exhibit 10.1 to the Company's Current Report on Form 8-K
dated October 13, 1994 is incorporated herein by reference.
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
-------------- -------------------------
<C> <S>
10.18 -- Pledge and Security Agreement dated October 13, 1994, between Zonagen, Inc. and J. Tyler
Dean. Exhibit 10.2 to the Company's Current Report on Form 8-K dated October 13, 1994 is
incorporated herein by reference.
10.19 -- Guaranty of Zonagen, Inc. dated October 13, 1994. Exhibit 10.4 to the Company's Current
Report on Form 8-K dated October 13, 1994 is incorporated herein by reference.
10.20 -- Agreement dated January 25, 1995, between the Company and Pharmaco, LSR to conduct clinical
trials. Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 is incorporated herein by reference.
10.21 -- Research Agreement dated November 6, 1995, between the Company and The Brigham and
Women's Hospital, Inc. Exhibit 10.24 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 is incorporated herein by reference.
10.22 -- License Agreement dated November 6, 1995, between the Company and The Brigham and
Women's Hospital, Inc. Exhibit 10.25 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 is incorporated herein by reference.
10.23 -- Conditional Amendment No. 1 to Assignment Agreement dated January 24, 1997, between the
Company and Gamogen, Inc. Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 1997 is incorporated herein by reference.
10.24 -- 1996 Nonemployee Directors' Stock Option Plan. Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1997 is incorporated herein by
reference.
10.25 -- Amendment No. 2 to Assignment Agreement dated September 30, 1997, between the Company
and Gamogen, Inc. Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997 is incorporated herein by reference.
10.26* -- Supply Agreement dated June 12, 1997, between the Company and Plasto S.A. (Synkem
Division).
10.27*++ -- Exclusive License Agreement dated November 15, 1997, between the Company and Schering
Corporation.
10.28*++ -- Exclusive License Agreement dated November 15, 1997, between the Company and Schering-
Plough Ltd.
11.1* -- Statement regarding computation of loss per share
23.1* -- Consent of Arthur Andersen LLP.
27.1* -- Financial Data Schedule
</TABLE>
* Filed herewith.
+ Management contract or compensatory plan.
++ Portions of this exhibit have been omitted based on a request for
confidential treatment pursuant to Rule 24b-2 of the Exchange Act. Such omitted
portions have been filed separately with the Commission.
(b) Reports on Form 8-K
The Company filed one Current Report on Form 8-K dated November 17,
1997, during the three months ended December 31, 1997. The Current Report on
Form 8-K related to the Company entering into Exclusive License Agreements with
two affiliates of Schering-Plough Corporation (including such affiliates,
"Schering-Plough") with respect to the exclusive license of the Company's
Vasomax product to Schering-Plough.
-33-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ZONAGEN, INC.
By: /s/ Joseph S. Podolski
----------------------
Joseph S. Podolski
President and Chief Executive Officer
Dated: March 31, 1998
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Joseph S. Podolski President, Chief Executive Officer March 31, 1998
- -------------------------- and Director
Joseph S. Podolski (Principal Executive Officer)
/s/ Louis Ploth, Jr. Vice President--Business Development March 31, 1998
- -------------------------- and Chief Financial Officer
Louis Ploth, Jr. (Principal Financial Officer and
Principal Accounting Officer)
/s/ Martin P. Sutter Chairman of the Board of Directors March 31, 1998
- --------------------------
Martin P. Sutter
/s/ Steven Blasnik Director March 31, 1998
- --------------------------
Steven Blasnik
/s/ Timothy McInerney Director March 31, 1998
- --------------------------
Timothy McInerney
/s/ David B. McWilliams Director March 31, 1998
- --------------------------
David B. McWilliams
</TABLE>
-34-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zonagen, Inc.:
We have audited the accompanying balance sheets of Zonagen, Inc. (a Delaware
corporation in the development stage), and subsidiary (collectively, "the
Company") as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 Zonagen, Inc., and subsidiary
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 24, 1998
F-1
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 73,761,823 $ 11,074,902
Accounts receivable 514,734 420,149
Product inventory 206,913 174,073
Prepaid expenses and other current assets 270,407 141,223
------------ ------------
Total current assets 74,753,877 11,810,347
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 557,199 311,093
GOODWILL, net 793,827 1,003,329
OTHER ASSETS, net 835,577 586,991
------------ ------------
Total assets $ 76,940,480 $ 13,711,760
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,285,031 $ 1,169,999
Accrued expenses 2,662,849 867,459
Current portion of long-term notes payable 14,160 80,526
------------ ------------
Total current liabilities 5,962,040 2,117,984
------------ ------------
LONG-TERM NOTES PAYABLE 2,639 16,799
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value, 3,075,000
shares authorized, none issued and outstanding -- --
Series B Preferred Stock, $.001 par value,
1,925,000 shares authorized, none and
1,514,906 shares issued and outstanding, respectively -- 1,515
Common Stock, $.001 par value, 20,000,000 shares
authorized, 11,541,923 and 6,033,396 shares
issued, respectively; 11,480,423 and 6,033,396 shares
outstanding, respectively 11,542 6,033
Additional paid-in capital 113,236,136 38,124,532
Deferred compensation (1,401,389) (144,718)
Cost of Treasury stock, 61,500 and none shares,
respectively (1,286,728) --
Deficit accumulated during the development stage (39,583,760) (26,410,385)
------------ ------------
Total stockholders' equity 70,975,801 11,576,977
------------ ------------
Total liabilities and stockholders' equity $ 76,940,480 $ 13,711,760
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20, 1987)
FOR THE YEAR ENDED DECEMBER 31, THROUGH
-------------------------------------------------- DECEMBER 31,
1997 1996 1995 1997
-------------------------------------------------- -----------------
(UNAUDITED)
REVENUES
<S> <C> <C> <C> <C>
Product sales $ 3,455,876 $ 3,021,940 $ 2,838,532 $ 10,117,095
Licensing fee 10,000,000 -- -- 10,250,000
Interest income 1,960,445 270,906 115,843 2,853,144
------------ ----------- ----------- ------------
Total revenues 15,416,321 3,292,846 2,954,375 23,220,239
COSTS AND EXPENSES
Cost of products sold 2,312,003 2,087,007 2,162,446 7,131,179
Research and development 22,299,099 7,936,188 2,794,928 41,067,023
Selling, general and administrative 3,756,305 2,515,509 2,068,115 13,159,540
Interest expense and amortization 222,289 224,476 216,203 1,082,874
of intangibles ------------ ----------- ----------- ------------
Total costs and expenses 28,589,696 12,763,180 7,241,692 62,440,616
------------ ----------- ----------- ------------
Loss from continuing operations (13,173,375) (9,470,334) (4,287,317) (39,220,377)
Loss from discontinued operations -- -- -- (288,104)
Loss on disposal -- -- -- (75,279)
------------ ----------- ----------- ------------
NET LOSS $(13,173,375) $(9,470,334) $(4,287,317) $(39,583,760)
============ =========== =========== ============
Loss per share:
Basic and diluted $(1.46) $(1.92) $(1.11)
Shares used in loss per share
calculation:
Basic and diluted 9,044,382 4,942,623 3,857,780
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ----------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- --------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Exchange of common stock
($.004 per share) for
technology rights and
services from founding
stockholders -- $ -- 245,367 $ 245 $ 805 $ --
Net Loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
BALANCE AT DECEMBER 31,
1987 (unaudited) -- -- 245,367 245 805 --
Net Loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
BALANCE AT DECEMBER 31,
1988 (unaudited) -- -- 245,367 245 805 --
Proceeds from issuance of
common stock -- -- 65,431 65 2,735 --
Net Loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
BALANCE AT DECEMBER 31,
1989 (unaudited) -- -- 310,798 310 3,540 --
Proceeds from issuance of
common stock -- -- 467 1 19 --
Net Loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
BALANCE AT DECEMBER 31,
1990 (unaudited) -- -- 311,265 311 3,559 --
Net Loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
BALANCE AT DECEMBER 31,
1991 (unaudited) -- -- 311,265 311 3,559 --
Conversion of 391,305
shares of Series C
preferred stock into
common stock -- -- 91,442 92 359,908 --
Purchase of retirement of
common stock -- -- (23,555) (24) (984) --
Proceeds from issuance of
common stock -- -- 16,946 17 6,983 --
Net Loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
BALANCE AT DECEMBER 31,
1992 (unaudited) -- -- 396,098 396 369,466 --
Issuance of common stock
for cash, April 1, 1993,
and May 12, 1993 ($5.50
per share), net of
offering costs of
$1,403,400 -- -- 1,534,996 1,535 7,037,543 --
Issuance of common stock
for cash and license
agreement, December 9,
1993 ($10.42 per share),
net of offering costs of
$46,833 -- -- 239,933 240 2,453,017 --
Conversion of Series A
preferred stock to
common stock -- -- 179,936 180 600,420 --
Conversion of Series B
preferred stock to common
stock -- -- 96,013 96 377,903 --
Conversion of Series C
preferred stock to common
stock -- -- 876,312 877 3,442,530 --
Conversion of Series D
preferred stock to common
stock -- -- 280,248 280 599,352 --
Conversion of bridge loan
to common stock -- -- 64,000 64 255,936 --
Net Loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
DEFICIT
ACCMULATED
TREASURY STOCK DURING THE TOTAL
---------------- DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT STAGE EQUITY
------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Exchange of common stock
($.004 per share) for
technology rights and
services from founding
stockholders -- $ -- $ -- $ 1,050
Net Loss -- -- (27,613) (27,613)
------ ------------ ------------ ------------
BALANCE AT DECEMBER 31,
1987 (unaudited) -- -- (27,613) (26,563)
Net Loss -- -- (327,412) (327,412)
------ ------------ ------------ ------------
BALANCE AT DECEMBER 31,
1988 (unaudited) -- -- (355,025) (353,975)
Proceeds from issuance of
common stock -- -- -- 2,800
Net Loss -- -- (966,681) (966,681)
------ ------------ ------------ ------------
BALANCE AT DECEMBER 31,
1989 (unaudited) -- -- (1,321,706) (1,317,856)
Proceeds from issuance of
common stock -- -- -- 20
Net Loss -- -- (1,426,320) (1,426,320)
------ ------------ ------------ ------------
BALANCE AT DECEMBER 31,
1990 (unaudited) -- -- (2,748,026) (2,744,156)
Net Loss -- -- (1,819,620) (1,819,620)
------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, -- -- (4,567,646) (4,563,776)
1991 (unaudited)
Conversion of 391,305
shares of Series C
preferred stock into
common stock -- -- -- 360,000
Purchase of retirement of
common stock -- -- -- (1,008)
Proceeds from issuance of
common stock -- -- -- 7,000
Net Loss -- -- (1,582,808) (1,582,808)
------ ------------ ------------ ------------
BALANCE AT DECEMBER 31,
1992 (unaudited) -- -- (6,150,454) (5,780,592)
Issuance of common stock
for cash, April 1, 1993,
and May 12, 1993 ($5.50
per share), net of
offering costs of
$1,403,400 -- -- -- 7,039,078
Issuance of common stock
for cash and license
agreement, December 9,
1993 ($10.42 per share),
net of offering costs of
$46,833 -- -- -- 2,453,257
Conversion of Series A
preferred stock to
common stock -- -- -- 600,600
Conversion of Series B
preferred stock to common
stock -- -- -- 377,999
Conversion of Series C
preferred stock to common
stock -- -- -- 3,443,407
Conversion of Series D
preferred stock to common
stock -- -- -- 599,632
Conversion of bridge loan
to common stock -- -- -- 256,000
Net Loss -- -- (2,531,883) (2,531,883)
------ ------------ ------------ ------------
</TABLE>
F-4
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- --------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
------ ------ -------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1993 (unaudited) -- $ -- 3,667,536 $ 3,668 $ 15,136,167 $ --
Deferred compensation
resulting from grant of
options -- -- -- -- 187,500 (187,500)
Amortization of deferred
compensation -- -- -- -- -- 37,500
Exercise of warrants to
purchase common stock
for cash, June 30, 1994
($3.94 per share) -- -- 39,623 40 156,079 --
Issuance of common stock
for purchase of FTI,
October 13, 1994 -- -- 111,111 111 1,567,184 --
Net loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
BALANCE AT DECEMBER 31,
1994 -- -- 3,818,270 3,819 17,046,930 (150,000)
Amortization of deferred
compensation -- -- -- -- -- 37,500
Exercise of options to
purchase common stock for
cash, January and April 1995
($.10 to $6.13 per share) -- -- 4,546 4 13,919 --
Issuance of common stock
for cash and a financing
charge, March 9, 1995 -- -- 16,000 16 75,984 --
Issuance of Series A
preferred stock for cash,
October 4, 1995, and
October 19, 1995
($10.00 per share), net
of offering costs of
$651,495 598,850 599 -- -- 5,336,406 --
Conversion of warrants to
purchase common
stock as a result of
offering under
antidilution clause,
October 19, 1995 ($3.63
per share) -- -- -- -- -- --
Conversion of Series A
preferred stock into
common stock, November
and December 1995 (94,000) (94) 259,308 259 (165) --
Net loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
BALANCE AT DECEMBER 31,
1995 504,850 505 4,098,124 4,098 22,473,074 (112,500)
Deferred compensation
resulting from grant of
options -- -- -- -- 86,250 (86,250)
Amortization of deferred
compensation -- -- -- -- -- 54,032
Exercise of warrants to
purchase common stock for
cash, January through December
1996 ($3.63 per share) -- -- 227,776 228 826,595 --
Conversion of Series A
preferred stock into
common stock, January
through November 1996 (507,563) (508) 1,396,826 1,397 (889) --
Issuance of options for
services, January 12,
1996 -- -- -- -- 98,745 --
Exercise of options to
purchase common stock for
cash, February through
November 1996 ($.001 to
$5.50 per share) -- -- 23,100 23 75,005 --
Issuance of common stock
for agreement not to
compete, April 13, 1996 -- -- 19,512 19 199,978 --
Exercise of warrants to
purchase Series A
preferred
stock under cashless
exercise provision,
June 5, 1996 2,713 3 -- -- (3) --
Issuance of Series B
preferred stock for cash,
September 30, 1996, and
October 11, 1996
($10.00 per share), net
of offering costs of
$2,557,440 1,692,500 1,693 -- -- 14,365,867 --
Conversion of Series B
preferred stock into
common stock, November
through December 1996 (177,594) (178) 268,058 268 (90) --
Net loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
DEFICIT
ACCUMULATED
TREASURY STOCK DURING THE TOTAL
------------------- DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT STAGE EQUITY
-------- -------- ------------ --------------
BALANCE AT DECEMBER 31, -- -- $ (8,682,337) $ 6,457,498
1993 (unaudited)
Deferred compensation
resulting from grant of
options -- -- -- --
Amortization of deferred
compensation -- -- -- 37,500
Exercise of warrants to
purchase common stock
for cash, June 30, 1994
($3.94 per share) -- -- -- 156,119
Issuance of common stock
for purchase of FTI,
October 13, 1994 -- -- -- 1,567,295
Net loss -- -- (3,970,397) (3,970,397)
---------- ------- ---------- ---------
BALANCE AT DECEMBER 31,
1994 -- -- (12,652,734) 4,248,015
Amortization of deferred -- -- -- 37,500
compensation
Exercise of options to
purchase common stock for
cash, January and April 1995
($.10 to $6.13 per share) -- -- -- 13,923
Issuance of common stock
for cash and a financing
charge, March 9, 1995 -- -- -- 76,000
Issuance of Series A
preferred stock for cash,
October 4, 1995, and
October 19, 1995
($10.00 per share), net
of offering costs of
$651,495 -- -- -- 5,337,005
Conversion of warrants to
purchase common
stock as a result of
offering under
antidilution clause,
October 19, 1995 ($3.63
per share) -- -- -- --
Conversion of Series A
preferred stock into
common stock, November
and December 1995 -- -- -- --
Net loss -- -- (4,287,317) (4,287,317)
---------- -------- ---------- ---------
BALANCE AT DECEMBER 31,
1995 -- -- (16,940,051) 5,425,126
Deferred compensation
resulting from grant of
options -- -- -- --
Amortization of deferred
compensation -- -- -- 54,032
Exercise of warrants to
purchase common stock for
cash, January through
December 1996 ($3.63
per share) -- -- -- 826,823
Conversion of Series A
preferred stock into
common stock, January
through November 1996 -- -- -- --
Issuance of options for
services, January 12,
1996 -- -- -- 98,745
Exercise of options to
purchase common stock for
cash, February through
November 1996 ($.001 to
$5.50 per share) -- -- -- 75,028
Issuance of common stock
for agreement not to
compete, April 13, 1996 -- -- -- 199,997
Exercise of warrants to
purchase Series A
preferred
stock under cashless
exercise provision,
June 5, 1996 -- -- -- --
Issuance of Series B
preferred stock for cash,
September 30, 1996, and
October 11, 1996
($10.00 per share), net
of offering costs of
$2,557,440 -- -- -- 14,367,560
Conversion of Series B
preferred stock into
common
stock, November through
December 1996 -- -- -- --
Net loss -- -- (9,470,334) (9,470,334)
---------- ------- ---------- ------------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- --------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- ------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996 1,514,906 $ 1,515 6,033,396 $ 6,033 $ 38,124,532 $ (144,718)
Deferred compensation
resulting from grant of
options -- -- -- -- 2,110,000 (2,110,000)
Amortization of deferred
compensation -- -- -- -- -- 853,329
Exercise of options to
purchase common stock
for cash, January
through December 1997
($0.00 to $22.25 per
share) -- -- 90,955 92 521,631 --
Exercise of warrants to
purchase common stock
for cash, January
through December 1997
($3.63 and $3.07 per
share) -- -- 22,368 22 75,495 --
Issuance of common stock
for a cashless exercise
of Series A preferred stock
warrants, February
through September 1997 -- -- 81,294 81 (81) --
Exercise of Series A
preferred stock warrants
to purchase common stock
for cash, April 1997
($11.00 per share) -- -- 818 1 3,266 --
Issuance of common stock
for a cashless exercise
of Series B preferred stock
warrants, April through
November 1997 -- -- 88,223 88 (88) --
Exercise of Series B
preferred stock warrants
to purchase common stock
for cash, April through
July 1997 ($11.00 per
share) -- -- 17,169 17 125,108 --
Issuance of common stock
as final purchase price
for acquisition of FTI,
January 31, 1997
($9.833 per share) -- -- 305,095 305 (305) --
Issuance of common stock
as final debt payment
on FTI acquisition,
January 31, 1997
($9.833 per share) -- -- 19,842 20 93,792 --
Conversion of Series B
preferred stock into
common stock, January
through October 1997 (1,514,906) (1,515) 2,295,263 2,295 (780) --
Issuance of common stock
for cash, July 25, 1997
($30.00 per share), net
of offering costs
of $5,438,846 -- -- 2,587,500 2,588 72,183,566 --
Purchase of treasury
stock, December 1997 -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- -------- ---------- ------- ------------ -------------
BALANCE AT DECEMBER 31, -- $ -- 11,541,923 $11,542 $113,236,136 $(1,401,389)
1997 ========== ======== ========== ======= ============ =============
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
TREASURY STOCK DURING THE TOTAL
------------------- DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT STAGE EQUITY
--------- ------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996 -- -- $(26,410,385) $ 11,576,977
Deferred compensation
resulting from grant of
options -- -- -- --
Amortization of deferred
compensation -- -- -- 853,329
Exercise of options to
purchase common stock
for cash, January
through December 1997
($0.00 to $22.25 per
share) -- -- -- 521,723
Exercise of warrants to
purchase common stock
for cash, January
through December 1997
($3.63 and $3.07 per
share) -- -- -- 75,517
Issuance of common stock
for a cashless exercise
of Series A preferred stock
warrants, February
through September 1997 -- -- -- --
Exercise of Series A
preferred stock warrants
to purchase common stock
for cash, April 1997
($11.00 per share) -- -- -- 3,267
Issuance of common stock
for a cashless exercise
of Series B preferred stock
warrants, April through
November 1997 -- -- -- --
Exercise of Series B
preferred stock warrants
to purchase common stock
for cash, April through
July 1997 ($11.00 per
share) -- -- -- 125,125
Issuance of common stock
as final purchase price
for acquisition of FTI,
January 31, 1997
($9.833 per share) -- -- -- --
Issuance of common stock
as final debt payment
on FTI acquisition,
January 31, 1997
($9.833 per share) -- -- -- 93,812
Conversion of Series B
preferred stock into
common stock, January
through October 1997 -- -- -- --
Issuance of common stock
for cash, July 25, 1997
($30.00 per share), net
of offering costs
of $5,438,846 -- -- -- 72,186,154
Purchase of Treasury stock,
December 1997 61,500 (1,286,728) -- (1,286,728)
Net Loss -- -- (13,173,375) (13,173,375)
---------- ----------- ----------- ------------
BALANCE AT DECEMBER 31,
1997 61,500 $(1,286,728) $(39,583,760) $ 70,975,801
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20, 1987)
FOR THE YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------------- DECEMBER 31,
1997 1996 1995 1997
--------------- -------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(13,173,375) $(9,470,334) $(4,287,317) $(39,583,760)
Loss on disposal of discontinued operations -- -- -- 75,279
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash financing costs -- -- 75,984 315,984
Depreciation and amortization 383,108 358,310 317,050 1,602,054
Noncash expenses related to stock-based
transactions 853,329 152,777 37,500 1,081,126
Common stock issued for agreement not to
compete -- 199,997 -- 199,997
Series B Preferred Stock issued for
consulting
services -- -- -- 17,999
Changes in operating assets and liabilities
(net effects of purchase of business in 1988
and 1994):
(Increase) decrease in receivables (155,807) (119,893) 146,120 (309,769)
(Increase) decrease in inventory (32,840) 56,307 79,570 74,615
Increase in prepaid expenses and
other current assets (67,962) (44,273) (1,005) (128,943)
Increase in accounts payable and
accrued expenses 3,938,109 877,155 383,444 5,730,567
------------ ----------- ----------- ------------
Net cash used in operating activities (8,255,438) (7,989,954) (3,248,654) (30,924,851)
------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (367,443) (182,337) (43,500) (1,278,142)
Purchase of technology rights and other assets (300,855) (203,651) (133,988) (971,877)
Cash acquired in purchase of FTI -- -- -- 2,695
Proceeds from sales of subsidiary, less
$12,345 for operating losses during
1990 phase-out period -- -- -- 137,646
Increase in net assets held for disposal -- -- -- (212,925)
------------ ----------- ----------- ------------
Net cash used in investing activities (668,298) (385,988) (177,488) (2,322,603)
------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 72,911,786 901,851 13,939 83,485,850
Proceeds from issuance of preferred stock -- 14,367,560 5,337,005 23,688,522
Purchase of treasury stock (1,286,728) -- -- (1,286,728)
Proceeds from issuance of notes payable -- -- -- 2,838,681
Principal payments on notes payable (14,401) (8,425) (182,714) (1,717,048)
------------ ----------- ----------- ------------
Net cash provided by financing activities 71,610,657 15,260,986 5,168,230 107,009,277
------------ ----------- ----------- ------------
Net increase in cash and cash equivalents 62,686,921 6,885,044 1,742,088 73,761,823
Cash and cash equivalents at beginning of
period 11,074,902 4,189,858 2,447,770 --
------------ ----------- ----------- ------------
Cash and cash equivalents at end of period $ 73,761,823 $11,074,902 $ 4,189,858 $ 73,761,823
============ =========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Reduction of debt due to final payment, in
stock, of FTI acquisition $ 93,812 $ -- $ -- $ 93,812
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Zonagen, Inc., a Delaware corporation, (together with its subsidiary, the
Company), was organized on August 20, 1987 (Inception), and is a
biopharmaceutical company in the development stage engaged in the research,
development and marketing of products which address conditions and diseases
associated with the human reproductive system. In addition to its proprietary
development activities, the Company markets and distributes a variety of third-
party fertility-related products to obstetrics/gynecology, urology and fertility
specialists through its wholly-owned subsidiary, Fertility Technologies, Inc.
("FTI"). From Inception through December 31, 1997, the Company has been
primarily engaged in research and development and is still in a development
stage. On April 1, 1993, the Company completed its initial public offering (the
Offering).
The Company has experienced negative cash flows from operations since its
inception, has an accumulated deficit of $39.6 million at December 31, 1997, and
expects to continue to incur losses for several years. The Company has funded
its activities to date primarily from equity financings. The Company will
continue to require substantial funds to continue research and development
activities, including preclinical studies and clinical trials of its products,
and to commence sales and marketing efforts if FDA and other regulatory
approvals are obtained. On July 25, 1997, the Company completed a public
offering of Common Stock ("1997 Offering") in which it sold 2,587,500 shares of
Common Stock at a price of $30 per share for net proceeds of approximately $72.2
million. The Company believes that its existing capital resources will be
sufficient to fund its operations through at least the end of 1999. The
Company's capital requirements will depend on many factors, including the
problems, delays, expenses and complications frequently encountered by
development stage companies; the progress of the Company's preclinical and
clinical activities; the progress of and costs associated with the Company's
future collaborative research, manufacturing, marketing or other funding
arrangements; the availability of qualified personnel and adequate product
liability exposure; the costs and timing of seeking regulatory approvals of the
Company's products; the Company's ability to obtain regulatory approvals; the
success of the Company's sales and marketing programs; the cost of filing,
prosecuting and defending and enforcing any patent claims and other intellectual
property rights; and changes in economic, regulatory or competitive conditions
of the Company's planned business. Other than through FTI, the Company has not
generated revenues from operations nor is there any assurance of significant
revenues in the future. The Company has generated only limited revenue from
product sales since inception and revenues from FTI will not be sufficient to
fund the Company's planned operations. See "Business Risks" elsewhere herein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of the Company and
FTI, its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
- -------------------------
For purposes of the consolidated statements of cash flows, the Company
considers all cash accounts and highly liquid investments having original
maturities of three months or less to be cash and cash equivalents.
PRODUCT INVENTORY
- -----------------
Product inventory consists primarily of products manufactured by others for
resale to obstetrics/gynecologists, urologists and fertility clinics. Inventory
at December 31, 1997, also includes finished goods manufactured by the Company
for sale to fertility clinics. Inventory is stated at the lower of cost or
market using the first-in, first-out method.
LAB EQUIPMENT, FURNITURE
AND LEASEHOLD IMPROVEMENTS
- --------------------------
Lab equipment, furniture and leasehold improvements are recorded at cost,
less accumulated depreciation and amortization. Depreciation is computed on the
straight-line method over an estimated useful life of five years or, in the case
of leasehold improvements, amortized over the remaining term of the lease.
Maintenance and repairs that do not improve or extend the life of assets are
expensed as incurred.
GOODWILL
- --------
Goodwill represents the excess of the purchase price of FTI over the fair
value of the assets acquired at the date of acquisition and is being amortized
using the straight-line method over 7 years, which represents management's
estimation of the related benefit to be derived from the acquired business.
Under Accounting Principles Board ("APB") Opinion No. 17 and Statement of
Financial Accounting Standards ("SFAS") No. 121, the Company periodically
evaluates whether events and circumstances after the acquisition date indicate
that the remaining balance of goodwill may not be recoverable. If factors
indicate that goodwill should be evaluated for possible impairment, the Company
would compare estimated undiscounted future cash flow from the related
operations to the carrying amount of goodwill. If the carrying amount of
goodwill were greater than the undiscounted future cash flow, an impairment loss
would be recognized. Any impairment loss would be computed as the excess of the
carrying amount of goodwill over the estimated fair value of the goodwill
(calculated based on discounting estimated future cash flows). Accumulated
amortization of goodwill was $655,582 and $446,080 as of December 31, 1997 and
1996, respectively.
OTHER ASSETS
- ------------
Other assets consist primarily of patent costs which are being amortized over
17 years, or the lesser of the legal or the estimated economic life of the
patent. Accumulated amortization of patent costs was $163,317 and $116,048 at
December 31, 1997 and 1996, respectively.
REVENUE RECOGNITION
- -------------------
The Company recognizes revenues from product sales upon shipment. Revenues
from licensing activities are recognized as these revenues are earned.
RESEARCH AND DEVELOPMENT COSTS
- ------------------------------
The Company expenses research and development costs in the period they are
incurred.
F-9
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOSS PER SHARE
- --------------
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 revised the standards for computing
and presenting earnings per share (EPS) of common stock such that the
computations required for primary and fully diluted EPS were replaced with basic
and diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
EPS is computed in the same manner as fully diluted EPS, except that, among
other changes, the average share price for the period is used in all cases when
applying the treasury stock method to potentially dilutive outstanding options.
All earnings per share amounts presented herein have been restated to reflect
the adoption of SFAS No. 128. In all applicable years, all common stock
equivalents, including Series A and Series B preferred stock, were antidilutive
and, accordingly, were not included in the computation for the Company.
3. LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
---------------------------------------------------
Lab equipment, furniture and leasehold improvements are classified as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Laboratory equipment $ 672,094 $ 592,479
Furniture and fixtures 180,957 137,235
Office equipment 131,183 101,427
Leasehold improvements 400,653 186,303
---------- ----------
1,384,887 1,017,444
Less - Accumulated depreciation (827,688) (706,351)
and amortization ---------- ----------
Total $ 557,199 $ 311,093
========== ==========
</TABLE>
Depreciation expense of $121,337, $104,559 and $96,667 was recorded in
1997, 1996 and 1995, respectively.
4. OPERATING LEASES:
----------------
The Company leases laboratory and office space pursuant to leases accounted
for as operating leases. Rental expense for the years ended December 31, 1997,
1996 and 1995, was $223,539, $179,335 and $179,640 , respectively. Future
minimum lease payments under noncancelable leases with original terms in excess
of one year as of December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998 $272,985
1999 244,121
2000 96,204
--------
Total $613,310
========
</TABLE>
F-10
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCRUED EXPENSES:
-----------------
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
----------- ---------
<S> <C> <C>
Research and development costs $1,446,674 $534,264
Consulting fees 177,787 --
Employee bonuses 175,000 --
Other 863,388 333,195
---------- --------
Total $2,662,849 $867,459
========== ========
</TABLE>
6. NOTES PAYABLE:
--------------
In connection with the acquisition of FTI, the Company assumed two note
agreements from a related party. One note agreement was paid in full on
September 30, 1995. The second note agreement required the payment of a number
of shares of common stock on January 31, 1997, determined based upon the market
price of common stock at that date. Interest was imputed at a rate of 11
percent. On January 31, 1997, the Company issued 19,842 shares of common stock
to satisfy the remaining note obligation.
In June 1996, FTI assumed two note agreements totaling $39,625, one of which
was to a related party . The notes bear interest at 8 percent and 11 percent
and mature on May 1, 1999, and October 1, 1998, respectively. Principal and
interest payments of approximately $1,400 are due monthly.
7. FEDERAL INCOME TAXES:
---------------------
The Company has had losses since inception and, therefore, has not been
subject to federal income taxes. The Company has accumulated approximately
$1,315,000 of research and development tax credits. As of December 31, 1997 and
1996, the Company had approximately $38,150,000 and $24,300,000, respectively,
of net operating loss (NOL) carryforwards for federal income tax purposes.
Additionally, if not utilized, these NOLs and research and development tax
credits will begin to expire in the year 2002 and 2003, respectively.
The Tax Reform Act of 1986 provided for a limitation on the use of NOL and
tax credit carryforwards following certain ownership changes that could limit
the Company's ability to utilize these NOLs and tax credits. The sale of
preferred stock in 1996, together with previous changes in stock ownership,
resulted in an ownership change for federal income tax purposes. The Company
estimates that the amount of NOL caryforwards and the credits available to
offset taxable income at December 31, 1997 is approximately $3.8 million per
year on a cumulative basis. Accordingly, if the Company generates taxable income
in any year in excess of its then cumulative limitation, the Company may be
required to pay federal income taxes even though it has unexpired NOL
carryforwards. Additionally, because U.S. tax laws limit the time during which
NOLs and tax credit carryforwards may be applied against future taxable income
and tax liabilities, the Company may not be able to take full advantage of its
NOLs and tax credit carryforwards for federal income tax purposes.
Under SFAS No. 109, "Accounting for Income Taxes," an NOL requires the
recognition of a deferred tax asset. As the Company has incurred losses since
inception, and there is no certainty of future revenues, a deferred tax asset
has been recorded and reserved in full in the accompanying financial statements
for the Company's NOL carryforward.
F-11
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 12,974,000 $ 8,268,000
Book/tax difference on basis of assets and license agreements 32,000 133,000
Research and development tax credits 1,315,000 520,000
Accruals/expenses not currently deductible 53,000 26,000
------------ -----------
Total deferred tax assets 14,374,000 8,947,000
Less -- Valuation allowance (14,374,000) (8,947,000)
------------ -----------
Net deferred tax assets $ -- $ --
============ ===========
</TABLE>
8. STOCKHOLDERS' EQUITY:
-----------------------
SERIES B PREFERRED STOCK
- ------------------------
In September 1996, the Company authorized 1,925,000 shares of Series B
convertible preferred stock (Series B Preferred Stock). The Company sold an
aggregate of 1,692,500 shares of Series B Preferred Stock in September and
October 1996 at a price of $10.00 per share, from which it received net proceeds
of approximately $14.4 million.
Effective July 25, 1997, the conversion rate of the Series B Preferred Stock
was adjusted to 1.53 shares of Common Stock from 1.5094 shares of Common Stock
for each share of Series B Preferred Stock that remained outstanding as of such
date. The adjustment was required under the terms of the Certificate of
Designation of the Preferred Stock because the price at which shares of Common
Stock were sold to the public in the July 25, 1997 Offering ($30.00 per share)
was less than the closing bid price of Common Stock on such date ($31.50 per
share).
On October 6, 1997, the Company exercised its right to cause the mandatory
conversion of the Series B Preferred Stock, with the result that all such shares
not previously converted were converted into Common Stock effective October 31,
1997.
COMMON STOCK
- ------------
The acquisition of FTI required a final payment based upon the market price
per share of common stock at January 31, 1997, and whether FTI achieved certain
earnings milestones. On January 31, 1997, the Company issued 305,095 shares of
common stock as final payment.
During 1997, the Company granted 5,000 shares of common stock to a member of
the board of directors for consulting services performed in connection with the
1997 Offering. In connection with this grant, the Company recorded compensation
expense of approximately $100,000 in the accompanying consolidated financial
statements.
WARRANTS
- --------
At December 31, 1997 there were a total of 124,914 warrants outstanding,
convertible into 202,054 shares of common stock. All warrants contain a
cashless exercise provision whereby the Company could receive cash proceeds up
to approximately $1,212,000 if the cashless exercise provision was not utilized.
F-12
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Offering, the Company issued to the underwriter
warrants to purchase 135,000 shares of common stock at an initial price per
share equal to 120 percent of the initial public offering price per share.
These warrants contain certain antidilution provisions providing for adjustment
of the initial exercise price and the number and type of securities issuable
upon exercise of the warrants upon certain conditions. These warrants were
recorded at zero value in the accompanying financial statements because the
value was determined to be de minimis when issued. In 1995, as a result of the
sale of Series A Preferred Stock, these warrants were converted into warrants to
purchase 245,459 shares of common stock for $3.63 per share. In November 1996,
as a result of the sale of Series B Preferred Stock, the remaining warrants were
converted into warrants to purchase 37,898 shares of common stock for $2.46 per
share. All warrants applicable to the Offering have been exercised as of
December 31, 1997.
In connection with the October 1995 sale of Series A Preferred Stock, the
Company issued warrants to the placement agent to purchase 59,885 shares of
Series A Preferred Stock at a price of $11.00 per share. These warrants expire
in 2000. These warrants were recorded at zero value in the accompanying
financial statements because the value was determined to be de minimis when
issued.
In connection with the issuance of Series B Preferred Stock, the Company
issued warrants to the placement agent to purchase 169,250 shares of Series B
Preferred Stock at a price of $11.00 per share. These warrants expire in 2001.
These warrants were recorded at estimated fair value of $405,269 and are
included as a component of additional paid in capital in the accompanying
consolidated financial statements. The fair value of these warrants was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions: risk-free interest rates of 5.67
percent; no expected dividend yield, expected life of one year and expected
volatility of 65 percent.
TREASURY STOCK
- --------------
On December 12, 1997 the Company announced a stock buyback of the Company's
common stock. The purchases are to be made from time to time in the open market
at prevailing market prices. As of December 31, 1997 the Company purchased a
total of 61,500 shares at an aggregate purchase price of $1,286,728 for an
average price of $20.922 per share. From January 1, 1998 to March 24, 1998 the
Company purchased an additional 226,800 shares at an aggregate purchase price of
$4,022,317 for an average of $17.735 per share. Total purchases resulting from
the stock buyback program are 288,300 for an aggregate purchase price of
$5,309,045 for a weighted average purchase price of $18.415 per share.
9. STOCK OPTIONS:
--------------
The Company has two stock option plans for the granting of options to
purchase a maximum of 2,150,000 shares of common stock by its employees and
consultants over the life of the plans. Currently, based on the plans, the
plans may grant options to purchase up to 1,275,330 shares of common stock.
There are no significant differences between the provisions of each plan.
Options are granted with an exercise price per share as determined by the board
of directors, generally equal to the fair market value per share of common stock
on the grant date. Vesting provisions for each grant are determined by the
board of directors and have generally been 20 percent on each anniversary of the
grant date. All options expire no later than the tenth anniversary of the grant
date. At December 31, 1997, 543,241 options were available to be granted under
these plans.
In December 1996, the board of directors approved the adoption of a new non-
employee director stock option plan which supersedes the prior non-employee
directors stock option plan and eliminated any remaining options available to be
granted under the preceding plan. Pursuant to the terms of this plan, the
Company may grant options to purchase up to 400,000 shares of common stock. The
plan provides that each director receive options to purchase
F-13
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25,000 shares of common stock upon initial election to the board of directors
and receive options to purchase 2,500 shares at each reelection. The vesting
provisions for the initial election grant of options is 20 percent on each
annual anniversary of the grant date. Vesting for the reelection grant of
options is 8.33 percent on each monthly anniversary of the grant date. All
options expire no later than the tenth anniversary of the grant date. In
December 1996, the Company granted options to purchase 175,000 shares of common
stock to members of the board of directors at the fair market value of the stock
on the date of grant. As the plan was not approved by the stockholders until
June 1997, the Company recorded approximately $2.4 million in deferred
compensation relating to these options for the excess over fair market value of
the stock between the grant date and the date shareholder approval was received.
The deferred compensation is being amortized over the vesting period of the
options. At December 31, 1997, 277,500 options were available to be granted
under this plan.
The Company accounts for its stock option plans under APB No. 25 "Accounting
for Stock Issued to Employees." Accordingly, deferred compensation is recorded
for stock options based on the excess of the market value of the common stock on
the measurement date over the exercise price of the options. This deferred
compensation is amortized over the vesting period of each option.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which, if fully adopted, requires the Company to record stock-
based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 for employee stock-based compensation and has
elected not to record related compensation expense in accordance with this
statement. Had compensation expense for its stock option plans been determined
consistent with SFAS No. 123, the Company's net loss and loss per share would
have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Net loss -
As reported $13,173,375 $9,470,334 $4,287,317
Pro forma 14,360,627 9,790,780 4,384,651
Loss per share -
As reported $ 1.46 $ 1.92 $ 1.11
Pro forma 1.59 1.99 1.14
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
Under SFAS No. 123, the fair value of each option grant was estimated on the
date of grant using the Black-Scholes option pricing model. The following
weighted average assumptions were used for grants in 1997, 1996, and 1995,
respectively: risk-free interest rates of 6.3%, 6.2%, and 6.1%; dividend rates
of $0, $0, and $0; expected lives of 6.0, 6.0 and 6.0 years; expected volatility
of 60%, 65% and 44%.
The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options and changes in the subjective input assumptions can materially affect
the fair value estimate.
F-14
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's option plans at December 31, 1997,
1996, and 1995 and changes during the years then ended is presented in the
tables below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 775,005 $ 6.41 647,855 $4.52 529,322 $4.77
Granted 320,300 17.57 206,650 7.79 172,500 4.16
Exercised (90,955) 5.74 (23,100) 3.25 (4,546) 3.06
Forfeited (81,919) 6.96 (56,400) 6.10 (49,421) 5.88
------- ------- -------
Outstanding at end of year 922,431 9.44 775,005 6.41 647,855 4.52
======= ======= =======
Exercisable at end of year 435,837 5.12 349,364 4.09 249,986 3.82
Weighted average fair value of
options granted at market 13.66 5.39 2.14
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .040 to $5.000 215,103 5.2 $ 2.27 170,103 $ 1.80
5.125 to 10.000 567,328 7.6 7.36 258,234 6.82
18.188 to 22.250 33,000 9.8 19.73 7,500 22.25
30.000 to 33.250 107,000 9.8 31.73 -- --
------- -------
922,431 435,837
======= =======
</TABLE>
10. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS:
---------------------------------------------
In November 1997, the Company entered into Exclusive License Agreements with
affiliates of Schering-Plough Corporation (including such affiliates, "Schering-
Plough") with respect to the exclusive license of the Company's Vasomax product
for treatment of male erectile dysfunction. Under the agreement, Schering-
Plough paid Zonagen an up-front payment of $10 million with subsequent milestone
payments once specified regulatory goals are achieved. Zonagen will receive
escalating royalties on all product sales.
During 1996, the Company entered into agreements with two contract research
organizations to which the Company made cash payments aggregating to
approximately $13,119,000 and $3,162,000 during the years ended December 31,
1997 and 1996, respectively, and recorded payables and accrued expenses of
$3,617,000 as of December 31, 1997.
On June 12, 1997 the Company and a contract manufacturing organization
executed an exclusive supply agreement. This agreement requires that the Company
purchase all of its bulk phentolamine from the organization for a period of five
years. The agreement shall thereafter continue for consecutive one year periods
until terminated by either party. The agreement requires the Company to
purchase specified minimum order quantities and that the organization
manufacture phentolamine exclusively for the Company.
On December 13, 1993, the Company entered into a corporate collaboration
agreement with Schering AG, a German company, to develop and commercialize the
human application of immunocontraceptive zona pellucida
F-15
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
technology. Under the agreement, the Company will continue to conduct research
studies of its zona pellucida technology, with a focus on identifying and
selecting a lead immunocontraceptive product for humans. Schering will then
conduct the necessary preclinical and clinical development studies of this and
subsequent immunocontraceptive products and will seek the necessary regulatory
approvals. The Company retains the manufacturing rights to the products as well
as the responsibility to develop scaled-up manufacturing processes and
production capabilities. The Company also retains certain marketing and
manufacturing rights in India and China, and the right to co-promote the product
in the United States. Schering has exclusive marketing rights in all other
countries worldwide. Upon execution of this agreement, the Company sold 239,933
shares of common stock to Schering Berlin Venture Corporation (SBVC) for $2.5
million, or $10.42 per share. SBVC is a subsidiary of Schering AG.
11. RELATED PARTIES:
----------------
The Company leases office space from an affiliate of a stockholder of the
Company. The Company recorded rent expense of approximately $170,000, $110,000
and $67,000 during 1997, 1996 and 1995, respectively, related to this lease.
12. COMMITMENTS AND CONTINGENCIES:
------------------------------
On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in the 270th
District Court of Harris County, Texas, naming Baylor College of Medicine
("BCM"), BCM Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands
Venture Capital Company and the Company as defendants (collectively, the "Dunbar
Defendants"). Dunbar is a cellular and molecular biologist who has been
employed by BCM as a teacher and research scientist since 1981. During the
course of her employment at BCM, Dunbar developed technologies relating to the
use of certain recombinant zona pellucida peptides, the intellectual property
rights to which were assigned to the Company in 1987. Dunbar claimed, among
other things, that her assignment of the patent rights was induced by statutory
and constructive fraud and a civil conspiracy on the part of the Dunbar
Defendants. The court granted partial summary judgement in favor of the Company
and the other Dunbar Defendants in connection with the action. As a result of
the rulings, Dunbar is unable to rescind the assignment of the patent rights and
is left only with ancillary claims regarding the Company's alleged conversion of
her ideas relating to endometriosis and ovarian cancer. Such ancillary claims
are subject to a motion to sever and abate pending Dunbar's appeal of the
court's orders granting the Company's motion for summary judgment. The Company
believes the ancillary claims are without merit.
13. SUBSEQUENT EVENT:
-----------------
During January 1998, the Company implemented a tax deferred employee benefit
plan in the form of a Simple IRA. The plan allows each employee to contribute a
maximum of $6,000 annually. The Company will match the employee's contribution
up to a maximum of 3% of their salary. Participaton in the plan may only begin
after the employee's one year anniversary from date of hire. The vesting
provisions provide that the employee is 100% vested once participation begins.
Certain purported class action complaints alleging violations of Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder have been filed
against the Company and certain of its officers and directors. The plaintiffs
assert that the defendants made materially false and misleading statements and
failed to disclose material facts about the patents and patent applications of
the Company relating to Vasomax and ImmuMax and about the effectiveness and
safety of Vasomax. As a result, the complaints allege, the price of the
Company's Common Stock was artificially inflated during periods beginning as
early as April 1, 1996 and ending on November 18, 1997, when Asensio & Co.
("Asensio") issued a press release alleging that the Company's Vasomax product
was not covered by any issued patent and was not patentable, or January 9, 1998,
the date on which Asensio issued a press release alleging patent misconduct and
fraud with respect to ImmuMax. The plaintiffs
F-16
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
further allege that certain of the named individual defendants sold Common Stock
during the class period when they knew or should have known adverse nonpublic
information. Each plaintiff seeks a determination that its suit is a proper
class action, certification of the plaintiff as a class representative and
damages in an unspecified amount, together with costs of litigation, including
attorneys' fees. The Company and the individual defendants believe that these
actions are without merit and intend to defend against them vigorously. No
estimate of loss or range of estimate of loss, if any, can be made at this time.
F-17
<PAGE>
EXHIBIT 10.26
SUPPLY AGREEMENT
This Agreement is made between:
ZONAGEN INC, a corporation organized and existing under the laws of Delaware,
with offices at 2408 Timberloch Place, B 4, The Woodlands, TEXAS 77380, USA
"ZONAGEN"
AND
- ---
PLASTO S.A. (SYNKEM DIVISION), a company organized and existing under the laws
of France with registered offices at 47 Rue de Longvic, 21300 CHENOVE, FRANCE
"SYNKEM"
WHEREAS
-------
1) ZONAGEN owns patent rights relating to the use of phentolamine mesylate in
the treatment of erectile dysfunctions;
2) Pursuant to a contract signed in November 1995, SYNKEM supplied ZONAGEN
with three validation batches of that compound in bulk form for the purpose of
supporting an IND application.
3) ZONAGEN is now preparing the launch of the pharmaceutical product made from
that compound in several countries.
4) SYNKEM is willing to supply Phentolamine Mesylate in bulk form to ZONAGEN
upon the terms and conditions hereof.
<PAGE>
NOW, THEREFORE THE PARTIES HERETO AGREE AS FOLLOWS:
--------------------------------------------------
ARTICLE 1
DEFINITIONS
-----------
"COMPOUND" means Phentolamine Mesylate in bulk form;
"FINISHED PRODUCT" means the product in finished pharmaceutical form
manufactured from the COMPOUND supplied hereunder;
"USP/NF" means the US Pharmacopoeia-23/National Formulary-18, as may
be amended, and any succeeding regulation or law;
"FORCE MAJEURE" means, in relation to either party, any circumstances beyond
the reasonable control of that party and not caused by such
party (including, without limitation, governmental orders or
restriction, war, warlike condition, revolution, riot,
internal or external strike, lock out, other forms of
industrial action, fire, flood);
"CONTROL" means the ability to direct the affairs of another whether
by virtue of contract, ownership of shares or otherwise
ARTICLE 2
SUPPLY
------
2.1 During the term of this Agreement, SYNKEM shall supply ZONAGEN
with such quantities of the COMPOUND meeting the requirements of USP/NF as will
be ordered by ZONAGEN in accordance with the provisions hereof.
2.2 Each order shall be placed by ZONAGEN no less than nine months
before the requested delivery date.
2.3 Each order shall amount to a whole number of batches of the
COMPOUND. One batch of the COMPOUND amounts to approximately 120 kg, being
understood that the precise quantity corresponding to one batch might vary
slightly from one batch to another because of differences in the yield of each
manufacturing run.
-2-
<PAGE>
2.4 All consignments of the COMPOUND shall be governed by the "CIP
HOUSTON" 1990 ICC INCOTERM, including, without limitation, its provisions for
the passing of risks.
2.5 Each batch of COMPOUND shall be accompanied by:
* an analytical certificate prepared by SYNKEM showing the actual
analytical data and the COMPOUND's batch number;
* a quality release statement certifying that the COMPOUND meets the
requirements of the USP/NF and that manufacturing and control records
were reviewed in accordance with GMP.
ARTICLE 3
PRICE-PAYMENT
-------------
3.1 The price for the first 1,000 kilograms of the COMPOUND supplied
hereunder shall be US$1,800.00 per kilogram; the price for the second 1,000
kilograms of the COMPOUND supplied hereunder shall be US$1,600.00 per kilogram.
After such amounts have been delivered, the parties shall negotiate
diligently and in good faith a price for further amounts to be delivered
hereunder taking into account changes in the dollar/franc exchange rate, changes
in the costs of production and prices charged by third parties for the COMPOUND.
If despite such good faith negotiations the parties are unable to agree upon a
price, either party may terminate this Agreement by notifying the other party in
writing.
Notwithstanding the above provisions: (i) SYNKEM may at any time
request good faith renegotiation of the supply price if the exchange rate
between USD and FRF falls short of FRF 5.50 to USD 1 according to the latest
monthly average rate quoted by BFCE Multidevise Database. If despite such good
faith negotiations the parties are unable to agree upon a price, either party
may terminate this Agreement by notifying the other party in writing.
(ii) ZONAGEN may at any time request good faith renegotiation of the
supply price if the exchange rate between USD and FRF exceeds FRF 6 to USD 1
according to the latest monthly average rate quoted by BFCE Multidevise
Database. If despite such good faith negotiations the parties are unable to
agree upon a price, either party may terminate this Agreement by notifying the
other party in writing.
3.2 ZONAGEN shall pay each consignment of the COMPOUND by bank
transfer in US Dollars:
* 25% shall be paid upon ordering the relevant consignment of COMPOUND;
-3-
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* 75% shall be paid within 30 calendar days of the end of the month
during which the relevant invoice was received. If ZONAGEN has not
received the COMPOUND consignment by the time the relevant invoice is
due to be paid, payment may be postponed by ZONAGEN until it receives
the relevant COMPOUND consignment but in no case shall such delay in
payment exceed thirty calendar days from the date payment was
initially due.
ARTICLE 4
EXCLUSIVE RIGHTS
----------------
4.1 During the term of this Agreement, SYNKEM shall refrain from
entering into agreements to directly or indirectly supply the COMPOUND to a
third party.
4.2 During the term of this Agreement, ZONAGEN shall purchase all its
requirements of the COMPOUND from SYNKEM and shall refrain from manufacturing
the COMPOUND or having the same manufactured by a third party.
Notwithstanding the foregoing, if at any time and for any reason
SYNKEM is unable to supply ZONAGEN with sufficient COMPOUND to satisfy ZONAGEN's
requirements, ZONAGEN may purchase from third parties any amount of COMPOUND it
requires in excess of that which can be supplied by SYNKEM.
ARTICLE 5
MINIMUM PURCHASE REQUIREMENTS
-----------------------------
For each calendar year during the term of this Agreement, ZONAGEN
commits itself to purchase the following minimal amounts of the COMPOUND from
SYNKEM:
1997: one (1) batch
1998: two (2) batches
ZONAGEN shall place orders totaling a minimum of 1000 Kilograms of the
COMPOUND (including the amounts ordered in 1997 and 1998) by no later
than June 30, 1999.
2000 and 2001: three (3) batches per calendar year; if for any
reason, ZONAGEN does not wish to be supplied with all or part of such
quantities of the COMPOUND, it shall pay to SYNKEM the sum
corresponding to the number of kilograms concerned multiplied by the
then applicable supply price.
-4-
<PAGE>
ARTICLE 6
MANUFACTURING REQUIREMENTS
--------------------------
6.1 SYNKEM shall manufacture the COMPOUND in accordance with cGMP.
6.2 SYNKEM shall retain a sample of each batch of COMPOUND produced
and, upon request, shall make such sample available to ZONAGEN. The retained
sample shall consist of at least twice the quantity necessary for all tests
required to determine whether the COMPOUND meets the requirements of the USP/NF.
The retained sample shall be kept under the same conditions as those under which
stocks of the COMPOUND are stored in SYNKEM's facilities.
For each batch, the sample shall be retained by SYNKEM for a period
expiring at the earliest one year after the expiration date of the last lot of
FINISHED PRODUCT containing that batch of the COMPOUND.
6.3 SYNKEM shall maintain records to ensure its ability to perform a
complete lot history via lot tracing of the COMPOUND.
6.4 SYNKEM shall keep on file all manufacturing records and
analytical results pertaining to the manufacture of each batch of the COMPOUND
for a period expiring not earlier than one year after the expiration date of the
last lot of FINISHED PRODUCT manufactured with that batch of COMPOUND. SYNKEM
shall make such records available to ZONAGEN or regulatory authorities for
inspection on request.
ARTICLE 7
REGULATORY OBLIGATIONS
----------------------
7.1 Upon request, SYNKEM shall issue letters authorizing registration
authorities to cross-refer to Drug Master Files ("DMFs") relating to the
COMPOUND under the possession or control of SYNKEM which are submitted to
governmental authorities for SYNKEM's manufacturing site(s). SYNKEM shall keep
such DMFs up to date.
7.2 If requested by regulatory authorities or by ZONAGEN, SYNKEM
shall accept and permit an inspection, at reasonable time and upon reasonable
prior notice, of its facilities where the COMPOUND is manufactured or stored and
of the manufacturing records pertaining to the manufacture of the COMPOUND.
7.3 Regarding inspections requested and made by ZONAGEN:
-5-
<PAGE>
* ZONAGEN shall, before making any such inspection, give full
details of the reason of such inspection and of all matters which
will be dealt with during such inspection. This information
shall be provided to SYNKEM in written form.
* Any information which may come to ZONAGEN's knowledge during such
inspection shall be subject to the secrecy provisions of Article
14.
ARTICLE 8
WARRANTY, LIABILITY AND INDEMNIFICATION
---------------------------------------
8.1 SYNKEM warrants that the COMPOUND manufactured and supplied
hereunder shall meet the requirements of the USP/NF. SYNKEM DISCLAIMS ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE
WARRANTY OF MERCHANTABILITY AND THE WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE.
8.2 Subject to Clause 8.3, ZONAGEN's EXCLUSIVE REMEDY FOR ANY FAILURE
OF THE COMPOUND TO MEET THE REQUIREMENTS OF THE USP/NF SHALL BE THE REPLACEMENT
OR REFUND PURSUANT TO CLAUSE 9.2. IN NO CASE SHALL SYNKEM BE LIABLE TO ZONAGEN
FOR INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
8.3 a) SYNKEM shall indemnify and hold ZONAGEN harmless from and
against any and all liability, damage, cost or expense (including reasonable
attorneys' fees) arising out of third party claims based upon failure by SYNKEM
to supply COMPOUND in accordance with the specifications set forth in the
USP/NF, such failure to be acknowledged as the cause of the third party's damage
by a court of competent jurisdiction, an arbitrator appointed pursuant to
Article 17 or the parties hereto by mutual written agreement.
b) SYNKEM shall not be liable hereunder for failure of the COMPOUND
to meet the specifications set forth in the USP/NF if ZONAGEN has not tested the
COMPOUND pursuant to Clause 9.1 before using the same or selling the FINISHED
PRODUCT made from the COMPOUND or if, despite such tests evidencing a failure of
COMPOUND to meet such specifications, ZONAGEN has decided to use it or sell the
FINISHED PRODUCT made from such COMPOUND.
8.4 ZONAGEN shall indemnify and hold SYNKEM harmless from and against
any and all liability, damage, cost and expenses (including reasonable
attorneys' fees) arising out of third party claims other than those based upon
failure by SYNKEM to supply COMPOUND in accordance with the specifications set
forth in the USP/NF, including without limitation faulty
-6-
<PAGE>
manufacture, labeling or promotion of the FINISHED PRODUCT by ZONAGEN or its sub
contractors or licensees.
8.5 ZONAGEN warrants and represents that the manufacture and supply
of COMPOUND hereunder shall not infringe any patent and ZONAGEN shall indemnify
and hold SYNKEM harmless against all judgements, decrees, cost and expenses
(including reasonable attorneys' fees) resulting from any alleged infringement.
However, this shall not apply if and to the extent that the manufacturing
process (or portion thereof) has been designed by SYNKEM and infringes a third
party patent claiming such process.
8.6 IN NO CASE SHALL ZONAGEN BE LIABLE TO SYNKEM FOR INDIRECT,
INCIDENTAL OR CONSEQUENTIAL DAMAGES.
8.7 THE EXCLUSION OF INDIRECT, INCIDENTAL AND CONSEQUENTIAL DAMAGES
SET FORTH IN CLAUSES 8.2 AND 8.6 SHALL NOT APPLY IN THE CASE OF THIRD PARTY
CLAIMS AS PROVIDED FOR IN THE HOLD HARMLESS PROVISIONS CONTAINED IN CLAUSES
8.3(a), 8.4 and 8.5.
8.8 The indemnities set forth in this Article 8 are subject to the
condition that the party seeking indemnity notifies the other party (the
"Indemnifying Party") without delay of the bringing or threat of any claim or
legal proceedings against or involving or implicating the Indemnifying Party
and:
a) abide by such reasonable instructions as the Indemnifying Party
may issue concerning the conduct of such claim or the defense of such
proceedings; and
b) does not make without the Indemnifying Party's express written
consent any admission of liability to a claimant or plaintiff or his, her
or its legal representative or insurer in respect of such claim, threatened
claim, proceedings or threatened proceedings; and
c) does not make without the Indemnifying Party's express written
consent any settlement or compromise of such claim, threatened claim,
proceedings or threatened proceedings.
ARTICLE 9
DEFECTIVE COMPOUND
------------------
9.1 a) Upon delivery, ZONAGEN shall inspect the COMPOUND according
to the relevant analytical methods set forth in the USP/NF. If the COMPOUND
delivered does not conform with the specifications of the USP/NF, ZONAGEN may
reject such COMPOUND by notifying SYNKEM within thirty days from the date of
delivery to ZONAGEN.
-7-
<PAGE>
b) Hidden defects not revealed by the above inspection which cause
the COMPOUND not to conform with the specifications of the USP/NF shall be
notified to SYNKEM immediately upon discovery. In such event, ZONAGEN may
reject such COMPOUND by notifying SYNKEM within thirty (30) days from the date
of such discovery.
9.2 After the consultation and agreement among the parties, the
quantity of COMPOUND which was rejected under Clause 9.1 ("Defective COMPOUND")
shall be replaced by SYNKEM with the same quantity of COMPOUND which meets the
specifications of the USP/NF by one of the following procedures which is
acceptable to ZONAGEN:
a) SYNKEM shall, at no additional cost to ZONAGEN, reprocess the
Defective COMPOUND within such period of time as will be reasonably agreed
upon by the parties by following a reworking procedure acceptable to
ZONAGEN and in compliance with SYNKEM's DMF for the COMPOUND.
Any loss of COMPOUND resulting from this procedure shall, if such
substance had been already paid by ZONAGEN, be replaced by an equivalent
quantity of new COMPOUND which conforms with the specifications of the
USP/NF or give rise to a compensation by SYNKEM for the COMPOUND lost at
the applicable price (as specified in Clause 3.1), at ZONAGEN's option.
b) SYNKEM shall carry out new production of the COMPOUND at no
additional cost to ZONAGEN within such period of time as will be reasonably
agreed upon by the parties.
c) In the event that ZONAGEN destroys or disposes of the defective
COMPOUND (or FINISHED PRODUCT containing the defective COMPOUND), this
shall be done in full compliance with local and national laws and
regulations.
ARTICLE 10
INSURANCE
---------
10.1 At all times this contract is in effect, each of ZONAGEN and
SYNKEM shall maintain product liability insurance in an amount of not less than
ten million dollars (USD 10,000,000) in the case of ZONAGEN or one hundred and
fifty million French Francs (FF 150,000,000) in the case of SYNKEM so as to
cover any liability it may incur pursuant to Article 8.
10.2 Each party hereto shall upon request at all reasonable times
provide the other with a certificate of insurance as evidence of such insurance.
In the event that such insurance is
-8-
<PAGE>
significantly reduced or restricted, terminated or otherwise not renewed, the
affected party shall immediately notify the other.
ARTICLE 11
TERM
----
This Agreement shall come into effect on the date of its complete
signature by both parties and, subject to the provisions for anticipatory
termination herein contained, shall remain in force for an initial term of five
years.
It shall thereafter continue for consecutive one year periods unless
and until terminated by either party giving not less than twelve (12) months'
prior written notice, such notice to be effective at the end of the initial term
or at the end of any subsequent one year term.
ARTICLE 12
ANTICIPATORY TERMINATION
------------------------
12.1 If either party shall at any time fail to abide by any of the
provisions of this Agreement, the other party shall have the right to terminate
this Agreement on thirty (30) days' prior written notice to the defaulting party
specifying the default complained of, provided, however, if said defaulting
party cures the default complained of within the said thirty (30) day period,
the Agreement will continue in full force and effect as if no default had
occurred.
12.2 Either party may terminate this Agreement at any time by giving
written notice with immediate effect to the other party if:
a) the other party is declared bankrupt or insolvent. or makes an
assignment for the benefit of creditors, or if a receiver is appointed, or
any procedures are commenced, voluntary or involuntarily, by or against a
party under any bankruptcy or similar law and such procedure is not
dismissed within sixty days of its commencement; or if
b) there is a change in CONTROL of the other party.
-9-
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ARTICLE 13
CONSEQUENCES OF TERMINATION
---------------------------
Upon termination of this Agreement pursuant to its provisions or the
provisions of the applicable law:
13.1 SYNKEM shall manufacture and supply those quantities of the
COMPOUND ordered by ZONAGEN prior to such termination and ZONAGEN shall pay the
relevant price for such COMPOUND;
13.2 The parties shall be relieved from the exclusivity obligations
set forth in Article 4.
13.3 Termination shall be without prejudice to (i) any remedies which
either party may then or thereafter have under this Agreement or at law or in
equity (including without limitation possible damages) and (ii) either party's
right to obtain performance of any obligation provided for in this Agreement
which survives termination by its terms or by a fair interpretation thereof.
13.4 Termination shall not relieve the parties of their obligations
that would survive termination by a reasonable interpretation of this Agreement
including Articles 8, 14 and 17.
ARTICLE 14
SECRECY
-------
14.1 Each party hereto ("RECIPIENT") agrees that, during the
continuance of this Agreement and for five years after termination hereof for
any reason, it will (i) maintain the confidentiality of any and all proprietary
or confidential information disclosed by the other party ("DISCLOSER") and (ii)
refrain from using the same except for the purpose of implementing this
Agreement, unless that information (i) is or becomes public knowledge through no
breach hereof or (ii) was in RECIPIENT's possession prior to disclosure by
DISCLOSER and was not obtained directly or indirectly from DISCLOSER or (iii) is
lawfully acquired from a third party who did not obtain it directly or
indirectly from DISCLOSER.
14.2 RECIPIENT shall, on demand on termination of this Agreement for
any reason provided by this Agreement or by law, return to DISCLOSER all
documents and other tangible mediums of expression embodying DISCLOSER's
INFORMATION and shall keep no summary or copy thereof except for one copy to be
retained in DISCLOSER's confidential files for evidence purposes.
-10-
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ARTICLE 15
FORCE MAJEURE
-------------
15.1 Should either party be affected by FORCE MAJEURE, it shall
without delay notify the other party of the nature and extent thereof.
15.2 Neither party shall be deemed to be in breach of this Agreement
or otherwise be liable to the other by reason of any delay in performance, or
non-performance, of any of its obligations hereunder to the extent that such
delay or non-performance, is due to any recognized FORCE MAJEURE of which it has
notified the other party, and the time of performance for that obligation shall
be extended accordingly.
ARTICLE 16
GOVERNING LAW
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the state of New York without reference to choice of law principles.
For the avoidance of doubt, the UN Convention on international sale of goods
shall not govern this Agreement.
ARTICLE 17
ARBITRATION
-----------
Any claim, controversy or dispute arising between the parties hereto
in connection with or with respect to the subject matter hereof which is not
resolved through mutual good faith efforts and negotiation shall be settled by
final and binding arbitration conducted in New York City in accordance with and
by one arbitrator appointed pursuant to the Rules of Arbitration of the
International Chamber of Commerce then in effect, and judgment upon the award
rendered pursuant thereto may be entered in any court having jurisdiction
thereof, and all rights and remedies of the parties hereto to the contrary are
hereby expressly waived. Neither party shall seek, nor shall the arbitrator be
empowered to award, punitive and/or exemplary damages to either party. Each of
the parties acknowledges that New York City is a convenient forum. The
arbitrator shall have the power to apportion the costs and expenses of the
arbitrator as well as out of pocket, legal, accounting and/or other direct costs
relating or incident to an arbitration hereunder between the parties in such
percentages as the arbitrator may determine, including without limitation,
charging the non-prevailing party with the full amount of such costs and
expenses.
-11-
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ARTICLE 18
ENTIRE AGREEMENT
----------------
18.1 This Agreement shall exclude all of SYNKEM's general terms and
conditions of supply and all of ZONAGEN's general terms and conditions of
purchase.
18.2 This Agreement expresses the entire understanding of the parties
with respect to the subject matter hereof and supersedes all prior offers,
negotiations, agreements and correspondence. For the avoidance of doubt the
Secrecy Agreement of September 14, 1994 between ZONAGEN and LABORATORIES
FOURNIER S.C.A. is not affected by this Agreement.
ARTICLE 19
ASSIGNMENT
----------
No party hereto may assign its rights or obligations hereunder without
prior written consent of the other party.
ARTICLE 20
AMENDMENTS
No amendment, changes, modifications or alterations of the terms and
conditions of this Agreement shall be effective unless in writing and duly
executed by both parties.
ARTICLE 21
NOTICES
-------
Any notices or other communication to be given by one party to the
other pursuant to this Agreement shall be in writing and shall be given by
sending the same by registered letter, express courier, telex, cable or
facsimile transmission to the address of the relevant party as set out below or
such other address as the addressee may notify the addressor in writing from
time to time.
PLASTO SA (SYNKEM DIVISION) ZONAGEN INC
47 rue de Longvic 2406 Timberloch Place, B 4
21300 CHENOVE The Woodlands, TEXAS 77380
FRANCE USA
Fax: +33.3.80.44.72.70 Fax: +1.713.363.8796
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ARTICLE 22
SEVERABILITY
------------
Should any part of this Supply Agreement be held unenforceable or in
conflict with the applicable laws or regulations of any jurisdiction, the
invalid or unenforceable part or provision shall be replaced with a provision
which accomplishes, to the extent possible, the original business purpose of
such invalid or unenforceable part or provision in a commercially reasonable,
valid and enforceable manner, and the remainder of this Supply Agreement shall
remain binding upon the parties hereto.
ARTICLE 23
COUNTERPARTS
------------
This Agreement has been executed in two counterparts, each of which is
deemed an original and all of which together constitute one and the same
agreement.
ARTICLE 24
BINDING EFFECT
--------------
Subject to the provisions of this Agreement, this Agreement shall be
binding upon and shall inure to the benefit of the parties, their respective
heirs, successors and assigns.
ARTICLE 25
GENERAL PROVISIONS
------------------
25.1 Failure by either party to respond to any proposal or statement
made by the other party shall not be deemed to be consent thereto nor operate so
as to modify the nature, effects or extent of any obligation under this
Agreement.
25.2 Failure by either party to exercise or enforce any right
conferred to it by this Agreement shall not be considered a waiver nor operate
so as to preclude the exercise or enforcement thereof at any subsequent time or
on any subsequent occasion.
25.3 This document is not an offer and shall not constitute a contract
unless signed by both parties.
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25.4 Unless the context otherwise requires, the words in singular
shall be deemed to include the plural and vice-versa.
25.5 Title headings have been inserted for convenience only and shall
not be used in interpreting this Agreement.
MADE IN DUPLICATE
ZONAGEN INC. PLASTO S.A. (SYNKEM DIVISION)
- ------------ -----------------------------
Date:________________________ Date:__________________________________
Signature:___________________ Signature:_____________________________
Name:________________________ Name:__________________________________
Position:____________________ Position:______________________________
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Exhibit 10.27
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The omitted portions are marked "***" and have
been filed separately with the Securities and Exchange Commission (the
"Commission").
EXCLUSIVE LICENSE AGREEMENT
BY AND BETWEEN
ZONAGEN, INC.
AND
SCHERING CORPORATION
<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I-DEFINITIONS....................................................... 1
1.1 Additional Indication............................................ 1
1.2 Affiliate........................................................ 1
1.3 Calendar Quarter................................................. 2
1.4 Calendar Year.................................................... 2
1.5 Change of Control................................................ 2
1.6 Combination Product.............................................. 3
1.7 Effective Date................................................... 3
1.8 ***.............................................................. 4
1.9 *** Patents...................................................... 4
1.10 Ex-U.S. License Agreement........................................ 4
1.11 FDA.............................................................. 4
1.12 Female Sexual Function Indication................................ 4
1.13 Field............................................................ 4
1.14 First Commercial Sale............................................ 4
1.15 HSR Act.......................................................... 4
1.16 Improvement...................................................... 4
1.17 Licensed Compound................................................ 5
1.18 Licensed Product(s).............................................. 5
1.19 Male Sexual Function Indication.................................. 5
1.20 Manufacture...................................................... 5
1.21 ***.............................................................. 5
1.22 NDA.............................................................. 6
1.23 Net Sales........................................................ 6
1.24 Patent Rights.................................................... 7
1.25 Proprietary Information.......................................... 7
1.26 Regulatory Approval.............................................. 8
1.27 Schering Additional Indications.................................. 8
1.28 Schering Combination Product..................................... 8
1.29 Schering Trademark............................................... 8
1.30 Specifications................................................... 8
1.31 ***.............................................................. 8
1.32 Target Patient Population........................................ 8
1.33 Term............................................................. 8
1.34 Territory........................................................ 9
1.35 Transaction Agreements........................................... 9
1.36 *** Formulation.................................................. 9
</TABLE>
i
<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
<TABLE>
<S> <C>
1.37 Valid Claim....................................................... 9
1.38 Worldwide Annual Net Sales........................................ 9
1.39 Zonagen Additional Indications.................................... 9
1.40 Zonagen Combination Product....................................... 9
1.41 Zonagen Know-How.................................................. 9
1.42 Zonagen Trademark................................................. 10
ARTICLE II - LICENSES; DISCLOSURE OF INFORMATION; APPROVALS................. 10
2.1 Exclusive License Grant........................................... 10
2.1.1 License.................................................... 10
2.1.2 Right to Sublicense; Appointment of Distributors........... 11
2.1.3 Retained Rights............................................ 11
2.2 Non-Exclusive License Grant....................................... 12
2.3 Disclosure of Information......................................... 12
2.4 HSR Filing and Approvals.......................................... 12
2.4.1 HSR Filing................................................. 12
2.4.2 Each of Zonagen's and Schering's Obligations............... 12
2.4.3 Additional Approvals....................................... 12
2.5 ***............................................................... 13
2.5.1 ***........................................................ 13
2.5.2 ***........................................................ 13
2.5.3 ***........................................................ 13
2.6 Change of Control of Zonagen...................................... 13
2.7 Improvements...................................................... 14
ARTICLE III -- COPROMOTION RIGHTS........................................... 14
3.1 Option for Zonagen Additional Indications and ***
Formulations...................................................... 14
3.1.1 Option for Zonagen Additional Indications.................. 14
3.1.2 Option for ***............................................. 15
3.1.3 Option Payments............................................ 15
3.2 Right of First Negotiation........................................ 20
3.2.1 Zonagen Combination Products............................... 20
3.2.2 *** Formulations........................................... 21
3.2.3 Standstill................................................. 21
3.2.4 Negotiation of Agreement................................... 22
3.3.1 Option to Copromote Licensed Product and ***............... 22
3.3 Option to Copromote *** Only...................................... 23
3.3.3 Conditions Precedent for Copromotion Rights................ 23
3.3.4 Copromotion Agreement...................................... 24
</TABLE>
ii
<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
<TABLE>
<S> <C>
ARTICLE IV - DEVELOPMENT, COMMERCIALIZATION AND
REGULATORY ISSUES.................................................... 26
4.1 Completion of Studies........................................... 26
4.2 Data and Reports................................................ 26
4.3 Preparation and Filing of NDA................................... 26
4.4 Adverse Event Reporting......................................... 27
4.5 Development Activities by Schering.............................. 27
4.6 Development of Zonagen Additional Indications and ***
Formulations.................................................... 27
4.7 Notice.......................................................... 28
4.8 Joint Development Committee..................................... 28
4.8.1 Establishment of Joint Development Committee............. 28
4.8.2 Composition of JDC....................................... 28
4.8.3 JDC Meetings............................................. 28
4.8.4 Deadlock................................................. 29
ARTICLE V -- MANUFACTURE AND SUPPLY
5.1 Supply of Schering's Requirements............................... 29
5.1.1 Manufacture and Supply by Zonagen........................ 29
5.1.2 Manufacturing and Supply Agreement....................... 30
5.1.3 Third Party Obligations.................................. 30
5.2 Purchase Price.................................................. 30
5.3 Clinical Trial Materials and Samples............................ 31
5.4.1 Forecasts................................................ 32
5.4.2 Purchase Orders.......................................... 32
5.5 Delivery Terms.................................................. 32
5.6 Scheduling of Delivery.......................................... 33
5.7 Inability to Supply............................................. 33
5.8 Second Source of Supply......................................... 33
5.9 Quality Control and Quality Assurance........................... 33
5.9.1 Adherence to Specifications.............................. 33
5.9.2 Quality Control Program.................................. 34
5.9.3 Testing and Release of Licensed Product.................. 34
5.9.4 Nonconforming Product.................................... 34
5.9.5 Inspections by Regulatory Authorities.................... 34
5.9.6 Inspections by Schering.................................. 35
5.10 Schering's Right to Manufacture................................. 35
5.10.1 Option.................................................. 35
5.10.2 Continued Manufacture by Zonagen........................ 35
5.10.3 Termination of Manufacturing and Supply Agreement....... 36
</TABLE>
iii
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<TABLE>
<S> <C>
ARTICLE VI - MARKETING AND COMMERCIALIZATION...................................... 36
6.1 Commercialization....................................................... 36
6.2 Opportunity to Cure..................................................... 37
6.3 Marketing Review........................................................ 37
ARTICLE VII - PAYMENTS, ROYALTIES AND REPORTS..................................... 38
7.1 Milestone Payments...................................................... 38
7.2 R&D Funding............................................................. 39
7.3 Royalties............................................................... 39
7.3.1 Royalty Rates.................................................... 39
7.3.2 Term and Scope of Royalty Obligations............................ 41
7.3.3 Third Party Licenses - Licensed Products......................... 42
7.3.4 Third Party Licenses - Schering Combination Products............. 42
7.3.5 Comarketing Rights............................................... 43
7.4 Reports and Payment of Royalty.......................................... 43
7.4.1 Royalties Paid Quarterly......................................... 43
7.4.2 Method of Payment................................................ 43
7.5 Maintenance of Records; Audits.......................................... 43
7.5.1 Record Keeping by Schering....................................... 43
7.5.2 Underpayments/Overpayments....................................... 44
7.5.3 Record Keeping by Sublicensee.................................... 44
7.5.4 Confidentiality.................................................. 44
7.5.5 Record Keeping by Zonagen........................................ 44
7.6 Separate Payment Obligations............................................ 45
ARTICLE VIII -- PATENTS........................................................... 45
8.1 Filing, Prosecution and Maintenance of Patents.......................... 45
8.2 Option of Schering to Prosecute and Maintain Patents.................... 45
8.3 Enforcement of Zonagen Patent Rights.................................... 45
8.3.1 Notice and Discontinuance of Infringement........................ 46
8.3.2 Continuance of Infringement...................................... 46
8.4 Infringement of Third Party Patents; Third Party Licenses............... 47
8.4.1 Course of Action................................................. 47
8.4.2 Schering Option to Negotiate..................................... 47
8.4.3 Zonagen Option to Negotiate...................................... 47
8.4.4 Third Party Infringement Suit.................................... 48
8.5 Certification Under Drug Price Competition and Patent Restoration Act... 48
8.6 Abandonment............................................................. 48
8.7 Patent Term Restoration................................................. 48
8.8 Notices Regarding Patents............................................... 49
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX - CONFIDENTIALITY AND PUBLICATION............................... 49
9.1 Confidentiality................................................ 49
9.1.1 Nondisclosure Obligation............................... 49
9.1.2 Disclosure to Agents................................... 50
9.1.3 Disclosure to a Third Parties.......................... 50
9.2 Return of Proprietary Information.............................. 51
9.3 No Publicity................................................... 51
9.4 Publication.................................................... 51
ARTICLE X- -REPRESENTATIONS AND WARRANTIES................................. 52
10.1 Representations and Warranties of Each Party................... 52
10.2 Zonagen's Representations...................................... 53
10.3 Continuing Representations..................................... 55
10.4 No Inconsistent Agreements..................................... 55
10.5 Representation by Legal Counsel................................ 55
ARTICLE XI - INDEMNIFICATION AND LIMITATION ON LIABILITY................... 55
11.1 Indemnification by Schering.................................... 55
11.2 Indemnification by Zonagen..................................... 55
11.3 Conditions to Indemnification.................................. 56
11.4 Settlements.................................................... 56
11.5 Limitation of Liability........................................ 56
11.6 Insurance...................................................... 56
ARTICLE XII - TRADEMARK PROVISIONS......................................... 57
12.1 Trademark Registrations and Infringements...................... 57
12.1.1 Use of Trademark; Registration........................ 57
12.1.2 Other Marks........................................... 57
12.1.3 No Confusing Mark..................................... 57
12.1.4 No Other Grants....................................... 58
12.1.5 Review by Zonagen..................................... 58
12.1.6 Use of Tradename...................................... 58
12.2 Infringement Actions........................................... 58
12.2.1 Notice of Infringement................................ 58
12.2.2 Costs of Infringement Action.......................... 58
12.2.3 Assistance in Actions................................. 59
ARTICLE XIII - TERM AND TERMINATION........................................ 59
13.1 Term and Expiration............................................ 59
13.2 Termination by Schering........................................ 59
13.3 Termination.................................................... 60
</TABLE>
v
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<TABLE>
<S> <C>
13.3.1 Termination for Cause............................... 60
13.3.2 Effect of Termination for Cause on License.......... 61
(i) Termination by Schering...................... 61
(ii) Termination by Zonagen....................... 61
(iii) Effect of Bankruptcy......................... 61
13.4 Effect of Termination....................................... 61
ARTICLE XIV - MISCELLANEOUS............................................ 61
14.1 Assignment.................................................. 61
14.2 Governing Law............................................... 62
14.3 Waiver...................................................... 62
14.4 Independent Relationship.................................... 62
14.5 Export Control.............................................. 63
14.6 Entire Agreement, Amendment................................. 63
14.7 Notices..................................................... 63
14.8 Provisions for Insolvency................................... 64
14.8.1 Effect on Licenses.................................. 64
14.8.2 Rights to Intellectual Property..................... 65
14.8.3 Schering's Rights................................... 65
14.9 Force Majeure............................................... 66
14.10 Severability................................................ 66
14.11 Counterparts................................................ 66
14.12 Captions.................................................... 66
14.13 Recording................................................... 66
14.14 Further Actions............................................. 67
</TABLE>
SCHEDULES
Schedule 1.22 Patents Rights
Schedule 4.4 Adverse Event Reporting Procedures
Schedule 10.2(m) Zonagen-Third Party Agreements
Schedule 14.2 Dispute Resolution Procedures
vi
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EXCLUSIVE LICENSE AGREEMENT
THIS EXCLUSIVE LICENSE AGREEMENT (the "Agreement") is made as of
November 14, 1997 by and between ZONAGEN, INC., a Delaware corporation
having its principal place of business at 2408 Timberloch Place, B-4, The
Woodlands, Texas 77380, (hereinafter referred to as "Zonagen") and SCHERING
CORPORATION, a New Jersey corporation having its principal place of
business at 2000 Galloping Hill Road, Kenilworth, New Jersey 07033,
(hereinafter referred to as "Schering"). Zonagen and Schering are sometimes
referred to herein individually as a "Party" and collectively as the
"Parties". References to "Schering" and "Zonagen" shall include their
respective Affiliates (as hereinafter defined).
WHEREAS, Zonagen has developed certain Zonagen Know-How (as
hereinafter defined) and has rights to Patent Rights (as hereinafter
defined) relating to certain phentolamine formulations; and
WHEREAS, Schering, together with its Affiliates (as hereinafter
defined) possesses extensive capabilities in the development and
commercialization of pharmaceutical products on a worldwide basis; and
WHEREAS, Schering desires to obtain and Zonagen is willing to grant to
Schering, an exclusive license in the Territory under the Patent Rights and
Zonagen Trademarks and to use the Zonagen Know-How, in the Field upon the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, Schering and Zonagen hereby agree as
follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following initially capitalized terms,
whether used in the singular or plural, shall have the respective meanings
set forth below:
1.1 "Additional Indication" shall mean any Schering Additional
Indication or any Zonagen Additional Indication.
1.2 "Affiliate" shall mean any individual or entity directly or
indirectly controlling, controlled by or under common control with, a Party
to this Agreement. For purposes of this Agreement, the direct or indirect
ownership of fifty percent (50%) or more of the outstanding voting
securities of an entity, or the right to receive fifty percent (50%) or
more of the profits or earnings of an entity shall be deemed to constitute
control. Such other relationship as in fact results in actual control over
the management, business and affairs of an entity shall also be deemed to
constitute control so long as the "controlling" entity has direct or
indirect ownership of thirty percent (30%) or more of the outstanding
voting securities of the "controlled" entity.
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1.3 "Calendar Quarter" shall mean the respective periods of three (3)
consecutive calendar months ending on March 31, June 30, September 30 or
December 31, for so long as this Agreement is in effect.
1.4 "Calendar Year" shall mean each successive period of twelve (12)
months commencing on January 1 and ending on December 31, for so long as
this Agreement is in effect.
1.5 "Change of Control" shall mean
(a) The acquisition by any Person (as defined in Section 3.2.3
hereof) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Act of 1934, as amended) of
securities of Zonagen or, in the case of Schering, of Schering's
parent company, Schering-Plough Corporation ("SP") or Schering (in
each case the "Acquired Entity"), where such acquisition causes such
Person to own fifty-one percent (51 %) or more of either (i) the then
outstanding shares of common stock of the Acquired Entity (the
"Outstanding Acquired Entity Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the Acquired
Entity entitled to vote generally in the election of the Acquired
Entity's directors (the "Outstanding Acquired Entity Voting
Securities"); provided, however, that for purposes of this subsection
-------- -------
(a) the following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the Acquired Entity; (ii)
any acquisition by the Acquired Entity; (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by
the Acquired Entity or any corporation controlled by the Acquired
Entity; or (iv) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii), and (iii) of
subsection (c) below; and, provided, further, that if any Person's
-------- -------
beneficial ownership of the Outstanding Acquired Entity Voting
Securities reaches or exceeds fifty-one percent (51%) as a result of a
transaction described in clauses (i) or (ii) above, and such Person
subsequently acquires beneficial ownership of additional voting
securities of the Acquired Entity, such subsequent acquisition shall
be treated as an acquisition that causes such Person to own fifty-one
percent (51%) or more of the Outstanding Acquired Entity Voting
Securities; or
(b) individuals, who, as of the date hereof, constitute the
board of directors of the Acquired Entity (the "Incumbent Acquired
Entity Board") cease for any reason to constitute at least a majority
of the Acquired Entity board of directors (the "Acquired Entity
Board"), provided, however, that any individual becoming a director
-------- -------
subsequent to the date hereof whose election, or nomination for
election by Acquired Entity's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Acquired Entity Board shall be considered as though such individual
were a member of the Incumbent Acquired Entity Board, but excluding,
for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest
with respect to the
-2-
<PAGE>
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Acquired Entity Board; or
(c) approval by the shareholders of the Acquired Entity of a
reorganization, merger or consolidation or sale or other disposition
of all or substantially all of the Acquired Entity's assets (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Acquired Entity Common Stock and the Outstanding Acquired
Entity Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than fifty
percent (50%) of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which, as a
result of such transaction, owns the Acquired Entity or all or
substantially all of the Acquired Entity's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Acquired Entity Common Stock and the
Outstanding Acquired Entity Voting Securities, as the case may be,
(ii) no Person (excluding any employee benefit plan (or related trust)
of the Acquired Entity or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly fifty-
one percent (51%) or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such
ownership existed prior to the Business Combination, and (iii) at
least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of
the Incumbent Acquired Entity Board at the time of the execution of
the initial agreement, or of the action of the Acquired Entity Board,
providing for such Business Combination; or
(d) approval by the shareholders of the Acquired Entity of a
complete liquidation or dissolution of the Acquired Entity.
1.6 "Combination Product" shall mean a Licensed Product which
comprises two (2) or more active ingredients at least one (1) of which is a
Licensed Compound.
1.7 "Effective Date" shall mean the next business day following the
last to occur of (i) expiration or earlier termination of any notice and
waiting period under the HSR Act; (ii) delivery of fully executed
counterparts of each of the Transaction Agreements.
-3-
<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
1.8 "***"shall mean Schering's brand of *** which contain *** and are
indicated for use *** for the treatment of ***.
1.9 "*** Patents" shall mean any and all patents which, during the
Term of this Agreement, are owned by Schering, or to which Schering through
assignment, purchase, license or otherwise has acquired or acquires rights,
including, but not limited to, those patents listed in Schedule 1.9, which
have claims covering ***, or any use thereof or any material or method of
manufacture useful in the development, manufacture, use or sale thereof,
and any substitutions, division, continuations, continuations-in-part,
reissues, renewals, registrations, confirmations, re-examinations,
extensions or supplementary protection certificates of any such patents.
1.10 "Ex-U.S. License Agreement" shall mean the agreement relating to
countries and territories outside of the United States entered into by
Zonagen and Schering's Affiliate, Schering-Plough Ltd. simultaneously with
the entering into of this Agreement.
1.11 "FDA" shall mean the United States Food and Drug Administration
or any successor agency thereto.
1.12 "Female Sexual Function Indication" shall mean the modulation of
sexual response or function and/or the treatment of sexual dysfunction in
human females.
1.13 "Field" shall mean the use of the Licensed Product in the Male
Sexual Function Indication and/or any Schering Additional Indication.
1.14 "First Commercial Sale" shall mean, with respect to any Licensed
Product, the first sale for end use of such Licensed Product after receipt
of the requisite Regulatory Approval.
1.15 "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
1.16 "Improvement" shall mean any enhancement in the formulation,
ingredients, preparation, presentation, means of delivery, dosage,
packaging, or manufacture of Licensed Product developed prior to or during
the Term of this Agreement by or on behalf of Zonagen or to which rights
are acquired, through assignment, purchase, license or otherwise, by
Zonagen or its Affiliates prior to or during the Term of this Agreement.
1.17 "Licensed Compound" shall mean phentolamine, phentolamine
mesylate, phentolamine hydrochloride and/or any active metabolites,
isomers, salts, analogues or non-covalently bonded derivatives of any of
the foregoing.
-4-
<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
1.18 "Licensed Product(s)" shall mean any form or dosage of
pharmaceutical compositions or preparations, including, without limitation,
Schering Combination Products, in final form for sale by prescription,
over-the-counter or any other method, which contain as an active ingredient
the Licensed Compound. Notwithstanding the foregoing, Licensed Products
shall not include (i) Zonagen Combination Products, (ii) injectable
formulations of pharmaceutical compositions containing, as an active
ingredient, the Licensed Compound or (iii) *** formulations containing, as
an active ingredient, the Licensed Compound.
1.19 "Male Sexual Function Indication" shall mean the modulation of
sexual response or function and/or the treatment of sexual dysfunction,
including, without limitation, erectile dysfunction or premature
ejaculation, in human males.
1.20 "Manufacture" shall mean the processing, formulating, tableting,
final packaging, final labeling and quality control testing of the Licensed
Product in accordance with this Agreement, the Specifications and the
Exhibits attached hereto and incorporated hereby.
1.21 ***
1.22 "NDA" shall mean a New Drug Application, Product License
Application or its equivalent filed with the United States Food and Drug
Administration seeking approval to market and sell a Licensed Product in
the United States.
1.23 "Net Sales" shall mean the proceeds actually received by
Schering, its Affiliates or sublicensees on all sales of Licensed Product
to an unaffiliated third party (whether an end-user, a distributor or
otherwise), and exclusive of intercompany transfers or sales, less the
----
reasonable and customary deductions from such gross amounts including: (i)
credits or allowances actually granted for damaged goods, returns or
rejections of Licensed Product and retroactive price reductions; (ii) sales
or similar taxes borne by Schering, its Affiliates or sublicensees
(including duties or other governmental charges levied on, absorbed or
otherwise imposed on the sale of Licensed Product including, without
limitation, value added taxes or other governmental charges otherwise
measured by the billing amount, when included in billing); (iii) freight,
postage, shipping, customs duties and insurance charges to the extent
included in the proceeds actually received from the customer; and (iv)
charge back payments and rebates granted to managed health care
organizations or to federal, state and local governments, their agencies,
and purchasers and reimbursers or to trade customers, including but not
limited to, wholesalers and chain and pharmacy buying groups. In the event
that Licensed Product is transferred for consideration other than cash the
Net Sales for such Licensed Product will be calculated based on the unit
price for such
-5-
<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
Licensed Products sales being equal to the average unit price of such
Licensed Product sold in cash transactions.
In the event that Licensed Product is sold as part of a bundle of
distinct products (i.e. not (i) packaged together with another product or
(ii) in a Combination Product form alone), the Net Sales for such Licensed
Product will be based on the discounted unit price for such Licensed
Products sales, which discounted price shall be equal to ***
In the event that Licensed Product is sold packaged together with
another product (together a "Composite Product"), Net Sales for such
Composite Product will be calculated by multiplying actual Net Sales of
such Composite Product by the fraction ***.
In the event that the Licensed Product is sold in the form of a
Composite Product containing one or more products other than Licensed
Product and one or more such products of the Composite Product are not sold
separately, then the above formula shall be modified such that ***. If the
Parties are unable to agree on the *** of the components of such Composite
Product, the resolution of such issue shall be made in accordance with
Section 14.2 hereof.
1.24 "Patent Rights" shall mean any and all patents and pending patent
applications which during the Term of this Agreement are owned by Zonagen,
or to which Zonagen through assignment, purchase, license or otherwise
acquires rights, including, but not limited to, those listed in Schedule
1.24, which have claims covering: (i) Licensed Compound or any use thereof
or an apparatus, material or method of manufacture useful in the
development, manufacture, use or sale thereof, or (ii) Licensed Product
(excluding that part of any Schering Combination Product developed by or on
behalf of Schering) or any use thereof or an apparatus, material or method
of manufacture useful in the development, manufacture, use or sale thereof;
or (iii) or are substitutions, divisions, continuations, continuations-in-
part, reissues, renewals, registrations, confirmations, re-examinations,
extensions, supplementary protection certificates or any like filing
thereof, or provisional applications of any such patents and patent
applications.
1.25 "Proprietary Information" shall mean (i) Zonagen Know-How and
(ii) all other scientific, clinical, regulatory, marketing, financial and
commercial information or data, whether communicated in writing, verbally
or electronically, which is provided by one Party to the other Party in
connection with this Agreement. When Propriety Information is disclosed in
a manner other than in writing, it shall be summarized written form, marked
"Confidential" and transmitted to the receiving Party within ten (10)
business days of disclosure to the receiving Party.
1.26 "Regulatory Approval" shall mean the technical, medical and
scientific licenses, registrations, authorizations and approvals
(including, without limitation, approvals of NDAs, supplements and
amendments, pre- and post-approvals, pricing and third party
-6-
<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
reimbursement approvals, and labeling approvals) of any national, regional,
state or local regulatory agency, department, bureau, commission, council
or other governmental entity, necessary for the development, manufacture,
distribution, marketing, promotion, offer for sale, use, import, export or
sale of Licensed Product(s) and/or Licensed Compound(s) in a regulatory
jurisdiction.
1.27 "Schering Additional Indications" shall mean any new or expanded
therapeutic indication(s) outside of the Male Sexual Function Indication,
including, without limitation, Female Sexual Function Indications, for
Licensed Compound and/or Licensed Product developed prior to or during the
Term of this Agreement by or on behalf of Schering (other than pursuant to
Schering's exercise of an option under Section 3.1 with respect to a
Zonagen Additional Indication) or to which rights are acquired, through
assignment, purchase, license or otherwise, by Schering or its Affiliates
prior to or during the Term of this Agreement.
1.28 "Schering Combination Product" shall mean a Combination Product
which is developed by or on behalf of Schering or its Affiliates, but not
including any Zonagen Combination Products.
1.29 "Schering Trademark" shall mean any trademark(s) proposed,
chosen, owned or controlled by Schering or its Affiliates for use with the
Licensed Compound and/or the Licensed Product in the Territory.
1.30 "Specifications" shall have the meaning set forth in Section
5.9.1 hereof.
1.31 ***
1.32 "Target Patient Population" shall mean the population of patients
experiencing mild to moderate erectile dysfunction.
1.33 "Term" shall mean the period commencing on the Effective Date and
unless terminated earlier pursuant to the relevant provisions of Article
XIII shall continue until the expiration of the last to expire in the
Territory of the Patent Rights incorporating a Valid Claim.
1.34 "Territory" shall mean the United States of America, its
territories, possessions and commonwealths.
1.35 "Transaction Agreements" shall mean collectively this Agreement
and the Ex-U.S. License Agreement.
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
1.36 ***
1.37 "Valid Claim" shall mean a composition of matter or a method of
use claim, or equivalent thereof, of an issued or granted and unexpired
patent in the Territory covering the use in the Field of any Licensed
Compound and/or Licensed Product included within the Patent Rights, which
(i) has not been revoked or held unenforceable or invalid by a decision of
a court or other governmental agency of competent jurisdiction,
unappealable or unappealed within the time allowed for appeal; or (ii) has
not been abandoned, disclaimed, denied or admitted to be invalid or
unenforceable through reissue or disclaimer or otherwise.
1.38 "Worldwide Annual Net Sales" shall mean the aggregate total of
(i) annual Net Sales of Licensed Product by Schering, its Affiliates or
their sublicensees under this Agreement and (ii) annual Net Sales of
Licensed Product by Schering-Plough Ltd., its affiliates or their
sublicensees made under and as converted to U.S. dollars in accordance with
the provisions of the Ex-U.S. License Agreement.
1.39 "Zonagen Additional Indications" shall mean any new or expanded
therapeutic indication(s) outside of the Field, including, without
limitation, Female Sexual Function Indications, for Licensed Compound
and/or Licensed Product developed prior to or during the Term of this
Agreement by or on behalf of Zonagen or to which rights are acquired,
through assignment, purchase, license or otherwise, by Zonagen or its
Affiliates prior to or during the Term of this Agreement.
1.40 "Zonagen Combination Product" shall mean a Combination Product
which is developed by or on behalf of Zonagen or its Affiliates. A Zonagen
Combination Product shall include, without limitation, a Combination
Product for which Zonagen initiates the development and later transfers
development obligations to Schering pursuant to an agreement entered into
in accordance with Section 3.3 hereof.
1.41 "Zonagen Know-How" shall mean any of Zonagen's, its Affiliates',
or its subcontractors' information and materials relating to the research,
development, registration, manufacture, marketing, use or sale of Licensed
Compounds and/or Licensed Products (excluding that part of any Schering
Combination Product developed by or on behalf of Schering) in the Field
which during the Term of this Agreement are in Zonagen's, its Affiliates'
or subcontractors' possession or control, through license or otherwise, and
which are not generally known. Zonagen Know-How shall include, without
limitation, discoveries, practices, methods, knowledge, Improvements,
processes, formulas, data, ideas, skill, experience, inventions, know-how,
technology, trade secrets, manufacturing procedures, purification and
isolation techniques, instructions, test data and other intellectual
property, patentable or otherwise, relating to Licensed Compounds and/or
Licensed Products (excluding that part of any Schering Combination Product
developed by or on behalf of
-8-
<PAGE>
Schering) for use in the Field, including without limitation, test
procedures and other new technologies derived therefrom. Zonagen Know-How
shall also include, without limitation: (i) all biological, chemical,
pharmacological, toxicological, pharmaceutical, physical and analytical,
clinical, safety, manufacturing and quality control data and information
related thereto; (ii) compositions of matter, assays and biological
materials specifically relating to development, manufacture, use or sale of
any Licensed Compound and/or Licensed Product (excluding that part of any
Schering Combination Product developed by or on behalf of Schering) for use
in the Field; and (iii) all applications, registrations, licenses,
authorizations, approvals and correspondence submitted to or received from
any regulatory authorities with jurisdiction over an investigational drug
containing any Licensed Compound and/or Licensed Product (excluding that
part of any Schering Combination Product developed by or on behalf of
Schering) for use in the Field in the Territory (including, without
limitation, minutes and meeting notes relating to any communications with
any regulatory authority with jurisdiction over an investigational drug
containing any Licensed Compound and/or Licensed Product (excluding that
part of any Schering Combination Product developed by or on behalf of
Schering) in the Territory).
1.42 "Zonagen Trademark" shall mean any trademark(s) proposed, chosen,
used, owned, or controlled by Zonagen or its Affiliates in connection with
the Licensed Compound and/or the Licensed Product in the Territory,
including, without limitation, the trademark "Vasomax".
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ARTICLE II
LICENSES; DISCLOSURE OF INFORMATION; APPROVALS
2.1 Exclusive License Grant.
-----------------------
2.1.1 License. Zonagen hereby grants to Schering, as of the
-------
Effective Date, an exclusive license (exclusive even as to Zonagen, except
as expressly provided otherwise herein), in the Territory, under the Patent
Rights and to use the Zonagen Know-How, each to discover, develop, make,
have made, import, export, use, distribute, market, promote, offer for sale
and sell Licensed Compound and Licensed Product(s) , each for use in the
Field. Any Improvements relating to the Licensed Product (excluding that
part of any Schering Combination Product developed by or on behalf of
Schering) developed prior to or during the Term of this Agreement by or on
behalf of Zonagen shall be included in Zonagen Know-How or Patent Rights,
as the case may be, for all purposes of this Agreement. Zonagen further
hereby grants to Schering, as of the Effective Date, an exclusive license,
exclusive even as to Zonagen, in the Territory to use the Zonagen
Trademark(s) for the Licensed Compound and/or the Licensed Product(s). It
is understood by the Parties that with respect to intellectual property
rights included within the Patent Rights or the Zonagen Know-How developed
or acquired (whether by license, assignment or otherwise) by Zonagen after
the Effective Date, such rights are granted to Schering under this Section
2.1.1, only to the extent that Zonagen is legally able to do so.
Notwithstanding the previous sentence, Zonagen, in developing or acquiring
such intellectual property rights, will use reasonable best efforts to
ensure that Schering's rights therein are not diminished.
2.1.2 Right to Sublicense; Appointment of Distributors. The
------------------------------------------------
license granted to Schering under Section 2.1.1 shall include the rights to
appoint distributors and to grant sublicenses to Affiliates and/or any
third party, provided, however, that any grant of a sublicense by Schering
----- --------
to a third party shall be subject to Zonagen's prior written consent, and,
provided further that an agreement with any third party sublicensee shall
provide that such sublicensee is subject to the same obligations (other
than obligations to make payments to Zonagen) as is Schering under this
Agreement. Zonagen's failure to respond within twenty (20) business days to
a Schering request for sublicense approval shall be deemed an approval of
such sublicense.
2.1.3 Retained Rights. Zonagen retains all rights in and to the
---------------
Patent Rights and Zonagen Know-How which are not otherwise expressly
granted to or conferred upon Schering under this Agreement.
2.2 Non-Exclusive License Grant. In the event that the discovery,
---------------------------
development, making, having made, importing, exporting, use, distribution,
marketing, promotion, offering
-10-
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for sale or sale by Schering, its Affiliates and/or sublicensees of
Licensed Compound(s) and/or Licensed Product(s) would infringe during the
Term of this Agreement a claim of an issued patent, and/or any patent
rights which Zonagen owns or has the rights to license and which patents
are not covered by the grant in Section 2.1, Zonagen hereby grants to
Schering and its Affiliates, to the extent Zonagen is legally able to do
so, a non-exclusive, royalty-free license in the Territory under such
issued patents solely for Schering, its Affiliates and/or sublicensees to
discover, develop, make, have made, import, export, use, distribute,
market, promote, offer for sale and sell Licensed Compound(s) and/or
Licensed Product(s) in the Field in the Territory. For the avoidance of
doubt, this Section 2.2 shall not be interpreted as permitting Schering to
avoid the payment of royalties which would otherwise be due for sales of
Licensed Product made pursuant to the license granted in Section 2.1.
2.3 Disclosure of Information. Upon Schering's request, which
-------------------------
requests may be made from time to time during the Term of this Agreement,
Zonagen shall promptly disclose to Schering in writing, or via electronic
media acceptable to Schering, all existing material Zonagen Know-How not
previously disclosed to Schering (or any part thereof as may be designated
by Schering in such request) in order to enable Schering to exploit its
rights granted under Section 2.1 of this Agreement. In addition, during the
Term of this Agreement Zonagen shall promptly disclose to Schering in
writing, or via electronic media acceptable to Schering, on an ongoing
basis all new material Zonagen Know-How. Such Zonagen Know-How and other
information shall be automatically deemed to be within the scope of the
licenses granted herein without payment of any additional compensation.
Upon Schering's request, Zonagen shall provide reasonable technical
assistance to enable Schering to utilize such additional Zonagen Know-How.
Schering shall reimburse Zonagen for the documented reasonable out-of-
pocket costs incurred by Zonagen in providing such technical assistance,
provided Schering has approved of such costs prior to the time they are
incurred. Schering shall have the right to use for all purposes in
connection with obtaining any Regulatory Approval for the Licensed
Product(s) all Zonagen Know-How and other information, disclosed pursuant
to this Section and under this Agreement.
2.4 HSR Filing and Approvals.
------------------------
2.4.1 HSR Filing. To the extent necessary, each of Zonagen and
----------
Schering shall, at their own expense, file, within ten (10) days after
the date of this Agreement, with the Federal Trade Commission (the
"FTC") and the Antitrust Division of the United States Department of
Justice (the "Antitrust Division") the notification and report form
(the "Report") required under the HSR Act with respect to the
transactions as contemplated hereby and shall cooperate with the other
Party to the extent necessary to assist the other Party in the
preparation of its Report and to proceed to obtain necessary approvals
under the HSR Act, including but not limited to the expiration or
earlier termination of any and all applicable waiting periods required
by the HSR Act.
2.4.2 Zonagen's and Schering's Obligations. Each of Zonagen and
------------------------------------
Schering shall use its good faith diligent efforts to eliminate any
concern on the part
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
of any court or government authority regarding the legality of the
proposed transaction, including, if required by federal or state
antitrust authorities, promptly taking all steps to secure government
antitrust clearance, including, without limitation, cooperating in
good faith with any government investigation including the prompt
production of documents and information demanded by a second request
for documents and of witnesses if requested.
2.4.3 Additional Approvals. Zonagen and Schering will cooperate
--------------------
and use respectively all reasonable efforts to make all other
registrations, filings and applications, to give all notices and to
obtain as soon as practicable all governmental or other consents,
transfers, approvals, orders, qualifications, authorizations, permits
and waivers, if any, and to do all other things necessary or desirable
for the consummation of the transactions as contemplated hereby.
2.5 ***
2.6 Change of Control of Zonagen; Schering Right of First Refusal.
-------------------------------------------------------------
Prior to any Change of Control of Zonagen, which Change of Control would
result in an acquisition of Zonagen by a third party that is marketing an
oral product that directly competes with the Licensed Product, Schering
shall receive notice of a proposed transaction together with the
substantive terms and conditions of any such transaction that, if
consummated, would result in a Change of Control of Zonagen (a "Third Party
Offer"). At Schering's option, the Parties shall have *** after receipt of
notice of the Third Party Offer, or such longer time as the Parties may
mutually agree, to negotiate, in good faith, whereby Schering would acquire
Zonagen on at least the substantive terms and conditions as the Third Party
Offer. In the event the Parties are unable to consummate any such
transaction within the period noted above, as may be extended, Zonagen
shall be free to enter into a transaction resulting in a Change of Control
of Zonagen, provided, however, that Zonagen agrees that the final terms of
-------- -------
any such agreement with a third party shall be no less favorable to
Zonagen, when taken as a whole, than the last set of terms and conditions
offered by Schering. In the event, however, that there is a Change of
Control of Zonagen by a party other than Schering, the surviving entity
shall do each of the following as Schering, in its sole option, may elect:
(i) discontinue the copromotion of the Licensed Product and any Schering
products that Zonagen may have been copromoting pursuant to Section 3.3
hereof, (ii) discontinue all research and development activities with
respect to the Licensed Product, and (iii) discontinue all research and
development activities with respect to (x) any Zonagen Combination Products
to which Schering has obtained rights under Article III hereof and (y) any
Zonagen Additional Indications for which Schering has previously exercised
its option.. Notwithstanding the foregoing or any other provision to the
contrary in this Agreement, upon any Change of Control of Zonagen, Zonagen
shall return to Schering all copies of any Proprietary Information Schering
has disclosed to Zonagen in connection with this
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
Agreement and Schering, thereafter, shall have no further obligation to
disclose any Proprietary Information to Zonagen (or the surviving entity in
a Change of Control of Zonagen) except that Schering shall remain obligated
to provide Zonagen the information required pursuant to Section 7.4.1
hereof, subject to the confidentiality provisions of Article IX hereof.
2.7 Improvements. If, in the development of Improvements to or
------------
Zonagen Additional Indications for the Licensed Product, Zonagen elects to
enter into agreements with third parties in order to obtain rights that are
necessary for such development and resultant commercialization, Zonagen
shall be permitted to do so, provided, however, that Zonagen shall use its
-------- -------
best efforts to obtain, from such third party, exclusive (exclusive even as
to such third party) worldwide rights, with the right to sublicense, to
make, have made, use, market, sell, offer for sale, distribute, import and
export any such Improvement or the Licensed Product for use in any such
Zonagen Additional Indication.
ARTICLE III
OPTIONS; COPROMOTION RIGHTS
3.1 Options for Zonagen Additional Indications and *** Formulations.
---------------------------------------------------------------
3.1.1 Option for Zonagen Additional Indications. Zonagen hereby
-----------------------------------------
grants to Schering an exclusive option to obtain an exclusive
(exclusive even as to Zonagen) license, in the Territory, under the
Patent Rights and Zonagen Trademarks and to use the Zonagen Know-How
to discover, develop, make, have made, import, export, use,
distribute, market, promote, offer for sale, and sell Licensed
Compounds and/or Licensed Products (other than *** Formulations) for
use in any or all Zonagen Additional Indications. At any time prior to
Regulatory Approval of the Licensed Product for use in a Zonagen
Additional Indication in the United States, Schering shall have the
right to exercise the option granted in this Section 3. 1.1 with
respect to such Zonagen Additional Indication, by providing Zonagen
with written notice of such election. Upon Schering's exercise of the
option hereunder, the Parties shall promptly execute an amendment to
this Agreement, which amendment (i) expands the definition of Field to
include the use of the Licensed Compound and/or Licensed Product in
such Zonagen Additional Indication and (ii) makes other modifications
to the Agreement which are necessary to conform the agreement to such
expanded scope. Schering agrees that it may exercise its option under
this Section 3.1.1 only if Schering-Plough Ltd. contemporaneously
exercises its similar option under Section 3.1.1 of the Ex.-U.S.
License Agreement.
3.1.2 Option for *** Formulations. If Schering exercises its
---------------------------
option under Section 3.1.1 hereof with respect to a tablet formulation
of the Licensed Product for
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
use in a Female Sexual Function Indication and Zonagen has not yet
obtained Regulatory Approval for a *** Formulation, then, upon
Schering's exercise of the option under Section 3.1.1, Schering shall
have a further exclusive option to obtain an exclusive (exclusive even
as to Zonagen) license, in the Territory, under the Patent Rights and
Zonagen Trademarks and to use the Zonagen Know-How to discover,
develop, make, have made, import, export, use, distribute, market,
promote, offer for sale, and sell *** Formulations for use in all
Additional Indications. At any time prior to *** after Zonagen has
provided Schering with copies of the results of Phase II studies
demonstrating the efficacy of the *** Formulation for use in any
Additional Indication in the United States (the "*** Option Period"),
Schering shall have the right to exercise the option granted in this
Section 3.1.2, by providing Zonagen with written notice of such
election. Upon Schering's exercise of the option hereunder, the
Parties shall promptly execute an amendment to this Agreement, which
amendment makes modifications to the Agreement which are necessary to
conform the Agreement to such expanded scope. Schering agrees that it
may exercise its option under this Section 3.1.2 only if Schering-
Plough Ltd. contemporaneously exercises its similar option under
Section 3.1.2 of the Ex.-U.S. License Agreement.
3.1.3 Option Payments.
---------------
(a) If Schering exercises the option granted in Section
3.1.1 hereof (with respect to any Zonagen Additional Indication)
or Section 3.1.2 hereof (with respect to the *** Formulation)
prior to the later of (x) the first anniversary of the Effective
Date or (ii) the enrollment of the first patient into a Phase II
clinical trial testing the safety and/or efficacy of the Licensed
Product for use in such Zonagen Additional Indication or of the
*** Formulation for use in any Additional Indication, as
appropriate, Schering shall, (i) subject to the limitations set
forth in Section 3.1.3 (e) hereof, reimburse Zonagen for the
reasonable out-of-pocket costs (which have not otherwise been
reimbursed by Schering-Plough Ltd. pursuant to the Ex-U.S.
License Agreement) incurred by Zonagen, both as of such date of
exercise and on a going-forward basis, in the development of such
Zonagen Additional Indications or the *** Formulation, as
appropriate, which reimbursement shall be made on a quarterly
basis pursuant to invoices supporting documentation submitted by
Zonagen to Schering; and (ii) subject to the limitations set
forth in Section 3.1.3(f) hereof, pay Zonagen *** within ten (10)
business days after Zonagen has provided Schering with written
evidence that the FDA has granted Regulatory Approval of the
Licensed Product for such Zonagen Additional Indication or of the
*** Formulation, as appropriate.
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
(b) If Schering exercises the option granted in Section 3.1.1
hereof (with respect to any Zonagen Additional Indication) or Section
3.1.2 hereof (with respect to the *** Formulation) after the
enrollment of the first patient into a Phase II clinical trial testing
the safety and/or efficacy of the Licensed Product for use in such
Zonagen Additional Indication or of the *** Formulation, as
appropriate, and prior to the enrollment of the first patient into a
Phase III pivotal trial testing the safety and efficacy of the
Licensed Product for use in such Zonagen Additional Indication or of
the *** Formulation, as appropriate, Schering shall, (i) subject to
the limitations set forth in Section 3.1.3(e) hereof, reimburse
Zonagen for the reasonable out-of-pocket costs (which have not
otherwise been reimbursed by Schering-Plough Ltd. pursuant to the Ex-
U.S. License Agreement) incurred by Zonagen in the development of such
Zonagen Additional Indication or the *** Formulation, as appropriate,
up to the date Schering so exercises its option which reimbursement
will be made pursuant to an invoice supporting documentation submitted
by Zonagen to Schering; (ii) subject to the limitations set forth in
Section 3.1.3(e) hereof, thereafter conduct and fund the remainder of
the development activities that are required to obtain Regulatory
Approval, in the United States, of the Licensed Product for such
Zonagen Additional Indication or such *** Formulation, as appropriate;
(iii) subject to the limitations set forth in Section 3.1.3(f) hereof
pay Zonagen *** within ten (10) business days after the Parties have
both signed the amendment described in Section 3.1.1 or 3.1.2 hereof,
as appropriate; and (iv) subject to the limitations set forth in
Section 3.1.3 (f) hereof pay Zonagen *** within ten (10) business days
after Zonagen has provided Schering with written evidence that the FDA
has granted Regulatory Approval of the Licensed Product for such
Zonagen Additional Indications or of the *** Formulation, as
appropriate.
(c) If Schering exercises the option granted in Section 3.1.1
hereof (with respect to any Zonagen Additional Indication) or Section
3.1.2 hereof (with respect to the *** Formulation) after the
enrollment of the first patient into a Phase III pivotal clinical
trial testing the safety and efficacy of the Licensed Product for use
in such Zonagen Additional Indication or of the *** Formulation, as
appropriate, and prior to United States Regulatory Approval of the
Licensed Product for use in such Zonagen Additional Indication or of
the *** Formulation, as appropriate, Schering shall, (i) subject to
the limitations set forth in Sections 3.1.3 (e) and 3.1.3 (f) hereof,
reimburse Zonagen for the reasonable out-of-pocket costs (which have
not otherwise been reimbursed by Schering-Plough Ltd. pursuant to the
Ex-U.S. License Agreement) incurred by Zonagen, both as of the date of
the exercise
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
of the option and on a going-forward basis, in the development of
such Zonagen Additional Indication or the *** Formulation, as
appropriate, and (ii) subject to the limitations set forth in
Section 3.1.3 (f) hereof pay Zonagen ***, each within ten (10)
business days after Zonagen has provided Schering with written
evidence that the FDA has granted Regulatory Approval of the
Licensed Product for such Zonagen Additional Indication or for
such *** Formulation.
(d) If Schering exercises the option granted in Section
3.1.1 or 3.1.2 hereof, Schering's Net Sales of the Licensed
Product for the Additional Indication or of the *** Formulation
shall be included in the calculation of Net Sales for purposes of
determining the royalty under Section 7.3 hereof.
(e) For any given Zonagen Additional Indication or for the
*** Formulation, as appropriate, Schering's obligation to
reimburse Zonagen for its out-of-pocket expenses pursuant to
either Section 3.1.3 (a) (i) or Section 3.1.3 (c)(i) hereof and
Schering's obligation to reimburse Zonagen for its out-of-pocket
expenses pursuant to Section 3.1.3(b)(i) hereof collectively with
Schering's obligation to fund the remaining development of the
Licensed Product for such Additional Indication pursuant to
Section 3.1.3(b)(ii) hereof and of the *** Formulation shall, in
each case, not exceed ***. In the event that, because of
Schering's funding of the remaining development of the Licensed
Product for such Additional Indication or of the *** Formulation,
as appropriate, Schering's obligation under Sections 3.1.3(b)(i)
and 3.1.3(b)(ii) hereof collectively exceeds ***, Schering, at
its option may, in its sole discretion, (x) elect to not proceed
with the continued development of the Licensed Product for use in
such Zonagen Additional Indication or of the *** Formulation, as
appropriate, in which event, upon Zonagen's request and the
refund of any payments Schering has made to Zonagen and the costs
incurred by Schering in developing data in connection with such
Zonagen Additional Indication, Zonagen shall have the right to
continue the development of such Zonagen Additional Indication
for its own account and Schering shall provide, to Zonagen, the
data generated by Schering relating to the Zonagen Additional
Indication or the *** Formulation (provided, however that
-------- -------
Zonagen's use of such data shall be at its own risk) (y) proceed
with such development only after the Parties have, in good faith,
renegotiated the financial terms of this Agreement with respect
to such Zonagen Additional Indication or the *** Formulation, as
appropriate, in which event, upon Zonagen's request and the
refund of any payments Schering has made to Zonagen in connection
with such Zonagen Additional Indication, Zonagen shall have the
right to continue the development of such Zonagen Additional
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
Indication for its own account, or (z) elect to proceed with such
continued development under the terms and conditions hereof,
crediting any payments over *** against royalties that are or
become due to Zonagen under Section 7.3 hereof after Regulatory
Approval of the Licensed Product for use in such Zonagen
Additional Indication or of the *** Formulation, as appropriate.
(f) Notwithstanding any other provision in this Agreement
to the contrary, if, at the time of the first filing of an NDA or
a supplement to an NDA previously filed pursuant to this
Agreement, in either case supporting Regulatory Approval of the
Licensed Product for such Zonagen Additional Indication or the
*** Formulation for a Zonagen Additional Indication, the Third
Year Projected Incremental Worldwide Annual Net Sales Potential
for the Licensed Product for such Zonagen Additional Indication
or the *** Formulation for a Zonagen Additional Indication
supported by such NDA or supplement is less than ***, Schering
shall not be required to make the payments specified in Sections
3.1.3(a)(ii), 3.1.3(b)(iv), 3.1.3(c)(i) and 3.1.3(c)(ii) hereof.
For purposes of this Section 3.1.3(f) the "Third Year Projected
Incremental Worldwide Annual Net Sales Potential" for a
particular Additional Indication shall be the amount of projected
Worldwide Annual Net Sales of the Licensed Product or the ***
Formulation, as appropriate, during the third full twelve (12)
month period after FDA grants Regulatory Approval of the Licensed
Product or the *** Formulation, as appropriate, for use in such
Additional Indication less the amount of projected Worldwide
Annual Net Sales of the Licensed Product during the third full
twelve (12) month period after FDA grants Regulatory Approval of
the Licensed Product for use in such Additional Indication that
would be expected to be made had the FDA and comparable foreign
regulatory authorities not granted Regulatory Approval of the
Licensed Product or the *** Formulation for use in such
Additional Indication. If, within *** after the filing of an NDA
or a supplement supporting Regulatory Approval of the Licensed
Product or the *** Formulation for use in such Additional
Indication in the United States, the Parties are unable to agree
on the level of the Third Year Projected Incremental Worldwide
Annual Net Sales Potential for such Licensed Product or ***
Formulation in such Additional Indication, an independent expert
shall be selected, by mutual agreement of the Parties, to make
such determination, which determination shall be binding upon the
Parties. If the Parties are unable to select such an expert
within *** after the filing of an NDA or a supplement supporting
Regulatory Approval of the Licensed Product or the ***
Formulation, as appropriate, for use in such Additional
Indication, each Party shall, within the next ten (10) business
days select an independent expert and the two (2) independent
experts shall select
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
a third independent expert so as to form a panel of three (3)
independent experts. The individual expert or panel of
independent experts, as appropriate, shall then have thirty (30)
days in which to make the determination of the level of the Third
Year Projected Incremental Worldwide Annual Net Sales Potential
for the License Product or the *** Formulation, as appropriate,
in such Additional Indication which determination shall be
binding upon the Parties.
3.1.4 Notice. Zonagen shall provide written notice to Schering
------
at least sixty (60) days prior to the expected occurrence of each of
the following events:
(a) the enrollment of the first patient into a Phase II
clinical trial testing the safety and/or efficacy of the Licensed
Product for use in each such Zonagen Additional Indication or of
the *** Formulation;
(b) the enrollment of the first patient into a Phase III
pivotal clinical trial testing the safety and efficacy of the
Licensed Product for use in each such Zonagen Additional
Indication or of the *** Formulation;
(c) the filing with the FDA of an NDA or a supplement to
a previously filed NDA which supports Regulatory Approval of the
Licensed Product for use in each such Zonagen Additional
Indication or of the *** Formulation; and
(d) the granting of Regulatory Approval, in the United
States, for the use of the Licensed Product in each such Zonagen
Additional Indication or for the *** Formulation.
Such notice shall state the date the relevant event is reasonably
anticipated to occur and shall include, as appropriate, copies of
any data, analyses, reports, protocols, or correspondence with
the FDA that have not previously been provided to Schering
pursuant to Section 4.6 hereof.
3.2 Right of First Negotiation.
--------------------------
3.2.1 Zonagen Combination Products. Schering acknowledges that
----------------------------
Zonagen intends to develop one or more Zonagen Combination Products.
Subject to the provisions set forth in this Section 3.2, Zonagen
hereby grants to Schering the exclusive first right to negotiate with
Zonagen, should Zonagen determine to work with third parties with
respect to the development, making, using, selling, marketing or
distribution of such Zonagen Combination Product, an agreement by
which
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
Schering will obtain the exclusive right (which, in Zonagen's
discretion may be either exclusive except as to Zonagen or
exclusive even as to Zonagen) to make, have made, import, export,
use, distribute, market, promote, offer for sale and sell Zonagen
Combination Products for all uses in the Field (as the definition
of Field has been modified in accordance with Sections 3. 1.1 or
3.1.2 hereof prior to the date the Parties sign an agreement with
respect to such Zonagen Combination Product). The exclusive right
to negotiate shall extend from the Effective Date of this
Agreement until *** after Zonagen provides Schering with written
notice that it has filed with the FDA and the FDA has accepted an
NDA supporting Regulatory Approval of a Zonagen Combination
Product, which notice shall include a copy of the NDA so filed
(the "Exclusive Negotiation Period"). Notwithstanding the
foregoing, if Schering sells a Schering Combination Product,
Schering's right of first negotiation under this Section 3.2.1
with respect to any Zonagen Combination Product containing the
same active ingredients as such Schering Combination Product
shall automatically cease upon Schering's First Commercial Sale
of such Schering Combination Product.
3.2.2 *** Formulations. If Zonagen has developed a ***
----------------
Formulation prior to Schering's exercise of its option under Section
3.1.1 hereof or if Schering's option under Section 3.1.2 has expired,
Schering shall have the exclusive first right to negotiate with
Zonagen, should Zonagen determine to work with third parties with
respect to the making, using, selling, marketing or distribution of
such *** Formulation, an agreement by which Schering will obtain the
exclusive right (which in Zonagen's discretion may be either exclusive
except as to Zonagen or exclusive even as to Zonagen) to make, have
made, import, export, use, distribute, market, promote, offer for sale
and sell *** Formulations for all uses. The exclusive right to
negotiate shall extend from the Effective Date of this Agreement until
*** after Zonagen provides Schering with written notice that it has
filed with the FDA and the FDA has accepted an NDA supporting
Regulatory Approval of a *** Formulation of the Licensed Product,
which notice shall include a copy of the NDA so filed (the "***
Exclusive Negotiation Period").
3.2.3 Standstill. Zonagen agrees that on or before the Effective
----------
Date of this Agreement it will terminate any existing discussions with
other potential purchasers or licensees of any such Zonagen
Combination Products and any such *** Formulations and that during the
Exclusive Negotiation Period (with respect to Zonagen Combination
Products) and the *** Exclusive Negotiation Period (with respect to
*** Formulations) it will not knowingly permit any of its officers,
directors, employees, representatives or agents to, directly or
indirectly, (i) solicit, initiate, encourage, or enter into any
discussions or negotiations with any
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
corporation, partnership, limited liability company, person or
other entity or group (each a "Person") with respect to any
proposal or offer to acquire, license, distribute or exploit any
such Zonagen Combination Product or *** Formulation in any manner
or (ii) furnish any Person with any information with respect
thereto. Notwithstanding the foregoing, this Section 3.2.3 shall
not prohibit Zonagen from negotiating or entering into agreements
with third parties whereby Zonagen will acquire rights to other
products or technology which will become part of such Zonagen
Combination Products, provided, however, that Zonagen shall use
-------- -------
its reasonable best efforts to not enter into any such agreement
which would in any way diminish Schering's rights hereunder with
respect to such Zonagen Combination Products (i.e., under such
agreements, Zonagen shall use its reasonable best efforts to
obtain exclusive worldwide rights, with the right to sublicense,
to make, have made, use, market, distribute, sell, import and
export, any Zonagen Combination Products using such third party
component). If, despite having used such reasonable best efforts,
Zonagen is not able to negotiate such an agreement that does not
diminish Schering's rights hereunder prior to entering into such
agreement, Zonagen shall consult with Schering, with the aim of
making reasonable alternative arrangements. Notwithstanding the
foregoing, Zonagen shall be free to provide such third party with
any data Zonagen generates with respect to the use of the
component provided by such third party as a single entity.
3.2.4 Negotiation of Agreement. At any time during the Exclusive
------------------------
Negotiation Period (with respect to Zonagen Combination Products) or
the *** Exclusive Negotiation Period (with respect to ***
Formulations) after Zonagen has provided Schering with copies of the
results of Phase II studies demonstrating the efficacy of such Zonagen
Combination Product or such *** Formulation, as appropriate,, Zonagen
may, by written notice to Schering, initiate negotiation of the
agreement described in Section 3.2.1 or 3.2.2 hereof, as appropriate.
Upon Zonagen's request to initiate such negotiations, the Parties
shall commence good faith negotiations of the agreement described in
Section 3.2.1 or 3.2.2 hereof, as appropriate, which agreement shall
contain terms and provisions which are reasonable and customary in the
pharmaceutical industry for the class of products that includes such
Zonagen Combination Products or *** Formulations. If the Parties fail
to sign a definitive within *** of the commencement of such
negotiations, or such longer period of time as the Parties may agree,
Zonagen thereafter shall be free to initiate negotiations with a third
party with respect to either the Zonagen Combination Product or the
*** Formulation, as appropriate, provided, however, that Zonagen may
-------- -------
not enter into an agreement with a third party on terms that, when
taken as a whole, are less favorable to Zonagen, than were the terms
in Schering's
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
last offer to Zonagen during their negotiations, without first
offering Schering, in writing, the opportunity to enter into an
agreement with Zonagen on such less favorable terms. Schering
shall have *** from the receipt of such written offer from
Zonagen to elect whether or not to accept such offer. If Schering
declines to accept such offer or fails to accept such offer
within such *** period, Zonagen shall be free to enter into an
agreement with a third party on such terms.
3.3 Zonagen Copromotion Rights.
--------------------------
3.3.1 Option to Copromote Licensed Product and ***. Subject to
--------------------------------------------
Section 3.3.3 hereof, Schering hereby grants to Zonagen an option to
obtain the right to copromote the Licensed Product together with ***
to urologists only in the United States and under the same trademarks
used by Schering for such products. Zonagen may exercise its option to
obtain such rights by providing Schering with written notice of such
election no later than *** prior to the anticipated commercial launch
of the Licensed Product in the United States. In order for Zonagen to
exercise this option, at the time of FDA acceptance of filing of the
NDA, Schering agrees to notify Zonagen of the anticipated launch date
of the Licensed Product. In its notice of election to Schering,
Zonagen must provide Schering with adequate assurances of its ability
to comply with the conditions set forth in Section 3.3.3 hereof. Upon
Schering's receipt of such written notice, the Parties shall promptly
commence negotiation of a definitive copromotion agreement in
accordance with Section 3.3.4 hereof.
3.3.2 Option to Copromote Licensed Product Only. Subject to
-----------------------------------------
Section 3.3.3 hereof and provided Zonagen has not previously exercised
its option under Section 3.3.1 hereof, Schering hereby grants to
Zonagen an option to obtain the right to copromote the Licensed
Product to urologists only in the United States and under the same
trademarks used by Schering for such Licensed Product. If Zonagen has
not previously exercised its option under Section 3.3.1 hereof,
Zonagen may exercise its option to obtain such rights by providing
Schering with written notice of such election no later than *** prior
to the anticipated commercial launch of the Licensed Product in the
United States. In such notice, Zonagen must provide Schering with
adequate assurances of its ability to comply with the conditions set
forth in Section 3.3.3 hereof. Upon Schering's receipt of such written
notice, the Parties shall promptly commence negotiation of a
definitive copromotion agreement in accordance with Section 3.3.4
hereof.
3.3.3 Conditions Precedent for Copromotion Rights. Zonagen's
-------------------------------------------
right to commence copromotion of either (i) the Licensed Product
together with *** in
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
accordance with the option granted under Section 3.3.1 hereof or (ii)
the Licensed Product alone in accordance with the option granted under
Section 3.3.2 hereof is contingent upon the following:
(a) At least *** prior to Schering's anticipated
commercial launch of the Licensed Product in the United States,
Zonagen must have in place a sales force consisting of at least
*** full time equivalent representatives, each of whom are
employees of Zonagen and have reasonable experience in selling
therapeutic products to physicians (or such other level of
experience as Schering, in its sole reasonable discretion, finds
acceptable);
(b) Zonagen's sales force must be available for training
with respect to the Licensed Product and *** (training with
respect to *** is to be provided only if Zonagen exercises the
option granted under Section 3.3.1 hereof) at least *** prior to
Schering's anticipated commercial launch of the Licensed Product.
3.3.4 Copromotion Agreement. If Zonagen exercises its option
---------------------
under either Sections 3.3.1 or 3.3.2 hereof, the Parties shall
commence good faith negotiations of a definitive copromotion agreement
promptly after Schering has received from Zonagen written notice of
Zonagen's election to exercise such option. In addition to provisions
to address the conditions precedent set forth in Section 3.3.3 hereof,
and other material terms and conditions, the Parties agree that such
definitive copromotion agreement shall contain the following terms (as
appropriate depending upon which option is exercised):
(a) The term of such copromotion agreement shall extend
from the effective date of such copromotion agreement until the
earlier of (x) *** after the effective date of such copromotion
agreement or (y) the expiration or earlier termination of this
Agreement. If Zonagen has exercised its option under Section
3.3.1 hereof, Zonagen shall have the right to copromote *** only
during the first *** of the term of such copromotion agreement or
for such longer period of time as the Parties may mutually agree
(the "Initial Term").
(b) Zonagen must commit that each of its sales
representatives will conduct an average of at least *** sales
calls per year to target urologists identified by Schering and
(x) if Zonagen has exercised its option under Section 3.3.1
hereof, that during each such sales call each such sales
representative will detail both the Licensed Product and *** in
the *** and *** positions, to the urologist during the Initial
Term of the copromotion
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
agreement and the Licensed Product in the *** or *** position, to
the urologist after the Initial Term of the copromotion
agreement, or (y) if Zonagen has exercised its option under
Section 3.3.2 hereof, that during each such sales call each such
sales representative will detail the Licensed Product, in the ***
or *** position, to the urologists during the term of the
copromotion agreement.
(c) If Zonagen exercises its option under Section 3.3.1
hereof, Zonagen shall have the right to commence copromotion of
*** at any time after the definitive copromotion agreement is
signed and prior to the launch of the Licensed Product provided
that the sales force training regarding *** has been completed.
(d) Schering will train the Zonagen sales force on the
Licensed Product and, if Zonagen has exercised its option under
Section 3.3.1 hereof, ***, provided that any out-of-pocket
expenses associated with the attendance by Zonagen's sales force
at any such training will be borne solely by Zonagen.
(e) The Zonagen sales force will be managed by Schering's
District Managers with respect to activities relating to the
copromotion of the Licensed Product and, if Zonagen has exercised
its option under Section 3.3.1 hereof, ***.
(f) The Zonagen sales force will utilize Schering's
targeting, call reporting and sampling procedures with respect to
its copromotion of the Licensed Product and, if Zonagen has
exercised its option under Section 3.3.1 hereof, ***.
(g) If Zonagen exercises its option under Section 3.3.1
hereof, Schering shall pay Zonagen *** for each sales call made
during the Initial Term of the copromotion agreement, up to a
maximum of *** calls per year. If Zonagen exercises its option
under Section 3.3.2 hereof, Schering shall pay Zonagen *** for
each *** position sales call and *** for each *** position sales
call made during the term of the copromotion agreement, up to a
maximum of an aggregate of *** calls per year. Any calls made in
excess of *** calls per year shall be at Zonagen's sole expense.
Additionally, the Parties will agree upon an incentive bonus
which will be based on the achievement of a certain level of
incremental sales which are generated by Zonagen's copromotion
efforts during the term of the copromotion agreement of (x) of
the Licensed Product and *** (if Zonagen exercises its option
under
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
Section 3.3.1 hereof) or (y) of the Licensed Product alone (if
Zonagen exercises its option under Section 3.3.2 hereof). The
copromotion agreement shall provide that payments under this
subsection 3.3.4(g) shall be adjusted for inflation.
(h) Zonagen will have the right to terminate such
copromotion agreement, without cause, at any time upon *** prior
written notice to Schering.
(i) If Zonagen exercises its option under Section 3.3.1
hereof, Zonagen will be granted an option to commence comarketing
of a second brand of *** prior to the expiration of the last to
expire of the *** Patents (including any extensions thereof) in
the Territory.
3.3.5 Good Faith Discussions. If Zonagen does not exercise its
----------------------
option under either Sections 3.3.1 or 3.3.2 hereof, at Zonagen's
option for a period of six (6) months after First Commercial Sale, the
parties shall discuss in good faith the ability of Zonagen to
copromote the Licensed Product.
ARTICLE IV
DEVELOPMENT, COMMERCIALIZATION AND REGULATORY ISSUES
4.1 Completion of Studies. Zonagen shall diligently conduct and
---------------------
complete all testing and studies, ongoing as of the Effective Date,
(including, without limitation, all post-marketing commitments either
imposed by the FDA or agreed to by Zonagen, as a condition of Regulatory
Approval of the Licensed Product) that are necessary or useful to support
Regulatory Approval in the United States of the Licensed Products with at
least the *** for use in the Male Sexual Function Indication, provided,
however, that Zonagen's obligation to use such diligent efforts shall not
be interpreted to require Zonagen to incur more than *** of expenses in
conducting such studies. If the cost of such studies exceeds ***, the
Parties shall mutually agree as to which Party shall complete and pay for
such studies. Zonagen shall have no other right to conduct clinical studies
of the Licensed Product or any Improvements thereto for use of such
Licensed Product or Improvements in the Male Sexual Function Indication
without first obtaining Schering's written consent to conduct such clinical
studies, which consent may be provided or withheld in Schering's sole
discretion. Should Zonagen fail to conduct any such studies within the time
frame requested by the FDA, Schering shall have the right to conduct such
studies and Schering shall be permitted to credit the reasonably fully
absorbed costs and expenses (directly attributed to the conduct of such
studies) incurred by Schering in conducting such studies (including any
payments Schering makes to Zonagen if Zonagen conducts such studies)
against royalties that are or become due to Zonagen under Section 7.3
hereof, provided, however, that in no event shall
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
such credit result in a reduction of more than *** of any royalty payment
due under Section 7.3 hereof.
4.2 Data and Reports. Zonagen shall promptly provide Schering with
----------------
copies of all data and reports that prior to the Effective Date have been
generated and after the Effective Date are generated in connection with all
studies conducted in support of Regulatory Approval of the Licensed
Products for use in the Field, or are useful to enable Schering to decide
whether to exercise its option for any Additional Indications pursuant to
Section 3. 1.
4.3 Preparation and Filing of NDA. Zonagen, at its own expense, shall
-----------------------------
diligently prepare and file, with the FDA, an NDA which supports Regulatory
Approval of the Licensed Products with at least the *** for use in the
Field. Schering, at its own expense, shall provide Zonagen with advice and
reasonable assistance in (i) developing an NDA filing strategy, (ii)
reviewing study reports, (iii) preparing an NDA, (iv) preparing supplements
to the NDA, (iv) responding to questions from the FDA regarding the NDA or
any supplement thereto, and (v) any other matters that the Parties mutually
agree need to be addressed to expedite the Regulatory Approval process for
the Licensed Product in the Field. Zonagen will promptly notify Schering of
any questions or requests for information from the FDA and shall permit
Schering to participate in all interactions with the FDA.
4.4 Adverse Event Reporting. After an NDA supporting Regulatory
-----------------------
Approval of the Licensed Product for use in the Field has been filed with
and accepted for filing by the FDA Schering shall be responsible for
adverse event reporting. To the extent Zonagen receives any information
regarding adverse events related to the use of the Licensed Product Zonagen
shall promptly provide Schering with such information in accordance with
the Adverse Event Reporting Procedures (as may be amended from time to time
upon mutual agreement) set forth in Schedule 4.4.
4.5 Development Activities by Schering. During the Term of this
----------------------------------
Agreement and thereafter, unless this Agreement is terminated prior to the
expiration of the Term, Schering shall have the right to (i) develop
improvements to the Licensed Products, (ii) to develop Schering Combination
Products and (iii) to conduct clinical studies with the Licensed Products,
Schering Combination Products and/or any Improvements thereto for use in
the Field or in any Zonagen Additional Indications for which Schering has
exercised its option under Section 3.1. Except as otherwise provided in
Section 7.3.1 hereof, Schering shall be solely responsible for the costs
incurred in connection with conducting such studies.
4.6 Development of Zonagen Additional Indications and ***
-----------------------------------------------------
Formulations. If Schering exercises its option under Section 3.1.1 with
------------
respect to a Zonagen Additional Indication or under Section 3.1.2 with
respect to the *** Formulation, unless the Parties
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
agree that Schering will assume such development responsibilities, Zonagen,
thereafter, shall use diligent efforts to conduct the clinical studies that
are necessary or useful to support Regulatory Approval of the Licensed
Product for such Zonagen Additional Indication or of the *** Formulation,
as appropriate. Except as otherwise provided in Section 3.1.3 hereof,
Zonagen shall be solely responsible for the costs, incurred in connection
with conducting such studies. Within thirty (30) days after the end of each
Calendar Quarter (whether or not Schering has exercised its option under
Sections 3.1.1 or 3.1.2 hereof), Zonagen shall provide Schering with a
written report which sets forth a summary of such research and development
activities conducted during such Calendar Quarter by or on behalf of
Zonagen. Upon Schering's request, which requests may be made from time to
time, Zonagen also shall provide Schering with copies with the following
information that relates to any the use of the Licensed Product or ***
Formulations of the Licensed Product in any of the Additional Indications:
(i) all data collected during such Calendar Quarter, (ii) any analyses
conducted during such Calendar Quarter, (iii) any study reports completed
during such Calendar Quarter, (iv) any clinical study protocols prepared
during such Calendar Quarter, and (v) any correspondence received from or
sent to the FDA during such Calendar Quarter. The foregoing reporting
obligations shall apply with respect to any given Zonagen Additional
Indication for only so long as Schering has an option to such Zonagen
Additional Indication pursuant to Section 3.1.1 or, if Schering has
exercised its option, for the remainder of the Term of this Agreement.
4.7 Notice. During the Term of this Agreement, each Party shall
------
notify the other Party upon its initiation of clinical studies with respect
to (i) any Additional Indication for the Licensed Product, (ii) any new
form or formulation of the Licensed Product, and (iii) any Combination
Product.
4.8 Joint Development Committee.
---------------------------
4.8.1 Establishment of Joint Development Committee. At
--------------------------------------------
Schering's option, a joint development committee ("JDC") will be
established to prepare and monitor the development program for
Additional Indications and for each Party to update the other on its
development of Additional Indications. Prior to the time Schering
exercises its option under Section 3.1 hereof with respect to
Additional Indications, the JDC shall have the right to monitor the
development program and shall serve only in an advisory capacity with
respect thereto. After the time Schering exercises its option under
Section 3.1 hereof with respect to Additional Indications, the JDC
shall have the additional authority to direct Zonagen's development of
the Licensed Product for such Additional Indications.
4.8.2 Composition of JDC. If Schering elects to establish the
------------------
JDC pursuant to Section 4.8.1 hereof, The JDC shall be composed of up
to three (3) representatives
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from each of Schering and Zonagen, and a quorum shall consist of at
least one (1) JDC representative from each Party. In any matter before
the JDC, each Party shall have one (1) vote, and no action shall be
taken except by the unanimous vote of the JDC. A Party's
representatives shall serve at the discretion of such Party and may be
substituted for or replaced at any time by such Party. The JDC shall
be chaired by a representative of Schering. The Chairperson shall be
responsible for calling meetings, preparing agendas and preparing and
issuing minutes of each meeting within thirty (30) days thereafter.
4.8.3 JDC Meetings. Once established, the JDC shall meet at
------------
least once each Calendar Quarter during the term of this Agreement,
until such time as the Parties agree to a more or less frequent
meeting schedule. The site of such meetings shall alternate between
the offices of Schering and Zonagen (or any other site mutually agreed
upon by the Parties) and each Party shall bear its own costs of
attending such meetings. All meetings of the JDC shall be summarized
in writing and sent to both Parties and countersigned by both Parties.
4.8.4 Deadlock. In the event that the JDC is unable to reach a
--------
decision by unanimous vote with respect to any matter and such
inability continues for a period of thirty (30) calendar days after
the date on which the matter is first voted on by the JDC, each Party
shall have the right to refer the matter to the most senior executive
managers responsible for the development of the Licensed Product,
i.e., the President of Zonagen and the President of Schering-Plough
Research Institute (for development and regulatory issues) or the
Executive Vice President, Schering-Plough Pharmaceuticals (for
commercial issues) for resolution. Such senior executive managers
shall have thirty (30) calendar days after the date on which the
matter is first submitted to them to resolve such dispute. If such
senior executive managers are unable to resolve such dispute within
such thirty (30) calendar day period, either Party may, by providing
written notice to the other Party within thirty (30) calendar days
after the end of such thirty (30) day period, request that the matter
be submitted to a special arbitration panel for resolution, in
accordance with the procedures set forth in Schedule 14.2, Part 1.
ARTICLE V
MANUFACTURE AND SUPPLY
5.1 Supply of Schering's Requirements.
---------------------------------
5.1.1 Manufacture and Supply by Zonagen. From the Effective Date
---------------------------------
until the fifth anniversary of Schering's First Commercial Sale of
Licensed Product in the Territory and in accordance with the
provisions of a manufacturing and supply agreement entered into by the
Parties pursuant to Section 5.1.2 hereof, Zonagen shall either
Manufacture the Licensed Compound at Zonagen's own premises or
subcontract the Manufacture of the Licensed Compound to one or more
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
subcontractors which shall have sufficient knowledge and expertise to
carry out the Manufacture of the Licensed Compound and sufficient
capacity to meet Schering's and Schering's Affiliates', distributors'
and sublicensees' requirements for Licensed Compound. From the
Effective Date until the *** anniversary of Schering's First
Commercial Sale of Licensed Product in the Territory and in accordance
with the provisions of a manufacturing and supply agreement entered
into by the Parties pursuant to Section 5.1.2 hereof, Zonagen shall
either Manufacture the Licensed Product at Zonagen's own premises or
subcontract the Manufacture of the Licensed Product to one or more
subcontractors which shall have sufficient knowledge and expertise to
carry out the Manufacture of the Licensed Product and sufficient
capacity to meet Schering's and Schering's Affiliates', distributors'
and sublicensees' requirements for Licensed Product. During such time
periods, Zonagen shall cause to be Manufactured and supply to
Schering, and Schering shall purchase exclusively from Zonagen,
Schering's Requirements of Licensed Compound and/or Licensed Product,
as appropriate, for the Territory, provided, however, that Zonagen's
-------- -------
obligation to supply and Schering's obligation to purchase Licensed
Compound and Licensed Product in accordance with this Section 5.1 are
subject to Schering's option to Manufacture and supply Licensed
Compounds and/or Licensed Products pursuant to Section 5.10 hereof.
For the purposes of this Agreement, the term "Requirements" shall
mean, except where specifically provided otherwise herein, all
quantities of the Licensed Compounds and Licensed Products that are
required by Schering and its Affiliates, distributors and sublicensees
for distribution, marketing (including sampling), clinical trial
materials and sale of the Licensed Product during the Term hereof.
5.1.2 Manufacturing and Supply Agreement. Promptly after the
----------------------------------
execution of this Agreement, the Parties shall meet to coordinate all
aspects of material logistics relating to the supply of the Licensed
Product hereunder. In a timely manner, but no later than within ninety
(90) days of the Effective Date, the Parties shall agree to the terms
of a Manufacture and Supply Agreement (which shall be consistent with
Zonagen's obligations under the ***), based on determinations and
understandings reached by the Parties that shall include, but not be
limited to, logistical procedures relating to the delivery, quality
control, quality assurance, recall procedures, release and
manufacturing regulatory compliance matters associated with the supply
of Licensed Product, and define the responsibilities and obligations
of Zonagen and Schering with respect thereto. The terms of the
Manufacture and Supply Agreement shall not include any additional
payment terms between the Parties and no material term of the
Manufacture and Supply Agreement shall be in conflict with this
Agreement. The Parties shall resolve all logistical issues relating to
the manufacture or supply of Licensed Product during the term of this
Agreement consistent with the terms and conditions of the Manufacture
and Supply Agreement.
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
5.1.3 Third Party Obligations. Schering acknowledges that, prior
-----------------------
to the Effective Date, Zonagen has entered into the *** relating to
the manufacture and supply of a Licensed Compound, in bulk form, for
Zonagen. Zonagen agrees that it will not extend the term of or renew
the *** and will not enter into agreements with any third party with
respect to the manufacture of the Licensed Compound and/or the
Licensed Product without Schering's prior written consent. Zonagen
further agrees that it will take all necessary action to cause the ***
to expire or terminate, with respect to the Licensed Compound for use
in the Field, at the end of the initial five (5) year term stated in
the ***, or, upon Schering's request, earlier, provided that such
earlier termination is permitted by the *** and results in no
financial penalty to Zonagen.
5.2 Purchase Price. If Schering purchases Licensed Compound or
--------------
Licensed Product from Zonagen pursuant to a Manufacture and Supply
Agreement entered into in accordance with Section 5.1.2 hereof, Schering
shall pay to Zonagen, the actual cost of goods paid by Zonagen to third
parties manufacturing the Licensed Product for Zonagen plus *** of such
actual cost of goods, provided, however, that Schering's purchase price for
-------- -------
Licensed Product hereunder will be based only on the first *** per tablet
of such actual cost of goods so paid by Zonagen and Schering's purchase
price for License Compound hereunder will be based only on the first ***
per kilogram of such actual cost of goods so paid by Zonagen. After the
First Commercial Sale of the Licensed Product in the Territory the
foregoing caps on Schering's purchase price hereunder shall be adjusted on
an annual basis each January 1st by the annual percentage charge in the
Producer's Price Index for Pharmaceutical Products reported in the month of
June of the year immediately preceding the year in which the adjustment is
to be effective.
5.3 Clinical Trial Materials and Samples. Notwithstanding anything to
------------------------------------
the contrary in Section 5.2 hereof, Licensed Product for clinical trials
and for distribution of samples to physicians shall be provided to Schering
by Zonagen free of charge, provided, however, that in any Calendar Year,
-------- -------
the amount of Licensed Product that Schering, under this Agreement, and
Schering-Plough Ltd., under the Ex-U.S. License Agreement, collectively may
receive free of charge from Zonagen for the purpose of distributing samples
of the Licensed Product shall not exceed the following amounts:
***
Notwithstanding the foregoing, the maximum number of tablets Zonagen
shall be required to provide collectively to Schering hereunder and to
Schering-Plough Ltd. under the Ex-U.S. License Agreement during any such
year for purpose of distributing Samples shall not exceed ***. For amounts
of Licensed Product in excess of such maximum amounts purchased by Schering
from Zonagen in any Calendar Year for distribution of samples, the
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
purchase price to be paid by Schering shall be the actual cost of goods
paid by Zonagen to third parties manufacturing the Licensed Product for
Zonagen.
5.4.1 Forecasts. The Parties will work together to establish
---------
mechanisms to ensure efficient, fair, equitable and cost effective
supply logistics and materials management. Within thirty (30) days
after the Effective Date, Schering shall provide Zonagen with a non-
binding preliminary forecast of Schering's estimated requirements of
the Licensed Product during the eighteen (18) month period following
the Effective Date. As soon as practicable, but not later than thirty
(30) days after the NDA is filed with the FDA, Schering shall provide
Zonagen with a written forecast (by Calendar Quarter) of the quantity
of Licensed Product that Schering desires to have delivered to it
during the following four (4) consecutive Calendar Quarters. The
forecast for the first two (2) of such four Calendar Quarters shall
represent a binding commitment of Schering to purchase and Zonagen to
supply such forecasted amount of Licensed Product. Thereafter, at
least fifteen (15) days before the end of each subsequent Calendar
Quarter, Schering shall provide a written, updated forecast (by
Calendar Quarter) of the quantity of Licensed Product that Schering
desires to have delivered to it during the following four (4)
consecutive Calendar Quarters. Zonagen acknowledges that such
forecasts are only estimates of Schering's purchase Requirements of
the Licensed Product and that Schering shall not be bound by any such
estimate, except that the first two (2) Calendar Quarters of each
successive forecast so provided shall likewise represent a binding
commitment of Schering to purchase and of Zonagen to supply such
forecasted quantity of Licensed Product in a timely manner, subject to
adjustment within the limits set forth in Section 5.4.2 hereof. The
Parties understand that the making of such forecasts (and purchase
orders pursuant to Section 5.4.2. hereof) must be consistent with
Zonagen's obligations under the ***.
5.4.2 Purchase Orders. Schering shall issue to Zonagen firm
---------------
purchase orders for each delivery not later than three (3) months
prior to the requested delivery date. Zonagen shall not be obligated
to supply that quantity of Licensed Product in any Calendar Quarter
that is more than one hundred and twenty-five percent (125%) of the
last binding forecast provided by Schering for the Calendar Quarter in
question; provided, however, that Zonagen shall endeavor to take all
-------- -------
reasonable steps to fill binding orders for Licensed Product in excess
of such amount.
5.5 Delivery Terms. All Licensed Compound and/or Licensed Product
--------------
shall be delivered *** (Incoterms 1990) to a single site to be specified by
Schering. Zonagen shall pay *** to such specified site and Schering shall
pay ***. Title and risk of loss shall pass to Schering upon delivery by
Zonagen to Schering.
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
5.6 Scheduling of Delivery. Zonagen shall schedule the timely
----------------------
manufacturing and shipment of the Licensed Product pursuant to Schering's
firm purchase orders. Should Zonagen, at any time during the course of this
Agreement, have reason to believe that it will be unable to meet Schering's
requested delivery dates, Zonagen will promptly notify Schering, in
writing, stating the reasons for the delay.
5.7 Inability to Supply. If at any time Zonagen is of the opinion
-------------------
that it may not be able to meet future binding orders from Schering for
Licensed Product (including, but not limited to a situation where as a
result of any intellectual property litigation Zonagen chooses not to
supply Licensed Product) it shall immediately notify Schering in writing,
and the Parties shall in good faith cooperate and endeavor to make
appropriate arrangements for a continuous and adequate supply of Licensed
Product from Zonagen to Schering. If Zonagen is unable to supply at least
eighty percent (80%) of the quantities of Licensed Product ordered by
Schering in any two (2) consecutive Calendar Quarters, based on Schering's
estimates of its future Requirements, Schering shall be relieved of its
obligation to purchase the Licensed Product from Zonagen and at any time
thereafter, Schering, consistent with Zonagen's obligations under the ***,
may exercise its right to manufacture the Licensed Compound or the Licensed
Product under Section 5.10 hereof. Zonagen, at its own expense, shall
provide Schering with all reasonable assistance to enable Schering or its
third party manufacturer to manufacture the Licensed Product permitted to
be manufactured by Schering hereunder.
5.8 Second Source of Supply. Within a reasonable time (which shall
-----------------------
not exceed *** plus any delay associated with approval of the site of
manufacture by the FDA) after Worldwide Annual Net Sales of the Licensed
Product attain a level of ***, or if a restriction is imposed upon (i)
manufacturing that would prevent Zonagen from meeting its supply
obligations hereunder or (b) exporting the Licensed Compound or Licensed
Product out of the country where it is manufactured, then, subject to the
terms and provisions of the ***, Zonagen shall, at its own cost and
expense, qualify a second source of supply of the Licensed Compound and
Licensed Product, which second source of supply shall be subject to
Schering's approval, which approval shall not unreasonably be withheld.
Schering, at its sole option, may elect to be qualified as such second
source of supply.
5.9 Quality Control and Quality Assurance.
-------------------------------------
5.9.1 Adherence to Specifications. Zonagen warrants that all of
---------------------------
the Licensed Product supplied by Zonagen (whether Manufactured by
Zonagen or a third party) to Schering hereunder shall conform to the
specifications therefor as defined in the then-current Regulatory
Approval of each country of the Territory ("Specifications"), as such
Schedule may be amended from time to time by written agreement between
the Parties and shall be manufactured in accordance with the
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current procedures described in the applicable Regulatory Approval and
all current Good Manufacturing Practices ("cGMPs") and other
applicable federal, national, State and local laws and regulations in
effect at the time of manufacture. In the event that Schering requests
any changes in the packaging of the Licensed Product beyond what is
required by the FDA to obtain or maintain Regulatory Approval for the
Licensed Product, Schering shall be responsible for the reasonable
out-of-pocket costs incurred in making such changes, provided such
costs have been approved by Schering prior to the time they are
incurred.
5.9.2 Quality Control Program. Zonagen shall maintain a quality
-----------------------
control program consistent with current cGMPs, as required by the
Pharmaceutical Inspection Convention, all applicable laws and
regulations, and health authorities, including, without limitation,
the FDA, in the Territory, as applicable, and the country of
manufacture, and all subsequent additions and revisions thereto.
5.9.3 Testing and Release of Licensed Product. At Zonagen's
---------------------------------------
expense representative samples of each shipment of Licensed Product
shall be analyzed in accordance with the methods of analysis defined
in the then-current marketing authorization for the Territory. On
release by Zonagen, Zonagen shall notify Schering that the lot of
Licensed Product is available for shipment to Schering from Zonagen's
manufacturing facility and along with such shipment shall provide
Schering with Certificates of Analysis and Compliance for the Licensed
Product included in such shipment. Schering retains the right to
analyze any shipment of Licensed Product to confirm that it conforms
to the Specifications.
5.9.4 Nonconforming Product. If a shipment of Licensed Product
---------------------
does not conform to the Specifications, Zonagen shall replace such
shipment free of charge with a substitute shipment which meets such
Specifications according to the following timeframe: If the Licensed
Product is in inventory then conforming Licensed Product will be
shipped promptly. If the Licensed Product is not in inventory, Zonagen
will take all reasonable steps to ensure expeditious manufacture of
conforming Licensed Product which will be shipped promptly after
completion of Manufacture. At Zonagen's expense, the non-conforming
shipment shall be returned to Zonagen, or disposed of by Schering, at
Schering's option.
5.9.5 Inspections by Regulatory-Authorities. Each Party agrees
-------------------------------------
to notify the other within two (2) business days of its receipt of
notification of any inquiries, notifications, or inspection activity
by any Regulatory Authority, governmental agency or authority in
regard to the Licensed Product or the manufacturing facilities
therefor. Zonagen shall provide a reasonable description to Schering
of any such governmental inquiries, notifications or inspections
promptly (but in no event later than five (5) calendar days) after
notification of completion of such visit or inquiry. Zonagen shall
furnish to Schering, (i) within two (2) business days after receipt,
any report or correspondence issued by the Regulatory Authority or
governmental authority in connection with such visit or inquiry,
including but not limited to, any
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
FDA form 483, Establishment Inspection Reports or warning letters and
(ii) at the same time it provides to any Regulatory Authority or
governmental authority, copies of any and all documents, responses or
explanations relating to items set forth above, in each case purged
only of trade secrets of Zonagen or its third party manufacturers that
are unrelated to the obligations under this Agreement or are unrelated
to the Licensed Product. In the event such governmental agency or
authority requests or requires any action to be taken to address any
citations, Zonagen agrees, after consultation with Schering, to take
such action as necessary to address such citations, and agrees to
cooperate with Schering with respect to any such citation and/or
action taken with respect thereto.
5.9.6 Inspections by Schering. Zonagen shall endeavor to obtain
-----------------------
the right for Schering to visit, during normal business hours and with
reasonable advance notice (a minimum of thirty (30) business days)
Zonagen's manufacturing facility (including Applied Analytical
Industries, Inc., Synkem, Ultraseal Corporation or their successors),
under customary confidentiality conditions, for the purpose of
observing the manufacturing, packaging, testing, and warehousing of
the Licensed Product and to inspect for compliance with cGMPs and
other applicable regulatory requirements.
5.10 Schering's Right to Manufacture.
-------------------------------
5.10.1 Option. Subject to Zonagen's obligations under the ***,
------
Schering shall have the right to begin Manufacturing the Licensed
Compound and/or the Licensed Product, itself or through a third party
selected by it, at any time during the Term of this Agreement after
Schering has provided Zonagen with six (6) months prior notice of its
intent to assume such Manufacturing responsibilities. When Schering
advises Zonagen that it is able to Manufacture all of its Requirements
of the Licensed Compound and the Licensed Product, Zonagen shall be
relieved of its Manufacturing and supply obligations under this
Article V. Upon Schering's request, Zonagen shall provide Schering
with all reasonable assistance to enable Schering or its third party
manufacturer to manufacture the Licensed Compound and/or the Licensed
Product. Schering shall reimburse Zonagen for the documented
reasonable out-of-pocket costs incurred by Zonagen in providing such
assistance, provided Schering has approved of such costs prior to the
time they are incurred. Upon assuming such Manufacturing
responsibilities, Schering shall Manufacture the Licensed Product in
accordance with the Specifications, cGMPs and all applicable
regulatory requirements and shall maintain a quality assurance program
with respect thereto.
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
5.10.2 Continued Manufacture by Zonagen. Notwithstanding Section
--------------------------------
5.10.1 hereof, if, prior to Schering's exercise of its right to begin
Manufacturing the Licensed Compound and/or the Licensed Product
pursuant to Section 5.10.1, Zonagen has established a second source of
supply of Licensed Compound and Licensed Product pursuant to Section
5.8 hereof, Zonagen shall have the right to continue to supply up to
*** of Schering's requirements to the Licensed Compound and the
Licensed Product until Zonagen, in accordance with generally accepted
accounting procedures, has fully amortized the out-of-pocket cost it
incurred in establishing such second source of supply, including any
early cancellation penalties to be paid by Zonagen to a third party
second source of supply, provided, however, that in no event shall
-------- -------
Schering, after it has exercised its right to manufacture, be
obligated to purchase the Licensed Compound or the Licensed Product
from Zonagen at a price that exceeds Schering's *** for manufacturing
such Licensed Compound or Licensed Product. Alternatively, Schering
may elect to reimburse Zonagen for the out-of-pocket cost incurred by
Zonagen in establishing such second source of supply, including any
early cancellation penalties to be paid by Zonagen to a third party
second source of supply (to the extent such out-of-pocket cost has not
otherwise been amortized in accordance with the preceding sentence),
and upon the provision of such reimbursement, Zonagen's right to
manufacture the Licensed Compound and the Licensed Product shall
immediately cease.
5.10.3 Termination of Manufacturing and Supply Agreement. Upon
-------------------------------------------------
the termination, pursuant to this Section 5.10 of Zonagen's right to
manufacture the Licensed Compound and the Licensed Product, the
Manufacturing and Supply Agreement entered into by Zonagen and
Schering shall automatically be terminated.
ARTICLE VI
MARKETING AND COMMERCIALIZATION
6.1 Commercialization. Except as set forth in Section 3.3, Schering
-----------------
shall be solely responsible for the promotion, marketing, distribution and
sale of Licensed Product in the Field hereunder. After Zonagen has received
Regulatory Approval of the Licensed Product in the Territory, Schering
shall use diligent efforts to promote, market and sell the Licensed Product
in the Territory. For the purposes of this Section 6. 1, "diligent efforts"
shall mean those efforts which are similar to the efforts used by Schering
in the marketing and sale of other products that have similar commercial
value, status and potential to the Licensed Product. The Parties
acknowledge and agree that, subject to the terms of this Agreement, all
business decisions including, without limitation, decisions relating to
Schering's manufacture, sale, commercialization, design, price,
distribution, marketing and promotion of Licensed Products covered under
this Agreement, shall be within the sole
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
discretion of Schering. Notwithstanding the foregoing, nothing in this
Agreement shall serve to prohibit Schering or its Affiliates from
developing, registering, making, using or selling any product for use in
the Field, whether or not such product directly or indirectly competes with
the Licensed Product, ***
6.2 Opportunity to Cure. If, in Zonagen's reasonable opinion,
-------------------
Schering fails to comply with any of its diligence obligations under
Section 6.1, then Zonagen shall have the right to give Schering written
notice thereof stating in reasonable detail the particular failure(s).
Schering shall have a period of *** from the receipt of such notice to
correct the failure or, in the event that the failure cannot be reasonably
cured within a *** period, then Schering shall initiate actions reasonably
expected to cure the failure within *** of receiving notice and shall
thereafter diligently pursue such actions to cure the failure (even if
requiring longer than the *** specified in Section 13.3.1(i)). In the event
of a dispute as to whether or not Schering has failed to exercise due
diligence under Section 6.1 or whether Schering is diligently pursuing
actions reasonably expected to cure such failure under this Section 6.2,
such dispute shall be resolved through the procedures set forth in Section
14.2 hereof. If, a determination is made, in accordance with such dispute
resolution procedures (taking into account the facts relevant to the
efforts Schering is using with respect to the Licensed Product, including,
without limitation, the competitive environment for the Licensed Product,
the product life cycle of the Licensed Product, and the adverse event
profile of the Licensed Product), that Schering has failed to meet its
diligence obligations under Section 6.1 and has failed to cure such failure
in accordance with this Section 6.2, Zonagen, as its sole remedy,
thereafter shall have the right to comarket, either itself or through a
third party, a second brand (i.e., using a trademark other than a trademark
used by Schering, its Affiliates or sublicensees for the Licensed Product)
of the Licensed Product in the Territory. In the event Zonagen obtains the
right to comarket a second brand of the Licensed Product hereunder,
Schering shall grant to Zonagen the right to cross-reference the NDA with
respect to the Licensed Product.
6.3 Marketing Review. Schering and Zonagen shall periodically meet,
----------------
at such times and places as are mutually agreed upon by the Parties, for
Schering to update Zonagen with respect to marketing strategy, programs and
progress for the Licensed Products, provided, however, that such meetings
-------- -------
shall occur once per Calendar Year unless the Parties agree to meet more or
less often. Schering and Zonagen shall each be responsible for its own
expenses incurred in connection with attending such meetings.
ARTICLE VII
PAYMENTS, ROYALTIES AND REPORTS
7.1 Milestone Payments. In partial consideration for the licenses and
------------------
other rights granted to Schering hereunder, Schering shall pay Zonagen
milestone payments as follows,
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
each such payment being due within ten (10) business days after the
occurrence of the event triggering such payment hereunder:
(a) Five Million Dollars ($5,000,000.00) upon the Effective
Date;
(b) *** after the occurrence of both (i) the completion by
Zonagen of the *** study of the Licensed Product and the submission of
a report to Schering for such study, which reports is in a form
reasonably acceptable to Schering and *** and (ii) the submission to
and acceptance by the United States Food and Drug Administration of a
New Drug Application for the Licensed Product in the Field; provided,
--------
however, that such NDA is accepted for filing on or before ***; and
-------
(c) *** upon Schering's receipt of written documentation of
Regulatory Approval of the Licensed Product with *** in the United
States; provided, however, that if the first Regulatory Approval of
-------- -------
the Licensed Product in the United States is granted without ***, such
*** milestone payment will be reduced to *** if Schering elects not to
terminate this Agreement pursuant to either Section 13.2(c) or Section
13.2(d) hereof; and
(d) If the first Regulatory Approval of the Licensed Product in
the United States is granted without *** and Schering has paid the ***
payment required under Section 7.1 (c) above, Schering will pay to
Zonagen an additional *** if and when Schering's Net Sales of the
Licensed Product in the United States during any four (4) consecutive
Calendar Quarters exceeds *** in the aggregate provided that such
level of Net Sales is attained within the first *** after First
Commercial Sale.
Each such milestone payment shall be payable one (1) time only regardless
of the number of times the event triggering the payment of such milestone
occurs. If, with respect to any milestone payment, the triggering event
does not occur prior to the termination or expiration of this agreement or
another specified in connection with such milestone payment, Schering shall
have no obligation to pay such milestone payment to Zonagen.
7.2 R&D Funding. In addition to the milestone payments due under
-----------
Section 7.1 hereof, Schering agrees to reimburse Zonagen for the reasonable
actual out-of-pocket expenses (which have not otherwise been reimbursed by
Schering-Plough Ltd. pursuant to the Ex-U.S. License Agreement) Zonagen has
incurred or incurs in conducting the ongoing open-label study of the
Licensed Product, which open-label study is identified by Zonagen as Study
ZON303. Notwithstanding the foregoing, Schering's total obligation to
reimburse Zonagen in accordance with this Section 7.2 shall not exceed ***.
Schering's reimbursement of such expenses pursuant to this Section 7.2 will
be made in installments, pursuant to invoices submitted by Zonagen to
Schering, which invoices shall include documentation
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
(including, without limitation, invoices Zonagen has received from third
parties) that supports the amount of expenses for which Schering is being
invoiced. Zonagen shall submit to Schering an invoice for the first such
installment upon the filing with the FDA of an NDA supporting U.S.
Regulatory Approval of the Licensed Product, which installment, subject to
the limitations set forth in this Section 7.2, shall be in the amount of
such actual out-of-pocket expenses incurred by Zonagen prior to such time.
Thereafter, Zonagen shall submit to Schering invoices and supporting
documentation within thirty (30) days after the end of each Calendar
Quarter, which invoices, subject to the limitations set forth in this
Section 7.2, shall be for the reasonable actual out-of-pocket expenses
incurred by Zonagen during such Calendar Quarter. Each such invoice shall
be payable within sixty (60) days after Schering's receipt of the invoice.
7.3 Royalties.
---------
7.3.1 Royalty Rates. (a) In further consideration for the
-------------
licenses and other rights granted to Schering hereunder, subject to
the terms and conditions of this Agreement and for so long as the
Licensed Product is covered by a Valid Claim that provides market
exclusivity for the Licensed Product in the Field in the Territory at
the time of sale by Schering, Schering shall pay to Zonagen royalties
as follows:
(i) *** of that portion of Schering's Net Sales of
Licensed Product in the Territory which, during a Calendar
Year are less than or equal to ***,
(ii) *** of that portion of Schering's Net Sales of
Licensed Product in the Territory which, during a Calendar
Year are greater than *** and less than or equal to ***,
and
(iii) *** of that portion of Schering's Net Sales of
Licensed Product in the Territory which, during a Calendar
Year are greater than ***,
(b) With respect to the sale of any Licensed Products for
use in Schering Additional Indications where such Licensed
Products are distinguishable from the Licensed Product
developed by Zonagen and sold by Schering in the Male Sexual
Function Indication (e.g., new formulations or dosages of the
Licensed Products which are not substitutable for the Licensed
Product developed by Zonagen and sold by Schering for the Male
Sexual Function Indication), the royalty rates provided for in
Section 7.3.1 (a) above shall each be reduced by ***. If a
Licensed Product sold for use in the Schering Additional
Indications is not distinguishable (as described
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
above) from the Licensed Product sold by Schering for use in
the Male Sexual Function Indication, then with respect to
Schering's sales of such Licensed Product, the royalty rates
set forth in Section 7.3.1(a) above shall not be reduced,
provided, however, that Zonagen reimburses Schering for up to
-------- -------
*** of the costs and expenses incurred by Schering in
developing such Schering Additional Indication which
reimbursement will be paid in the form of a credit against
future royalties payable by Schering hereunder, provided,
--------
however, that the credit will be applied against only *** of
-------
the royalties due during each Calendar Quarter until the credit
is fully exhausted.
(c) With respect to the sale of any Licensed Products
which, at the time of sale by Schering, its Affiliates or
sublicensees, are not covered by a Valid Claim that provides
market exclusivity for such Licensed Product in the Field in
the Territory, the royalty rates under Sections 7.3.1(a) and
7.3.1(b) hereof shall be reduced to *** of the royalty rate set
forth in Sections 7.3.1 (a) and 7.3.1 (b) hereof, as applicable
and, unless the royalty rates are further reduced as provided
in this Agreement, royalties shall be payable at such rates for
sales of Licensed Product made prior to the *** anniversary of
the First Commercial Sale of a Licensed Product in the
Territory.
(d) With respect to the sale of any Licensed Products
which, at the time of sale by Schering, its Affiliates or
sublicensees, are not covered by a Valid Claim that provides
market exclusivity for such Licensed Product in the Field in
the Territory, notwithstanding the royalty rate reductions set
forth in Section 7.3.1(c) above, the royalty rates under
Sections 7.3.1 (a) and 7.3.1 (b) hereof shall be further
reduced to *** of the royalty rates set forth under Sections
7.3.1(a) and 7.3.1(b) hereof, as applicable, if during any
Calendar Quarter, unit sales, in the Territory, of orally
administered pharmaceutical products containing a Licensed
Compound as an active ingredient, the making, using or selling
of which would infringe a Valid Claim of the Patent Rights, if
such Valid Claim were then in force and effect, (other than
sales by Schering, its Affiliates or sublicensees of the
Licensed Product), amount to more than *** of the total unit
sales (including both those of Schering and of all other
parties) of orally administered pharmaceutical products
containing a Licensed Compound as an active ingredient, made in
the Territory during such Calendar Quarter. Unless further
reduced pursuant to the provisions of this Agreement, royalties
shall be payable at such rates until the *** anniversary of the
First Commercial Sale of a Licensed Product in the Territory.
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
(e) With respect to the sale of any Licensed Products
which, at the time of sale by Schering, its Affiliates or
sublicensees, are not covered by a Valid Claim that provides
market exclusivity for such Licensed Product in the Field in
the Territory, notwithstanding the royalty rate reductions set
forth in Section 7.3.1 (c) and 7.3.1 (d) above, no royalty
shall thereafter be payable with respect to the sale of any
such Licensed Product if during any Calendar Quarter, unit
sales, in the Territory, of orally administered pharmaceutical
products containing a Licensed Compound as an active
ingredient, the making, using or selling of which would
infringe a Valid Claim of the Patent Rights, if such Valid
Claim were then in force and effect, (other than sales by
Schering, its Affiliates or sublicensees of the Licensed
Product), amount to more than *** of the total unit sales
(including both those of Schering and of all other parties) of
orally administered pharmaceutical products containing a
Licensed Compound as an active ingredient, made in the
Territory during such Calendar Quarter.
(f) The Parties acknowledge and agree that nothing herein
shall be construed as representing an estimate or projection of
anticipated sales or the actual value of Licensed Compounds or
Licensed Products and the figures set forth in this Section
7.3.1 are merely intended to define Schering's royalty
obligations to Zonagen in the event such sales performance is
achieved.
7.3.2 Term and Scope of Royalty Obligations. Subject to Section
-------------------------------------
8.3.2 relating to discontinuance of royalty obligations and Section
13.1 relating to term of royalty obligations, royalties on each
Licensed Product at the rate set forth in Section 7.3.1(a) shall
continue until the expiration of the time set forth in Section 7.3.1.
No royalties shall be due upon the sale or other transfer among
Schering, its Affiliates or sublicensees, but in such cases the
royalty shall be due and calculated upon Schering's or its Affiliates'
or its sublicensees' Net Sales to the first independent third party.
No royalties shall accrue on the disposition of Licensed Product by
Schering, Affiliates or its sublicensees as samples (promotion or
otherwise) or as donations (for example, to non-profit institutions or
government agencies for a non-commercial purpose) or for clinical
studies. Such sales by Schering shall not be included in the
determination of Net Sales, during the period of time in which such
third party sales are occurring.
7.3.3 Third Party Licenses - Licensed Products. In the event
----------------------------------------
that patent licenses from third parties (hereinafter "Third Party
Patent Licenses"), are required by Schering, its Affiliates and
sublicensees in order to discover, develop, make, have made, import,
export, use, distribute, promote, market, offer for sale or sell
Licensed Product (other than Schering Combination Products) then the
royalty rates set forth
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
in Section 7.3.1 shall be adjusted such that the royalty rate for Net
Sales of Licensed Product which Schering is obligated to pay Zonagen
hereunder shall be reduced by *** for each *** in royalties which
Schering is obligated to pay third parties under Third Party Patent
Licenses provided, however, that the royalty payable by Schering
-------- -------
hereunder shall not be reduced, pursuant to this Section 7.3.3, to
less than *** of Schering's Net Sales of Licensed Product. By way of
example and for avoidance of doubt, if Schering is obligated to pay
Zonagen a *** royalty on certain Net Sales of Licensed Product, and is
also obligated to pay a *** royalty on the same Net Sales of the same
Licensed Product under a Third Party Patent License, then the royalty
rate under this Agreement would be reduced by *** to ***. The royalty
rate reductions provided for in this Section 7.3.3 are applicable
regardless of the royalty rate being paid under Section 7.3.1(a)
hereof. The use of the term Licensed Product in this Section 7.3.3
shall not include Schering Combination Products.
7.3.4 Third Party Licenses - Schering Combination Products.
----------------------------------------------------
Notwithstanding anything to the contrary in Section 7.3.3 hereof, in
the event that, because of the inclusion of the Licensed Compound or
Licensed Product or the use of Zonagen Know-How in Schering
Combination Products, Third Party Patent Licenses are required by
Schering, its Affiliates and/or sublicensees in order to discover,
develop, make, have made, import, export, use, distribute, promote,
market, offer for sale or sell such Schering Combination Products,
then the royalty rates set forth in Section 7.3.1 shall be adjusted
such that the royalty rate for Net Sales of such Schering Combination
Products which Schering is obligated to pay Zonagen hereunder shall be
reduced by *** for each *** in royalties which Schering is obligated
to pay third parties under such Third Party Patent Licenses, provided,
--------
however, that the royalty payable by Schering hereunder shall not be
-------
reduced, pursuant to this Section 7.3.4, to less than *** of
Schering's Net Sales of such Schering Combination Product. By way of
example and for avoidance of doubt, if Schering is obligated to pay
Zonagen a *** royalty on certain Net Sales of a Schering Combination
Product, and is also obligated to pay a *** royalty on the same Net
Sales of the same Schering Combination Product under a Third Party
Patent License because of the inclusion of the Licensed Compound or
Licensed Product or the use of Zonagen Know-How in such Schering
Combination Product, then the royalty rate under this Agreement would
be reduced by *** to ***.
7.3.5 Comarketing Rights. If Schering's obligation to pay
------------------
royalties to Zonagen hereunder permanently ceases in accordance with
the provisions of this Section 7.3, Zonagen thereafter shall have the
right to comarket a second brand of the Licensed Product (i.e., using
a trademark other than a trademark used by Schering, its Affiliates or
sublicensees for the Licensed Product) in the Territory.
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
7.4 Reports and Payment of Royalty.
------------------------------
7.4.1 Royalties Paid Quarterly. Within sixty (60) calendar days
------------------------
following the close of each Calendar Quarter, following the First
Commercial Sale of a Licensed Product, Schering shall furnish to
Zonagen a written report for the Calendar Quarter showing the Net
Sales of Licensed Product sold by Schering, its Affiliates and its
sublicensees in the Territory during such Calendar Quarter and the
royalties payable under this Agreement for such Calendar Quarter.
Simultaneously with the submission of the written report, Schering
shall pay to Zonagen, for the account of Schering or the applicable
Affiliate or sublicensee, as the case may be, a sum equal to the
aggregate royalty due for such Calendar Quarter calculated in
accordance with this Agreement (reconciled for any previous
overpayments, underpayments or credits).
7.4.2 Method of Payment. Payments to be made by Schering to
-----------------
Zonagen under this Agreement shall be paid at Schering's option,
either by bank wire transfer in immediately available funds to such
bank account as is designated in writing by Zonagen from time to time
or by check in immediately available funds. Royalty payments shall be
made in United States dollars.
7.5 Maintenance of Records; Audits.
------------------------------
7.5.1 Record Keeping by Schering. Schering and its Affiliates
shall keep complete and accurate records in sufficient detail to
enable the royalties payable hereunder to be determined. Upon forty-
five (45) days prior written notice from Zonagen, Schering shall
permit an independent certified public accounting firm of nationally
recognized standing selected by Zonagen and reasonably acceptable to
Schering, at Zonagen's expense, to have access during normal business
hours to examine pertinent books and records of Schering and/or its
Affiliates as may be reasonably necessary to verify the accuracy of
the royalty reports hereunder. The examination shall be limited to
pertinent books and records for any year ending not more than twenty-
four (24) months prior to the date of such request. An examination
under this Section 7.5.1 shall not occur more than once in any
Calendar Year. Schering may designate competitively sensitive
information which such auditor may not disclose to Zonagen, provided,
--------
however, that such designation shall not encompass the auditor's
-------
conclusions. The accounting firm shall disclose to Zonagen only
whether the royalty reports are correct or incorrect and the specific
details concerning any discrepancies. No other information shall be
provided to Zonagen. All such accounting firms shall sign a
confidentiality agreement (in form and substance reasonably acceptable
to Schering) as to any of Schering's or its Affiliate's confidential
information which they are provided, or to which they have access,
while conducting any audit pursuant to this Section 7.5.1.
7.5.2 Underpayments/Overpayments. If such accounting firm
correctly concludes that additional royalties were owed during such
period, Schering shall pay
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
the additional royalties within thirty (30) days of the date Zonagen
delivers to Schering such accounting firm's written report so
correctly concluding. If such underpayment exceeds *** of the royalty
correctly due Zonagen then the fees charged by such accounting firm
for the work associated with the underpayment audit shall be paid by
Schering. Any overpayments by Schering will be credited against future
royalty obligations. In the event that Schering disagrees with the
audit report and the chief financial officers of Schering and Zonagen
fail to resolve such disagreement, the dispute will be resolved
through the dispute resolution mechanism set forth in Section 14.2.
7.5.3 Record Keeping by Sublicensee. Schering shall include in
-----------------------------
each sublicense granted by it pursuant to this Agreement a provision
requiring the sublicensee to make reports to Schering, to keep and
maintain records of sales made pursuant to such sublicense and to
grant access to such records by Zonagen's independent accountant to
the same extent required of Schering under this Agreement. Upon the
expiration of twenty-four (24) months following the end of any year,
the calculation of royalties payable with respect to such year shall
be binding and conclusive upon Zonagen and Schering and its
sublicensees shall be released from any liability or accountability
with respect to royalties for such year.
7.5.4 Confidentiality. Zonagen shall treat all financial
---------------
information subject to review under this Section 7.5, or under any
sublicense agreement, in accordance with the confidentiality
provisions of this Agreement.
7.5.5 Record Keening by Zonagen. Zonagen and its Affiliates
-------------------------
shall keep complete and accurate records in sufficient detail to
enable the expenses which are to be reimbursed by Schering hereunder
and, during such time as Zonagen is Manufacturing the Licensed
Product, Zonagen's cost of goods hereunder to be determined. Upon
forty-five (45) days prior written notice from Schering, Zonagen shall
permit an independent certified public accounting firm of nationally
recognized standing selected by Schering and reasonably acceptable to
Zonagen, at Schering's expense, to have access during normal business
hours to examine pertinent books and records of Zonagen and/or its
Affiliates as may be reasonably necessary to verify the accuracy of
the invoices submitted by Zonagen to Schering hereunder. The
examination shall be limited to pertinent books and records for any
year ending not more than twenty-four (24) months prior to the date of
such request. An examination under this Section 7.5.5 shall not occur
more than once in any Calendar Year. Zonagen may designate
competitively sensitive information which such auditor may not
disclose to Schering, provided, however, that such designation shall
-------- -------
not encompass the auditor's conclusions. The accounting firm shall
disclose to Schering only whether the invoices are correct or
incorrect and the specific details concerning
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<PAGE>
any discrepancies. No other information shall be provided to Schering.
All such accounting firms shall sign a confidentiality agreement (in
form and substance reasonably acceptable to Zonagen) as to any of
Zonagen's or its Affiliate's confidential information which they are
provided, or to which they have access, while conducting any audit
pursuant to this Section 7.5.5.
7.6 Separate Payment Obligations. The Parties acknowledge that
----------------------------
Schering's payment obligations as set forth in Sections 7.1, 7.2 and 7.3 of
this Agreement are separate from and in addition to the payment obligations
of Schering-Plough Ltd. as set forth in the Ex-U.S. License Agreement.
ARTICLE VIII
PATENTS
8.1 Filing, Prosecution and Maintenance of Patents. Zonagen agrees to
----------------------------------------------
diligently file, prosecute and maintain in the Territory, upon appropriate
consultation with Schering, the Patent Rights owned in whole or in part by
Zonagen and licensed to Schering under this Agreement, including without
limitation, any patent applications or patents relating to any Improvement.
Zonagen shall give Schering an opportunity to review the text of the
applications before filing, shall consult with Schering with respect
thereto, and shall supply Schering with a copy of the applications as
filed, together with notice of its filing date and serial number. Zonagen
shall keep Schering advised of the status of the actual and prospective
patent filings (including, without limitation, the grant of any Patent
Rights), and upon the written request of Schering shall provide advance
copies of any substantive papers related to the filing, prosecution and
maintenance of such patent filings.
8.2 Option of Schering to Prosecute and Maintain Patents. Zonagen
----------------------------------------------------
shall give one hundred and eighty (180) day notice to Schering of any
desire to cease prosecution and/or maintenance of a particular Patent Right
and, in such case, shall permit Schering, at its sole discretion, to
continue prosecution or maintenance at its own expense. If Schering elects
to continue prosecution or maintenance, Zonagen shall execute such
documents and perform such acts, at Schering's expense, as may be
reasonably necessary to effect an assignment of such Patent Rights to
Schering. Any such assignment shall be completed in a timely manner to
allow Schering to continue such prosecution or maintenance. Any patents or
patent applications so assigned shall not be considered Patent Rights for
all purposes under this Agreement.
8.3 Enforcement of Zonagen Patent Rights.
------------------------------------
8.3.1 Notice and Discontinuance of Infringement. In the event
-----------------------------------------
that either Schering or Zonagen becomes aware of any infringement
within the Territory of any issued patent within the Patent Rights, it
will notify the other Party in writing to that effect. Any such notice
shall include evidence to support an allegation of infringement by
such third party. Zonagen shall use its best efforts to obtain a
discontinuance of such infringement or bring suit against the third
party infringer
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
within *** from the date of said notice. Zonagen shall bear all the
expenses of any suit brought by it. Schering shall have the right,
prior to commencement of the trial, suit or action brought by Zonagen,
to join any such suit or action, and in such event shall pay one-half
of the costs of such suit or action. In no event shall Zonagen enter
into any settlement, consent judgment or other voluntary final
disposition of such suit which would adversely affect Schering's
rights under this Agreement in any way without first obtaining
Schering's written consent to do so, which consent may be provided or
withheld in Schering's sole discretion. Additionally, in the event
that Schering has joined in the action and shared in the costs thereof
as set forth above, no settlement, consent judgment or other voluntary
final disposition of the suit may be entered into without the consent
of Schering. In the event that Schering has not joined the suit or
action, Schering will reasonably cooperate with Zonagen in any such
suit or action and shall have the right to consult with Zonagen and be
represented by its own counsel at its own expense, provided that
--------
Zonagen shall periodically reimburse Schering for its out-of-pocket
costs (excluding the costs of retaining its own outside counsel)
incurred in cooperating with Zonagen. Any recovery or damages derived
from a suit which Schering has joined and shared costs shall be used
first to reimburse each of Zonagen and Schering for its documented
out-of-pocket legal expenses relating to the suit, with any remaining
amounts to be shared equally by the Parties. Any recovery or damages
derived from a suit which Schering has not joined shall be retained by
Zonagen.
8.3.2 Continuance of Infringement. If, after the expiration of
---------------------------
the *** period specified in Section 8.3.1, Zonagen has not overcome
the allegation of infringement, obtained a discontinuance of such
infringement or filed suit against such third party infringer, then,
notwithstanding the limitations on royalty rate reduction set forth in
Sections 7.3.3 and 7.3.4, the royalty rates to be paid by Schering on
its Net Sales of Licensed Product in the Territory where such
infringement is occurring shall be reduced as set forth in Section
7.3.1(c) or 7.3.1 (d), as applicable, until said infringement ceases
and, thereafter, the royalty shall revert to the applicable full
royalty set forth in Section 7.3.1. In the event that said
infringement does not cease, the royalty reductions set forth above
shall remain in effect. In addition, Schering shall have the right,
but not the obligation, to bring suit against such infringer under the
Patent Rights and join Zonagen as a party plaintiff, provided that
Schering shall bear all the expenses of such suit. Zonagen will
cooperate with Schering in any suit for infringement of a Patent Right
brought by Schering against a third party, and shall have the right to
consult with Schering and to participate in and be represented by
independent counsel in such litigation at its own expense. Schering
shall periodically reimburse Zonagen for its out-of-pocket costs
(excluding Zonagen's costs of retaining independent counsel) incurred
in cooperating with Schering. Schering shall incur no liability to
Zonagen as a consequence of such litigation or any unfavorable
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<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
decision resulting therefrom, including any decision holding any of
the Patent Rights invalid or unenforceable. In the event that Schering
recovers any sums in such litigation by way of damages or in
settlement thereof, Schering shall retain all such sums.
8.4 Infringement of Third Party Patents; Third Party Licenses.
---------------------------------------------------------
8.4.1 Course of Action. In the event that Schering's, its
----------------
Affiliates' or its sublicensees' making, having made, importing,
exporting, using, distributing, marketing, promoting, offering for
sale or selling Licensed Compounds and/or Licensed Products infringes,
will infringe or is alleged by a third party to infringe a third
party's patent, the Party becoming aware of same shall promptly notify
the other.
8.4.2 Schering Option to Negotiate. Schering shall in the first
----------------------------
instance have the right to negotiate with said third party for a
suitable license or assignment provided, however, that Schering shall
-------- -------
enter into no such agreement unless it has first obtained Zonagen's
approval (which approval shall not be unreasonably withheld) of any
royalties or payments which are to be deducted from payments to be
made to Zonagen hereunder. In the event that such negotiation results
in a consummated agreement, then any lump sum payment made thereunder
shall be paid by Schering and shall offset any royalties due Zonagen
hereunder, but only to the extent of reducing royalties due Zonagen by
*** in any Calendar Quarter. Any unused amounts not so offset can be
carried over to subsequent quarters.
8.4.3 Zonagen Option to Negotiate. Should Schering fail to
---------------------------
consummate an agreement with said third party within *** of initiating
negotiations, then Zonagen shall have the right to negotiate with said
third party for a suitable license or assignment. In the event that
such negotiation results in a consummated agreement, then any lump sum
payments made thereafter shall be paid by Zonagen. Should such
agreement require the payment of royalties, Schering shall continue to
pay the royalties due Zonagen hereunder and Zonagen shall pay any
royalties due said third party on Schering's behalf.
8.4.4 Third Party Infringement Suit. In the event that a third
-----------------------------
party sues Schering alleging that Schering's, its Affiliates' or its
sublicensees' making, having made, importing, exporting, using,
distributing, marketing, promoting, offering for sale or selling
Licensed Compounds and/or Licensed Products infringes or will infringe
said third party's patent, then Schering may, in its sole discretion,
elect to defend such suit and, during the period in which such suit is
pending, Schering shall have the right to apply up to *** of the
royalties due Zonagen on sales of the
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allegedly infringing Licensed Product against its litigation expenses,
including settlement costs and royalties paid in settlement of any
such suit. Upon Schering's request and in connection with Schering's
defense of any such third party infringement suit, Zonagen shall
provide reasonable assistance to Schering for such defense.
8.5 Certification Under Drug Price Competition and Patent Restoration
-----------------------------------------------------------------
Act. Zonagen and Schering each shall immediately give written notice to the
---
other of any certification of which they become aware filed pursuant to 21
U.S.C. (S)355(b)(2)(A) (or any amendment or successor statute thereto)
claiming that Patent Rights covering Licensed Compound and/or Licensed
Product(s) are invalid or that infringement will not arise from the
manufacture, use or sale of Compound(s) or Licensed Product(s) by a third
party. Notwithstanding any provision to the contrary, in the event that the
Patent Rights at issue are owned and/or controlled by Zonagen and Zonagen
has failed to bring an infringement action against such third party at
least fourteen (14) days prior to expiration of the forty five (45) day
period set forth in 21 U.S.C. (S)355(c)(3)(C) (or any amendment or
successor statute thereto), Schering shall have the right to bring such an
infringement action, in its sole discretion and at its own expense, in its
own name and/or in the name of Zonagen. At Schering's request, Zonagen
shall, at its own expense, provide Schering reasonable assistance to
conduct such infringement action, including, without limitation, causing
the execution of such legal documents as Schering may deem necessary for
the prosecution of such action. Schering shall periodically reimburse
Zonagen for its out-of pocket costs (excluding any of Zonagen's costs of
retaining independent counsel) incurred in assisting Schering. Schering
shall incur no liability to Zonagen as a consequence of such litigation or
any unfavorable decision resulting therefrom, including any decision
holding any of the Patent Rights invalid or unenforceable. In the event
that Schering recovers any sums in such litigation by way of damages or in
settlement thereof, Schering shall have the right to retain all such sums
to offset its costs, losses and expenses.
8.6 Abandonment. Subject to Schering's rights pursuant to Section
-----------
8.2, Zonagen shall at the earliest known date give notice to Schering of
the grant, lapse, revocation, surrender, invalidation of abandonment of any
Patent Rights licensed to Schering for which Zonagen is responsible for the
filing, prosecution and maintenance under this Agreement.
8.7 Patent Term Restoration. The Parties hereto shall cooperate with
-----------------------
each other in obtaining patent term restoration or its equivalent in the
Territory where applicable to Patent Rights. In the event that elections
with respect to obtaining such patent term restoration are to be made,
Schering shall have the right to make the election and Zonagen agrees to
abide by such election.
8.8 Notices Regarding Patents. All notices, inquiries and
-------------------------
communications in connection with this Article IV shall be sent in the
manner set forth in Section 13.7 to the Parties at the addresses and
facsimile numbers indicated below.
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<PAGE>
If to Zonagen: Zonagen, Inc.
2408 Timberloch Place, B-4
The Woodlands, Texas 77380
Attn.: Joseph S. Podolski, President and CEO
Fax No.: (281) 363-8796
If to Schering: Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attn.: Staff Vice President - Patents and Trademarks
Fax No.: (908) 298-5388
ARTICLE IX
CONFIDENTIALITY AND PUBLICATION
9.1 Confidentiality.
---------------
9.1.1 Nondisclosure Obligation. Each of Zonagen and Schering shall
------------------------
use only in accordance with this Agreement and shall not disclose to any
third party any Proprietary Information received by it from the other
Party, without the prior written consent of the other Party. The foregoing
obligations shall survive the expiration or termination of this Agreement
for a period of ***. These obligations shall not apply to Proprietary
Information that:
(i) is known by the receiving Party at the time of its
receipt, and not through a prior disclosure by the disclosing Party,
as documented by business records;
(ii) is at the time of disclosure or thereafter becomes
published or otherwise part of the public domain without breach of
this Agreement by the receiving Party;
(iii) is subsequently disclosed to the receiving Party by a
third party who has the right to make such disclosure;
(iv) is developed by the receiving Party independently of
Proprietary Information or other information received from the
disclosing Party and such independent development can be documented by
the receiving Party;
(v) is disclosed to any institutional review board of any
entity conducting clinical trials or any governmental or other
regulatory agencies in order to obtain patents or to gain approval to
conduct clinical trials or to market Licensed Compound and/or Licensed
Product, but such disclosure may be made only to the extent reasonably
necessary to obtain such patents
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
or authorizations; and, in which case reasonable effort shall be taken
to maintain the confidentiality of such Proprietary Information, or
(vi) is required by law, regulation, rule, act or order of
any governmental authority or agency to be disclosed by a Party,
provided that notice is promptly delivered to the other Party in order
--------
to provide an opportunity to seek a protective order or other similar
order with respect to such Proprietary Information and thereafter the
disclosing Party discloses to the requesting entity only the minimum
Proprietary Information required to be disclosed in order to comply
with the request, whether or not a protective order or other similar
order is obtained by the other Party.
9.1.2 Disclosure to Agents. Notwithstanding the provisions of
--------------------
Section 9.1.1 and subject to the other terms of this Agreement each Party
shall have the right to disclose Proprietary Information received or
obtained from the other Party to its sublicensees, agents, consultants,
Affiliates or other third parties (collectively "Representatives") in
accordance with this Section 9.1.2. Such disclosure shall be limited only
to those Representatives directly involved in the research, development,
manufacturing, marketing or promotion of Licensed Compound or Licensed
Product (or for such Representatives to determine their interest in
performing such activities) in accordance with this Agreement. Any such
Representatives must agree in writing to be bound by confidentiality and
non-use obligations essentially the same as those contained in this
Agreement. The term of confidentiality and non-use obligations for such
Representatives shall be no less than ***.
9.1.3 Disclosure to a Third Parties. Notwithstanding anything
-----------------------------
herein to the contrary, Zonagen shall not disclose, provide or transfer any
Zonagen Know-How to any third party (other than to the subcontractors
Zonagen has engaged to Manufacture Licensed Product for supply to Schering
hereunder or contract research organizations engaged by Zonagen for the
purpose of meeting its research, development and regulatory filing
obligations hereunder, provided, however, that such disclosure shall be
-------- -------
made only pursuant to a written confidential disclosure agreement which is,
in form and substance, acceptable to Schering) without the prior written
approval of Schering. Zonagen shall be permitted to disclose to third
parties Zonagen Know-How that relates solely to (x) injectable formulations
of the Licensed Product or (y) Zonagen Combination Products for which
Schering has not acquired rights under Section 3.2 hereof and Schering's
right of first negotiation under Section 3.2 has expired.
9.2 Return of Proprietary Information. At any time upon request of the
---------------------------------
disclosing Party after termination of this Agreement pursuant to Sections 13.2
or 13.3 hereof, the
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
receiving Party shall return all documents, and copies thereof, (including those
in the possession of Schering's Representatives pursuant to Section 9.1.2),
containing the disclosing Party's Proprietary Information. However, the
receiving Party may retain one (1) copy of such documents in a secure location
solely for the purpose of determining its obligations hereunder, to comply with
any applicable regulatory requirements, or to defend against any product
liability claims.
9.3 No Publicity. A Party may not use the name of the other Party in any
------------
publicity or advertising and, except as provided in Section 9.1, may not issue a
press release or otherwise publicize or disclose any information related to the
existence of this Agreement or the terms or conditions hereof, without the prior
written consent of the other Party. The Parties shall agree on a form and
timing of the initial press release that may be used by either Party to describe
this Agreement. Nothing in the foregoing, however, shall prohibit a Party from
making such disclosures to the extent deemed necessary under applicable federal
or state securities laws or any rule or regulation of any nationally recognized
securities exchange. In such event, however, the disclosing Party shall use
good faith efforts to consult with the other Party prior to such disclosure and,
where applicable, shall request confidential treatment to the extent available.
Schering acknowledges that Zonagen will be required to file this Agreement with
the United States Securities and Exchange Commission. Zonagen will seek
confidential treatment of such filing to the extent it is reasonably able to do
so and shall, prior to making any such filing, give Schering the opportunity to
review and propose modifications to Zonagen's proposed redactions. Zonagen
shall not unreasonably refuse to comply with any of Schering's proposed
modifications.
9.4 Publication. Schering and Zonagen each acknowledge the potential
-----------
benefit in publishing results of certain studies to obtain recognition within
the scientific community and to advance the state of scientific knowledge. Each
Party also recognizes the mutual interest in obtaining valid patent protection
and in protecting business interests and trade secret information. No
publication of Zonagen Know-How or Patent Rights may be made without the prior
written consent of Zonagen. The Parties agree that Zonagen shall not publish
any information regarding the use of the Licensed Products in the Field or in
any Zonagen Additional Indication without Schering's prior written consent and
that Schering, its Affiliates, employees or consultants shall be free to make
any publication which does not disclose Zonagen Know-How or Patent Rights. In
the event that any proposed publication (as defined below) discloses Zonagen
Know-How or Patent Rights, the following procedure shall apply: Either Party,
its Affiliates, employees or consultants wishing to make a publication shall
deliver to the other Party a copy of the proposed written publication or an
outline of an oral disclosure at least *** prior to submission for publication
or presentation. For purposes of this Agreement, the term "publication" shall
include, without limitation, abstracts and manuscripts for publication, slides
and texts of oral or other public presentations, and texts of any transmission
through any electronic media, e.g. any computer
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<PAGE>
access system such as the Internet, World Wide Web. The reviewing Party shall
have the right (i) to propose modifications to the publication for patent
reasons, trade secret reasons or business reasons or (ii) to request delay of
the publication or presentation in order to protect patentable information. If
the reviewing Party requests a delay, the publishing Party shall delay
submission or presentation for a period not less than eighteen (18) months from
the filing date of the first patent application covering the information
contained in the proposed publication or presentation. If the reviewing Party
requests modifications to the publication, the publishing Party may edit such
publication to prevent disclosure or trade secret or proprietary business
information prior to submission of the publication or presentation. In the
event, however, that the publication contains Zonagen Know-How or Patent Rights,
any such publication must be approved, in writing, by Zonagen.
ARTICLE X
REPRESENTATIONS AND WARRANTIES
10.1 Representations and Warranties of Each Party. Each of Zonagen and
--------------------------------------------
Schering hereby represents, warrants and covenants to the other Party hereto as
follows:
(a) it is a corporation or entity duly organized and validly existing
under the laws of the state or other jurisdiction of incorporation or
formation;
(b) the execution, delivery and performance of this Agreement by such
Party has been duly authorized by all requisite corporate action;
(c) it has the power and authority to execute and deliver this
Agreement and to perform its obligations hereunder;
(d) the execution, delivery and performance by such Party of this
Agreement and its compliance with the terms and provisions hereof does not
and will not conflict with or result in a breach of any of the terms and
provisions of or constitute a default under (i) a loan agreement, guaranty,
financing agreement, agreement affecting a product or other agreement or
instrument binding or affecting it or its property; (ii) the provisions of
its charter or operative documents or bylaws; or (iii) any order, writ,
injunction or decree of any court or governmental authority entered against
it or by which any of its property is bound;
(e) except for the governmental and Regulatory Approvals required to
market the Licensed Product in the Territory and any approvals required
under the HSR Act, the execution, delivery and performance of this
Agreement by such Party does not require the consent, approval or
authorization of, or notice, declaration, filing or registration with, any
governmental or regulatory authority and the execution, delivery or
performance of this Agreement will not violate any law, rule or regulation
applicable to such Party;
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(f) this Agreement has been duly authorized, executed and
delivered and constitutes such Party's legal, valid and binding obligation
enforceable against it in accordance with its terms subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to the
availability of particular remedies under general equity principles; and
(g) it shall comply with all applicable material laws and
regulations relating to its activities under this Agreement.
10.2 Zonagen's Representations. Zonagen hereby represents, warrants
-------------------------
and covenants to Schering as follows:
(a) As of the Effective Date, the Patent Rights, Zonagen Know-How
and Zonagen Trademarks are existing and, to the best of its knowledge, are
not invalid or unenforceable, in whole or in part;
(b) it has the full right, power and authority to grant all of the
right, title and interest in the licenses granted under Article II hereof;
(c) it has not, prior to the Effective Date, previously assigned,
transferred, conveyed or otherwise encumbered its right, title and interest
in any of the Licensed Compound, Licensed Products, the Patent Rights,
Zonagen Know-How or Zonagen Trademark, with respect to which Schering has
been granted a license, an option or other rights hereunder;
(d) it is the sole and exclusive owner of the Patent Rights,
Zonagen Know-How and Zonagen Trademarks existing as of the Effective Date,
all of which are free and clear of any liens, charges and encumbrances, and
no other person, corporate or other private entity, or governmental entity
or subdivision thereof, has or shall have any claim of ownership with
respect to the Patent Rights, Zonagen Know-How or the Zonagen Trademark
existing as of the Effective Date, whatsoever;
(e) to the best of its knowledge the Patent Rights, Zonagen Know-
How and Zonagen Trademark, and the development, manufacture, use,
distribution, marketing, promotion and sale of Licensed Product in its
current formulation or in the formulations currently under development by
Zonagen do not, as of the Effective Date, interfere or infringe on any
intellectual property rights owned or possessed by any third party;
(f) to the best of its knowledge, as of the Effective Date, there
are no third party pending patent applications which, if issued, would
cover the development, manufacture, use or sale of Licensed Product, in its
current formulation or in formulations currently under development by
Zonagen;
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
(g) as of the Effective Date, there are no claims, judgments or
settlements against or owed by Zonagen or, to the best of its knowledge,
pending or threatened claims or litigation relating to Licensed Compound,
the Patent Rights, Zonagen Know-How and Zonagen Trademark;
(h) as of the Effective Date, , it has disclosed to Schering all
material Zonagen Know-How and other relevant information, including,
without limitation, other information relating to the Patent Rights,
Licensed Compounds and Licensed Products in the Field;
(i) during the Term of this Agreement it will use diligent efforts
not to diminish the rights under the Patent Rights, Zonagen Know-How and
Zonagen Trademark granted to Schering hereunder, including without
limitation, by not committing or permitting any actions or omissions which
would cause the breach of any agreements between itself and third parties
which provide for intellectual property rights applicable to the
development, manufacture, use or sale of Licensed Compounds and/or Licensed
Products, that it will provide Schering promptly with notice of any such
alleged breach, and that as of the Effective Date, it is in compliance in
all material respects with any agreements with third parties relating to
Patent Rights, Zonagen Know How, Zonagen Trademarks, Licensed Compounds
and/or Licensed Products;
(j) data summaries provided to Schering by Zonagen prior to the
Effective Date relating to the pre-clinical and clinical studies of the
Licensed Compound accurately represent all the underlying raw data;
(k) it has provided to Schering a summary of all adverse events
known to it relating to the Licensed Compound;
(1) except as set forth in Schedule 10.2(m), as of the Effective
Date, there are no collaborative, licensing, material transfer, supply,
distributorship or marketing agreements or arrangements or other similar
agreements to which it or any of its Affiliates are party relating to
Licensed Compound, Licensed Product or Patent Rights, which agreements are
inconsistent with Schering rights hereunder;
(m) it has not granted any rights to any third party with respect
to the Licensed Compound, Licensed Product or Patent Rights, which grant of
rights would be inconsistent with the rights granted to Schering hereunder;
and
(n) it has no knowledge of any material information, other than
information provided to Schering prior to the signing of this Agreement,
which
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
would negatively affect the ability of either Party to obtain Regulatory
Approval for the Licensed Product with *** or which would negatively affect
the timing for obtaining such Regulatory Approval.
10.3 Continuing Representations. The representations and warranties of
--------------------------
each Party contained in Sections 10.1 and 10.2(b), 10.2(d), 10.2(i), 10.2(k) and
10.2(m) shall survive the execution of this Agreement and shall remain true and
correct after the date hereof with the same effect as if made as of the date
hereof.
10.4 No Inconsistent Agreements. Neither Party has in effect and
--------------------------
after the Effective Date neither Party shall enter into any oral or written
agreement or arrangement that would be inconsistent with its obligations under
this Agreement.
10.5 Representation by Legal Counsel. Each Party hereto represents
-------------------------------
that it has been represented by legal counsel in connection with this Agreement
and acknowledges that it has participated in the drafting hereof. In
interpreting and applying the terms and provisions of this Agreement, the
Parties agree that no presumption shall exist or be implied against the Party
which drafted such terms and provisions.
ARTICLE XI
INDEMNIFICATION AND LIMITATION ON LIABILITY
11.1 Indemnification by Schering. Schering shall indemnify, defend
---------------------------
and hold harmless Zonagen and its Affiliates, and each of its and their
respective employees, officers, directors and agents (each, a "Zonagen
Indemnified Party") from and against any and all liability, loss, damage, cost,
and expense (including reasonable attorneys' fees), subject to the limitations
in Section 11.5 (collectively, a "Liability") which the Zonagen Indemnified
Party may incur, suffer or be required to pay resulting from or arising in
connection with (i) the breach by Schering of any covenant, representation or
warranty contained in this Agreement (ii) the Manufacture, promotion,
distribution, use, testing, marketing, sale or other disposition of Licensed
Compounds and/or Licensed Products by Schering, its Affiliates or sublicensees
or clinical trails conducted by or on behalf of Schering on a Licensed Product
or (iii) the successful enforcement by a Zonagen Indemnified Party of its rights
under this Section 11.1. Notwithstanding the foregoing, Schering shall have no
obligation under this Agreement to indemnify, defend or hold harmless any
Zonagen Indemnified Party with respect to claims, demands, costs or judgments
which result from willful misconduct or negligent acts or omissions of Zonagen,
its Affiliates, or any of their respective employees, officers, directors or
agents.
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11.2 Indemnification by Zonagen. Zonagen shall indemnify, defend and
--------------------------
hold harmless Schering and its Affiliates, and each of its and their respective
employees, officers, directors and agents (each, a "Schering Indemnified Party")
from and against any Liability which the Schering Indemnified Party may incur,
suffer or be required to pay resulting from or arising in connection with (i)
the breach by Zonagen of any covenant, representation or warranty contained in
this Agreement; (ii) the discovery, development, Manufacture, promotion, sale or
use of Licensed Compounds and/or Licensed Products by Zonagen, its Affiliates or
their subcontractors or clinical trials conducted by or on behalf of Zonagen on
Licensed Products; or (iii) the successful enforcement by a Schering Indemnified
Party of its rights under this Section 11.2. Notwithstanding the foregoing,
Zonagen shall have no obligation under this Agreement to indemnify, defend, or
hold harmless any Schering Indemnified Party with respect to claims, demands,
costs or judgments which result from willful misconduct or negligent acts or
omissions of Schering, its Affiliates, or any of their respective employees,
officers, directors or agents.
11.3 Conditions to Indemnification. The obligations of the
-----------------------------
indemnifying Party under Sections 11.1 and 11.2 are conditioned upon the
delivery of written notice to the indemnifying Party of any potential Liability
promptly after the indemnified Party becomes aware of such potential Liability.
The indemnifying Party shall have the right to assume the defense of any suit or
claim related to the Liability if it has assumed responsibility for the suit or
claim in writing; however, if in the reasonable judgment of the indemnified
Party, such suit or claim involves an issue or matter which could have a
materially adverse effect on the business operations or assets of the
indemnified Party, the indemnified Party may waive its rights to indemnity under
this Agreement and control the defense or settlement thereof, but in no event
shall any such waiver be construed as a waiver of any indemnification rights
such Party may have at law or in equity. If the indemnifying Party defends the
suit or claim, the indemnified Party may participate in (but not control) the
defense thereof at its sole cost and expense.
11.4 Settlements. Neither Party may settle a claim or action related
-----------
to a Liability without the consent of the other Party, if such settlement would
impose any monetary obligation on the other Party or require the other Party to
submit to an injunction or otherwise limit the other Party's rights under this
Agreement. Any payment made by a Party to settle any such claim or action shall
be at its own cost and expense.
11.5 Limitation of Liability. With respect to any claim by one Party
-----------------------
against the other arising out of the performance or failure of performance of
the other Party under this Agreement, the Parties expressly agree that the
liability of such Party to the other Party for such breach shall be limited
under this Agreement or otherwise at law or equity to direct damages only and in
no event shall a Party be liable for, punitive, exemplary or consequential
damages. The limitations set forth in this Section 11.5 shall not apply with
respect to the obligations of either Party to indemnify the other under Sections
11.1 or 11.2 hereof in connection with a Liability to a third party.
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
11.6 Insurance. Zonagen acknowledges and agrees that during the Term
---------
of this Agreement and for a period of five (5) years following the expiration or
earlier termination of this Agreement, it shall maintain, in full force and
effect, adequate liability insurance, including product liability and
contractual liability insurance each with coverage of not less than *** for each
claim and in the aggregate to cover such Party's obligations under this
Agreement. Such insurance coverage shall be maintained with a nationally
recognized insurance carrier(s) that is reasonably acceptable to Schering.
Zonagen shall provide Schering with evidence of such insurance upon Schering's
request, which requests may be made from time to time during the Term of this
Agreement and the five (5) year period following expiration or earlier
termination of this Agreement. Schering acknowledges and agrees that during the
Term of this Agreement and for a period of five (5) years following the
expiration or earlier termination of this Agreement, it shall maintain, in full
force and effect, an insurance program (which may be through self-insurance) for
liability insurance, including products liability and contractual liability
insurance, reasonably covering its obligations under this Agreement.
ARTICLE XII
TRADEMARK PROVISIONS
12.1 Trademark Registrations and Infringements.
-----------------------------------------
12.1.1 Use of Trademark; Registration. Schering shall have the
------------------------------
exclusive right, but not the obligation to use the Zonagen Trademarks for
the Licensed Compounds and/or the Licensed Products in the Territory and is
free to use any of its own trademarks in connection therewith. Should
Schering elect to use the Zonagen Trademarks in the Territory, Schering
shall notify Zonagen, in writing, and within thirty (30) days of such
notice, Zonagen shall notify Schering as to whether the Zonagen Trademark
is filed or registered in the Territory. Zonagen shall search, file,
prosecute, maintain and defend in its or an Affiliate's name, and at its
own cost and expense, the Zonagen Trademarks in the Territory relating to
the marketing or sale of the Licensed Compound and/or the Licensed Product
and shall provide Schering with regular status reports. Should Zonagen
reasonably determine that a Zonagen Trademark is not available for use or
registration, Zonagen shall notify Schering in writing and the Parties
shall agree on whether an alternate Zonagen Trademark shall be used.
12.1.2 Other Marks. Schering and Zonagen each acknowledge the
-----------
rights of the other in their respective trademarks, trade names, trade
dress and logos used in connection with the products other than the
Licensed Compound and/or the Licensed Product, and, except and to the
extent expressly provided in this Agreement, nothing in this Agreement
shall be deemed to give either Party during or after the duration
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of this Agreement any right, title or interest in the trademarks, trade
names, trade dress or logos of the other Party.
12.1.3 No Confusing Mark. Zonagen shall neither use nor seek to
-----------------
register any trademarks which are confusingly similar to the Zonagen
Trademark or any other trademarks, trade names, trade dress or logos used
in connection with the Licensed Compound and/or the Licensed Product.
12.1.4 No Other Grants. Zonagen agrees that it shall neither use
---------------
itself, nor grant to a third party or to an Affiliate, the right to the use
of the Zonagen Trademarks in the Territory during the Term of this
Agreement without the written consent of Schering, which consent may be
withheld for any reason.
12.1.5 Review by Zonagen. Should Schering elect to use a Zonagen
-----------------
Trademark, Schering shall submit to Zonagen, in writing, intended formats
for use on the packaging and on promotional and sales materials prior to
the first use thereof by Schering. Should Zonagen not provide a reasonable
basis for disapproval of the intended formats within thirty (30) days of
receipt, Schering may then use such Zonagen Trademark in the formats
submitted on those and on subsequently developed packaging and promotional
materials. Schering agrees that it will not thereafter implement any
changes to such formats unless the same has been submitted to Zonagen in
accordance with the procedure set forth in the preceding sentence.
12.1.6 Use of Tradename. In addition to the tradename of Schering
----------------
or its Affiliates, Schering shall, if permitted by applicable laws and
regulation, include on the packaging and promotional materials for Licensed
Product a statement indicating that Schering is selling the Licensed
Product pursuant to a license granted by Zonagen.
12.2 Infringement Actions.
--------------------
12.2.1 Notice of Infringement If Schering elects to use the
----------------------
Zonagen Trademark in the Territory, Schering shall notify Zonagen promptly
and in writing upon learning that the Zonagen Trademark is actually or
potentially infringed by a third party, or if an allegation is made the
Zonagen Trademark may infringe the rights of a third party. Zonagen shall
have the right, but not the obligation, to take appropriate action to stop
the infringement or to defend the right to the continued use of its
trademark. Should Zonagen decline to take action within thirty (30) days
of receipt of notice from Schering, then Schering is not obligated to but
may, at its option, take reasonable action to stop the infringement or to
defend the right to the continued use of the Zonagen Trademark. The Party
bringing the action shall be deemed the "Litigating Party" and the other
Party, the "Non-Litigating Party" for purposes of this Article XII.
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
12.2.2 Costs of Infringement Action. In any action brought
----------------------------
pursuant to Section 12.2.1, the costs of the action shall be borne and any
recovery shall be retained by the Litigating Party; provided, however, that
-------- -------
if the Litigating Party recovers damages attributable to (i) the profits of
a third party infringer; or (ii) lost profits or lost sales of the Non-
Litigating Party; or (iii) punitive damages against the third party
infringer; then any net recovery to the Litigating Party (i.e. total amount
of recovery, less court costs and attorneys' fees), shall be divided
equally between Zonagen and Schering. If Schering is the Litigating Party
in an action to defend the right to the continued use of the Zonagen
Trademark and is successful in obtaining a final judgment of a court of
competent jurisdiction defending the right to the continued use of the
Zonagen Trademark, then Zonagen shall reimburse Schering for half of its
reasonable out-of-pocket net costs in obtaining the judgment (i.e., court
costs and reasonable attorneys' fees less any recoveries received).
12.2.3 Assistance in Actions. In any action brought pursuant to
---------------------
Section 12.2.1, the Non-Litigating Party shall provide reasonable
assistance and information to the Litigating Party and shall be reimbursed
for its reasonable out-of-pocket costs and expenses.
ARTICLE XIII
TERM AND TERMINATION
13.1 Term and Expiration. This Agreement shall be effective as of the
-------------------
Effective Date and unless terminated earlier by mutual written agreement of the
Parties or pursuant to Sections 13.2 or 13.3 below, the Term of this Agreement
shall continue in effect until expiration of the last to expire Patent Right
incorporating a Valid Claim. The expiration or termination of this Agreement
shall not have the effect of causing the expiration or termination of the Ex-
U.S. License Agreement. Upon expiration of this Agreement (i) Schering's
licenses, other than the license to use the Zonagen Trademarks, pursuant to
Section 2.1 and 2.2 shall become fully paid-up, perpetual non-exclusive licenses
and (ii) Schering's license to use the Zonagen Trademarks, pursuant to Section
2.1, shall become a fully paid-up, perpetual, exclusive license (exclusive even
as to Zonagen).
13.2 Termination by Schering. Notwithstanding anything contained herein
-----------------------
to the contrary, Schering shall have the unilateral right, but not the
obligation, to terminate this Agreement, in its sole discretion, upon written
notice to Zonagen if any of the following occur:
(a) the results of the *** do not permit the filing of an
NDA for the Licensed Product prior to *** of the Licensed Product;
or
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
(b) an NDA supporting Regulatory Approval of the Licensed
Product with *** is not filed with and accepted for filing by the
FDA on or before ***; or
(c) Regulatory Approval permitting the sale of the Licensed
Product with *** in the United States has not been granted on or
before ***; or
(d) the first Regulatory Approval permitting the sale of
the Licensed Product in the United States does not contain labeling
that Schering, in its sole discretion, finds satisfactory; or
(e) after Regulatory Approval permitting the sale of the
Licensed Product in the United States, serious adverse events are
reported with respect to the Licensed Product or the FDA requires a
significant change in the labeling of the Licensed Product; or
(f) a license from a third party is required in order to
make, have made, use or sell the Licensed Product and the total
royalty payable by Schering cumulatively to Zonagen and such third
party(ies) exceeds *** of Schering's Net Sales of the Licensed
Product.
13.3 Termination.
-----------
13.3.1 Termination for Cause. This Agreement may be terminated by
---------------------
notice by either Party at any time during the Term of this Agreement:
(i) subject to Section 14.2, if the other Party is in
breach of its material obligations (other than a breach of
Schering's diligence obligations under Section 6.1 hereof)
hereunder and has not cured such breach within *** after notice
requesting cure of the breach with reasonable detail of the
particulars of the alleged breach or in the event that the breach
cannot be reasonably cured within such ***, the other Party has not
initiated actions reasonably expected to cure the cited failure
within *** of receiving notice; or
(ii) upon the filing or institution of bankruptcy,
reorganization, liquidation or receivership proceedings, or upon an
assignment of a substantial portion of the assets for the benefit
of creditors by the other Party, or in the event a receiver or
custodian is appointed for such Party's business, or if a
substantial portion of such Party's business is subject to
attachment or
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
similar process; provided, however, that in the case of any
-------- -------
involuntary bankruptcy proceeding such right to terminate shall
only become effective if the proceeding is not dismissed within ***
after the filing thereof.
13.3.2 Effect of Termination for Cause on License.
------------------------------------------
(i) Termination by Schering. In the event Schering
terminates this Agreement under Section 13.3.1(i), Schering's
licenses pursuant to Sections 2.1 and 2.2 shall become fully paid-
up, perpetual licenses.
(ii) Termination by Zonagen. In the event that Zonagen
----------------------
terminates this Agreement under Section 13.3.1(i), then the rights
and licenses granted to Schering under Sections 2.1 and 2.2 of this
Agreement shall terminate and all rights to the Patent Rights,
Zonagen Know-How, Zonagen Trademarks, Licensed Compounds and
Licensed Products shall revert to Zonagen. Additionally, the
Parties will negotiate, in good faith, the grant by Schering of a
license to Zonagen, on appropriate commercial terms, of any of
Schering's know-how solely as such know-how relates to Zonagen's
rights to manufacture and sell the Licensed Product.
(iii) Effect of Bankruptcy. In the event Schering
--------------------
terminates this Agreement under Section 13.3.1(ii) or this
Agreement is otherwise terminated under Section 13.3.1(ii), the
Parties agree that Schering, as a licensee of rights to
intellectual property under this Agreement, shall retain and may
fully exercise all of its rights and elections under Title 11,
including as set forth in Section 14.8 hereof.
13.4 Effect of Termination. Expiration or termination of the
---------------------
Agreement shall not relieve the Parties of any obligation accruing prior to such
expiration or termination, and the provisions of Article IX (other than Section
9.4) and XI shall survive the expiration of the Agreement. The provisions of
Section 9.4 shall survive any termination of this Agreement by Schering under
Section 13.3.1 because of a breach of this Agreement by Zonagen. Any expiration
or early termination of this Agreement shall be without prejudice to the rights
of either Party against the other accrued or accruing under this Agreement prior
to termination, including the obligation to pay royalties for Licensed
Product(s) or Licensed Compound sold prior to such termination.
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ARTICLE XIV
MISCELLANEOUS
14.1 Assignment. Neither this Agreement nor any or all of the rights
----------
and obligations of a Party hereunder shall be assigned, delegated, sold,
transferred, sublicensed (except as otherwise provided herein) or otherwise
disposed of, by operation of law or otherwise, to any third party other than an
Affiliate of such Party, without the prior written consent of the other Party,
and any attempted assignment, delegation, sale, transfer, sublicense or other
disposition, by operation of law or otherwise, of this Agreement or of any
rights or obligations hereunder contrary to this Section 14.1 shall be a
material breach of this Agreement by the attempting Party, and shall be void and
without force or effect; provided, however, either Party may, without such
-------- -------
consent, assign the Agreement and its rights and obligations hereunder in
connection with the transfer or sale of all or substantially all of its assets
related to the division or the subject business, or in the event of its merger
or consolidation or change in control or similar transaction. This Agreement
shall be binding upon, and inure to the benefit of, each Party, its Affiliates,
and its permitted successors and assigns. Each Party shall be responsible for
the compliance by its Affiliates with the terms and conditions of this
Agreement.
14.2 Governing Law. This Agreement shall be governed, interpreted and
-------------
construed in accordance with the laws of the State of New Jersey, without giving
effect to conflict of law principles. The Parties recognize that a bona fide
dispute as to certain matters may from time to time arise during the term of
this Agreement. In the event of the occurrence of such a dispute (except for a
deadlock in a matter being considered by the JDC, the resolution of which shall
be accomplished in accordance with the provisions of Section 4.8.4 hereof)
either Party may, by written notice to the other Party, have such dispute
referred to their respective officers (designated below) or their successors for
attempted resolution by good faith negotiations within thirty (30) calendar days
after such notice is received. Said designated officers are as follows:
For Schering: Executive Vice President,
Schering-Plough Pharmaceuticals
For Zonagen: President of Zonagen
In the event the designated officers are not able to resolve such dispute
through good faith negotiations within such thirty (30) calendar day period,
either Party may invoke the provisions of Schedule 14.2, Part II at any time
within thirty (30) calendar days following the end of such thirty (30) calendar
day period. Notwithstanding the foregoing, nothing in this Section 14.2 shall
prohibit a Party from seeking temporary or injunctive relief from a court of
competent jurisdiction pending the resolution of a dispute in accordance with
the provisions of this Section 14.2.
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14.3 Waiver. Any delay or failure in enforcing a Party's rights under
------
this Agreement or any waiver as to a particular default or other matter shall
not constitute a waiver of such Party's rights to the future enforcement of its
rights under this Agreement, nor operate to bar the exercise or enforcement
thereof at any time or times thereafter, excepting only as to an express written
and signed waiver as to a particular matter for a particular period of time.
14.4 Independent Relationship. Nothing herein contained shall be deemed
------------------------
to create an employment, agency, joint venture or partnership relationship
between the Parties hereto or any of their agents or employees, or any other
legal arrangement that would impose liability upon one Party for the act or
failure to act of the other Party. Neither Party shall have any power to enter
into any contracts or commitments or to incur any liabilities in the name of, or
on behalf of, the other Party, or to bind the other Party in any respect
whatsoever.
14.5 Export Control. This Agreement is made subject to any restrictions
--------------
concerning the export of products or technical information from the United
States of America which may be imposed upon or related to Zonagen or Schering
from time to time by the government of the United States of America.
Furthermore, Schering agrees that it will not export, directly or indirectly,
any technical information acquired from Zonagen under this Agreement or any
products using such technical information to any country for which the United
States government or any agency thereof at the time of export requires an export
license or other governmental approval, without first obtaining the written
consent to do so from the Department of Commerce or other agency of the United
States government when required by an applicable statute or regulation.
14.6 Entire Agreement, Amendment. This Agreement, including the
---------------------------
Exhibits and Schedules hereto and all the covenants, promises, agreements,
warranties, representations, conditions and understandings sets forth the
complete, final and exclusive agreement between the Parties and supersedes and
terminates all prior and contemporaneous agreements and understandings between
the Parties, whether oral or in writing. There are no covenants, promises,
agreements, warranties, representations, conditions or understandings, either
oral or written, between the Parties other than as are set forth herein. No
subsequent alteration, amendment, change, waiver or addition to this Agreement
shall be binding upon the Parties unless reduced to writing and signed by an
authorized officer of each Party. No understanding, agreement, representation
or promise, not explicitly set forth herein, has been relied on by either Party
in deciding to execute this Agreement.
14.7 Notices. Except as provided under Section 8.8 hereof, any notice
-------
required or permitted to be given or sent under this Agreement shall be hand
delivered or sent by express delivery service or certified or registered mail,
postage prepaid, or by facsimile transmission (with written confirmation copy by
registered first-class mail) to the Parties at the addresses and facsimile
numbers indicated below.
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If to Zonagen, to: Zonagen, Inc.
2408 Timberloch Place, B-4
The Woodlands, Texas 77380
Attn.: Joseph S. Podolski, President, CEO
Fax No.: (281) 363-8796
with copies to: Cooley Godward, LLP
Five Palo Alto Square
300 El Camino Real
Palo Alto, CA 94306
Attn: Robert L. Jones
Fax No. (650) 857-0663
If to Schering, to: Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attn.: Vice President, Business Development
Fax No.: (908) 298-5379
with copies to: Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attn.: Law Department - Senior Legal Director,
Licensing
Fax No.: (908) 298-2739
Any such notice shall be deemed to have been received on the date actually
received. Either Party may change its address or its facsimile number by giving
the other Party written notice, delivered in accordance with this Section.
14.8 Provisions for Insolvency.
-------------------------
14.8.1 Effect on Licenses. All rights and licenses granted under
------------------
or pursuant to this Agreement by Zonagen to Schering are, for all purposes
of Section 365(n) of Title 11 of the United States Code ("Title 11"),
licenses of rights to "intellectual property" as defined in Title 11.
Zonagen agrees that Schering, as licensee of such rights under this
Agreement shall retain and may fully exercise all of its rights and
elections under Title 11. Zonagen agrees during the Term of this Agreement
to create and maintain current copies or, if not amenable to copying,
detailed descriptions or other appropriate embodiments, to the extent
feasible, of all such intellectual property. If a case is commenced by or
against Zonagen under Title 11, Zonagen (in any capacity, including debtor-
inpossession) and its successors and assigns (including, without
limitation, a Title 11 Trustee) shall,
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(i) as Schering may elect in a written request, immediately
upon such request:
(A) perform all of the obligations provided in this
Agreement to be performed by Zonagen including, where applicable
and without limitation, providing to Schering portions of such
intellectual property (including embodiments thereof) held by
Zonagen and such successors and assigns or otherwise available to
them; or
(B) provide to Schering all such intellectual property
(including all embodiments thereof) held by Zonagen and such
successors and assigns or otherwise available to them; and
(ii) not interfere with the rights of Schering under this
Agreement, or any agreement supplemental hereto, to such intellectual
property (including such embodiments), including any right to obtain
such intellectual property (or such embodiments) from another entity.
14.8.2 Rights to Intellectual Property. If a Title 11 case is
-------------------------------
commenced by or against Zonagen, and this Agreement is rejected as provided
in Title 11, and Schering elects to retain its rights hereunder as provided
in Title 11, then Zonagen (in any capacity, including debtor-in-possession)
and its successors and assigns (including, without limitation, a Title 11
Trustee) shall provide to Schering all such intellectual property
(including all embodiments thereof) held by Zonagen and such successors and
assigns, or otherwise available to them, immediately upon Schering's
written request. Whenever Zonagen or any of its successors or assigns
provides to Schering any of the intellectual property licensed hereunder
(or any embodiment thereof) pursuant to this Section 14.8, Schering shall
have the right to perform the obligations of Zonagen hereunder with respect
to such intellectual property, but neither such provision nor such
performance by Schering shall release Zonagen from any such obligation or
liability for failing to perform it.
14.8.3 Schering's Rights. All rights, powers and remedies of
-----------------
Schering provided herein are in addition to and not in substitution for any
and all other rights, powers and remedies now or hereafter existing at law
or in equity (including, without limitation, Title 11) in the event of the
commencement of a Title 11 case by or against Zonagen. Schering, in
addition to the rights, power and remedies expressly provided herein, shall
be entitled to exercise all other such rights and powers and resort to all
other such remedies as may now or hereafter exist at law or in equity
(including, without limitation, Title 11) in such event. The Parties agree
that they intend the foregoing Schering rights to extend to the maximum
extent permitted by law, including, without limitation, for purposes of
Title 11:
(i) the right of access to any intellectual property
(including all embodiments thereof) of Zonagen, or any third
party with whom Zonagen
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contracts to perform an obligation of Zonagen under this
Agreement, and, in the case of the third party, which is
necessary for the development, registration, manufacture and
marketing of Licensed Compounds and/or Licensed Products; and
(ii) the right to contract directly with any third party
described in (i) to complete the contracted work.
14.9 Force Majeure. Failure of any Party to perform its obligations
-------------
under this Agreement (except the obligation to make payments when properly due)
shall not subject such Party to any liability or place them in breach of any
term or condition of this Agreement to the other Party if such failure is due to
any cause beyond the reasonable control of such non-performing Party ("force
majeure"), unless conclusive evidence to the contrary is provided. Causes of
non-performance constituting force majeure shall include, without limitation,
acts of God, fire, explosion, flood, drought, war, riot, sabotage, embargo,
strikes or other labor trouble, failure in whole or in part of suppliers to
deliver on schedule materials, equipment or machinery, interruption of or delay
in transportation, a national health emergency or compliance with any order or
regulation of any government entity acting with color of right. The Party
affected shall promptly notify the other Party of the condition constituting
force majeure as defined herein and shall exert reasonable efforts to eliminate,
cure and overcome any such causes and to resume performance of its obligations
with all possible speed. If a condition constituting force majeure as defined
herein exists for more than ninety (90) consecutive days, the Parties shall meet
to negotiate a mutually satisfactory resolution to the problem, if practicable.
14.10 Severability. If any provision of this Agreement is declared
------------
illegal, invalid or unenforceable by a court having competent jurisdiction, it
is mutually agreed that this Agreement shall endure except for the part declared
invalid or unenforceable by order of such court, provided, however, that in the
-------- -------
event that the terms and conditions of this Agreement are materially altered,
the Parties will, in good faith, renegotiate the terms and conditions of this
Agreement to reasonably substitute such invalid or unenforceable provisions in
light of the intent of this Agreement.
14.11 Counterparts. This Agreement shall become binding when any one
------------
or more counterparts hereof, individually or taken together, shall bear the
signatures of each of the Parties hereto. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against either
Party whose signature appears thereon, but all of which taken together shall
constitute but one and the same instrument.
14.12 Captions. The captions of this Agreement are solely for the
--------
convenience of reference and shall not affect its interpretation.
14.13 Recording. Each Party shall have the right, at any time, to
---------
record, register, or otherwise notify this Agreement in appropriate governmental
or regulatory offices
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anywhere in the world, and each Party shall provide reasonable assistance to the
other in effecting such recording, registering or notifying.
14.14 Further Actions. Each Party agrees to execute, acknowledge and
---------------
deliver such further instruments, and to do all other acts, as may be necessary
or appropriate in order to carry out the purposes and intent of this Agreement
including, without limitation, any filings with any antitrust agency which may
be required.
IN WITNESS WHEREOF, this Agreement has been executed by the duly authorized
representatives of the Parties as of the date set forth below.
ZONAGEN, INC. SCHERING CORPORATION
By: /s/ Joseph S. Podolski By: /s/ David Poorvin
---------------------- -------------------------
Title: President & CEO Title: Vice President
- -------------------------- -----------------------------
Date: November 15, 1997 Date: November 15, 1997
- -------------------------- -----------------------------
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*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
SCHEDULE 1.9
***
-1-
<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
SCHEDULE 1.22
PATENT RIGHTS
-------------
***
-1-
<PAGE>
SCHEDULE 4.4
ADVERSE EVENT REPORTING PROCEDURES
----------------------------------
The Parties hereby agree that the following terms will govern
disclosures of each Party to the other with respect to adverse event
reporting relating to the Licensed Product as clinically tested or marketed
by or on behalf of either Party.
1. An Adverse Event ("AE") is defined as:
a) any experience which is adverse, including what are commonly
described as adverse or undesirable experiences, adverse events,
adverse reactions, side effects, or death due to any cause associated
with, or observed in conjunction with the use of a drug, biological
product, or device in humans, whether or not considered related to the
use of that product:
. occurring in the course of the use of a drug, biological product
or device,
. associated with, or observed in conjunction with product
overdose, whether accidental or intentional,
. associated with, or observed in conjunction with product abuse,
and/or
. associated with, or observed in conjunction with product
withdrawal.
b) Any significant failure of expected pharmacological or biologic
therapeutical action (with the exception of in clinical trials).
2. Serious or Non-Serious is defined as:
a) A Serious AE is one that is life threatening or fatal,
permanently disabling, requires or prolongs in-patient hospitalization
or prolonged hospitalization, or is a congenital anomaly, cancer or
overdose. In addition, end organ toxicity, including hematological,
renal, hepatic, and central nervous system AEs, may be considered
serious. In laboratory tests in animals, a serious AE includes any
experience suggesting significant risk for human subjects.
b) A Non-Serious AE is any AE which does not meet the criteria for a
serious AE.
3. Life-threatening is defined as: the patient is at immediate risk of
death from the AE as it occurs.
-1-
<PAGE>
4. End-Organ Toxicity is defined as: A medically significant event or lab
value change in which a patient may not necessarily be hospitalized or
disabled, but is clinically significant enough to warrant monitoring (e.g.
seizures, blood dyscrasias).
5. Expected or unexpected is defined as:
a) Expected AE - An AE which is listed in the Investigator's
Brochure for clinical trials, included in local labeling (e.g.,
Summary of Licensed Product Characteristics) for Marketed Drugs, or in
countries with no local labeling, in the Corporate Standard
Prescribing Document.
b) Unexpected AE - An AE that does not meet the criteria for an
expected AE or an AE which is listed but differs from that event in
terms of severity or specificity.
6. Associated with or related to the use of the drug is defined as: A
reasonable possibility exists that the AE was caused by the drug.
7. Unassociated or unrelated to the use of the drug is defined as: A
reasonable possibility exists that the AE may not have been caused by the
drug.
8. NDA Holder is defined as: An "Applicant" as defined in 21 CFR Part
314.3(b), for regulatory approval of an Licensed Product in any regulatory
jurisdiction, including a holder of a foreign equivalent thereto.
9. IND Holder is defined as: A "Sponsor" as defined in 21 CFR Part
313.1(b) of an investigational new drug in any regulatory jurisdiction,
including a holder of a foreign equivalent thereto.
10. Capitalized terms not defined in this Schedule shall have the meaning
assigned thereto in the Agreement.
11. With respect to the Licensed Product, the Parties agree as follows:
All initial reports and any follow-up information (oral or
written) for any and all Serious AEs as defined above (other than
with respect to animal studies), which become known to either
Party (other than from disclosure by or on behalf of the other
Party) must be communicated by telephone, telefax or
electronically directly to the other Party and/or the NDA Holder,
IND Holder (individually and collectively referred to as
"Holders") within forty eight hours of receipt of the
information. Written confirmation of the Serious AE received by
such Party should be sent to the other Party and/or the Holders
as soon as it becomes available, but in any event within forty-
eight (48) hours of initial report of the Serious AE by such
Party.
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<PAGE>
Both Parties shall exchange Medwatch and/or CIOMs forms and other
health authority reports within forty eight hours of submission
to any regulatory agency.
All initial reports and follow-up information received for all
Non-Serious AEs for marketed Licensed Product which become known
to a Party (other than from disclosure by or on behalf of the
other Party) must be communicated in writing, by telefax or
electronically to the other Party on a monthly basis, on Medwatch
or CIOMs forms (where possible).
Each Party shall coordinate and cooperate with the other whenever
practicable to prepare a single written report regarding all
Serious and/or Non-Serious AEs, provided, however, that neither
-------- -------
Party shall be obligated to delay reporting of any AE in
violation of applicable law or regulations regarding the
reporting of adverse events.
12. The Parties further agree that:
a) a written report be forwarded to the other Party within forty-
eight hours of receipt by the Party making the report, for AEs for
animal studies which suggest a potential significant risk for humans;
b) Each Party will give the other Party a print-out or computer disk
of all AEs reported to it and its Affiliates relating to the Licensed
Product within the last year, within 30 days of receipt of a request
from the other Party but not more often than four times a year;
c) if either Party wishes access to AE Reports of the other Party
relating to the Licensed Product, upon request of that Party, the
other Party shall make available its AE records relating to the
Licensed Product (including computer disks) for viewing and copying by
the other Party. The Parties may discuss the transfer of AE Reports by
computer disk.
d) disclosure of information hereunder by a Party to the other Party
shall continue as long as either Party and/or its Affiliates or
designees continue to clinically test or market Licensed Product.
e) all written regulatory reports, including periodic NDA, annual
IND, safety updates, or foreign equivalents thereto, etc. shall be
sent by a Party to the other Party within forty eight hours forty of
submission to the appropriate regulatory agency. The Parties shall
agree on a procedure for preparing these reports.
13. Each Party shall diligently undertake the following further
obligations where both Parties are or will be commercializing the Licensed
Product pursuant to the Agreement and/or performing clinical trials with
respect to the Licensed Product:
-3-
<PAGE>
a) upon the Effective Date, each Party shall identify individuals
who shall be responsible for identifying all AE reporting requirements
in all countries of the Territory as set forth in the Agreement, and
any amendments thereto;
b) to immediately consult with the other Party, with respect to the
investigation and handling of any Serious AE disclosed to it by the
other Party or by a third Party and to allow the other Party to review
the Serious AE and to participate in the follow-up investigation;
c) to immediately advise the other Party of any Licensed Product
safety communication received from a health authority and consult with
the other Party with respect to any Licensed Product warning, labeling
change or change to an investigators' brochure involving safety issues
proposed by the other Party, including, but not limited to the safety
issues agreed to by the Parties;
d) to diligently handle in a timely manner the follow-up
investigation and resolution of each AE reported to it;
e) to provide the other Party mutually agreed upon audit rights of
its AE reporting system and documentation, upon prior notice, during
normal business hours, at the expense of the auditing Party and under
customary confidentiality obligations;
f) to meet in a timely fashion from time to time as may be
reasonably required to implement the adverse event reporting and
consultation procedures described in this Schedule 4.4, including
identification of those individuals in each Party's Drug Safety group
who will be responsible for reporting to and receiving AE information
from the other Party, and the development of a written standard
operating procedure with respect to adverse event reporting
responsibilities, including reporting responsibilities to
investigators;
g) where possible, to transmit all data electronically;
h) to report to each other any addenda, revisions or changes to the
Agreement (e.g., change in territories, local regulations, addition of
new licensors/licensees to the Agreement, etc.) which might alter the
adverse event reporting responsibilities hereunder;
i) to utilize English as the language of communication and data
exchange between the Parties;
j) to develop a system of exchange of documents and information in
the event that the Agreement involves more than two Parties;
-4-
<PAGE>
k) to work together to develop an electronic system to transmit
Adverse Event data.
14. The Parties may meet after the Effective Date of the Agreement to
establish a separate agreement for adverse event exchange which will
supersede this Schedule 4.4.
-5-
<PAGE>
*** This portion has been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion
has been separately filed with the Commission.
SCHEDULE 10.2(M)
ZONAGEN-THIRD PARTY AGREEMENTS
------------------------------
1. ***
2. ***
3. ***
4. ASSIGNMENT AGREEMENT BETWEEN ZONAGEN AND GAMOGEN, INC.
-1-
<PAGE>
SCHEDULE 14.2
DISPUTE RESOLUTION PROCEDURES
-----------------------------
I. Procedures for resolving disputes of the JDC:
a. Within ten (10) business days after the receipt of the notice
provided for in Section 4.7.4 of this Agreement, each Party shall
appoint an independent expert, knowledgeable in the field concerning
the disputed matter (e.g., an expert in the field of developing
pharmaceutical products for female sexual function indications), to
serve on the special arbitration panel. The two independent experts so
appointed by the Parties shall, within ten (10) business days
thereafter, appoint a neutral third independent expert, knowledgeable
in the field concerning the disputed matter. Such neutral third
independent expert shall serve as the chairperson of the special
arbitration panel. Each of the members of the special arbitration
panel shall be required to sign a secrecy agreement with respect to
any information provided by either Party during the special
arbitration procedure.
b. Within five (5) business days after the chairperson of the
special arbitration panel is appointed, each Party shall submit, to
each member of the special arbitration panel and to the other Party, a
written statement setting forth the relevant facts with respect to the
disputed matter and arguments supporting such Party's position with
respect to the resolution of the disputed matter.
c. Within five (5) business days after such written statements are
provided to the special arbitration panel, the panel and appropriate
representatives of each Party shall meet so that the Parties can
present oral arguments to the arbitration panel and the arbitration
panel can have the opportunity to ask questions of the Parties. The
location of such meeting shall be at Schering's facility in
Kenilworth, New Jersey if Zonagen requests the special arbitration and
at Zonagen's facility in The Woodlands, Texas if Schering requests the
special arbitration. Each Party shall have two (2) hours to present
its arguments to the special arbitration panel and thirty (30)
additional minutes to rebut the arguments made by the other Party. The
Party requesting the special arbitration shall be the first to present
its oral argument to the special arbitration panel.
d. Within five (5) business days after such meeting, the special
arbitration panel shall render a decision on the disputed matter,
which decision shall be reduced to writing by the chairperson of the
special arbitration panel and signed by each member of the special
arbitration panel. The chairperson of the special arbitration panel
shall be responsible for immediately providing a copy of the written
decision to each Party. The decision of the special arbitration panel
shall be binding upon the Parties.
-1-
<PAGE>
e. Nothing contained herein shall be construed to permit the
arbitration panel or any court or any other forum to award punitive,
exemplary or any other damages. By entering into this Agreement to
arbitrate, the Parties expressly waive any claim for punitive,
exemplary or any other damages with respect to the resolution of a
deadlock by the JDC.
f. Each Party shall be responsible for its own costs incurred in
such arbitration procedures and the cost of the special arbitration
panel shall be shared equally by the Parties.
II. Procedures for resolving disputes other than disputes of the JDC:
Except as otherwise set forth in Part I above, any dispute, controversy or
claim arising out of or relating to the validity, construction,
enforceability or performance of this Agreement including disputes relating
to an alleged breach or termination of this Agreement (but excluding
disputes regarding the validity of any Patent Rights, which disputes may be
submitted to the appropriate tribunal) shall be settled by binding
arbitration in the manner set forth below:
(a) Scope. Subject to and in accordance with the terms of this
-----
Agreement and this Schedule 14.2, all differences, disputes, claims or
controversies arising out of or in any way connected or related to
this Agreement (other than those that are subject to the procedures
set forth in Part I above), whether arising before or after the
expiration of the term of this Agreement, and including, without
limitation, its negotiation, execution, delivery, enforceability,
performance, breach, discharge, interpretation and construction,
existence, validity and any damages resulting therefrom or the rights,
privileges, duties and obligations of the Parties under or in relation
to this Agreement (including any dispute as to whether an issue is
arbitrable), which are not otherwise resolved in accordance with
Section 14.2 of this Agreement, shall be referred to binding
arbitration in accordance with the rules of the American Arbitration
Association, as in effect at the time of the arbitration.
(b) Parties to Arbitration. For the purposes of each arbitration
----------------------
under this Agreement, Schering shall constitute one Party to the
arbitration and Zonagen shall constitute the other Party to the
arbitration.
(c) Notice of Arbitration. A Party requesting arbitration hereunder
---------------------
shall give a notice of arbitration to the other Party containing a
concise description of the matter submitted for arbitration, including
references to the relevant provisions of the Agreement and a proposed
solution (a "Notice of Arbitration"). Notice of Arbitration shall be
delivered to the other Party in accordance with Section 14.7 of the
Agreement.
-2-
<PAGE>
(d) Response. The non-requesting Party must respond in writing within
--------
forty-five (45) days of receiving a Notice of Arbitration with an
explanation, including references to the relevant provisions of the
Agreement and a response to the proposed solution and suggested time
frame for action. The non-requesting Party may add additional issues
to be resolved.
(e) Meeting. Within fifteen (15) days of receipt of the response from
-------
the non-requesting Party pursuant to Paragraph (d), the Parties shall
meet and discuss in good faith options for resolving the dispute. The
requesting Party must initiate the scheduling of this resolution
meeting. Each Party shall make available appropriate personnel to meet
and confer with the other Party during such fifteen (15) day period.
(f) Selection of Arbitrator. Any and all disputes that cannot be
-----------------------
resolved pursuant to Paragraphs (c), (d) and (e) shall be submitted to
an arbitrator (the "Arbitrator") to be selected by mutual agreement of
the Parties. Unless the Parties otherwise agree, the Arbitrator shall
be a retired judge of a state or federal court, to be chosen from a
list of such retired judges to be prepared jointly by the Parties,
with each Party entitled to submit the names of three such retired
judges for inclusion in the list. No Arbitrator appointed or selected
hereunder shall be an employee, director or shareholder of, or
otherwise have any current or previous relationship with, any Party or
its respective Affiliates. If the Parties fail to agree on the
selection of the Arbitrator, the Arbitrator shall be designated by a
judge of the Federal District Court in New Jersey upon application by
either Party.
(g) Powers of Arbitrator. The Arbitrator may determine all questions
--------------------
of law and jurisdiction (including questions as to whether a dispute
is arbitrable) and all matters of procedure relating to the
arbitration. The Arbitrator shall have the right to grant legal and
equitable relief (including injunctive relief) and to award costs
(including reasonable legal fees and costs of arbitration) and
interest. The Arbitrator is not empowered to award punitive, exemplary
or any similar damages.
(h) Arbitration Procedure. In the event that Schering is the Party
---------------------
requesting arbitration, the arbitration shall take place in the State
of Texas unless otherwise agreed by the Parties, at such place and
time as the Arbitrator may fix for the purpose of hearing the evidence
and representations that the Parties may present. In the event that
Zonagen is the Party requesting arbitration, the arbitration shall
take place in the State of New Jersey unless otherwise agreed by the
Parties at such place and time as the Arbitrator may fix for the
purpose of hearing the evidence and representations that the Parties
may present. The arbitration proceedings shall be conducted in the
English language. The law applicable to the arbitration shall be the
law of the State of New Jersey. No later than twenty (20) business
days after hearing the representations and evidence of the Parties,
the Arbitrator shall make its determination in writing and deliver one
copy to each of the Parties.
-3-
<PAGE>
(i) Discovery and Hearing. During the meeting referred to in
---------------------
Paragraph (e) of Part II of this Schedule 14.2, the Parties shall
negotiate in good faith the scope and schedule of discovery, relating
to depositions, document production and other discovery devices,
taking into account the nature of the dispute submitted for
resolution. If the Parties are unable to reach agreement as to the
scope and schedule of discovery, the Arbitrator may order such
discovery as it deems necessary. To the extent practicable taking into
account the nature of the dispute submitted for resolution, such
discovery shall be completed within sixty (60) days from the date of
the selection of the Arbitrator. At the hearing, which shall commence
within twenty (20) days after completion of discovery unless the
Arbitrator otherwise orders, the Parties may present testimony (either
live witness or deposition), subject to cross-examination, and
documentary evidence. To the extent practicable taking into account
the nature of the dispute submitted for resolution and the
availability of the Arbitrator, the hearing shall be conducted over a
period not to exceed thirty (30) consecutive business days, with each
Party entitled to approximately half of the allotted time unless
otherwise ordered by the Arbitrator. The Arbitrator shall have sole
discretion with regard to the admissibility of any evidence and all
other matters relating to the conduct of the hearing.
(j) Witness Lists. At least twenty (20) business days prior to the
-------------
date set for the hearing, each Party shall submit to each other Party
and the Arbitrator a list of all documents on which such Party intends
to rely in any oral or written presentation to the Arbitrator and a
list of all witnesses, if any, such Party intends to call at such
hearing and a brief summary of each witness' testimony. At least five
(5) business days prior to the hearing, each Party must submit to the
Arbitrator and serve on each other Party a proposed findings of fact
and conclusions of law on each issue to be resolved. Following the
close of hearings, the Parties shall each submit such post-hearing
briefs to the Arbitrator addressing the evidence and issues to be
resolved as may be required or permitted by the Arbitrator.
(k) Confidentiality. The arbitration proceedings shall be
---------------
confidential and, except as required by law, no Party shall make, or
instruct the Arbitrator to make, any public announcement with respect
to the proceedings or decision of the Arbitrator without the prior
written consent of the other Party. The existence of any dispute
submitted to arbitration and the award of the Arbitrator shall be kept
in confidence by the Parties and the Arbitrator, except as required in
connection with the enforcement of such award or as otherwise required
by law.
(l) Awards and Appeal. Subject to the provisions of this Schedule
-----------------
14.2, the decision of the Arbitrator shall be final and binding upon
the Parties in respect of all matters relating to the arbitration, the
conduct of the Parties during the proceedings, and the final
determination of the issues in the arbitration. There shall be no
appeal from the final determination of the Arbitrator to any court,
except in the case of fraud or bad faith on the part of the Arbitrator
or any Party to the arbitration proceeding in
-4-
<PAGE>
connection with the conduct of such proceedings. Judgment upon any
award rendered by the Arbitrator may be entered in any court having
jurisdiction thereof.
(m) Costs of Arbitration. The costs of any arbitration hereunder
shall be borne by the Parties in the manner specified by the
Arbitrator in its determination.
(n) Performance of the Agreement. During the pendency of the
----------------------------
arbitration proceedings, each Party shall continue to perform its
obligations under this Agreement. Notwithstanding the foregoing, in
the event that Schering makes payments pursuant to Sections 7.1, 7.2
or 7.3 and it is subsequently determined by the Arbitrator that
Schering was not required to make such payment(s) then Zonagen shall
promptly repay to Schering all such payments. For purposes of this
Paragraph (n) the term "pendency of the arbitration proceeding" shall
mean the period starting on the date on which arbitration proceedings
are commenced by a Party in accordance with Paragraph (c) of Part II
of this Schedule 14.2 and ending on the date on which the Arbitrator
delivers its final determination in writing to the Parties.
-5-
<PAGE>
EXHIBIT 10.28
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The omitted portions are marked "***" and have
been filed separately with the Securities and Exchange Commission (the
"Commission").
EXCLUSIVE LICENSE AGREEMENT
BY AND BETWEEN
ZONAGEN, INC.
AND
SCHERING-PLOUGH LTD.
<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE I - DEFINITIONS........................................ -1-
1.1 "Additional Indication"............................ -1-
1.2 "Affiliate"........................................ -1-
1.3 "Calendar Quarter"................................. -2-
1.4 "Calendar Year".................................... -2-
1.5 "Change of Control"................................ -2-
1.6 "Combination Product".............................. -3-
1.7 "Effective Date"................................... -3-
1.8 "FDA".............................................. -3-
1.9 "Female Sexual Function Indication"................ -4-
1.10 "Field"............................................ -4-
1.11 "First Commercial Sale"............................ -4-
1.12 "HRD".............................................. -4-
1.13 "HSR Act".......................................... -4-
1.14 "Improvement"...................................... -4-
1.15 "Licensed Compound"................................ -4-
1.16 "Licensed Product(s)".............................. -4-
1.17 Male Sexual Function Indication"................... -4-
1.18 "Manufacture"...................................... -5-
1.19 "***".............................................. -5-
1.20 "NDA".............................................. -6-
1.21 "Net Sales"........................................ -6-
1.22 "Patent Rights".................................... -7-
1.23 "Proprietary Information".......................... -7-
1.24 "Regulatory Approval".............................. -7-
1.25 "Regulatory Authority"............................. -7-
1.26 "SP Ltd. Additional Indications"................... -8-
1.27 "SP Ltd. Combination Product"...................... -8-
1.28 "SP Ltd. Trademark"................................ -8-
1.29 "Specifications"................................... -8-
1.30 "***".............................................. -8-
1.31 "Target Patient Population"........................ -8-
1.32 "Term"............................................. -8-
1.33 "Territory"........................................ -8-
1.34 "Transaction Agreements"........................... -8-
1.35 "U.S. License Agreement"........................... -9-
1.36 "*** Formulation".................................. -9-
1.37 "Valid Claim"...................................... -9-
</TABLE>
i
<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
<TABLE>
<S> <C>
1.38 "Worldwide Annual Net Sales"............................. -9-
1.39 "Zonagen Additional Indications"......................... -9-
1.40 "Zonagen Combination Product"............................ -9-
1.41 "Zonagen Know-How"....................................... -9-
1.42 "Zonagen Trademark"...................................... -10-
ARTICLE II - LICENSES; DISCLOSURE OF INFORMATION; APPROVALS........... -10-
2.1 Exclusive License Grant.................................. -10-
2.1.1 License........................................... -10-
2.1.2 Right to Sublicense,Appointment of Distributors... -11-
2.1.3 Retained Rights................................... -11-
2.2 Non-Exclusive License Grant.............................. -11-
2.3 Disclosure of Information................................ -11-
2.4 Government Approvals..................................... -12-
2.4.1 Zonagen's and SP Ltd.'s Obligations............... -12-
2.4.2 Additional Approvals.............................. -12-
2.5 ***...................................................... -12-
2.5.1 ***............................................... -12-
2.5.2 ***............................................... -12-
2.5.3 ***............................................... -13-
2.6 Change of Control of Zonagen............................. -13-
2.7 Improvements............................................. -13-
ARTICLE III - OPTIONS................................................. -13-
3.1 Options for Zonagen Additional Indications and
*** Formulations........................................ -13-
3.1.1 Option for Zonagen Additional Indications........ -13-
3.1.2 Option for *** Formulations...................... -14-
3.1.3 Option Payments.................................. -14-
3.1.4 Notice........................................... -18-
3.2 Right of First Negotiation.............................. -18-
3.2.1 Zonagen Combination Products..................... -18-
3.2.2 *** Formulations................................. -19-
3.2.3 Standstill....................................... -19-
3.2.4 Negotiation of Agreement......................... -20-
ARTICLE IV - DEVELOPMENT, COMMERCIALIZATION
AND REGULATORY ISSUES......................................... -20-
4.1 Completion of Studies................................... -20-
4.1.1 Pre-Clinical and Clinical Studies and Testing.... -21-
</TABLE>
-ii-
<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
<TABLE>
<S> <C>
4.1.2 Investigator Initiated Studies............................ -21-
4.2 Data and Reports................................................. -21-
4.3 Preparation and Filing of HRD.................................... -21-
4.3.1 Europe.................................................... -21-
4.3.2 Other Countries........................................... -22-
4.4 Adverse Event Reporting.......................................... -22-
4.5 Development Activities by SP Ltd................................. -22-
4.6 Development of Zonagen Additional Indications
and *** Formulations............................................. -22-
4.7 Notice........................................................... -23-
4.8 Joint Development Committee...................................... -23-
4.8.1 Establishment of Joint Development Committee.............. -23-
4.8.2 Composition of JDC........................................ -23-
4.8.3 JDC Meetings.............................................. -24-
4.8.4 Deadlock.................................................. -24-
ARTICLE V - MANUFACTURE AND SUPPLY......................................... -24-
5.1 Supply of SP Ltd.'s Requirements................................. -24-
5.1.1 Manufacture and Supply by Zonagen......................... -24-
5.1.2 Manufacturing and Supply Agreement........................ -25-
5.1.3 Third Party Obligations................................... -25-
5.2 Purchase Price................................................... -26-
5.3 Clinical Trial Materials and Samples............................. -26-
5.4 Forecasts and Orders............................................. -27-
5.4.1 Forecasts................................................. -27-
5.4.2 Purchase Orders........................................... -27-
5.5 Delivery Terms................................................... -28-
5.6 Scheduling of Delivery........................................... -28-
5.7 Inability to Supply.............................................. -28-
5.8 Second Source of Supply.......................................... -28-
5.9 Quality Control and Quality Assurance............................ -28-
5.9.1 Adherence to Specifications............................... -28-
5.9.2 Quality Control Program................................... -29-
5.9.3 Testing and Release of Licensed Product................... -29-
5.9.4 Nonconforming Product..................................... -29-
5.9.5 Inspections by Regulatory Authorities..................... -29-
5.9.6 Inspections by SP Ltd..................................... -30-
5.10 SP Ltd.'s Right to Manufacture................................... -30-
5.10.1 Option.................................................... -30-
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
5.10.2 Continued Manufacture by Zonagen......................... -30-
5.10.3 Termination of Manufacturing and Supply Agreement........ -31-
ARTICLE VI - MARKETING AND COMMERCIALIZATION............................... -31-
6.1 Commercialization................................................ -31-
6.2 Opportunity to Cure.............................................. -32-
6.3 Marketing Review................................................. -32-
ARTICLE VII - PAYMENTS, ROYALTIES AND REPORTS.............................. -32-
7.1 Milestone Payments............................................... -33-
7.2 R&D Funding...................................................... -34-
7.3 Royalties........................................................ -35-
7.3.1 Royalty Rates............................................ -35-
7.3.2 Term and Scope of Royalty Obligations.................... -38-
7.3.3 Third Party Licenses - Licensed Products................. -38-
7.3.4 Third Party Licenses - SP Ltd. Combination Products...... -39-
7.3.5 Compulsory Licenses...................................... -39-
7.3.6 Comarketing Rights....................................... -39-
7.4 Reports and Payment of Royalty................................... -40-
7.4.1 Royalties Paid Quarterly................................. -40-
7.4.2 Method of Payment........................................ -40-
7.5 Maintenance of Records. Audits................................... -40-
7.5.1 Record Keeping by SP Ltd................................. -40-
7.5.2 Underpayment/Overpayments................................ -41-
7.5.3 Record Keeping by Sublicensee............................ -41-
7.5.4 Confidentiality.......................................... -41-
7.5.5 Record Keeping by Zonagen................................ -41-
7.6 Separate Payment Obligations..................................... -42-
7.7 Income Tax Withholding........................................... -42-
7.8 Direct Affiliate Licenses........................................ -42-
ARTICLE VIII - PATENTS..................................................... -42-
8.1 Filing, Prosecution and Maintenance of Patents................... -42-
8.2 Option of SP Ltd. to Prosecute and Maintain Patents.............. -43-
8.3.2 Continuance of Infringement.............................. -44-
8.4 Infringement of Third Party Patents; Third Party Licenses........ -44-
8.4.1 Course of Action......................................... -44-
8.4.2 LP Ltd. Option to Negotiate.............................. -44-
8.4.3 Zonagen Option to Negotiate.............................. -45-
8.4.4 Third Party Infringement Suit............................ -45-
8.5 Certification Under Drug Price Competition and Patent Restoration
Act.............................................................. -45-
8.6 Abandonment...................................................... -46-
8.7 Patent Term Restoration.......................................... -46-
</TABLE>
-iv-
<PAGE>
<TABLE>
<S> <C>
8.8 Notices Regarding Patents...................................... -46-
ARTICLE IX - CONFIDENTIALITY AND PUBLICATION............................... -46-
9.1 Confidentiality................................................ -46-
9.1.1 Nondisclosure Obligation................................ -46-
9.1.2 Disclosure to Agents.................................... -47-
9.1.3 Disclosure to Third Parties............................. -47-
9.2 Return of Proprietary Information.............................. -48-
9.3 No Publicity................................................... -48-
9.4 Publication.................................................... -48-
ARTICLE X - REPRESENTATIONS AND WARRANTIES................................. -49-
10.1 Representations and Warranties of Each Party................... -49-
10.2 Zonagen's Representations...................................... -50-
10.3 Continuing Representations..................................... -52-
10.4 No Inconsistent Agreements..................................... -52-
10.5 Representation by Legal Counsel................................ -52-
ARTICLE XI - INDEMNIFICATION AND LIMITATION ON LIABILITY................... -52-
11.1 Indemnification by SP Ltd..................................... -52-
11.2 Indemnification by Zonagen..................................... -53-
11.3 Conditions to Indemnification.................................. -53-
11.4 Settlements.................................................... -53-
11.5 Limitation of Liability........................................ -53-
11.6 Insurance...................................................... -53-
ARTICLE XII - TRADEMARK PROVISIONS......................................... -54-
12.1 Trademark Registrations and Infringements...................... -54-
12.1.1 Use of Trademark, Registration.......................... -54-
12.1.2 Other Marks............................................. -54-
12.1.3 No Confusing Mark....................................... -54-
12.1.4 No Other Grants......................................... -55-
12.1.5 Review by Zonagen....................................... -55-
12.1.6 Use of Tradename........................................ -55-
12.2 Infringement Actions........................................... -55-
12.2.1 Notice of Infringement.................................. -55-
12.2.2 Costs of Infringement Action............................ -55-
12.2.3 Assistance in Actions................................... -56-
ARTICLE XIII - TERM AND TERMINATION........................................ -56-
13.1 Term and Expiration............................................ -56-
13.2 Termination by SP Ltd.......................................... -56-
13.3 Termination.................................................... -57-
</TABLE>
-v-
<PAGE>
<TABLE>
<S> <C>
13.3.1 Termination for Cause................................... -57-
13.3.2 Effect of Termination for Cause on License.............. -57-
(i) Termination by SP Ltd............................ -57-
(ii) Termination by Zonagen........................... -57-
(iii) Effect of Bankruptcy............................. -58-
13.4 Effect of Termination.......................................... -58-
ARTICLE XIV - MISCELLANEOUS................................................ -58-
14.1 Assignment..................................................... -58-
14.2 Governing Law.................................................. -58-
14.3 Waiver......................................................... -59-
14.4 Independent Relationship....................................... -59-
14.5 Export Control................................................. -59-
14.6 Entire Agreement, Amendment.................................... -60-
14.7 Notices........................................................ -60-
14.8 Provisions for Insolvency...................................... -61-
14.8.1 Effect on Licenses...................................... -61-
14.8.2 Rights to Intellectual Property......................... -62-
14.8.3 SP Ltd.'s Rights........................................ -62-
14.8.4 Deemed Grant of Rights.................................. -62-
14.8.5 Security Interests...................................... -63-
14.9 Force Majeure.................................................. -63-
14.10 Severability................................................... -63-
14.11 Counterparts................................................... -63-
14.12 Captions....................................................... -63-
14.13 Recording...................................................... -63-
14.14 Further Actions................................................ -64-
</TABLE>
SCHEDULES
Schedule 1.22 Patent Rights
Schedule 4.4 Adverse Event Reporting Procedures
Schedule 10.2(m) Zonagen-Third Party Agreements
Schedule 14.2 Dispute Resolution Procedures
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EXCLUSIVE LICENSE AGREEMENT
THIS EXCLUSIVE LICENSE AGREEMENT (the "Agreement") is made as of November
14, 1997 by and between ZONAGEN, INC., a Delaware corporation having its
principal place of business at 2408 Timberloch Place, B-4, The Woodlands, Texas
77380, (hereinafter referred to as "Zonagen") and SCHERING-PLOUGH LTD., a
corporation organized and existing under the laws of Switzerland, having its
principal place of business at Topferstrasse 5, 6004 Lucerne, Switzerland
(hereinafter referred to as "SP Ltd."). Zonagen and SP Ltd. are sometimes
referred to herein individually as a "Party" and collectively as the "Parties".
References to "SP Ltd." and "Zonagen" shall include their respective Affiliates
(as hereinafter defined).
WHEREAS, Zonagen has developed certain Zonagen Know-How (as hereinafter
defined) and has rights to Patent Rights (as hereinafter defined) relating to
certain phentolamine formulations; and
WHEREAS, SP Ltd., together with its Affiliates (as hereinafter defined)
possesses extensive capabilities in the development and commercialization of
pharmaceutical products on a worldwide basis; and
WHEREAS, SP Ltd. desires to obtain and Zonagen is willing to grant to SP
Ltd., an exclusive license in the Territory under the Patent Rights and Zonagen
Trademarks and to use the Zonagen Know-How, in the Field upon the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained, SP Ltd. and Zonagen hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following initially capitalized terms,
whether used in the singular or plural, shall have the respective meanings set
forth below:
1.1 "Additional Indication" shall mean any SP Ltd. Additional Indication
or any Zonagen Additional Indication.
1.2 "Affiliate" shall mean any individual or entity directly or indirectly
controlling, controlled by or under common control with, a Party to this
Agreement. For purposes of this Agreement, the direct or indirect ownership of
fifty percent (50%) or more of the outstanding voting securities of an entity,
or the right to receive fifty percent (50%) or more of the profits or earnings
of an entity shall be deemed to constitute control. Such other relationship as
in fact results in actual control over the management, business and affairs of
an entity shall also be deemed to constitute
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control so long as the "controlling" entity has direct or indirect ownership of
thirty percent (30%) or more of the outstanding voting securities of the
"controlled" entity.
1.3 "Calendar Quarter" shall mean the respective periods of three (3)
consecutive calendar months ending on March 31, June 30, September 30 or
December 31, for so long as this Agreement is in effect.
1.4 "Calendar Year" shall mean each successive period of twelve (12)
months commencing on January 1 and ending on December 31, for so long as this
Agreement is in effect.
1.5 "Change of Control" shall mean
(a) The acquisition by any Person (as defined in Section 3.2.3
hereof) of beneficial ownership (within the meaning of Rule l3d-3
promulgated under the Securities Act of 1934, as amended) of securities of
Zonagen or, in the case of SP, Ltd., of either SP Ltd.'s parent company,
Schering-Plough Corporation ("SP") or SP Ltd. (in each case the "Acquired
Entity"), where such acquisition causes such Person to own fifty-one
percent (51%) or more of either (i) the then outstanding shares of common
stock of the Acquired Entity (the "Outstanding Acquired Entity Common
Stock") or (ii) the combined voting power of the then outstanding voting
securities of the Acquired Entity entitled to vote generally in the
election of the Acquired Entity's directors (the "Outstanding Acquired
Entity Voting Securities"); provided, however, that for purposes of this
-----------------
subsection (a) the following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the Acquired Entity; (ii) any
acquisition by the Acquired Entity; (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Acquired
Entity or any corporation controlled by the Acquired Entity; or (iv) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii), and (iii) of subsection (c) below; and, provided,
--------
further, that if any Person's beneficial ownership of the Outstanding
Acquired Entity Voting Securities reaches or exceeds fifty-one percent
(51%) as a result of a transaction described in clauses (i) or (ii) above,
and such Person subsequently acquires beneficial ownership of additional
voting securities of the Acquired Entity, such subsequent acquisition shall
be treated as an acquisition that causes such Person to own fifty-one
percent (51%) or more of the Outstanding Acquired Entity Voting Securities;
or
(b) individuals, who, as of the date hereof, constitute the board of
directors of the Acquired Entity (the "Incumbent Acquired Entity Board")
cease for any reason to constitute at least a majority of the Acquired
Entity board of directors (the "Acquired Entity Board"), provided, however,
-------- -------
that any individual becoming a director subsequent to the date hereof whose
election, or nomination for election by Acquired Entity's shareholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Acquired Entity Board shall be considered as though such
individual were a member of the Incumbent Acquired Entity Board, but
excluding, for this purpose, any such individual whose initial assumption
of office occurs as a result of an actual or threatened election contest
with respect
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to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Acquired Entity Board; or
(c) approval by the shareholders of the Acquired Entity of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the Acquired Entity's assets (a "Business
Combination"), in each case, unless, following such Business Combination,
(i) all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Acquired Entity Common
Stock and the Outstanding Acquired Entity Voting Securities immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than fifty percent (50%) of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which, as a result of such transaction, owns the Acquired
Entity or all or substantially all of the Acquired Entity's assets either
directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Acquired Entity Common Stock and the
Outstanding Acquired Entity Voting Securities, as the case may be, (ii) no
Person (excluding any employee benefit plan (or related trust) of the
Acquired Entity or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly fifty-one percent
(51%) or more of, respectively, the then outstanding shares of common stock
of the corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such corporation
except to the extent that such ownership existed prior to the Business
Combination, and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such Business Combination were
members of the Incumbent Acquired Entity Board at the time of the execution
of the initial agreement, or of the action of the Acquired Entity Board,
providing for such Business Combination; or
(d) approval by the shareholders of the Acquired Entity of a complete
liquidation or dissolution of the Acquired Entity.
1.6 "Combination Product"shall mean a Licensed Product which comprises two
(2) or more active ingredients at least one (1) of which is a Licensed Compound.
1.7 "Effective Date" shall mean the next business day following the last
to occur of: (i) expiration or earlier termination of any notice and waiting
period under the HSR Act; (ii) delivery of fully executed counterparts of each
of the Transaction Agreements.
1.8 "FDA" shall mean the United States Food and Drug Administration or any
successor agency thereto.
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
1.9 "Female Sexual Function Indication" shall mean the modulation of
sexual response or function and/or the treatment of sexual dysfunction in human
females.
1.10 "Field" shall mean the use of the Licensed Product in the Male
Sexual Function Indication and/or any SP Ltd. Additional Indication.
1.11 "First Commercial Sale" shall mean, with respect to any Licensed
Product, the first sale for end use of such Licensed Product after receipt of
the requisite Regulatory Approval.
1.12 "HRD" shall mean a health registration dossier or its equivalent,
submitted to a national government or a supranational governmental authority,
consisting of the chemical, pharmaceutical and biological documentation; the
toxicological and pharmacological documentation; and the clinical documentation
respectively, and covering a Licensed Product which is filed in any country
outside the United States and which is analogous to a new drug application,
product license application or its equivalent filed with the United States Food
and Drug Administration seeking approval to market and sell a Licensed Product
in the Territory and including, where applicable, applications for pricing,
pricing reimbursement approval, labeling and Regulatory Approval.
1.13 "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, or any foreign equivalent statute.
1.14 "Improvement" shall mean any enhancement in the formulation,
ingredients, preparation, presentation, means of delivery, dosage, packaging, or
manufacture of Licensed Product developed prior to or during the Term of this
Agreement by or on behalf of Zonagen or to which rights are acquired, through
assignment, purchase, license or otherwise, by Zonagen or its Affiliates prior
to or during the Term of this Agreement.
1.15 "Licensed Compound" shall mean phentolarnine, phentolamine mesylate,
phentolamine hydrochloride and/or any active metabolites, isomers, salts,
analogues or non-covalently bonded derivatives of any of the foregoing.
1.16 "Licensed Product(s)" shall mean any form or dosage of pharmaceutical
compositions or preparations, including, without limitation, SP Ltd. Combination
Products, in final form for sale by prescription, over-the-counter or any other
method, which contain as an active ingredient the Licensed Compound.
Notwithstanding the foregoing, Licensed Products shall not include (i) Zonagen
Combination Products, (ii) injectable formulations of pharmaceutical
compositions containing, as an active ingredient, the Licensed Compound or (iii)
*** formulations containing, as an active ingredient, the Licensed Compound.
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
1.17 Male Sexual Function Indication" shall mean the modulation of sexual
response or function and/or the treatment of sexual dysfunction, including,
without limitation, erectile dysfunction or premature ejaculation, in human
males.
1.18 "Manufacture" shall mean the processing, formulating, tableting, final
packaging, final labeling and quality control testing of the Licensed Product in
accordance with this Agreement, the Specifications and the Exhibits attached
hereto and incorporated hereby.
1.19 ***
1.20 "NDA" shall mean a New Drug Application, Product License Application
or its equivalent filed with the United States Food and Drug Administration
seeking approval to market and sell a Licensed Product in the United States.
1.21 "Net Sales" shall mean the proceeds actually received by SP Ltd., its
Affiliates or sublicensees on all sales, in those countries of the Territory for
which SP Ltd. is then obligated to pay royalties to Zonagen as set forth in
Section 7.3 hereof, of Licensed Product to an unaffiliated third party (whether
an end-user, a distributor or otherwise), and exclusive of intercompany
transfers or sales, less the reasonable and customary deductions from such gross
amounts including: (i) credits or allowances actually granted for damaged goods,
returns or rejections of Licensed Product and retroactive price reductions; (ii)
sales or similar taxes borne by SP Ltd., its Affiliates or sublicensees
(including duties or other governmental charges levied on, absorbed or otherwise
imposed on the sale of Licensed Product including, without limitation, value
added taxes or other governmental charges otherwise measured by the billing
amount, when included in billing); (iii) freight, postage, shipping, customs
duties and insurance charges to the extent included in the proceeds actually
received from the customer; (iv) charge back payments and rebates granted to
managed health care organizations or to federal, state and local governments,
their agencies, and purchasers and reimbursers or to trade customers, including
but not limited to, wholesalers and chain and pharmacy buying groups; and (v)
rebates (or equivalents thereof) granted to or charged by national, state or
local governmental authorities in countries other than the United States. In the
event that Licensed Product is transferred for consideration other than cash the
Net Sales for such Licensed Product will be calculated based on the unit price
for such Licensed Products sales being equal to the average unit price of such
Licensed Product sold in cash transactions.
In the event that Licensed Product is sold as part of a bundle of distinct
products (i.e. not (i) packaged together with another product or (ii) in a
Combination Product form alone), the Net Sales
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
for such Licensed Product will be based on the discounted unit price for such
Licensed Products sales, which discounted price shall be equal to ***.
In the event that Licensed Product is sold packaged together with another
product (together a "Composite Product"), Net Sales for such Composite Product
will be calculated by multiplying actual Net Sales of such Composite Product by
the fraction ***. In the event that the Licensed Product is sold in the form of
a Composite Product containing one or more products other than Licensed Product
and one or more such products of the Composite Product are not sold separately,
then the above formula shall be modified such that ***. If the Parties are
unable to agree on the *** of the components of such Composite Product, the
resolution of such issue shall be made in accordance with Section 14.2 hereof.
1.22 "Patent Rights" shall mean any and all patents and pending patent
applications which during the Term of this Agreement are owned by Zonagen, or to
which Zonagen through assignment, purchase, license or otherwise acquires
rights, including, but not limited to, those listed in Schedule 1.22, which have
claims covering: (i) Licensed Compound or any use thereof or an apparatus,
material or method of manufacture useful in the development, manufacture, use or
sale thereof; or (ii) Licensed Product (excluding that part of any SP Ltd.
Combination Product developed by or on behalf of SP Ltd.) or any use thereof or
an apparatus, material or method of manufacture useful in the development,
manufacture, use or sale thereof; or (iii) or are substitutions, divisions,
continuations, continuations-in-part, reissues, renewals, registrations,
confirmations, re-examinations, extensions, supplementary protection
certificates or any like filing thereof, or provisional applications of any such
patents and patent applications.
1.23 "Proprietary Information" shall mean (i) Zonagen Know-How and
(ii) all other scientific, clinical, regulatory, marketing, financial and
commercial information or data, whether communicated in writing, verbally or
electronically, which is provided by one Party to the other Party in connection
with this Agreement. When Propriety Information is disclosed in a manner other
than in writing, it shall be summarized written form, marked "Confidential" and
transmitted to the receiving Party within ten (10) business days of disclosure
to the receiving Party.
1.24 "Regulatory Approval" shall mean the technical, medical and
scientific licenses, registrations, authorizations and approvals (including,
without limitation, approvals of HRDs, supplements and amendments, pre- and
post- approvals, pricing and third party reimbursement approvals, and labeling
approvals) of any national, supra-national (e.g., the European Commission, the
Council of the European Union, or the European Agency for the Evaluation of
Medicinal Products), regional, state or local regulatory agency, department,
bureau, commission, council or other governmental entity, necessary for the
development, manufacture, distribution, marketing, promotion, offer for sale,
use, import, export or sale of Licensed Product(s) and/or Licensed Compound(s)
in a regulatory jurisdiction.
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
1.25 "Regulatory Authority" shall mean any national, supra-national (e.g.,
the European Commission, the Council of the European Union, or the European
Agency for the Evaluation of Medicinal Products), regional, state or local
regulatory agency, department, bureau, commission, council or other governmental
entity in each country of the Territory involved in the granting of Regulatory
Approval for the Licensed Product.
1.26 "SP Ltd. Additional Indications" shall mean any new or expanded
therapeutic indication(s) outside of the Male Sexual Function Indication,
including,, without limitation, Female Sexual Function Indications, for Licensed
Compound and/or Licensed Product developed prior to or during the Term of this
Agreement by or on behalf of SP Ltd. (other than pursuant to SP Ltd.'s exercise
of an option under Section 3.1 with respect to a Zonagen Additional Indication)
or to which rights are acquired, through assignment, purchase, license or
otherwise, by SP Ltd. or its Affiliates prior to or during the Term of this
Agreement.
1.27 "SP Ltd. Combination Product" shall mean a Combination Product which
is developed by or on behalf of SP Ltd. or its Affiliates, but not including any
Zonagen Combination Products.
1.28 "SP Ltd. Trademark" shall mean any trademark(s) proposed, chosen,
owned or controlled by SP Ltd. or its Affiliates for use with the Licensed
Compound and/or the Licensed Product in the Territory.
1.29 "Specifications" shall have the meaning set forth in Section
5.9.1 hereof.
1.30 ***
1.31 "Target Patient Population" shall mean the population of patients
experiencing mild to moderate erectile dysfunction.
1.32 "Term" shall mean, on a country-by-country basis, the period
commencing on the Effective Date and unless terminated earlier pursuant to the
relevant provisions of Article XIII shall continue until the later of (i) the
expiration of the last to expire of the Patent Rights incorporating a Valid
Claim in such country, or (ii) ten (10) years after the First Commercial Sale of
the Licensed Product in such country.
1.33 "Territory" shall mean the entire world, except United States of
America, its territories, possessions and commonwealths.
1.34 "Transaction Agreements" shall mean collectively this Agreement and
the U.S. License Agreement.
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
1.35 "U.S. License Agreement" shall mean the agreement relating to the
United States, its territories and possessions entered into by Zonagen and SP
Ltd.'s Affiliate, Schering Corporation simultaneously with the entering into of
this Agreement.
1.36 ***
1.37 "Valid Claim" shall mean a composition of matter or a method of
use claim, or equivalent thereof, of an issued or granted and unexpired patent
in the Territory covering the use in the Field of any Licensed Compound and/or
Licensed Product included within the Patent Rights, which (i) has not been
revoked or held unenforceable or invalid by a decision of a court or other
governmental agency of competent jurisdiction, unappealable or unappealed within
the time allowed for appeal; or (ii) has not been abandoned, disclaimed, denied
or admitted to be invalid or unenforceable through reissue or disclaimer or
otherwise.
1.38 "Worldwide Annual Net Sales" shall mean the aggregate total of (i)
annual Net Sales of Licensed Product by SP Ltd., its Affiliates or their
sublicensees under this Agreement and (ii) annual Net Sales of Licensed Product
by Schering Corporation, its affiliates or their sublicensees made under the
U.S. License Agreement.
1.39 "Zonagen Additional Indications" shall mean any new or expanded
therapeutic indication(s) outside of the Field, including, without limitation,
Female Sexual Function Indications, for Licensed Compound and/or Licensed
Product developed prior to or during the Term of this Agreement by or on behalf
of Zonagen or to which rights are acquired, through assignment, purchase,
license or otherwise, by Zonagen or its Affiliates prior to or during the Term
of this Agreement.
1.40 "Zonagen Combination Product" shall mean a Combination Product
which is developed by or on behalf of Zonagen or its Affiliates. A Zonagen
Combination Product shall include, without limitation, a Combination Product for
which Zonagen initiates the development and later transfers development
obligations to SP Ltd. pursuant to an agreement entered into in accordance with
Section 3.3 hereof.
1.41 "Zonagen Know-How" shall mean any of Zonagen's, its Affiliates', or
its subcontractors' information and materials relating to the research,
development, registration, manufacture, marketing, use or sale of Licensed
Compounds and/or Licensed Products (excluding that part of any Combination
Product developed by or on behalf of SP Ltd.) in the Field which during the Term
of this Agreement are in Zonagen's, its Affiliates' or subcontractors'
possession or control, through license or otherwise, and which are not generally
known. Zonagen Know-How shall include, without limitation, discoveries,
practices, methods, knowledge, Improvements, processes, formulas, data, ideas,
skill, experience, inventions, know-how, technology, trade secrets,
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manufacturing procedures, purification and isolation techniques, instructions,
test data and other intellectual property, patentable or otherwise, relating to
Licensed Compounds and/or Licensed Products (excluding that part of any SP Ltd.
Combination Product developed by or on behalf of SP Ltd.) for use in the Field ,
including without limitation, test procedures and other new technologies derived
therefrom. Zonagen Know-How shall also include, without limitation: (i) all
biological, chemical, pharmacological, toxicological, pharmaceutical, physical
and analytical, clinical, safety, manufacturing and quality control data and
information related thereto; (ii) compositions of matter, assays and biological
materials specifically relating to development, manufacture, use or sale of any
Licensed Compound and/or Licensed Product (excluding that part of any SP Ltd.
Combination Product developed by or on behalf of SP Ltd.)for use in the Field;
and (iii) all applications, registrations, licenses, authorizations, approvals
and correspondence submitted to or received from any regulatory authorities with
jurisdiction over an investigational drug containing any Licensed Compound
and/or Licensed Product (excluding that part of any SP Ltd. Combination Product
developed by or on behalf of SP Ltd.) for use in the Field in the Territory
(including, without limitation, minutes and meeting notes relating to any
communications with any regulatory authority with jurisdiction over an
investigational drug containing any Licensed Compound and/or Licensed Product
(excluding that part of any SP Ltd. Combination Product developed by or on
behalf of SP Ltd.) in the Territory).
1.42 "Zonagen Trademark" shall mean any trademark(s) proposed, chosen,
used, owned, or controlled by Zonagen or its Affiliates in connection with the
Licensed Compound and/or the Licensed Product in the Territory, including,
without limitation, the trademark "Vasomax" but, excluding the Vasomax trademark
in Mexico.
ARTICLE II
LICENSES; DISCLOSURE OF INFORMATION; APPROVALS
2.1 Exclusive License Grant.
-----------------------
2.1.1 License. Zonagen hereby grants to SP Ltd., as of the
-------
Effective Date, an exclusive license (exclusive even as to Zonagen, except
as expressly provided otherwise herein), in the Territory, under the Patent
Rights and to use the Zonagen Know-How, each to discover, develop, make,
have made, import, export, use, distribute, market, promote, offer for sale
and sell Licensed Compound and Licensed Product(s), each for use in the
Field. Any Improvements relating to the Licensed Product (excluding that
part of any SP Ltd. Combination Product developed by or on behalf of SP
Ltd.) developed prior to or during the Term of this Agreement by or on
behalf of Zonagen shall be included in Zonagen Know-How or Patent Rights,
as the case may be, for all purposes of this Agreement. Zonagen further
hereby grants to SP Ltd., as of the Effective Date, an exclusive license,
exclusive even as to Zonagen, in the Territory to use the Zonagen
Trademark(s) for the Licensed Compound and/or the Licensed Product(s). It
is understood by the Parties that with respect to intellectual property
rights included within the Patent Rights or the Zonagen Know-How
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developed or acquired (whether by license, assignment or otherwise) by
Zonagen after the Effective Date, such rights are granted to SP Ltd. under
this Section 2.1.1, only to the extent that Zonagen is legally able to do
so. Notwithstanding the previous sentence, Zonagen, in developing or
acquiring such intellectual property rights, will use reasonable best
efforts to ensure that SP Ltd.'s rights therein are not diminished.
2.1.2 Right to Sublicense, Appointment of Distributors. The license
------------------------------------------------
granted to SP Ltd. under Section 2.1.1 shall include the rights to appoint
distributors and to grant sublicenses to Affiliates and/or any third party.
SP Ltd. shall give Zonagen notice of the appointment of any such
sublicensees or distributors. Agreements with any third party sublicensee
shall provide that such sublicensee is subject to the same obligations
(other than obligations to make payments to Zonagen) as is SP Ltd. under
this Agreement.
2.1.3 Retained Rights. Zonagen retains all rights in and to the
---------------
Patent Rights and Zonagen Know-How in the Territory which are not otherwise
expressly granted to or conferred upon SP Ltd. under this Agreement.
2.2 Non-Exclusive License Grant. In the event that the discovery,
---------------------------
development, making, having made, importing, exporting, use, distribution,
marketing, promotion, offering for sale or sale by SP Ltd., its Affiliates
and/or sublicensees of Licensed Compound(s) and/or Licensed Product(s) would
infringe during the Term of this Agreement a claim of an issued patent, and/or
any patent rights which Zonagen owns or has the rights to license and which
patents are not covered by the grant in Section 2.1, Zonagen hereby grants to SP
Ltd. and its Affiliates, to the extent Zonagen is legally able to do so, a non-
exclusive, royalty-free license in the Territory under such issued patents
solely for SP Ltd., its Affiliates and/or sublicensees to discover, develop,
make, have made, import, export, use, distribute, market, promote, offer for
sale and sell Licensed Compound(s) and/or Licensed Product(s) in the Field in
the Territory. For the avoidance of doubt, this Section 2.2 shall not be
interpreted as permitting SP Ltd. to avoid the payment of royalties which would
otherwise be due for sales of Licensed Product made pursuant to the license
granted in Section 2.1.
2.3 Disclosure of Information. Upon SP Ltd.'s request, which requests may
-------------------------
be made from time to time during the Term of this Agreement, Zonagen shall
promptly disclose to SP Ltd. in writing, or via electronic media acceptable to
SP Ltd., all existing material Zonagen Know-How not previously disclosed to SP
Ltd. (or any part thereof as may be designated by SP Ltd. in such request) in
order to enable SP Ltd. to exploit its rights granted under Section 2.1 of this
Agreement. In addition, during the Term of this Agreement Zonagen shall promptly
disclose to SP Ltd. in writing, or via electronic media acceptable to SP Ltd.,
on an ongoing basis all new material Zonagen Know-How. Such Zonagen Know-How
and other information shall be automatically deemed to be within the scope of
the licenses granted herein without payment of any additional compensation. Upon
SP Ltd.'s request, Zonagen shall provide reasonable technical assistance to
enable SP Ltd. to utilize such additional Zonagen Know-How. SP Ltd. shall
reimburse Zonagen for the documented reasonable out-of-pocket costs incurred by
Zonagen in providing such technical assistance provided SP Ltd. has approved of
such costs prior to the time they are incurred. SP Ltd. shall have the right
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
to use for all purposes in connection with obtaining any Regulatory Approval for
the Licensed Product(s) all Zonagen Know-How and other information, disclosed
pursuant to this Section and under this Agreement.
2.4 Government Approvals.
--------------------
2.4.1 Zonagen's and SP Ltd.'s Obligations. Each of Zonagen and SP
-----------------------------------
Ltd. shall use its good faith diligent efforts to eliminate any concern on
the part of any court or government authority regarding the legality of the
proposed transaction, including, if required by national, supra-national,
state or local antitrust authorities, promptly taking all steps to secure
government antitrust clearance, including, without limitation, cooperating
in good faith with any government investigation including the prompt
production of documents and information demanded by a governmental entity
having authority or jurisdiction with respect to such antitrust clearance.
2.4.2 Additional Approvals. Zonagen and SP Ltd. will cooperate and
--------------------
use respectively all reasonable efforts to make all other registrations,
filings and applications, to give all notices and to obtain as soon as
practicable all governmental or other consents, transfers, approvals,
orders, qualifications authorizations, permits and waivers, if any, and to
do all other things necessary or desirable for the consummation of the
transactions as contemplated hereby.
2.5 ***
2.5.1 ***
2.5.2 ***
2.5.3 ***
2.6 Change of Control of Zonagen. In the event there is a Change of
----------------------------
Control of Zonagen, which Change of Control would result in an acquisition of
Zonagen by a third party that is marketing an orally administered product that
directly competes with the Licensed Product the surviving entity shall do each
of the following as SP Ltd., in its sole option, may elect: (i) discontinue the
copromotion of the Licensed Product and any SP Ltd. products that Zonagen may
have been copromoting pursuant to Section 3.3 hereof, (ii) discontinue all
research and development activities with respect to the Licensed Product, and
(iii) discontinue all research and development activities with respect to (x)
any Zonagen Combination Products to which SP Ltd. has obtained rights under
Article III hereof and (y) any Zonagen Additional Indications for which SP Ltd.
has previously exercised its option. Notwithstanding the foregoing or any other
provision to the contrary in this
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
Agreement, upon any Change of Control of Zonagen, Zonagen shall return to SP
Ltd. all copies of any Proprietary Information that SP Ltd. has disclosed to
Zonagen in connection with this Agreement and SP Ltd., thereafter, shall have no
further obligation to disclose any Proprietary Information to Zonagen (or the
surviving entity in a Change of Control of Zonagen) except that SP Ltd. shall
remain obligated to provide Zonagen the information required pursuant to Section
7.4.1 hereof subject to the confidentiality provisions of Article IX hereof.
2.7 Improvements. If, in the development of Improvements to or Zonagen
------------
Additional Indications for the Licensed Product, Zonagen elects to enter into
agreements with third parties in order to obtain rights that are necessary for
such development and resultant commercialization, Zonagen shall be permitted to
do so, provided, however, that Zonagen shall use its best efforts to obtain,
--------
from such third party, exclusive (exclusive even as to such third party)
worldwide rights, with the right to sublicense, to make, have made, use, market,
sell, offer for sale, distribute, import and export any such Improvement or the
Licensed Product for use in any such Zonagen Additional Indication.
ARTICLE III
OPTIONS
3.1 Options for Zonagen Additional Indications and *** Formulations.
---------------------------------------------------------------
3.1.1 Option for Zonagen Additional Indications. Zonagen hereby
-----------------------------------------
grants to SP Ltd. an exclusive option to obtain an exclusive(exclusive even
as to Zonagen) license, in the Territory, under the Patent Rights and
Zonagen Trademarks and to use the Zonagen Know-How to discover, develop,
make, have made, import, export, use, distribute, market, promote, offer
for sale, and sell Licensed Compounds and/or Licensed Products (other than
*** Formulations) for use in any or all Zonagen Additional Indications. At
any time prior to Regulatory Approval of the Licensed Product for use in a
Zonagen Additional Indication in the United States, SP Ltd. shall have the
right to exercise the option granted in this Section 3. 1.1 with respect to
such Zonagen Additional Indication, by providing Zonagen with written
notice of such election. Upon SP Ltd.'s exercise of the option hereunder,
the Parties shall promptly execute an amendment to this Agreement, which
amendment (i) expands the definition of Field to include the use of the
Licensed Compound and/or Licensed Product in such Zonagen Additional
Indication and (ii) makes other modifications to the Agreement which are
necessary to conform the agreement to such expanded scope. SP Ltd. agrees
that it may exercise its option under this Section 3.1 .1 only if Schering
Corporation contemporaneously exercises its similar option under the
U.S.License Agreement.
3.1.2 Option for *** Formulations. If SP Ltd. exercises its option
---------------------------
under Section 3.1.1 hereof with respect to a tablet formulation of the
Licensed Product for use in a Female
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
Sexual Function Indication and Zonagen has not yet obtained Regulatory
Approval for a *** Formulation, then, upon SP Ltd.'s exercise of the option
under Section 3.1.1, SP Ltd. shall have a further exclusive option to
obtain an exclusive (exclusive even as to Zonagen) license, in the
Territory, under the Patent Rights and Zonagen Trademarks and to use the
Zonagen Know-How to discover, develop, make, have made, import, export,
use, distribute, market, promote, offer for sale, and sell *** Formulations
for use in all Additional Indications. At any time prior to Regulatory
Approval of a *** Formulation for use in any Additional Indication in the
United States (the "*** Option Period"), SP Ltd. shall have the right to
exercise the option granted in this Section 3.1.2, by providing Zonagen
with written notice of such election. Upon SP Ltd.'s exercise of the
option hereunder, the Parties shall promptly execute an amendment to this
Agreement, which amendment makes modifications to the Agreement which are
necessary to conform the Agreement to such expanded scope. SP Ltd. agrees
that it may exercise its option under this Section 3.1.2 only if Schering
Corporation contemporaneously exercises its similar option under Section
3.1.2 of the U.S. License Agreement.
3.1.3 Option Payments.
---------------
(a) If SP Ltd. exercises the option granted in Section
3.1.1 hereof (with respect to any Zonagen Additional Indication) or
Section 3.1.2 hereof (with respect to the *** Formulation) prior to
the later of (x) the first anniversary of the Effective Date or (ii)
the enrollment of the first patient into a Phase II clinical trial
testing the safety and/or efficacy of the Licensed Product for use in
such Zonagen Additional Indication or of the *** Formulation for use
in any Additional Indication, as appropriate, SP Ltd. shall, (i)
subject to the limitations set forth in Section 3.1.3 (e) hereof,
reimburse Zonagen for the reasonable out-of-pocket costs (which have
not otherwise been reimbursed by Schering Corporation pursuant to the
U.S. License Agreement) incurred by Zonagen, both as of such date of
exercise and on a going-forward basis, in the development of such
Zonagen Additional Indications or the *** Formulation, as appropriate,
which reimbursement shall be made on a quarterly basis pursuant to
invoices supporting documentation submitted by Zonagen to SP Ltd.; and
(ii) subject to the limitations set forth in Section 3.1.3(f) hereof,
pay Zonagen *** within ten (10) business days after Zonagen has
provided SP Ltd. with written evidence that the FDA has granted
Regulatory Approval, in the United States, of the Licensed Product for
such Zonagen Additional Indication or of the *** Formulation, as
appropriate.
(b) If SP Ltd. exercises the option granted in Section
3.1.1 hereof (with respect to any Zonagen Additional Indication) or
Section 3.1.2 hereof (with respect to the *** Formulation) after the
enrollment of the first patient into a Phase II clinical
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
trial testing the safety and/or efficacy of the Licensed Product for
use in such Zonagen Additional Indication or of the *** Formulation,
as appropriate, and prior to the enrollment of the first patient into
a Phase III pivotal trial testing the safety and efficacy of the
Licensed Product for use in such Zonagen Additional Indication or of
the *** Formulation, as appropriate, SP Ltd. shall, (i) subject to the
limitations set forth in Section 3.1.3(e) hereof, reimburse Zonagen
for the reasonable out-of-pocket costs (which have not otherwise been
reimbursed by Schering Corporation pursuant to the U.S. License
Agreement) incurred by Zonagen in the development of such Zonagen
Additional Indication or the *** Formulation, as appropriate, up to
the date SP Ltd. so exercises its option which reimbursement will be
made pursuant to an invoice supporting documentation submitted by
Zonagen to SP Ltd.; (ii) subject to the limitations set forth in
Section 3.1.3(e) hereof, thereafter conduct and fund the remainder of
the development activities that are required to obtain Regulatory
Approval, in the United States, of the Licensed Product for such
Zonagen as Additional Indication or such *** Formulation, as
appropriate; (iii) subject to the limitations set forth in Section
3.1.3(f) hereof pay Zonagen *** within ten (10) business days after
the Parties have both signed the amendment described in Section 3.1.1
or 3.1.2 hereof, as appropriate; and (iv) subject to the limitations
set forth in Section 3.1.3 (f) hereof pay Zonagen *** within ten (10)
business days after Zonagen has provided SP Ltd. with written evidence
that the FDA has granted Regulatory Approval, in the United States, of
the Licensed Product for such Zonagen Additional Indications or of the
*** Formulation, as appropriate.
(c) If SP Ltd. exercises the option granted in Section
3.1.1 hereof (with respect to any Zonagen Additional Indication) or
Section 3.1.2 hereof (with respect to the *** Formulation) after the
enrollment of the first patient into a Phase III pivotal clinical
trial testing the safety and efficacy of the Licensed Product for use
in such Zonagen Additional Indication or of the *** Formulation, as
appropriate, and prior to United States Regulatory Approval of the
Licensed Product for use in such Zonagen Additional Indication or of
the *** Formulation, as appropriate, SP Ltd. shall, (i) subject to the
limitations set forth in Sections 3.1.3 (e) and 3.1.3 (f) hereof,
reimburse Zonagen for the reasonable out-of-pocket costs (which have
not otherwise been reimbursed by Schering Corporation pursuant to the
U.S. License Agreement) incurred by Zonagen, both as of the date of
the exercise of the option and on a going-forward basis in the
development of such Zonagen Additional Indication or the ***
Formulation, as appropriate, and (ii) subject to the limitations set
forth in Section 3.1.3 (f) hereof pay Zonagen ***, each within ten
(10) business days after Zonagen has provided SP Ltd. with written
evidence that the FDA has granted Regulatory Approval, in the United
States, of the Licensed Product for such Zonagen Additional Indication
or for such *** Formulation.
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
(d) If SP Ltd. exercises the option granted in Section
3.1.1 or 3.1.2 hereof, SP Ltd.'s Net Sales of the Licensed Product for
the Additional Indication or of the *** Formulation shall be included
in the calculation of Net Sales for purposes of determining the
royalty under Section 7.3 hereof.
(e) For any given Zonagen Additional Indication or for the
*** Formulation, as appropriate, SP Ltd.'s obligation to reimburse
Zonagen for its out-of-pocket expenses pursuant to either Section
3.1.3 (a) (i) or Section 3.1.3 (c)(i) hereof and SP Ltd.'s obligation
to reimburse Zonagen for its out-of-pocket expenses pursuant to
Section 3.1.3(b)(i) hereof collectively with SP Ltd.'s obligation to
fund the remaining development of the Licensed Product for such
Additional Indication pursuant to Section 3.1.3(b)(ii) hereof and of
the *** Formulation shall, in each case, not exceed ***. In the event
that, because of SP Ltd.'s funding of the remaining development of the
Licensed Product for such Additional Indication or of the ***
Formulation, as appropriate, SP Ltd.'s obligation under Sections
3.1.3(b)(i) and 3.1.3(b)(ii) hereof collectively exceeds *** SP Ltd.,
at its option may, in its sole discretion, (x) elect to not proceed
with the continued development of the Licensed Product for use in such
Zonagen Additional Indication or of the *** Formulation, as
appropriate, in which event, upon Zonagen's request and the refund of
any payments SP Ltd. has made to Zonagen and the costs incurred by SP
Ltd. in developing data in connection with such Zonagen Additional
Indication, Zonagen shall have the right to continue the development
of such Zonagen Additional Indication for its own account and SP Ltd.
shall provide, to Zonagen, the data generated by SP Ltd. relating to
the Zonagen Additional Indication or the *** Formulation; provided,
--------
however, that Zonagen's use of such data will be at its own risk), (y)
-------
proceed with such development only after the Parties have, in good
faith, renegotiated the financial terms of this Agreement with respect
to such Zonagen Additional Indication or the *** Formulation, as
appropriate, or (z) elect to proceed with such continued development
under the terms and conditions hereof, crediting any payments over ***
against royalties that are or become due to Zonagen under Section 7.3
hereof after Regulatory Approval of the Licensed Product for use in
such Zonagen Additional Indication or of the *** Formulation, as
appropriate.
(f) Notwithstanding any other provision in this Agreement
to the contrary, if, at the time of the first filing, in the United
States, of an NDA or a supplement to an NDA previously filed pursuant
to the U.S. License Agreement, in either case supporting Regulatory
Approval, in the United States, of the Licensed Product for such
Zonagen Additional Indication or the *** Formulation for a
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
Zonagen Additional Indication, the Third Year Projected Incremental
Worldwide Annual Net Sales Potential for the Licensed Product for such
Zonagen Additional Indication or the *** Formulation for a Zonagen
Additional Indication supported by such NDA or supplement is less than
***, SP Ltd. shall not be required to make the payments specified in
Sections 3.1.3(a)(ii), 3.1.3(b)(iv), 3.1.3(c)(i) and 3.1.3(c)(ii)
hereof. For purposes of this Section 3.1.3(f) the "Third Year
Projected Incremental Worldwide Annual Net Sales Potential" for a
particular Additional Indication shall be the amount of projected
Worldwide Annual Net Sales of the Licensed Product or the Formulation,
as appropriate, during the third full twelve (12) month period after
FDA grants Regulatory Approval, in the United States, of the Licensed
Product or the *** Formulation, as appropriate, for use in such
Additional Indication less the amount of projected Worldwide Annual
Net Sales of the Licensed Product during the third full twelve (12)
month period after FDA grants Regulatory Approval, in the United
States, of the Licensed Product for use in such Additional Indication
that would be expected to be made had the FDA and comparable foreign
regulatory authorities not granted Regulatory Approval of the Licensed
Product or the *** Formulation for use in such Additional Indication.
If, within *** after the filing of an NDA or a supplement supporting
Regulatory Approval of the Licensed Product or the *** Formulation for
use in such Additional Indication in the United States, the Parties
are unable to agree on the level of the Third Year Projected
Incremental Worldwide Annual Net Sales Potential for such Licensed
Product or *** Formulation in such Additional Indication, an
independent expert shall be selected, by mutual agreement of the
Parties, to make such determination, which determination shall be
binding upon the Parties. If the Parties are unable to select such an
expert within *** after the filing, in the United States, of an NDA or
a supplement supporting Regulatory Approval of the Licensed Product or
the *** Formulation, as appropriate, for use in such Additional
Indication, each Party shall, within the next ten (10) business days
select an independent expert and the two (2) independent experts shall
select a third independent expert so as to form a panel of three (3)
independent experts. The individual expert or panel of independent
experts, as appropriate, shall then have thirty (30) days in which to
make the determination of the level of the Third Year Projected
Incremental Worldwide Annual Net Sales Potential for the License
Product or the *** Formulation, as appropriate, in such Additional
Indication which determination shall be binding upon the Parties.
3.1.4 Notice. Zonagen shall provide written notice to SP Ltd. at
------
least sixty (60) days prior to the expected occurrence of each of the
following events:
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
(a) the enrollment of the first patient into a Phase II
clinical trial testing the safety and/or efficacy of the Licensed
Product for use in each such Zonagen Additional Indication or of the
*** Formulation;
(b) the enrollment of the first patient into a Phase III
pivotal clinical trial testing the safety and efficacy of the Licensed
Product for use in each such Zonagen Additional Indication or of the
*** Formulation;
(c) the filing with the FDA of an NDA or a supplement to a
previously filed NDA which supports Regulatory Approval of the
Licensed Product for use in each such Zonagen Additional Indication or
of the *** Formulation; and
(d) the granting of Regulatory Approval, in the United
States, for the use of the Licensed Product in each such Zonagen
Additional Indication or for the *** Formulation. Such notice shall
state the date the relevant event is reasonably anticipated to occur
and shall include, as appropriate, copies of any data, analyses,
reports, protocols, or correspondence with the FDA that have not
previously been provided to SP Ltd. pursuant to Section 4.6 hereof.
3.2 Right of First Negotiation.
--------------------------
3.2.1 Zonagen Combination Products. SP Ltd. acknowledges that
----------------------------
Zonagen intends to develop one or more Zonagen Combination Products.
Subject to the provisions set forth in this Section 3.2, Zonagen hereby
grants to SP Ltd. the exclusive first right to negotiate with Zonagen,
should Zonagen determine to work with third parties with respect to the
development, making, using, selling, marketing or distribution of such
Zonagen Combination Product an agreement by which SP Ltd. will obtain the
exclusive right (which in Zonagen's discretion may be either exclusive
except as to Zonagen or exclusive even as to Zonagen) to make, have made,
import, export, use, distribute, market, promote, offer for sale, and sell
Zonagen Combination Products for all uses in the Field (as the definition
of Field has been modified in accordance with Sections 3.1.1 or 3.1.2
hereof prior to the date the Parties sign an agreement with respect to such
Zonagen Combination Product). Such agreement may contain territorial
limitations as may be agreed upon by the Parties. The exclusive right to
negotiate shall extend from the Effective Date of this Agreement until ***
after Zonagen provides SP Ltd. with written notice that it has filed, in
the United States, with the FDA and the FDA has accepted an NDA supporting
Regulatory Approval of a Zonagen Combination Product, which notice shall
include a copy of the NDA so filed (the "Exclusive Negotiation Period").
Notwithstanding the foregoing, if SP Ltd. sells a SP Ltd. Combination
Product,
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
SP Ltd.'s right of first negotiation under this Section 3.2.1 with respect
to any Zonagen Combination Product containing the same active ingredients
as such SP Ltd. Combination Product shall automatically cease upon SP
Ltd.'s First Commercial Sale of such SP Ltd. Combination Product.
3.2.2 *** Formulations. If Zonagen has developed a *** Formulation
----------------
prior to SP Ltd.'s exercise of its option under Section 3.1.1 hereof or if
SP Ltd.'s option under Section 3.1.2 has expired, SP Ltd. shall have the
exclusive first right to negotiate with Zonagen, should Zonagen determine
to work with third parties with respect to the making, using, selling,
marketing or distribution of such *** Formulation, an agreement by which
SP Ltd. will obtain the exclusive right (which, in Zonagen's discretion may
be either exclusive except as to Zonagen or exclusive even as to Zonagen)
to make, have made, import, export, use, distribute, market, promote, offer
for sale and sell *** Formulations for all uses. The exclusive right to
negotiate shall extend from the Effective Date of this Agreement until ***
after Zonagen provides SP Ltd. with written notice that it has filed, in
the United States, with the FDA and the FDA has accepted an NDA supporting
Regulatory Approval of a *** Formulation of the Licensed Product, which
notice shall include a copy of the NDA so filed (the "*** Exclusive
Negotiation Period").
3.2.3 Standstill. Zonagen agrees that on or before the Effective
----------
Date of this Agreement it will terminate any existing discussions with
other potential purchasers or licensees of any such Zonagen Combination
Products and any such *** Formulations and that during the Exclusive
Negotiation Period (with respect to Zonagen Combination Products) and the
*** Exclusive Negotiation Period (with respect to *** Formulations) it will
not knowingly permit any of its officers, directors, employees,
representatives or agents to, directly or indirectly, (i) solicit,
initiate, encourage or enter into any discussions or negotiations with any
corporation, partnership, limited liability company, person or other entity
or group (each a "Person") with respect to any proposal or offer to
acquire, license, distribute or exploit any such Zonagen Combination
Product or *** Formulation in any manner or (ii) furnish any Person with
any information with respect thereto. Notwithstanding the foregoing, this
Section 3.2.3 shall not prohibit Zonagen from negotiating or entering into
agreements with third parties whereby Zonagen will acquire rights to other
products or technology which will become part of such Zonagen Combination
Products, provided, however, that Zonagen shall use its reasonable best
-----------------
efforts to not enter into any such agreement which would in any way
diminish Schering's rights hereunder with respect to such Zonagen
Combination Products (i.e., under such agreements, Zonagen shall use its
reasonable best efforts to obtain exclusive worldwide rights, with the
right to sublicense, to make, have made, use, market, distribute, sell,
import and export, any Zonagen Combination Products using such third party
component). If, despite having used such reasonable best efforts, Zonagen
is not able to negotiate such an agreement that does not
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
diminish SP Ltd.'s rights hereunder, prior to entering into such Agreement,
Zonagen shall consult with SP Ltd., with the aim of making reasonable
alternative arrangements. Notwithstanding the foregoing, Zonagen shall be
free to provide such third party with any data Zonagen generates with
respect to the use of the component provided by such third party as a
single entity.
3.2.4 Negotiation of Agreement. At any time during the Exclusive
------------------------
Negotiation Period (with respect to Zonagen Combination Products) or the
*** Exclusive Negotiation Period (with respect to *** Formulations), after
Zonagen has provided Schering; with copies of the results of Phase II
studies demonstrating the efficacy of such Zonagen Combination Product or
such *** Formulation, Zonagen may, by written notice to SP Ltd., initiate
negotiation of the agreement described in Section 3.2.1 or 3.2.2 hereof, as
appropriate. Upon Zonagen's request to initiate such negotiations, the
Parties shall commence good faith negotiations of the agreement described
in Section 3.2.1 or 3.2.2 hereof, as appropriate, which agreement shall
contain terms and provisions which are reasonable and customary in the
pharmaceutical industry for the class of products that includes such
Zonagen Combination Products or *** Formulations. If the Parties fail to
sign a definitive agreement within *** of the commencement of such
negotiations, or such longer period of time as the Parties may agree,
Zonagen thereafter shall be free to initiate negotiations with a third
party with respect to either the Zonagen Combination Product or the ***
Formulation, as appropriate, provided, however that Zonagen may not enter
-------- -------
into an agreement with a third party on terms that, when taken as a whole,
are less favorable to Zonagen, than were the terms in SP Ltd.'s last offer
to Zonagen during their negotiations, without first offering SP Ltd., in
writing, the opportunity to enter into an agreement with Zonagen on such
less favorable terms. SP Ltd. shall have *** from the receipt of such
written offer from Zonagen to elect whether or not to accept such offer.
If SP Ltd. declines to accept such offer or fails to accept such offer
within such *** period, Zonagen shall be free to enter into an agreement
with a third party on such terms.
ARTICLE IV
DEVELOPMENT, COMMERCIALIZATION AND REGULATORY ISSUES
4.1 Completion of Studies.
---------------------
4.1.1 Pre-Clinical and Clinical Studies and Testing. Zonagen, at
---------------------------------------------
its own cost and expense, shall diligently conduct and complete all ongoing
(as of the Effective Date) testing and studies that are necessary or useful
to support Regulatory Approval in the member states of the European Union
as constituted on the Effective Date (the "European Union") of the Licensed
Products for use in the Male Sexual Function Indication. Additionally,
Zonagen shall diligently conduct and complete all testing and studies,
including, without limitation,
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
all post-marketing commitments, that are imposed by Regulatory Authorities
or agreed to as a condition of Regulatory Approval of the Licensed Product
with *** for use in the Male Sexual Function Indication, provided, however,
-------- -------
that Zonagen's obligation to use such diligent efforts shall not be
interpreted to require Zonagen to incur more than *** of expenses in
conducting such studies. If the cost of such studies exceeds ***, the
Parties shall mutually agree as to which Party shall complete and pay for
such studies. Zonagen shall have no other right to conduct clinical
studies of the Licensed Product or any Improvements thereto for use of such
Licensed Product or Improvements in the Male Sexual Function Indication
without first obtaining SP Ltd.'s written consent to conduct such clinical
studies, which consent may be provided or withheld in SP Ltd.'s sole
discretion. Should Zonagen fail to conduct any such studies within the
time frame requested by Regulatory Authorities, SP Ltd. shall have the
right to conduct such studies. SP Ltd. shall be permitted to credit the
reasonably fully absorbed costs and expenses (directly attributed to the
conduct of such studies) incurred by SP Ltd. in conducting such studies
(including any payments SP Ltd. makes to Zonagen if Zonagen conducts such
studies) against royalties that are or become due to Zonagen under Section
7.3 hereof, provided, however, that in no event shall such credit result in
-------- -------
a reduction of more than *** of any royalty payment due under Section 7.3
hereof.
4.1.2 Investigator Initiated Studies. SP Ltd. will support
------------------------------
investigator initiated studies of the Licensed Product in the Field, which
studies shall be initiated in the European Union prior to Regulatory
Approval of the Licensed Product in the European Union. SP Ltd.'s
obligation under this Section 4.1.2 shall be limited to supporting such
studies, which in the aggregate, have no more than *** patients enrolled.
4.2 Data and Reports. Zonagen shall promptly provide SP Ltd. with copies
----------------
of all data and reports that prior to the Effective Date have been generated and
after the Effective Date are generated in connection with all studies conducted
in support of Regulatory Approval of the Licensed Products for use in the Field,
or are useful to enable SP Ltd. to decide whether to exercise its option for any
Additional Indications pursuant' to Section 3.1.
4.3 Preparation and Filing of HRD.
-----------------------------
4.3.1 Europe. Zonagen, at its own expense, shall diligently prepare
------
for filing by SP Ltd. with Regulatory Authorities in the European Union, a
single HRD, in English, which supports Regulatory Approval, in the European
Union, of the Licensed Product with a goal of obtaining at least the ***
for use of the Licensed Product in the Field. Upon SP Ltd.'s request,
Zonagen shall promptly provide SP Ltd. with responses to any questions
posed by Regulatory Authorities in the Territory with respect to such HRDs
or the Licensed Product. With respect to the HRD for filing in the European
Union, SP Ltd., at its own expense, shall provide Zonagen with advice and
reasonable assistance in (i) reviewing study reports, (ii)
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
preparing HRDs, (iii) preparing supplements to the HRDs, and (iv) any other
matters that the Parties mutually agree need to be addressed to expedite
the Regulatory Approval process in the European Union for the Licensed
Product in the Field.
4.3.2 Other Countries. SP Ltd., at its own expense, shall
---------------
diligently prepare and file, with the Regulatory Authorities in those
countries of the Territory outside of the European Union where SP Ltd., in
its sole discretion, determines it is commercially sensible to do so, HRDs
which support Regulatory Approval, in such countries, of the Licensed
Product for use in the Field. Upon SP Ltd.'s request, Zonagen shall
promptly provide SP Ltd. with responses to any questions posed by
Regulatory Authorities in the Territory with respect to such HRDs or the
Licensed Product. Also, upon SP Ltd.'s request, Zonagen, at its own
expense, (to the extent Zonagen can do so utilizing in-house resources)
shall provide SP Ltd. with advice and reasonable assistance in (i)
developing an HRD filing strategy with respect to such countries, (ii)
reviewing study reports, (iii) preparing HRDs for filing in such countries,
(iv) preparing supplements to such HRDs, (iv) responding to questions from
the Regulatory Authorities regarding the HRDs or any supplements thereto
filed in such countries, and (v) any other matters that the Parties
mutually agree need to be addressed to expedite the Regulatory Approval
process in such countries for the Licensed Product in the Field. SP Ltd.
shall reimburse Zonagen for its documented reasonable out-of-pocket
expenses incurred in connection with providing such assistance.
4.4 Adverse Event Reporting. After an NDA supporting Regulatory Approval
-----------------------
of the Licensed Product for use in the Field has been filed with and accepted
for filing by the FDA SP Ltd. shall be responsible for adverse event reporting.
To the extent Zonagen receives any information regarding adverse events related
to the use of the Licensed Product Zonagen shall promptly provide SP Ltd. with
such information in accordance with the Adverse Event Reporting Procedures (as
may be amended from time to time upon mutual agreement) set forth in Schedule
4.4.
4.5 Development Activities by SP Ltd. During the Term of this Agreement
---------------------------------
and thereafter, unless this Agreement is terminated prior to the expiration of
the Term, SP Ltd. shall have the right to (i) develop improvements to the
Licensed Products, (ii) to develop SP Ltd. Combination Products and (iii) to
conduct clinical studies with the Licensed Products, SP Ltd. Combination
Products and/or any Improvements thereto for use in the Field or in any Zonagen
Additional Indications for which SP Ltd. has exercised, its option under Section
3.1. Except as otherwise provided in Section 7.3.1 hereof, SP Ltd. shall be
solely responsible for the costs incurred in connection with conducting such
studies.
4.6 Development of Zonagen Additional Indications and *** Formulations.
------------------------------------------------------------------
If SP Ltd. exercises its option under Section 3.1.l with respect to a Zonagen
Additional Indication or under Section 3.1.2 with respect to the ***
Formulation, unless the Parties agree that SP Ltd. will assume
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
such development responsibilities Zonagen, thereafter, shall use diligent
efforts to conduct the clinical studies that are necessary or useful to support
Regulatory Approval of the Licensed Product for such Zonagen Additional
Indication or of the *** Formulation, as appropriate. Except as otherwise
provided in Section 3.1.3 hereof, Zonagen shall be solely responsible for the
costs, incurred in connection with conducting such studies. Within *** after
the end of each Calendar Quarter (whether or not SP Ltd. has exercised its
option under Sections 3.1.1 or 3.1.2 hereof), Zonagen shall provide SP Ltd. with
a written report which sets forth a summary of such research and development
activities conducted during such Calendar Quarter by or on behalf of Zonagen.
Upon SP Ltd.'s request, which requests may be made from time to time, Zonagen
also shall provide SP Ltd. with copies with the following information that
relates to any the use of the Licensed Product or *** Formulations of the
Licensed Product in any of the Additional Indications: (i) all data collected
during such Calendar Quarter, (ii) any analyses conducted during such Calendar
Quarter, (iii) any study reports completed during such Calendar Quarter, (iv)
any clinical study protocols prepared during such Calendar Quarter, and (v) any
correspondence received from or sent to the FDA during such Calendar Quarter.
The foregoing reporting obligations shall apply with respect to any given
Zonagen Additional Indication for only so long as SP Ltd. has an option to such
Zonagen Additional Indication pursuant to Section 3.1.1 or, it SP Ltd. has
exercised its option, for the remainder of the Term of this Agreement.
4.7 Notice. During the Term of this Agreement, each Party shall notify
------
the other Party upon its initiation of clinical studies with respect to (i) any
Additional Indication for the Licensed Product, (ii) any new form or formulation
of the Licensed Product, and (iii) any Combination Product.
4.8 Joint Development Committee.
---------------------------
4.8.1 Establishment of Joint Development Committee. At SP Ltd.'s
--------------------------------------------
option, a joint development committee ("JDC") will be established to
prepare and monitor the development program for Additional Indications and
for each Party to update the other on its development of Additional
Indications. Prior to the time SP Ltd. exercises its option under Section
3.1 hereof with respect to Additional Indications, the JDC shall have the
right to monitor the development program and shall serve only in an
advisory capacity with respect thereto. After the time SP Ltd. exercises
its option under Section 3.1 hereof with respect Additional Indications,
the JDC shall have the additional authority to direct Zonagen's development
of the Licensed Product for such Additional Indications.
4.8.2 Composition of JDC. If SP Ltd. elects to establish the JDC
------------------
pursuant to Section 4.8.1 hereof, The JDC shall be composed of up to three
(3) representatives from each of SP Ltd. and Zonagen, and a quorum shall
consist of at least one (1) JDC representative from each Party. In any
matter before the JDC, each Party shall have one (1) vote, and no
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<PAGE>
action shall be taken except by the unanimous vote of the JDC. A Party's
representatives shall serve at the discretion of such Party and may be
substituted for or replaced at any time by such Party. The JDC shall be
chaired by a representative of SP Ltd.. The Chairperson shall be
responsible for calling meetings, preparing agendas and preparing and
issuing minutes of each meeting within thirty (30) days thereafter.
4.8.3 JDC Meetings. Once established, the JDC shall meet at least
------------
once each Calendar Quarter during the term of this Agreement, until such
time as the Parties agree to a more or less frequent meeting schedule. The
site of such meetings shall alternate between the offices of SP Ltd. and
Zonagen (or any other site mutually agreed upon by the Parties) and each
Party shall bear its own costs of attending such meetings. All meetings of
the JDC shall be summarized in writing and sent to both Parties and
countersigned by both Parties
4.8.4 Deadlock. In the event that the JDC is unable to reach a
--------
decision by unanimous vote with respect to any matter and such inability
continues for a period of thirty (30) calendar days after the date on which
the matter is first voted on by the JDC, each Party shall have the right to
refer the matter to the most senior executive managers responsible for the
development of the Licensed Product, i.e., the President of Zonagen and the
President of Schering-Plough Research Institute (for development and
regulatory issues) or the Executive Vice President, Schering-Plough
Pharmaceuticals (for commercial issues) for resolution. Such senior
executive managers shall have thirty (30) calendar days after the date on
which the matter is first submitted to them to resolve such dispute. If
such senior executive managers are unable to resolve such dispute within
such thirty (30) calendar day period, either Party may, by providing
written notice to the other Party within thirty (30) calendar days after
the end of such thirty (30) day period, request that the matter be
submitted to a special arbitration panel for resolution, in accordance with
the procedures set forth in Schedule 14.2, Part I.
ARTICLE V
MANUFACTURE AND SUPPLY
5.1 Supply of SP Ltd.'s Requirements.
--------------------------------
5.1.1 Manufacture and Supply by Zonagen. From the Effective Date
---------------------------------
until the fifth anniversary of SP Ltd.'s First Commercial Sale of Licensed
Product in the Territory and in accordance with the provisions of a
manufacturing and supply agreement entered into by the Parties pursuant to
Section 5.1.2 hereof, Zonagen shall either Manufacture the Licensed
Compound at Zonagen's own premises or subcontract the Manufacture of the
Licensed Compound to one or more subcontractors which shall have sufficient
knowledge and expertise to carry out the Manufacture of the Licensed
Compound and sufficient capacity to meet SP Ltd.'s and SP Ltd.'s
Affiliates', distributors' and sublicensees' requirements for
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
Licensed Compound. From the Effective Date until the *** anniversary of SP
Ltd.'s First Commercial Sale of Licensed Product in the Territory and in
accordance with the provisions of a manufacturing and supply agreement
entered into by the Parties pursuant to Section 5.1.2 hereof, Zonagen shall
either Manufacture the Licensed Product at Zonagen's own premises or
subcontract the Manufacture of the Licensed Product to one or more
subcontractors which shall have sufficient knowledge and expertise to carry
out the Manufacture of the Licensed Product and sufficient capacity to meet
SP Ltd.'s and SP Ltd.'s Affiliates', distributors' and sublicensees'
requirements for Licensed Product. During such time periods, Zonagen shall
cause to be Manufactured and supply to SP Ltd., and SP Ltd. shall purchase
exclusively from Zonagen, SP Ltd.'s Requirements of Licensed Compound
and/or Licensed Product, as appropriate, for the Territory, provided,
---------
however, that Zonagen's obligation to supply and SP Ltd.'s obligation to
-------
purchase Licensed Compound and Licensed Product in accordance with this
Section 5.1 are subject to SP Ltd.'s option to Manufacture and supply
Licensed Compounds and/or Licensed Products pursuant to Section 5.10
hereof. For the purposes of this Agreement, the term "Requirements" shall
mean, except where specifically provided otherwise herein, all quantities
of the Licensed Compounds and Licensed Products that are required by SP
Ltd. and its Affiliates, distributors and sublicensees for distribution,
marketing (including sampling), clinical trial materials and sale of the
Licensed Product during the Term hereof.
5.1.2 Manufacturing and Supply Agreement. Promptly after the
----------------------------------
execution of this Agreement, the Parties shall meet to coordinate all
aspects of material logistics relating to the supply of the Licensed
Product hereunder. In a timely manner, but no later than within ninety
(90) days of the Effective Date, the Parties shall agree to the terms of a
Manufacture and Supply Agreement (which shall be consistent with Zonagen's
obligations under the ***), based on determinations and understandings
reached by the Parties that shall include, but not be limited to,
logistical procedures relating to the delivery, quality control, quality
assurance, recall procedures, release and manufacturing regulatory
compliance matters associated with the supply of Licensed Product, and
define the responsibilities and obligations of Zonagen and SP Ltd. with
respect thereto. The terms of the Manufacture and Supply Agreement shall
not include any additional payment terms between the Parties and no
material term of the Manufacture and Supply Agreement shall be in conflict
with this Agreement. The Parties shall resolve all logistical issues
relating to the manufacture or supply of Licensed Product during the term
of this Agreement consistent with the terms and conditions of the
Manufacture and Supply Agreement.
5.1.3 Third Party Obligations. SP Ltd. acknowledges that, prior to
-----------------------
the Effective Date, Zonagen has entered into the *** relating to the
manufacture and supply of a Licensed Compound, in bulk form, for Zonagen.
Zonagen agrees that it will not extend the term of or renew the *** and
will not enter into agreements with any third party with respect to the
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
manufacture of the Licensed Compound and/or the Licensed Product without SP
Ltd.'s prior written consent. Zonagen further agrees that it will take all
necessary action to cause the *** to expire or terminate, with respect to
the Licensed Compound for use in the Field, at the end of the initial five
(5) year term stated in the ***, or, upon SP Ltd.'s request, earlier,
provided that such earlier termination is permitted by the *** and results
in no financial penalty to Zonagen.
5.2 Purchase Price. If SP Ltd. purchases Licensed Compound or Licensed
Product from Zonagen pursuant to a Manufacture and Supply Agreement entered into
in accordance with Section 5.1.2 hereof, SP Ltd. shall pay to Zonagen, the
actual cost of goods paid by Zonagen to third parties manufacturing the Licensed
Product for Zonagen plus *** of such actual cost of goods, provided, however,
-------- -------
that SP Ltd.'s purchase price for Licensed Product hereunder will be based only
on the first *** per tablet of such actual cost of goods so paid by Zonagen and
SP Ltd.'s purchase price for License Compound hereunder will be based only on
the first *** per kilogram of such actual cost of goods so paid by Zonagen.
After the First Commercial Sale of the Licensed Product in the Territory the
foregoing caps on SP Ltd.'s purchase price hereunder shall be adjusted on an
annual basis each January 1st by the annual percentage charge in the Producer's
Price Index for Pharmaceutical Products reported in the month of June of the
year immediately preceding the year in which the adjustment is to be effective.
5.3 Clinical Trial Materials and Samples. Notwithstanding anything to the
------------------------------------
contrary in Section 5.2 hereof, Licensed Product for clinical trials and for
distribution of samples to physicians shall be provided to SP Ltd. by Zonagen
free of charge, provided, however, that in any Calendar Year, the amount of
-------- -------
Licensed Product that SP Ltd. may receive free of charge from Zonagen for the
purpose of distributing samples of the Licensed Product shall not exceed the
following amounts:
***
Notwithstanding the foregoing, the maximum number of tablets Zonagen shall be
required to provide collectively to SP Ltd. hereunder and to Schering
Corporation under the U.S. License Agreement during any such year for purpose of
distributing samples shall not exceed ***.
For amounts of Licensed Product in excess of maximum amounts purchased by SP
Ltd. from Zonagen in any Calendar Year for distribution of samples, the purchase
price to be paid by SP Ltd. shall be the actual cost of goods paid by Zonagen to
third parties manufacturing the Licensed Product for Zonagen
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
5.4 Forecasts and Orders.
--------------------
5.4.1 Forecasts. The Parties will work together to establish
---------
mechanisms to ensure efficient, fair, equitable and cost effective supply
logistics and materials management. Within thirty (30) days after the
Effective Date, SP Ltd. shall provide Zonagen with a non-binding
preliminary forecast of SP Ltd.'s estimated requirements of the Licensed
Product during the eighteen (18) month period following the Effective Date.
As soon as practicable, but not later than thirty (30) days after the first
HRD is filed with Regulatory Authorities in the Territory, SP Ltd. shall
provide Zonagen with a written forecast (by Calendar Quarter) of the
quantity of Licensed Product that SP Ltd. desires to have delivered to it
during the following four (4) consecutive Calendar Quarters. The forecast
for the first two (2) of such four Calendar Quarters shall represent a
binding commitment of SP Ltd. to purchase and Zonagen to supply such
forecasted amount of Licensed Product. Thereafter, at least fifteen (15)
days before the end of each subsequent Calendar Quarter, SP Ltd. shall
provide a written, updated forecast (by Calendar Quarter) of the quantity
of Licensed Product that SP Ltd. desires to have delivered to it during the
following four (4) consecutive Calendar Quarters. Zonagen acknowledges
that such forecasts are only estimates of SP Ltd.'s purchase Requirements
of the Licensed Product and that SP Ltd. shall not be bound by any such
estimate except that the first two (2) Calendar Quarters of each successive
forecast so provided shall likewise represent a binding commitment of SP
purchase and of Zonagen to supply such forecasted quantity of Licensed
Product in a timely manner, subject to adjustment within the limits set
forth in Section 5.4.2 hereof. The Parties understand that the making of
such forecasts and purchase orders pursuant to Section 5.4.2 hereof must be
consistent with Zonagen's obligations under the ***.
5.4.2 Purchase Orders. SP Ltd. shall issue to Zonagen firm purchase
---------------
orders for each delivery not later than three (3) months prior to the
requested delivery date. Zonagen shall not be obligated to supply that
quantity of Licensed Product in any Calendar Quarter that is more than one
hundred and twenty-five percent (125%) of the last binding forecast
provided by SP Ltd. for the Calendar Quarter in question; provided,
--------
however, that Zonagen shall endeavor to take all reasonable steps to fill
-------
binding orders for Licensed Product in excess of such amount.
5.5 Delivery Terms. All Licensed Compound and/or Licensed Product shall
--------------
be delivered *** (Incoterms 1990) to up to five (5) sites in the Territory to be
specified by SP Ltd.. Zonagen shall pay *** specified site and SP Ltd. shall pay
***. Title and risk of loss shall pass to SP Ltd. upon delivery by Zonagen to
SP Ltd.
5.6 Scheduling of Delivery. Zonagen shall schedule the timely
----------------------
manufacturing and shipment of the Licensed Product pursuant to SP Ltd.'s firm
purchase orders. Should Zonagen, at
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
any time during the course of this Agreement, have reason to believe that it
will be unable to meet SP Ltd.'s requested delivery dates, Zonagen will promptly
notify SP Ltd., in writing, stating the reasons for the delay.
5.7 Inability to Supply. If at any time Zonagen is of the opinion that it
-------------------
may not be able to meet future binding orders from SP Ltd. for Licensed Product
(including, but not limited to a situation where as a result of any intellectual
property litigation Zonagen chooses not to supply Licensed Product) it shall
immediately notify SP Ltd. in writing, and the Parties shall in good faith
cooperate and endeavor to make appropriate arrangements for a continuous and
adequate supply of Licensed Product from Zonagen to SP Ltd. If Zonagen is
unable to supply at least eighty percent (80%) of the quantities of Licensed
Product ordered by SP Ltd. in any two (2) consecutive Calendar Quarters, based
on SP Ltd.'s estimates of its future Requirements, SP Ltd. shall be relieved of
its obligation to purchase the Licensed Product from Zonagen and at any time
thereafter, SP. Ltd., consistent with Zonagen's obligations under the ***, may
exercise its right to manufacture the Licensed Compound or the Licensed Product
under Section 5.10 hereof. Zonagen, at its own expense, shall provide SP Ltd.
with all reasonable assistance to enable SP Ltd. or its third party manufacturer
to manufacture the Licensed Product permitted to be manufactured by SP Ltd.
hereunder.
5.8 Second Source of Supply. Within a reasonable time (which shall not
-----------------------
exceed *** plus any delay associated with approval of the site of manufacture by
Regulatory Authorities) after Worldwide Annual Net Sales of the Licensed Product
attain a level of ***, or if a restriction is imposed upon (i) manufacturing
that would prevent Zonagen from meeting its supply obligations hereunder or (b)
exporting the Licensed Compound or Licensed Product out of the country where it
is manufactured, then, subject to the terms and provisions of the ***, Zonagen
shall, at its own cost and expense, qualify a second source of supply of the
Licensed Compound and Licensed Product, which second source of supply shall be
subject to SP Ltd.'s approval, which approval shall not unreasonably be
withheld. SP Ltd., at its sole option, may elect to be qualified as such second
source of supply.
5.9 Quality Control and Quality Assurance.
-------------------------------------
5.9.1 Adherence to Specifications. Zonagen warrants that all of the
---------------------------
Licensed Product supplied by Zonagen (whether Manufactured by Zonagen or a
third party) to SP Ltd. hereunder shall conform to the specifications
therefor as defined in the then-current Regulatory Approval of each country
of the Territory ("Specifications"), as such Schedule may be amended from
time to time by written agreement between the Parties and shall be
manufactured in accordance with the current procedures described in the
applicable Regulatory Approval and all current Good Manufacturing Practices
("cGMPs") and other applicable federal, national, supra-national, state and
local laws and regulations in effect at
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<PAGE>
the time of manufacture. In the event that SP Ltd. requests any changes in
the packaging of the Licensed Products beyond what is required by the
relevant Regulatory Authorities to obtain or maintain Regulatory Approval
for the Licensed Product in a country of the Territory, SP Ltd. shall
reimburse Zonagen for they reasonable documented out of pocket costs
incurred by Zonagen in making such changes, provided that such costs have
been approved by SP Ltd. prior to the time they are incurred.
5.9.2 Quality Control Program. Zonagen shall maintain a quality
-----------------------
control program consistent with current cGMPs, as required by the
Pharmaceutical Inspection Convention, all applicable laws and regulations,
and health authorities, including, without limitation, the FDA, in the
Territory, as applicable, and the country of manufacture, and all
subsequent additions and revisions thereto.
5.9.3 Testing and Release of Licensed Product. At Zonagen's expense
---------------------------------------
representative samples of each shipment of Licensed Product shall be
analyzed in accordance with the methods of analysis defined in the then-
current marketing authorization for the Territory. On release by Zonagen,
Zonagen shall notify SP Ltd. that the lot of Licensed Product is available
for shipment to SP Ltd. from Zonagen's manufacturing facility and along
with such shipment shall provide SP Ltd. with Certificates of Analysis and
Compliance for the Licensed Product included in such shipment. SP Ltd.
retains the right to analyze any shipment of Licensed Product to confirm
that it conforms to the Specifications.
5.9.4 Nonconforming Product. If a shipment of Licensed Product does
---------------------
not conform to the Specifications, Zonagen shall replace such shipment free
of charge with a substitute shipment which meets such Specifications
according to the following timeframe: If the Licensed Product is in
inventory then conforming Licensed Product will be shipped promptly. If
the Licensed Product is not in inventory, Zonagen will take all reasonable
steps to ensure expeditious manufacture of conforming Licensed Product
which will be shipped promptly after completion of Manufacture. At
Zonagen's expense, the nonconforming shipment shall be returned to Zonagen,
or disposed of by SP Ltd., at SP Ltd.'s option.
5.9.5 Inspections by Regulatory Authorities. Each Party agrees to
-------------------------------------
notify the other within two (2) business days of its receipt of
notification of any inquiries, notifications, or inspection activity by any
Regulatory Authority, governmental agency or authority in regard to the
Licensed Product or the manufacturing facilities therefor. Zonagen shall
provide a reasonable description to SP Ltd. of any such governmental
inquiries, notifications or inspections promptly (but in no event later
than five (5) calendar days) after notification of completion of such visit
or inquiry. Zonagen shall furnish to SP Ltd., (i) within two (2) business
days after receipt, any report or correspondence issued by the Regulatory
Authority or governmental authority in connection with such visit or
inquiry, including but not limited to, any FDA form 483, Establishment
Inspection Reports or warning letters and (ii) at the same time it provides
to any Regulatory Authority or governmental authority, copies of any
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
and all documents, responses or explanations relating to items set forth
above, in each case purged only of trade secrets of Zonagen or its third
party manufacturers that are unrelated to the obligations under this
Agreement or are unrelated to the Licensed Product. In the event such
governmental agency or authority requests or requires any action to be
taken to address any citations, Zonagen agrees, after consultation with SP
Ltd., to take such action as necessary to address such citations, and
agrees to cooperate with SP Ltd. with respect to any such citation and/or
action taken with respect thereto.
5.9.6 Inspections by SP Ltd. Zonagen shall endeavor to obtain the
----------------------
right for SP Ltd. to visit, during normal business hours and with
reasonable advance notice (a minimum of thirty (30) business days)
Zonagen's manufacturing facility (including Applied Analytical Industries,
Inc., Synkem, Ultraseal Corporation or their successors), under customary
confidentiality conditions, for the purpose of observing the manufacturing,
packaging, testing, and warehousing of the Licensed Product and to inspect
for compliance with cGMPs and other applicable regulatory requirements.
5.10 SP Ltd.'s Right to Manufacture.
------------------------------
5.10.1 Option. Subject to Zonagen's obligations under the ***, SP
------
Ltd. shall have the right to begin Manufacturing the Licensed Compound
and/or the Licensed Product, itself or through a third party selected by
it, at any time during the Term of this Agreement after SP Ltd. has
provided Zonagen with six (6) months prior notice of its intent to assume
such Manufacturing responsibilities. When SP Ltd. advises Zonagen that it
is able to Manufacture all of its Requirements of the Licensed Compound and
the Licensed Product, Zonagen shall be relieved of its Manufacturing and
supply obligations under this Article V. Upon SP Ltd.'s request, Zonagen,
shall provide SP Ltd. with all reasonable assistance to enable SP Ltd. or
its third party manufacturer to manufacture the Licensed Compound and/or
the Licensed Product. SP Ltd. shall reimburse Zonagen for the documented
reasonable out-of-pocket costs incurred by Zonagen in providing such
assistance, provided that SP Ltd. has approved of such costs prior to the
time they are incurred. Upon assuming such Manufacturing responsibilities,
SP Ltd. shall Manufacture the Licensed Product in accordance with the
Specifications cGMPs and all applicable regulatory requirements and shall
maintain a quality assurance program with respect thereto.
5.10.2 Continued Manufacture by Zonagen. Notwithstanding Section
--------------------------------
5.10.1 hereof, if, prior to SP Ltd.'s exercise of its right to begin
Manufacturing the Licensed Compound and/or the Licensed Product pursuant to
Section 5.10.1, Zonagen has established a second source of supply of
Licensed Compound and Licensed Product pursuant to Section 5.8 hereof,
Zonagen shall have the right to continue to supply up to *** of SP Ltd.'s
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
requirements to the Licensed Compound and the Licensed Product until
Zonagen, in accordance with generally accepted accounting procedures, has
fully amortized the out-of-pocket cost it incurred in establishing such
second source of supply, including any early cancellation penalties to be
paid by Zonagen to a third party second source of supply, provided, however
-------- -------
that in no event shall SP Ltd., after it has exercised its right to
manufacture, be obligated to purchase the Licensed Compound or the Licensed
Product from Zonagen at a price that exceeds SP Ltd.'s *** for
manufacturing such Licensed Compound or Licensed Product. Alternatively,
SP Ltd. may elect to reimburse Zonagen for the out-of-pocket cost incurred
by Zonagen in establishing such second source of supply, including any
early cancellation penalties to be paid by Zonagen to a third party second
source of supply (to the extent such out-of-pocket cost has not otherwise
been amortized in accordance with the preceding sentence), and upon the
provision of such reimbursement, Zonagen's right to manufacture the
Licensed Compound and the Licensed Product shall immediately cease.
5.10.3 Termination of Manufacturing and Supply Agreement. Upon the
-------------------------------------------------
termination, pursuant to this Section 5.10 of Zonagen's right to
manufacture the Licensed Compound and the Licensed Product, the
Manufacturing and Supply Agreement entered into by Zonagen and SP Ltd.
shall automatically be terminated.
ARTICLE VI
MARKETING AND COMMERCIALIZATION
6.1 Commercialization. Except as set forth in Section 3.3, SP Ltd. shall
-----------------
be solely responsible for the promotion, marketing, distribution and sale of
Licensed Product in the Field hereunder. After receipt of Regulatory Approval
of the Licensed Product,, SP Ltd. shall use diligent efforts to promote, market
and sell the Licensed Product in those countries of the Territory where such
Regulatory Approval has been received. For the purposes of this Section 6.1,
"diligent efforts" shall mean those efforts which are similar to the efforts
used by SP Ltd. in the marketing and sale of other products that have similar
commercial value, status and potential to the Licensed Product. The Parties
acknowledge and agree that, subject to the terms of this Agreement, all business
decisions including, without limitation, decisions relating to SP Ltd.'s
manufacture, sale, commercialization, design, price, distribution, marketing and
promotion of Licensed Products covered under this Agreement, shall be within the
sole discretion of SP Ltd.. Notwithstanding the foregoing, nothing in this
Agreement shall serve to prohibit SP Ltd. or its Affiliates from developing,
registering, making, using or selling any product for use in the Field, whether
or not such product directly or indirectly competes with the Licensed Product,
***
6.2 Opportunity to Cure. If, in Zonagen's reasonable opinion, SP Ltd.
-------------------
fails to comply with any of its diligence obligations under Section 6.1 in any
country of the Territory (provided,
--------
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
however that for purposes of this Article VI, the countries of the European
- -------
Union, shall collectively be considered as a single country), then Zonagen shall
have the right to give SP Ltd. written notice thereof stating in reasonable
detail the particular failure(s). SP Ltd. shall have a period of *** from the
receipt of such notice to correct the failure or, in the event that the failure
cannot be reasonably cured within a *** period, then SP Ltd. shall initiate
actions reasonably expected to cure the failure within *** of receiving notice
and shall thereafter diligently pursue such actions to cure the failure (even if
requiring longer than the *** specified in Section 13.3.1 (i)). In the event of
a dispute as to whether or not SP Ltd. has failed to exercise due diligence
under Section 6.1 or whether SP Ltd. is diligently pursuing actions reasonably
expected to cure such failure under this Section 6.2, such dispute shall be
resolved through the procedures set forth in Section 14.2 hereof. If, a
determination is made, in accordance with such dispute resolution procedures
(taking into account the facts relevant to the efforts SP Ltd. is using with
respect to the Licensed Product, including, without limitation, the competitive
environment for the Licensed Product, the product life cycle of the Licensed
Product, and the adverse event profile of the Licensed Product), that SP Ltd.
has failed to meet its diligence obligations under Section 6.1 in any country of
the Territory and has failed to cure such failure in accordance with this
Section 6.2, Zonagen, as its sole remedy, thereafter shall have the right to
comarket, either itself or through a third party, a second brand (i.e., using a
trademark other than a trademark used by SP Ltd., its Affiliates or sublicensees
for the Licensed Product) of the Licensed Product in such country of the
Territory. In the event Zonagen obtains the right to comarket a second brand of
the Licensed Product under this Agreement, SP Ltd. shall grant to Zonagen the
right to cross-reference all applicable HRDs with respect to the Licensed
Product.
6.3 Marketing Review. SP Ltd. and Zonagen shall periodically meet, at
----------------
such times and places as are mutually agreed upon by the Parties, for SP Ltd. to
update Zonagen with respect to marketing strategy, programs and progress for the
Licensed Products, provided, however, that such meetings shall occur once per
-------- -------
Calendar Year unless the Parties agree to meet more or less often. SP Ltd. and
Zonagen shall each be responsible for its own expenses incurred in connection
with attending such meetings.
ARTICLE VII
PAYMENTS, ROYALTIES AND REPORTS
7.1 Milestone Payments. In partial consideration for the licenses
------------------
and other rights granted to SP Ltd. hereunder, SP Ltd. shall pay Zonagen
milestone payments as follows, each such payment being due within ten (10)
business days after the occurrence of the event triggering such payment
hereunder:
(a) Five Million Dollars ($5,000,000.00) upon the Effective Date;
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
(b) *** after the occurrence of both (i) the completion by
Zonagen of the *** the Licensed Product and the submission of a report
to SP Ltd. for such study, which report is in a form reasonably
acceptable to SP Ltd. and *** and (ii) the submission to and
acceptance by the United States Food and Drug Administration of a New
Drug Application for the Licensed Product in the Field; provided,
--------
however that such NDA is accepted for filing on or before ***; and
-------
(c) *** upon SP Ltd.'s receipt of written documentation of the
first Regulatory Approval of the Licensed Product with *** in the
United Kingdom, provided, however that if the first Regulatory
-------- -------
Approval of the Licensed Product in the United Kingdom is granted
without ***, such *** milestone payment will be reduced to *** if SP
Ltd. elects not to terminate this Agreement pursuant to either Section
13.2(c) or Section 13.2(d) hereof, provided, however that if such
--------
reduced payment is made an additional *** payment will be made to
Zonagen if and when SP Ltd.'s Net Sales of the Licensed Product in all
countries of the Territory, excluding Japan, during any *** exceeds
*** in the aggregate provided that such level of Net Sales is attained
within the first *** after the First Commercial Sale of the Licensed
Product in the Territory;
(d) *** upon SP Ltd.'s receipt of written documentation of the
first Regulatory Approval of the Licensed Product with *** in France;
provided, however, that if the first Regulatory Approval of the
-------- -------
Licensed Product in France is granted without ***, such *** milestone
payment will be reduced to *** if SP Ltd. elects not to terminate this
Agreement pursuant to either Section 13.2(c) or Section 13.2(d)
hereof, provided, however, that if such reduced payment is made an
-------- -------
additional *** payment will be made to Zonagen if and when SP Ltd.'s
Net Sales of the Licensed Product in all countries of the Territory,
excluding Japan, during any *** exceeds *** in the aggregate provided
that such level of Net Sales is attained within the first *** after
the First Commercial Sale of the Licensed Product in the Territory;
(e) *** upon SP Ltd.'s receipt of written documentation of the
first Regulatory Approval of the Licensed Product with *** in Germany,
provided, however, that if the first Regulatory Approval of the
-------- -------
Licensed Product in Germany is granted without ***, such *** milestone
payment will be reduced to *** if SP Ltd. elects not to terminate this
Agreement pursuant to either Section 13.2(c) or Section 13.2(d)
hereof, provided, however that if such reduced payment is made an
-------- -------
additional *** payment will be made to Zonagen if and when SP Ltd.'s
Net Sales of the Licensed Product in all countries of the Territory,
excluding Japan, during any *** exceeds *** in the aggregate provided
that such level of Net Sales is attained within
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
the first *** after the First Commercial Sale of the Licensed Product
in the Territory; and
(f) *** upon SP Ltd.'s receipt of written documentation of the
first Regulatory Approval of the Licensed Product with *** in Japan;
provided, however, that if the first Regulatory Approval of the
-------- -------
Licensed Product in Japan is granted without ***, such *** milestone
payment will be reduced to *** if SP Ltd. elects not to terminate this
Agreement pursuant to either Section 13.2(c) or Section 13.2(d)
hereof, provided, however, that if such reduced payment is made an
-------- -------
additional *** payment will be made to Zonagen if and when SP Ltd.'s
Net Sales of the Licensed Product in Japan, during any *** exceeds
***, provided that such level of Net Sales is attained within the
first *** after the First Commercial Sale of the Licensed Product in
Japan.
Each such milestone payment shall be payable one (1) time only regardless of the
number of times the event triggering the payment of such milestone occurs. If,
with respect to any milestone payment, the triggering event does not occur prior
to the termination or expiration of this agreement or another specified in
connection with such milestone payment, SP Ltd. shall have no obligation to pay
such milestone payment to Zonagen.
7.2 R&D Funding. In addition to the milestone payments due under Section
-----------
7.1 hereof, SP Ltd. agrees to reimburse Zonagen for the reasonable actual out-
of-pocket expenses (which have not otherwise been reimbursed by Schering
Corporation pursuant to the U.S. License Agreement) Zonagen has incurred or
incurs in conducting the ongoing open-label study of the Licensed Product, which
open-label study is identified by Zonagen as Study ZON303. Notwithstanding the
foregoing, SP Ltd.'s total obligation to reimburse Zonagen in accordance with
this Section 7.2 shall not exceed ***. SP Ltd.'s reimbursement of such expenses
pursuant to this Section 7.2 will be made in installments, pursuant to invoices
submitted by Zonagen to SP Ltd., which invoices shall include documentation
(including, without limitation, invoices Zonagen has received from third
parties) that supports the amount of expenses for which SP Ltd. is being
invoiced. Zonagen shall submit to SP Ltd. an invoice for the first such
installment upon the filing with the FDA of an NDA supporting U.S. Regulatory
Approval of the Licensed Product, which installment, subject to the limitations
set forth in this Section 7.2, shall be in the amount of such actual out-of-
pocket expenses incurred by Zonagen prior to such time. Thereafter, Zonagen
shall submit to SP Ltd. invoices and supporting documentation within thirty (30)
days after the end of each Calendar Quarter, which invoices, subject to the
limitations set forth in this Section 7.2, shall be for the reasonable actual
out-of-pocket expenses incurred by Zonagen during such Calendar Quarter. Each
such invoice shall be payable within sixty (60) days after SP Ltd.'s receipt of
the invoice.
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
7.3 Royalties.
---------
7.3.1 Royalty Rates. (a) In further consideration for the licenses
-------------
and other rights granted to SP Ltd. hereunder, subject to the terms and
conditions of this Agreement and with respect to each country of the
Territory for so long as the Licensed Product is covered by a Valid Claim
that provides market exclusivity for the Licensed Product in the Field in
such country of the Territory at the time of sale by SP Ltd., SP Ltd. shall
pay to Zonagen royalties as follows:
(i) *** of that portion of SP Ltd.'s Net Sales of
Licensed Product in the Territory which, during a Calendar
Year are less than or equal to ***,
(ii) *** of that portion of SP Ltd.'s Net Sales of
Licensed Product in the Territory which, during a Calendar
Year are greater than *** and less than or equal to ***, and
(iii) *** of that portion of SP Ltd.'s Net Sales of
Licensed Product in the Territory which, during a Calendar
Year are greater than ***,
(b) With respect to the sale of any Licensed Products for use
in SP Ltd. Additional Indications where such Licensed Products are
distinguishable from the Licensed Product developed by Zonagen and
sold by SP Ltd. in the Male Sexual Function Indication (e.g., new
formulations or dosages of the Licensed Products which are not
substitutable for the Licensed Product developed by Zonagen and sold
by SP Ltd. for the Male Sexual Function Indication), the royalty rates
provided for in Section 7.3.1 (a) above shall each be reduced by ***.
If a Licensed Product sold for use in the SP Ltd. Additional
Indications is not distinguishable (as described above) from the
Licensed Product sold by SP Ltd. for use in the Male Sexual Function
Indication, then with respect to SP Ltd.'s sales of such Licensed
Product, the royalty rates set forth in Section 7.3.1(a) above shall
not be reduced, provided, however, that Zonagen reimburses SP Ltd. for
-------- -------
up to *** of the costs and expenses incurred by SP Ltd. in developing
such SP Ltd. Additional Indication which reimbursement will be paid
in the form of a credit against future royalties payable by SP Ltd.
hereunder, provided, however, that the credit will be applied against
-------- -------
only *** of the royalties due during each Calendar Quarter until the
credit is fully exhausted.
(c) With respect to the sale, in those countries of the
Territory that are member states of the Patent Cooperation Treaty, of
any Licensed Products which, at the time of sale by SP Ltd., its
Affiliates or sublicensees, are not covered by a Valid
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
Claim that provides market exclusivity for such Licensed Product in
the Field in such countries, the royalty rates under Sections 7.3.1(a)
and 7.3.1(b) hereof shall be reduced to *** of the royalty rate set
forth in Sections 7.3.1(a) and 7.3.1(b) hereof, as applicable and,
unless the royalty rates are further reduced as provided in this
Agreement, royalties shall be payable at such rates for sales of
Licensed Product made prior to the *** anniversary of the First
Commercial Sale of a Licensed Product in the Territory.
(d) With respect to the sale, in those countries of the Territory
that are member states of the Patent Cooperation Treaty, of any
Licensed Products which, at the time of sale by SP Ltd., its
Affiliates or sublicensees, are not covered by a Valid Claim that
provides market exclusivity for such Licensed Product in the Field in
such countries, notwithstanding the royalty rate reductions set forth
in Section 7.3.1(c) above, the royalty rates under Sections 7.3.(a)
and 7.3.1(b) hereof shall be further reduced to *** of the royalty
rates set forth under Sections 7.3.1(a) and 7.3.1(b) hereof, as
applicable, if during any Calendar Quarter, unit sales, in the
Territory, of orally administered pharmaceutical products containing a
Licensed Compound as an active ingredient, the making, using or
selling of which would infringe a Valid Claim of the Patent Rights in
such countries, if such Valid Claim were then in force and effect,
(other than sales by SP Ltd., its Affiliates or sublicensees of the
Licensed Product), amount to more than *** of the total unit sales
(including, both those of SP Ltd. and of all other parties) of orally
administered pharmaceutical products containing a Licensed Compound as
an active ingredient, made in the Territory during such Calendar
Quarter. Unless further reduced pursuant to the provisions of this
Agreement, royalties shall be payable at such rates until the ***
anniversary of the First Commercial Sale of a Licensed Product in the
Territory.
(e) With respect to the sale, in those countries of the Territory
that are member states of the Patent Cooperation Treaty, of any
Licensed Products which, at the time of sale by SP Ltd., its
Affiliates or sublicensees, are not covered by a Valid Claim that
provides market exclusivity for such Licensed Product in the Field in
such countries, notwithstanding the royalty rate reductions set forth
in Section 7.3.1(c) and 7.3.1(d) above, no royalty thereafter shall be
payable with respect to the sale of any such Licensed Product if
during any Calendar Quarter, unit sales, in the Territory, of orally
administered pharmaceutical products containing a Licensed Compound as
an active ingredient, the making, using or selling of which would
infringe a Valid Claim of the Patent Rights in such countries, if such
Valid Claim were then in force and effect, (other than sales by SP
Ltd., its Affiliates or sublicensees of the Licensed
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
Product), amount to more than *** of the total unit sales (including
both those of SP Ltd. and of all other parties) of orally administered
pharmaceutical products containing a Licensed Compound as an active
ingredient, made in the Territory during such Calendar Quarter.
(f) With respect to the sale of Licensed Products, in any country
of the Territory other than those that are member states of the Patent
Cooperation Treaty, the royalty payable by SP Ltd. under Sections
7.3.1(a) and 7.3.(b) hereof shall be reduced to
(i) *** of the rates set forth in Sections 7.3.1(a) or
7.3.1(b), as applicable, if during any Calendar Quarter, unit
sales, in such country, of orally administered pharmaceutical
products containing a Licensed Compound as an active ingredient,
the making, using or selling of which would infringe a Valid
Claim of the Patent Rights in such countries, if such Valid Claim
were then in force and effect, (other than sales by SP Ltd., its
Affiliates or sublicensees of the Licensed Product), amount to
more than *** of the total unit sales (including both those of SP
Ltd. and of all other parties) of orally administered
pharmaceutical products containing a Licensed Compound as an
active ingredient, made in such country during such Calendar
Quarter;
(ii) *** of the rates set forth in Sections 7.3.1(a) or
7.3.1(b), as applicable, if during any Calendar Quarter, unit
sales, in such country, of orally administered pharmaceutical
products containing a Licensed Compound as an active ingredient,
the making, using or selling of which would infringe a Valid
Claim of the Patent Rights in such countries, if such Valid Claim
were then in force and effect, (other than sales by SP Ltd., its
Affiliates or sublicensees of the Licensed Product), amount to
more than *** of the total unit sales (including both those of SP
Ltd. and of all other parties) of orally administered
pharmaceutical products containing a Licensed Compound as an
active ingredient, made in such country during such Calendar
Quarter; and
(iii) *** of SP Ltd.'s Net Sales of the Licensed Product in
such country, if during any Calendar Quarter, unit sales, in such
country, of orally administered pharmaceutical products
containing a Licensed Compound as an active ingredient, the
making, using or selling of which would infringe a Valid Claim of
the Patent Rights in such countries, if such Valid Claim were
then in force and effect, (other than sales by SP Ltd., its
Affiliates or
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
sublicensees of the Licensed Product), amount to more than *** of the
total unit sales (including both those of SP Ltd. and of all other
parties) of orally administered pharmaceutical products containing a
Licensed Compound as an active ingredient, made in such country during
such Calendar Quarter.
(g) The Parties acknowledge and agree that nothing herein shall be
construed as representing an estimate or projection of anticipated sales or
the actual value of Licensed Compounds or Licensed Products and the figures
set forth in this Section 7.3.1 are merely intended to define SP Ltd.'s
royalty obligations to Zonagen in the event such sales performance is
achieved.
7.3.2 Term and Scope of Royalty Obligations. Subject to Section
-------------------------------------
8.3.2 relating to discontinuance of royalty obligations and Section 13.1
relating to term of royalty obligations, royalties on each Licensed Product
at the rates set forth in Section 7.3.1 shall continue until the expiration
of the time set forth in Section 7.3.1. No royalties shall be due upon the
sale or other transfer among SP Ltd., its Affiliates or sublicensees, but
in such cases the royalty shall be due and calculated upon SP Ltd.'s or its
Affiliates' or its sublicensees' Net Sales to the first independent third
party. No royalties shall accrue on the disposition of Licensed Product by
SP Ltd., Affiliates or its sublicensees as samples (promotion or otherwise)
or as donations (for example, to non-profit institutions or government
agencies for a non-commercial purpose) or for clinical studies. Such sales
by SP Ltd. shall not be included in the determination of Net Sales, during
the period of time in which such third party sales are occurring.
7.3.3 Third Party Licenses - Licensed Products. In the event that
----------------------------------------
patent licenses from third parties (hereinafter "Third Party Patent
Licenses"), are required by SP Ltd., its Affiliates and sublicensees in
order to discover, develop, make, have made, import, export, use,
distribute, promote, market, offer for sale or sell Licensed Product other
than SP Ltd. Combination Products then the royalty rates set forth in
Section 7.3.1 shall be adjusted such that the royalty rate for Net Sales of
Licensed Product which SP Ltd. is obligated to pay Zonagen hereunder shall
be reduced by *** for each *** in royalties which SP Ltd. is obligated to
pay third parties under Third Party Patent Licenses; provided, however,
-------- -------
that the royalty payable by SP Ltd. hereunder shall not be reduced,
pursuant to this Section 7.3.3, to less than *** of SP Ltd.'s Net Sales of
Licensed Product. By way of example and for avoidance of doubt, if SP Ltd.
is obligated to pay Zonagen a *** royalty on certain Net Sales of Licensed
Product, and is also obligated to pay a *** royalty on the same Net Sales
of the same Licensed Product under a Third Party Patent License, then the
royalty rate under this Agreement would be reduced by *** to ***. The
royalty rate reductions provided for in this Section 7.3.3 are applicable
regardless of the royalty rate being paid under Section 7.3.1 (a)
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
hereof. The use of the term Licensed Product in this Section 7.3.3 shall
not include SP Ltd. Combination Products.
7.3.4 Third Party Licenses - SP Ltd. Combination Products.
---------------------------------------------------
Notwithstanding anything to the contrary in Section 7.3.3 hereof, in the
event that, because of the inclusion of the Licensed Compound or Licensed
Product or the use of Zonagen Know-How in SP Ltd. Combination Products,
Third Party Patent Licenses are required by SP Ltd., its Affiliates and/or
sublicensees in order to discover, develop, make, have made, import,
export, use, distribute, promote, market, offer for sale or sell such SP
Ltd. Combination Products, then the royalty rates set forth in Section
7.3.1 shall be adjusted such that the royalty rate for Net Sales of such SP
Ltd. Combination Products which SP Ltd. is obligated to pay Zonagen
hereunder shall be reduced by *** for each *** in royalties which SP Ltd.
is obligated to pay third parties under Third Party Patent Licenses,
provided, however that the royalty payable by SP Ltd. hereunder shall not
-------- -------
be reduced, pursuant to this Section 7.3.4, to less than *** of SP Ltd.'s
Net Sales of such SP Ltd.'s Net Sales of such SP Ltd. Combination Product.
By way of example and for avoidance of doubt, if SP Ltd. is obligated to
pay Zonagen a *** royalty on certain Net Sales of a SP Ltd. Combination
Product, and is also obligated to pay a *** royalty on the same Net Sales
of the same SP Ltd. Combination Product under a Third Party Patent License
because of the inclusion of the Licensed Compound or Licensed Product or
the use of Zonagen Know-How in such SP Ltd. Combination Product, then the
royalty rate under this Agreement would be reduced by *** to ***.
7.3.5 Compulsory Licenses. If a compulsory license is granted to a
-------------------
third party with respect to Licensed Compound and/or Licensed Product in
any country in the Territory with a royalty rate lower than the royalty
rate provided by Section 7.3.1, then the royalty rate to be paid by SP Ltd.
on Net Sales in that country under Section 7.3.1 shall be reduced to the
rate paid by the compulsory licensee.
7.3.6 Comarketing Rights. If SP Ltd.'s obligation to pay royalties
------------------
to Zonagen in any country of the Territory hereunder permanently ceases in
accordance with the provisions of this Section 7.3, Zonagen thereafter
shall have the right to comarket a second brand of Licensed Product (i.e.,
using a trademark other than a trademark used by SP Ltd., its Affiliates or
sublicenses for the Licensed Product) in such country.
7.4 Reports and Payment of Royalty.
------------------------------
7.4.1 Royalties Paid Quarterly. Within sixty (60) calendar days
------------------------
following the close of each Calendar Quarter, following the First
Commercial Sale of a Licensed Product, SP Ltd. shall furnish to Zonagen a
written report for the Calendar Quarter showing the Net Sales
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<PAGE>
of Licensed Product sold by SP Ltd., its Affiliates and its sublicensees in
the Territory during such Calendar Quarter and the royalties payable under
this Agreement for such Calendar Quarter. Simultaneously with the
submission of the written report, SP Ltd. shall pay to Zonagen, for the
account of SP Ltd. or the applicable Affiliate or sublicensee, as the case
may be, a sum equal to the aggregate royalty due for such Calendar Quarter
calculated in accordance with this Agreement (reconciled for any previous
overpayments, underpayment or credits).
7.4.2 Method of Payment. Payments to be made by SP Ltd. to Zonagen
-----------------
under this Agreement shall be paid, at SP Ltd.'s option, either by bank
wire transfer in immediately available funds to such bank account as is
designated in writing by Zonagen from time to time or by check in
immediately available funds. Royalties shall be deemed payable by the
entity making the Net Sales from the country in which earned in local
currency and subject to foreign exchange regulations then prevailing.
Royalty payments shall be made in United States dollars to the extent that
free conversions to United States dollars is permitted. The rate of
exchange to be used in any such conversion from the currency in the country
where such Net Sales are made shall be the rate of exchange used by SP Ltd.
for reporting such sales for United States financial statement purposes.
If, due to restrictions or prohibitions imposed by national or
international authority, payments cannot be made as aforesaid, the parties
shall consult with a view to finding a prompt and acceptable solution, and
SP Ltd. will deal with such monies as Zonagen may lawfully direct at no
additional out-of-pocket expense to SP Ltd. Notwithstanding the foregoing,
if royalties in any country cannot be remitted to Zonagen for any reason
within six (6) months after the end of the Calendar Quarter during which
they are earned, then SP Ltd. shall be obligated to deposit the royalties
in a bank account in such country in the name of Zonagen.
7.5 Maintenance of Records. Audits.
------------------------------
7.5.1 Record Keeping by SP Ltd. SP Ltd. and its Affiliates shall
-------------------------
keep complete and accurate records in sufficient detail to enable the
royalties payable hereunder to be determined. Upon forty-five (45) days
prior written notice from Zonagen, SP Ltd. shall permit an independent
certified public accounting firm of nationally recognized standing selected
by Zonagen and reasonably acceptable to SP Ltd., at Zonagen's expense, to
have access during normal business hours to examine pertinent books and
records of SP Ltd. and/or its Affiliates as may be reasonably necessary to
verify the accuracy of the royalty reports hereunder. The examination
shall be limited to pertinent books and records for any year ending not
more than twenty-four (24) months prior to the date of such request. An
examination under this Section 7.5.1 shall not occur more than once in any
Calendar Year. SP Ltd. may designate competitively sensitive information
which such auditor may not disclose to Zonagen, provided, however, that
-------- -------
such designation shall not encompass the auditor's conclusions. The
accounting firm shall disclose to Zonagen only whether the royalty reports
are correct or incorrect and the specific details concerning any
discrepancies. No other information shall be provided to Zonagen. All such
accounting firms shall sign a
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
confidentiality agreement (in form and substance reasonably acceptable to
SP Ltd.) as to any of SP Ltd.'s or its Affiliate's confidential information
which they are provided, or to which they have access, while conducting any
audit pursuant to this Section 7.5.1.
7.5.2 Underpayment/Overpayments. If such accounting firm correctly
-------------------------
concludes that additional royalties were owed during such period, SP Ltd.
shall pay the additional royalties within thirty (30) days of the date
Zonagen delivers to SP Ltd. such accounting firm's written report so
correctly concluding. If such underpayment exceeds *** of the royalty
correctly due Zonagen then the fees charged by such accounting firm for the
work associated with the underpayment audit shall be paid by SP Ltd. Any
overpayments by SP Ltd. will be credited against future royalty
obligations. In the event that SP Ltd. disagrees with the audit report and
the chief financial officers of SP Ltd. and Zonagen fail to resolve such
disagreement, the dispute will be resolved through the dispute resolution
mechanism set forth in Section 14.2.
7.5.3 Record Keeping by Sublicensee. SP Ltd. shall include in each
-----------------------------
sublicense granted by it pursuant to this Agreement a provision requiring
the sublicensee to make reports to SP Ltd., to keep and maintain records of
sales made pursuant to such sublicense and to grant access to such records
by Zonagen's independent accountant to the same extent required of SP Ltd.
under this Agreement. Upon the expiration of twenty-four (24) months
following the end of any year, the calculation of royalties payable with
respect to such year shall be binding and conclusive upon Zonagen and SP
Ltd. and its sublicensees shall be released from any liability or
accountability with respect to royalties for such year.
7.5.4 Confidentiality. Zonagen shall treat all financial
---------------
information subject to review under this Section 7.5, or under any
sublicense agreement, in accordance with the confidentiality provisions of
this Agreement.
7.5.5 Record Keeping by Zonagen. Zonagen and its Affiliates shall
-------------------------
keep complete and accurate records in sufficient detail to enable the
expenses which are to be reimbursed by SP Ltd. hereunder and, during such
time as Zonagen is Manufacturing the Licensed Product, Zonagen's cost of
goods hereunder to be determined. Upon forty-five (45) days prior written
notice from SP Ltd., Zonagen shall permit an independent certified public
accounting firm of nationally recognized standing selected by SP Ltd. and
reasonably acceptable to Zonagen, at SP Ltd.'s expense, to have access
during normal business hours to examine pertinent books and records of
Zonagen and/or its Affiliates as may be reasonably necessary to verify the
accuracy of the invoices submitted by Zonagen to SP Ltd. hereunder. The
examination shall be limited to pertinent books and records for any year
ending not more than twenty-four (24) months prior to the date of such
request. An examination under this Section 7.5.5 shall not occur more than
once in any Calendar Year. Zonagen may designate
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<PAGE>
competitively sensitive information which such auditor may not disclose to
SP Ltd., provided, however, that such designation shall not encompass the
-------- -------
auditor's conclusions. The accounting firm shall disclose to SP Ltd. only
whether the invoices are correct or incorrect and the specific details
concerning any discrepancies. No other information shall be provided to SP
Ltd. All such accounting firms shall sign a confidentiality agreement (in
form and substance reasonably acceptable to Zonagen) as to any of Zonagen's
or its Affiliate's confidential information which they are provided, or to
which they have access, while conducting any audit pursuant to this Section
7.5.5.
7.6 Separate Payment Obligations. The Parties acknowledge that SP Ltd.'s
----------------------------
payment obligations as set forth in Sections 7.1, 7.2 and 7.3 of this Agreement
are separate from and in addition to the payment obligations of Schering
Corporation as set forth in the Ex-U.S. License Agreement.
7.7 Income Tax Withholding. If at any time, any jurisdiction within the
----------------------
Territory requires the withholding of income taxes or other taxes imposed upon
payments to Zonagen set forth in this Article VII, SP Ltd. shall make such
withholding payments as required and subtract such withholding payments from the
payments set forth in this Article VII, or if applicable, Zonagen will promptly
reimburse SP Ltd. or its designee(s) of the amount of such payments. SP Ltd.
shall provide Zonagen with documentation of such withholding and payment in a
manner that is satisfactory for purposes of the U.S. Internal Revenue Service.
Any withholdings paid when due hereunder shall be for the account of Zonagen.
Zonagen shall be liable for any fine, assessment or penalty (resulting from a
misrepresentation by Zonagen) or any deficiency imposed by any taxing authority
in the Territory for any deficiency in the amount of any such withholding or the
failure to make such withholding payment. If SP Ltd. is required to pay any
such deficiency, or any such fine, assessment or penalty for any such
deficiency, Zonagen shall promptly reimburse SP Ltd. for such payments, which
shall not be included in the calculation of Net Sales.
7.8 Direct Affiliate Licenses. Whenever SP Ltd. shall reasonably
-------------------------
demonstrate to Zonagen that, in order to facilitate direct royalty payments by
an Affiliate, it is desirable that a separate license agreement be entered into
between Zonagen and such Affiliate, Zonagen will grant such licenses directly to
such Affiliate by means of an agreement which shall be consistent with all of
the provisions hereof, provided that SP Ltd. guarantees the Affiliate's
obligations thereunder.
ARTICLE VIII
PATENTS
8.1 Filing, Prosecution and Maintenance of Patents. Zonagen agrees to
----------------------------------------------
diligently file, prosecute and maintain in the Territory, upon appropriate
consultation with SP Ltd. the Patent Rights owned in whole or in part by Zonagen
and licensed to SP Ltd. under this Agreement, including without limitation, any
patent applications or patents relating to any Improvement. Zonagen shall give
SP Ltd. an opportunity to review the text of the applications before filing,
shall consult with SP
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
Ltd. with respect thereto, and shall supply SP Ltd. with a copy of the
applications as filed, together with notice of its filing date and serial
number. Zonagen shall keep SP Ltd. advised of the status of the actual and
prospective patent filings (including, without limitation, the grant of any
Patent Rights), and upon the written request of SP Ltd. shall provide advance
copies of any substantive papers related to the filing, prosecution and
maintenance of such patent filings.
8.2 Option of SP Ltd. to Prosecute and Maintain Patents. Zonagen shall
---------------------------------------------------
give one hundred and eighty (180) day notice to SP Ltd. of any desire to cease
prosecution and/or maintenance of a particular Patent Right and, in such case,
shall permit SP Ltd., at its sole discretion, to continue prosecution or
maintenance at its own expense. If SP Ltd. elects to continue prosecution or
maintenance, Zonagen shall execute such documents and perform such acts, at SP
Ltd.'s expense, as may be reasonably necessary to effect an assignment of such
Patent Rights to SP Ltd. Any such assignment shall be completed in a timely
manner to allow SP Ltd. to continue such prosecution or maintenance. Any
patents or patent applications so assigned shall not be considered Patent Rights
for all purposes under this Agreement.
8.3 Enforcement of Zonagen Patent Rights.
------------------------------------
8.3.1 Notice and Discontinuance of Infringement. In the event that
-----------------------------------------
either SP Ltd. or Zonagen becomes aware of any infringement within any
country in the Territory of any issued patent within the Patent Rights, it
will notify the other Party in writing to that effect. Any such notice
shall include evidence to support an allegation of infringement by such
third party. Zonagen shall use its best efforts to obtain a discontinuance
of such infringement or bring suit against the third party infringer within
*** from the date of said notice. Zonagen shall bear all the expenses of
any suit brought by it. SP Ltd. shall have the right, prior to
commencement of the trial, suit or action brought by Zonagen, to join any
such suit or action, and in such event shall pay one-half of the costs of
such suit or action. In no event shall Zonagen enter into any settlement,
consent judgment or other voluntary final disposition of such suit which
would adversely affect SP Ltd.'s rights under this Agreement in any way
without first obtaining SP Ltd.'s written consent to do so, which consent
may be provided or withheld in SP Ltd.'s sole discretion. Additionally, in
the event that SP Ltd. has joined in the action and shared in the costs
thereof as set forth above, no settlement, consent judgment or other
voluntary final disposition of the suit may be entered into without the
consent of SP Ltd.. In the event that SP Ltd. has not joined the suit or
action, SP Ltd. will reasonably cooperate with Zonagen in any such suit or
action and shall have the right to consult with Zonagen and be represented
by its own counsel at its own expense, provided that Zonagen shall
periodically reimburse SP Ltd. for its out-of-pocket costs (excluding the
costs of retaining its own outside counsel) incurred in cooperating with
Zonagen. Any recovery or damages derived from a suit which SP Ltd. has
joined and shared costs shall be used first to reimburse each of Zonagen
and SP Ltd. for its documented out-of-pocket legal
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
expenses relating to the suit, with any remaining amounts to be shared
equally by the Parties. Any recovery or damages derived from a suit which
SP Ltd. has not joined shall be retained by Zonagen.
8.3.2 Continuance of Infringement. If, after the expiration of the
---------------------------
*** period specified in Section 8.3.1, Zonagen has not overcome the
allegation of infringement, obtained a discontinuance of such infringement
or filed suit against such third party infringer, then, notwithstanding the
limitations on royalty rate reduction set forth in Sections 7.3.3 and
7.3.4, the royalty rates to be paid by SP Ltd. on its Net Sales of the
Licensed Product in the country of the Territory where such infringement is
occurring shall be reduced as set forth in Section 7.3.1(c) or Section
7.3.1(d), as applicable, until said infringement ceases and, thereafter,
the royalty shall revert to the applicable full royalty set forth in
Section 7.3.1. In addition, SP Ltd. shall have the right, but not the
obligation, to bring suit against such infringer under the Patent Rights
and join Zonagen as a party plaintiff, provided that SP Ltd. shall bear all
the expenses of such suit. Zonagen will cooperate with SP Ltd. in any suit
for infringement of a Patent Right brought by SP Ltd. against a third
party, and shall have the right to consult with SP Ltd. and to participate
in and be represented by independent counsel in such litigation at its own
expense. SP Ltd. shall periodically reimburse Zonagen for its out-of-
pocket costs (excluding Zonagen's costs of retaining independent counsel)
incurred in cooperating with SP Ltd. SP Ltd. shall incur no liability to
Zonagen as a consequence of such litigation or any unfavorable decision
resulting therefrom, including any decision holding any of the Patent
Rights invalid or unenforceable. In the event that SP Ltd. recovers any
sums in such litigation by way of damages or in settlement thereof, SP Ltd.
shall retain all such sums.
8.4 Infringement of Third Party Patents; Third Party Licenses.
---------------------------------------------------------
8.4.1 Course of Action. In the event that SP Ltd.'s, its
----------------
Affiliates' or its sublicensees 'making, having made, importing, exporting,
using, distributing, marketing, promoting, offering for sale or selling
Licensed Compounds and/or Licensed Products infringes, will infringe or is
alleged by a third party to infringe a third party's patent, the Party
becoming aware of same shall promptly notify the other.
8.4.2 LP Ltd. Option to Negotiate. SP Ltd. shall in the first
---------------------------
instance have the right to negotiate with said third party for a suitable
license or assignment provided, however, that SP Ltd. shall enter into no
-------- -------
such agreement unless it has first obtained Zonagen's approval (which
approval shall not be unreasonably withheld) of any royalties or payments
which are to be deducted from payments to be made to Zonagen hereunder. In
the event that such negotiation results in a consummated agreement, then
any lump sum payment made
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
thereunder shall be paid by SP Ltd. and shall offset any royalties due
Zonagen hereunder, but only to the extent of reducing royalties due Zonagen
by *** in any Calendar Quarter. Any unused amounts not so offset can be
carried over to subsequent quarters.
8.4.3 Zonagen Option to Negotiate. Should SP Ltd. fail to
---------------------------
consummate an agreement with said third party within *** of initiating
negotiations, then Zonagen shall have the right to negotiate with said
third party for a suitable license or assignment. In the event that such
negotiation results in a consummated agreement, then any lump sum payments
made thereafter shall be paid by Zonagen. Should such agreement require
the payment of royalties, SP Ltd. shall continue to pay the royalties due
Zonagen hereunder and Zonagen shall pay any royalties due said third party
on SP Ltd.'s behalf.
8.4.4 Third Party Infringement Suit. In the event that a third
-----------------------------
party sues SP Ltd. alleging that SP Ltd.'s, its Affiliates' or its
sublicensees' making, having made, importing, exporting, using,
distributing, marketing, promoting, offering for sale or selling Licensed
Compounds and/or Licensed Products infringes or will infringe said third
party's patent, then SP Ltd. may, in its sole discretion, elect to defend
such suit and, during the period in which such suit is pending, SP Ltd.
shall have the right to apply up to *** of the royalties due Zonagen on
sales of the allegedly infringing Licensed Product against its litigation
expenses, including settlement costs and royalties paid in settlement of
any such suit. Upon SP Ltd.'s request and in connection with SP Ltd.'s
defense of any such third party infringement suit, Zonagen shall provide
reasonable assistance to SP Ltd. for such defense.
8.5 Certification Under Drug Price Competition and Patent Restoration Act.
---------------------------------------------------------------------
Zonagen and SP Ltd. each shall immediately give written notice to the other of
any certification of which they become aware filed pursuant to 21 U.S.C.
(S)355(b)(2)(A) (or any amendment or successor statute thereto), or its foreign
equivalent, claiming that Patent Rights covering Licensed Compound and/or
Licensed Product(s) are invalid or that infringement will not arise from the
manufacture, use or sale of Compound(s) or Licensed Product(s) by a third party.
Notwithstanding any provision to the contrary, in the event that the Patent
Rights at issue are owned and/or controlled by Zonagen and Zonagen has failed to
bring an infringement action against such third party at least fourteen (14)
days prior to expiration of the forty five (45) day period set forth in 21
U.S.C. (S)355(c)(3)(C) (or any amendment or successor statute thereto), or its
foreign equivalent, SP Ltd. shall have the right to bring such an infringement
action, in its sole discretion and at its own expense, in its own name and/or in
the name of Zonagen. At SP Ltd.'s request, Zonagen shall, at its own expense,
provide SP Ltd. reasonable assistance to conduct such infringement action,
including, without limitation, causing the execution of such legal documents as
SP Ltd. may deem necessary for the prosecution of such action. SP Ltd. shall
periodically reimburse Zonagen for its out-of-pocket costs (excluding any of
Zonagen's costs of retaining independent counsel) incurred in assisting SP Ltd..
SP Ltd. shall
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<PAGE>
incur no liability to Zonagen as a consequence of such litigation or any
unfavorable decision resulting therefrom, including any decision holding any of
the Patent Rights invalid or unenforceable. In the event that SP Ltd. recovers
any sums in such litigation by way of damages or in settlement thereof, SP Ltd.
shall have the right to retain all such sums to offset its costs, losses and
expenses.
8.6 Abandonment. Subject to SP Ltd.'s rights pursuant to Section 8.2,
-----------
Zonagen shall at the earliest known date give notice to SP Ltd. of the grant
lapse, revocation, surrender, invalidation of abandonment of any Patent Rights
licensed to SP Ltd. for which Zonagen is responsible for the filing, prosecution
and maintenance under this Agreement.
8.7 Patent Term Restoration. The Parties hereto shall cooperate with each
-----------------------
other in obtaining patent term restoration, supplemental protection certificates
or their equivalents in the Territory where applicable to Patent Rights. In the
event that elections with respect to obtaining such patent term restoration are
to be made, SP Ltd. shall have the right to make the election and Zonagen agrees
to abide by such election.
8.8 Notices Regarding Patents. All notices, inquiries and communications
-------------------------
in connection with this Article IV shall be sent in the manner set forth in
Section 14.7 to the Parties at the addresses and facsimile numbers indicated
below.
If to Zonagen: Zonagen, Inc.
2408 Timberloch Place, B-4
The Woodlands, Texas 77380
Attn.: Joseph S. Podolski, President and CEO
Fax No.: (281) 363-8796
If to SP Ltd.: Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attn.: Staff Vice President - Patents and Trademarks
Fax No.: (908) 298-5388
ARTICLE IX
CONFIDENTIALITY AND PUBLICATION
9.1 Confidentiality.
---------------
9.1.1 Nondisclosure Obligation. Each of Zonagen and SP Ltd. shall
------------------------
use only in accordance with this Agreement and shall not disclose to any
third party any Proprietary Information received by it from the other
Party, without the prior written consent of the other
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
Party. The foregoing obligations shall survive the expiration or
termination of this Agreement for a period of ***. These obligations shall
not apply to Proprietary Information that:
(i) is known by the receiving Party at the time of its
receipt, and not through a prior disclosure by the disclosing
Party, as documented by business records; is at the time of
disclosure or thereafter becomes published or otherwise part
of the public domain without breach of this Agreement by the
receiving Party;
(iii) is subsequently disclosed to the receiving Party
by a third party who has the right to make such disclosure;
(iv) is developed by the receiving Party independently
of Proprietary Information or other information received from
the disclosing Party and such independent development can be
documented by the receiving Party;
(v) is disclosed to any institutional review board of
any entity conducting clinical trials or any governmental or
other regulatory agencies in order to obtain patents or to
gain approval to conduct clinical trials or to market Licensed
Compound and/or Licensed Product, but such disclosure may be
made only to the extent reasonably necessary to obtain such
patents or authorizations; and, in which case reasonable
effort shall be taken to maintain the confidentiality of such
Proprietary Information, or
(vi) is required by law, regulation, rule, act or order
of any governmental authority or agency to be disclosed by a
Party, provided that notice is promptly delivered to the other
Party in order to provide an opportunity to seek a protective
order or other similar order with respect to such Proprietary
Information and thereafter the disclosing Party discloses to
the requesting entity only the minimum Proprietary Information
required to be disclosed in order to comply with the request,
whether or not a protective order or other similar order is
obtained by the other Party.
9.1.2 Disclosure to Agents. Notwithstanding the provisions of
--------------------
Section 9.1.1 and subject to the other terms of this Agreement each Party
shall have the right to disclose Proprietary Information received or
obtained from the other Party to its sublicensees, agents, consultants,
Affiliates or other third parties (collectively "Representatives") in
accordance with this Section 9.1.2. Such disclosure shall be limited only
to those Representatives
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
directly involved in the research, development, manufacturing, marketing or
promotion of Licensed Compound or Licensed Product (or for such
Representatives to determine their interest in performing such activities)
in accordance with this Agreement. Any such Representatives must agree in
writing to be bound by confidentiality and non-use obligations essentially
the same as those contained in this Agreement. The term of confidentiality
and non-use obligations for such Representatives shall be no less than ***.
9.1.3 Disclosure to Third Parties. Notwithstanding anything herein
---------------------------
to the contrary, Zonagen shall not disclose, provide or transfer any
Zonagen Know-How to any third party (other than to the subcontractors
Zonagen has engaged to Manufacture Licensed Product for supply to SP Ltd.
hereunder or contract research organizations engaged by Zonagen for the
purpose of meeting its research, development and regulatory filing
obligations hereunder, provided, however, that such disclosure shall be
-------- -------
made only pursuant to a written confidential disclosure agreement which is,
in form and substance, acceptable to SP Ltd.) without the prior written
approval of SP Ltd. Zonagen shall be permitted to disclose to third
parties Zonagen Know How that relates solely to (x) injectable formulations
of the Licensed Product or (y) Zonagen Combination Products for which SP
Ltd. has not acquired rights under Section 3.2 hereof and SP Ltd.'s right
of first negotiation under Section 3.2 has expired.
9.2 Return of Proprietary Information. At any time upon request of the
---------------------------------
disclosing Party after termination of this Agreement pursuant to Sections 13.2
or 13.3 hereof, the receiving Party shall return all documents, and copies
thereof, (including those in the possession of SP Ltd.'s Representatives
pursuant to Section 9.1.2), containing the disclosing Party's Proprietary
Information. However, the receiving Party may retain one (1) copy of such
documents in a secure location solely for the purpose of determining its
obligations hereunder, to comply with any applicable regulatory requirements, or
to defend against any product liability claims.
9.3 No Publicity. A Party may not use the name of the other Party in any
------------
publicity or advertising and, except as provided in Section 9.1, may not issue a
press release or otherwise publicize or disclose any information related to the
existence of this Agreement or the terms or conditions hereof, without the prior
written consent of the other Party. The Parties shall agree on a form and
timing of the initial press release that may be used by either Party to describe
this Agreement. Nothing in the foregoing, however, shall prohibit a Party from
making such disclosures to the extent deemed necessary under applicable federal
or state securities laws or any rule or regulation of any nationally recognized
securities exchange. In such event, however, the disclosing Party shall use
good faith efforts to consult with the other Party prior to such disclosure and,
where applicable, shall request confidential treatment to the extent available.
SP Ltd. acknowledges that Zonagen will be required to file this Agreement with
the United States Securities and Exchange Commission. Zonagen will seek
confidential treatment of such filing to the extent it is reasonably able to do
so and shall, prior to making any such filing, give SP Ltd. the opportunity to
review and
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
propose modifications to Zonagen's proposed redactions. Zonagen shall not
unreasonably refuse to comply with any of SP Ltd.'s proposed modifications.
9.4 Publication. SP Ltd. and Zonagen each acknowledge the potential
-----------
benefit in publishing results of certain studies to obtain recognition within
the scientific community and to advance the state of scientific knowledge. Each
Party also recognizes the mutual interest in obtaining valid patent protection
and in protecting business interests and trade secret information. No
publication of Zonagen Know-How or Patent Rights may be made without the prior
written consent of Zonagen. The Parties agree that Zonagen shall not publish
any information regarding the use of the Licensed Products in the Field or in
any Zonagen Additional Indication without SP Ltd.'s prior written consent and
that SP Ltd., its Affiliates, employees or consultants shall be free to make any
publication which does not disclose Zonagen Know-How or Patent Rights. In the
event that any proposed publication (as defined below) discloses Zonagen Know-
How or Patent Rights, the following procedure shall apply: Either Party, its
Affiliates, employees or consultants wishing to make a publication shall deliver
to the other Party a copy of the proposed written publication or an outline of
an oral disclosure at least *** prior to submission for publication or
presentation. For purposes of this Agreement, the term "publication" shall
include, without limitation, abstracts and manuscripts for publication, slides
and texts of oral or other public presentations, and texts of any transmission
through any electronic media, e.g. any computer access system such as the
Internet, World Wide Web. The reviewing Party shall have the right (i) to
propose modifications to the publication for patent reasons, trade secret
reasons or business reasons or (ii) to request delay of the publication or
presentation in order to protect patentable information. If the reviewing Party
requests a delay, the publishing Party shall delay submission or presentation
for a period not less than eighteen (18 ) months from the ,filing date of the
first patent application covering the information contained in the proposed
publication or presentation. If the reviewing Party requests modifications to
the publication, the publishing Party may edit such publication to prevent
disclosure or trade secret or proprietary business information prior to
submission of the publication or presentation. In the event, however, that the
publication contains Zonagen Know-How or Patent Rights, any such publication
must be approved, in writing, by Zonagen.
ARTICLE X
REPRESENTATIONS AND WARRANTIES
10.1 Representations and Warranties of Each Party. Each of Zonagen and
--------------------------------------------
SP Ltd. hereby represents, warrants and covenants to the other Party hereto as
follows:
(a) it is a corporation or entity duly organized and validly
existing under the laws of the state or other jurisdiction of
incorporation or formation;
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(b) the execution, delivery and performance of this Agreement by
such Party has been duly authorized by all requisite corporate action,
(c) it has the power and authority to execute and deliver this
Agreement and to perform its obligations hereunder;
(d) the execution, delivery and performance by such Party of this
agreement and its compliance with the terms and provisions hereof does
not and will not conflict with or result in a breach of any of the
terms and provisions of or constitute a default under (i) a loan
agreement, guaranty, financing agreement, agreement affecting a
product or other agreement or instrument binding or affecting it or
its property; (ii) the provisions of its charter or operative
documents or bylaws; or (iii) any order, writ, injunction or decree of
any court or governmental authority entered against it or by which any
of its property is bound;
(e) except for the governmental and Regulatory Approvals required
to market the Licensed Product in the Territory and any approvals
required under the HSR Act, the execution, delivery and performance of
this Agreement by such Party does not require the consent, approval or
authorization of, or notice, declaration, filing or registration with,
any governmental or regulatory authority and the execution, delivery
or performance of this Agreement will not violate any law, rule or
regulation applicable to such Party;
(f) this Agreement has been duly authorized, executed and
delivered and constitutes such Party's legal, valid and binding
obligation enforceable against it in accordance with its terms
subject, as to enforcement, to bankruptcy, insolvency, reorganization
and other laws of general applicability relating to or
affectingcreditors'rightsandtotheavailabilityofparticularremediesunder
general equity principles; and
(g) it shall comply with all applicable material laws and
regulations relating to its activities under this Agreement.
10.2 Zonagen's Representations. Zonagen hereby represents, warrants and
-------------------------
covenants to SP Ltd. as follows:
(a) as of the Effective Date, the Patent Rights, Zonagen Know-How
and Zonagen Trademarks are existing and to the best of its knowledge,
are not invalid or unenforceable, in whole or in part;
(b) it has the full right, power and authority to grant all of
the right, title and interest in the licenses granted under Article II
hereof;
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(c) it has not prior to the Effective Date, assigned,
transferred, conveyed or otherwise encumbered its right, title and
interest in any of the Licensed Compound, Licensed Products, the
Patent Rights, Zonagen Know-How or Zonagen Trademark, with respect to
which SP Ltd. has been granted a license, an option or other rights
hereunder;
(d) it is the sole and exclusive owner of the Patent Rights,
Zonagen Know-How and Zonagen Trademarks existing as of the Effective
Date, all of which are free and clear of any liens, charges and
encumbrances, and no other person, corporate or other private entity,
or governmental entity or subdivision thereof, has or shall have any
claim of ownership with respect to the Patent Rights, Zonagen Know-How
or the Zonagen Trademark existing as of the Effective Date,
whatsoever;
(e) to the best of its knowledge the Patent Rights, Zonagen Know-
How and Zonagen Trademark, and the development, manufacture, use,
distribution, marketing, promotion and sale of Licensed Product in its
current formulation or in any formulations currently under development
by Zonagen do not, as of the Effective Date, interfere or infringe on
any intellectual property rights owned or possessed by any third
party;
(f) to the best of its knowledge, as of the Effective Date, there
are no third party pending patent applications which, if issued, would
cover the development, manufacture, use or sale of Licensed Product in
its current formulation or in any formulations currently under
development by Zonagen;
(g) as of the Effective Date, there are no claims, judgments or
settlements against or owed by Zonagen or, to the best of its
knowledge pending, or threatened claims or litigation relating to
Licensed Compound, the Patent Rights, Zonagen Know-How and Zonagen
Trademark;
(h) as of the Effective Date it has disclosed to SP Ltd. all
material Zonagen Know-How and other relevant information, including,
without limitation, other information relating to the Patent Rights,
Licensed Compounds and Licensed Products in the Field;
(i) during the Term of this Agreement it will use diligent
efforts not to diminish the rights under the Patent Rights, Zonagen
Know-How and Zonagen Trademark granted to SP Ltd. hereunder, including
without limitation, by not committing or permitting any actions or
omissions which would cause the breach of any agreements between
itself and third parties which provide for intellectual property
rights applicable to the development, manufacture, use or sale of
Licensed Compounds and/or Licensed Products, that it will provide SP
Ltd. promptly with notice of any such alleged breach, and that as of
the Effective Date, it is in
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
compliance in all material respects with any agreements with third
parties relating to Patent Rights, Zonagen Know How, Zonagen
Trademarks, Licensed Compounds and/or Licensed Products;
(j) data summaries provided to SP Ltd. by Zonagen prior to the
Effective Date relating to the pre-clinical and clinical studies of
the Licensed Compound accurately represent all the underlying raw
data;
(k) it has provided to SP Ltd. a summary of all adverse events
known to it relating to the Licensed Compound;
(l) except as set forth in Schedule 10.2(m), as of the
Effective Date, there are no collaborative, licensing, material
transfer, supply, distributorship or marketing agreements or
arrangements or other similar agreements to which it or any of its
Affiliates are party relating to Licensed Compound, Licensed Product
or Patent Rights, which agreements are inconsistent with SP Ltd.'s
rights hereunder
(m) it has not granted any rights to any third party with
respect to the Licensed Compound, Licensed Product or Patent Rights,
which grant of rights would be inconsistent with the rights granted
to SP Ltd. hereunder; and
(n) it has no knowledge of any material information, other than
information provided to SP Ltd. prior to the signing of this
Agreement, which would negatively affect the ability of either Party
to obtain Regulatory Approval for the Licensed Product with *** or
which would negatively affect the timing for obtaining such
Regulatory Approval.
10.3. Continuing Representations. The representations and warranties of
--------------------------
each Party contained in Sections 10.1, 10.2(b), 10.2(d), 10.2(i), 10.2(k), and
10.2(m) shall survive the execution of this Agreement and shall remain true and
correct after the date hereof with the same effect as if made as of the date
hereof
10.4 No Inconsistent Agreements. Neither Party has in effect and after
--------------------------
the Effective Date neither Party shall enter into any oral or written agreement
or arrangement that would be inconsistent with its obligations under this
Agreement.
10.5 Representation by Legal Counsel. Each Party hereto represents that
-------------------------------
it has been represented by legal counsel in connection with this Agreement and
acknowledges that it has
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participated in the drafting hereof. In interpreting and applying the terms and
provisions of this Agreement, the Parties agree that no presumption shall exist
or be implied against the Party which drafted such terms and provisions.
ARTICLE XI
INDEMNIFICATION AND LIMITATION ON LIABILITY
11.1 Indemnification by SP Ltd. SP Ltd. shall indemnify, defend and
---------------------------
hold harmless Zonagen and its Affiliates, and each of its and their respective
employees, officers, directors and agents (each, a "Zonagen Indemnified Party")
from and against any and all liability, loss, damage, cost, and expense
(including reasonable attorneys' fees), subject to the limitations in Section
11.5 (collectively, a "Liability") which the Zonagen Indemnified Party may
incur, suffer or be required to pay resulting from or arising in connection with
(i) the breach by SP Ltd. of any covenant, representation of warranty contained
in this Agreement (ii) the Manufacture, promotion, distribution, use, testing,
marketing, sale or other disposition of Licensed Compounds and/or Licensed
Products by SP Ltd., its Affiliates or sublicensees or clinical trails conducted
by or on or on behalf of SP Ltd. on a Licensed Product or (iii) the successful
enforcement by a Zonagen Indemnified Party of its rights under this Section
11.1. Notwithstanding the foregoing, SP Ltd. shall have no obligation under
this Agreement to indemnify, defend or hold harmless any Zonagen Indemnified
Party with respect to claims, demands, costs or judgments which result from
willful misconduct or negligent acts or omissions of Zonagen, its Affiliates, or
any of their respective employees, officers, directors or agents.
11.2 Indemnification by Zonagen. Zonagen shall indemnify, defend and
--------------------------
hold harmless SP Ltd. and its Affiliates, and each of its and their respective
employees, officers, directors and agents (each, a "SP Ltd. Indemnified Party")
from and against any Liability which the SP Ltd. Indemnified Party may incur,
suffer or be required to pay resulting from or arising in connection with (i)
the breach by Zonagen of any covenant, representation or warranty contained in
this Agreement; (ii) the discovery, development, Manufacture, promotion, sale or
use of Licensed Compounds and/or Licensed Products by Zonagen, its Affiliates or
their subcontractors or clinical trials conducted by or on behalf of Zonagen on
Licensed Products; or (iii) the successful enforcement by a SP Ltd. Indemnified
Party of its rights under this Section 11.2. Notwithstanding the foregoing,
Zonagen shall have no obligation under this Agreement to indemnify, defend, or
hold harmless any SP Ltd. Indemnified Party with respect to claims, demands,
costs or judgments which result from willful misconduct or negligent acts or
omissions of SP Ltd., its Affiliates, or any of their respective employees,
officers, directors or agents.
11.3 Conditions to Indemnification. The obligations of the indemnifying
-----------------------------
Party under Sections 11.1 and 11.2 are conditioned upon the delivery of written
notice to the indemnifying Party of any potential Liability promptly after the
indemnified Party becomes aware of such potential Liability. The indemnifying
Party shall have the right to assume the defense of any suit or claim related to
the Liability if it has assumed responsibility for the suit or claim in writing;
however, if in the reasonable judgment of the indemnified Party, such suit or
claim involves an issue or matter
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
which could have a materially adverse effect on the business operations or
assets of the indemnified Party, the indemnified Party may waive its rights to
indemnity under this Agreement and control the defense or settlement thereof,
but in no event shall any such waiver be construed as a waiver of any
indemnification rights such Party may have at law or in equity. If the
indemnifying Party defends the suit or claim, the indemnified Party may
participate in (but not control) the defense thereof at its sole cost and
expense.
11.4 Settlements. Neither Party may settle a claim or action related to
-----------
a Liability without the consent of the other Party, if such settlement would
impose any monetary obligation on the other Party or require the other Party to
submit to an injunction or otherwise limit the other Party's rights under this
Agreement. Any payment made by a Party to settle any such claim or action shall
be at its own cost and expense.
11.5 Limitation of Liability. With respect to any claim by one Party
-----------------------
against the other arising out of the performance or failure of performance of
the other Party under this Agreement, the Parties expressly agree that the
liability of such Party to the other Party for such breach shall be limited
under this Agreement or otherwise at law or equity to direct damages only and in
no event shall a Party be liable for, punitive, exemplary or consequential
damages. The limitations set forth in this Section 11.5 shall not apply with
respect to the obligations of either Party to indemnify the other under Sections
11.1 or 11.2 hereof in connection with a Liability to a third party.
11.6 Insurance. Zonagen acknowledges and agrees that during the Term of
---------
this Agreement and for a period of five (5) years following the expiration or
earlier termination of this Agreement, it shall maintain, in full force and
effect, adequate liability insurance, including product liability and
contractual liability insurance each with coverage of not less than *** for each
claim and in the aggregate to cover such Party's obligations under this
Agreement. Such insurance coverage shall be maintained with a nationally
recognized insurance carrier(s) that is reasonably acceptable to SP Ltd. Zonagen
shall provide SP Ltd. with evidence of such insurance upon SP Ltd.'s request,
which requests may be made from time to time during the Term of this Agreement
and the five (5) year period following expiration or earlier termination of this
Agreement. SP Ltd. acknowledges and agrees that during the Term of this
Agreement and for a period of five (5) years following the expiration or earlier
termination of this Agreement, it shall maintain, in full force and effect, an
insurance program (which may be through self-insurance) for liability insurance,
including products liability and contractual liability insurance, reasonably
covering its obligations under this Agreement.
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ARTICLE XII
TRADEMARK PROVISIONS
12.1 Trademark Registrations and Infringements.
-----------------------------------------
12.1.1 Use of Trademark, Registration. SP Ltd. shall have the
------------------------------
exclusive right, but not the obligation to use the Zonagen Trademarks for
the Licensed Compounds and/or the Licensed Products in the Territory and is
free to use any of its own trademarks in connection therewith. Should SP
Ltd. elect to use the Zonagen Trademarks in the Territory, SP Ltd. shall
notify Zonagen, in writing, and within thirty (30) days of such notice,
Zonagen shall notify SP Ltd. as to whether the Zonagen Trademark is filed
or registered in the Territory. Zonagen shall search, file, prosecute,
maintain and defend in its or an Affiliate's name, and at its own cost and
expense, the Zonagen Trademarks in the Territory relating to the marketing
or sale of the Licensed Compound and/or the Licensed Product and shall
provide SP Ltd. with regular status reports. Should Zonagen reasonably
determine that a Zonagen Trademark is not available for use or
registration, Zonagen shall notify SP Ltd. in writing and the Parties shall
agree on whether an alternate Zonagen Trademark shall be used.
12.1.2 Other Marks. SP Ltd. and Zonagen each acknowledge the rights
-----------
of the other in their respective trademarks, trade names, trade dress and
logos used in connection with the products other than the Licensed Compound
and/or the Licensed Product, and, except and to the extent expressly
provided in this Agreement, nothing in this Agreement shall be deemed to
give either Party during or after the duration of this Agreement any right,
title or interest in the trademarks, trade names, trade dress or logos of
the other Party.
12.1.3 No Confusing Mark. Zonagen shall neither use nor seek to
-----------------
register any trademarks which are confusingly similar to the Zonagen
Trademark or any other trademarks, trade names, trade dress or logos used
in connection with the Licensed Compound and/or the Licensed Product.
12.1.4 No Other Grants. Zonagen agrees that it shall neither use
---------------
itself, nor grant to a third party or to an Affiliate, the right to the use
of the Zonagen Trademarks in the Territory during the Term of this
Agreement without the written consent of SP Ltd., which consent may be
withheld for any reason.
12.1.5 Review by Zonagen. Should SP Ltd. elect to use a Zonagen
-----------------
Trademark, SP Ltd. shall submit to Zonagen, in writing, intended formats
for use on the packaging and on promotional and sales materials prior to
the first use thereof by SP Ltd. Should Zonagen not provide a reasonable
basis for disapproval of the intended formats within thirty (30) days of
receipt, SP Ltd. may then use such Zonagen Trademark in the formats
submitted on those and on subsequently developed packaging and promotional
materials. SP Ltd. agrees that it will not thereafter implement any
changes to such formats unless the same has been submitted to Zonagen in
accordance with the procedure set forth in the preceding sentence.
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12.1.6 Use of Tradename. In addition to the tradename of SP Ltd. or
----------------
its Affiliates, SP Ltd. shall, if permitted by applicable laws and
regulations, include on the packaging and promotional materials for
Licensed Product indicating that SP Ltd. is selling the Licensed Product
pursuant to a license granted by Zonagen.
12.2 Infringement Actions.
--------------------
12.2.1 Notice of Infringement. If SP Ltd. elects to use the Zonagen
----------------------
Trademark in the Territory, SP Ltd. shall notify Zonagen promptly and in
writing upon learning that the Zonagen Trademark is actually or potentially
infringed by a third party, or if an allegation is made the Zonagen
Trademark may infringe the rights of a third party. Zonagen shall have the
right, but not the obligation to take appropriate action to stop the
infringement or to defend the right to the continued use of its trademark.
Should Zonagen decline to take action within thirty (30) days of receipt of
notice from SP Ltd., then SP Ltd. is not obligated to but may, at its
option, take reasonable action to stop the infringement or to defend the
right to the continued use of the Zonagen Trademark. The Party bringing
the action shall be deemed the "Litigating Party" and the other Party, the
"Non-Litigating Party" for purposes of this Article XII.
12.2.2 Costs of Infringement Action. In any action brought pursuant
----------------------------
to Section 12.2.1, the costs of the action shall be borne and any recovery
shall be retained by the Litigating Party; provided, however, that if the
-------- -------
Litigating Party recovers damages attributable to (i) the profits of a
third party infringer; or (ii) lost profits or lost sales of the Non-
Litigating Party; or (iii) punitive damages against the third party
infringer; then any net recovery to the Litigating Party (i.e. total amount
of recovery, less court costs and attorneys' fees), shall be divided
equally between Zonagen and SP Ltd. If SP Ltd. is the Litigating Party in
an action to defend the right to the continued use of the Zonagen Trademark
and is successful in obtaining a final judgment of a court of competent
jurisdiction defending the right to the continued use of the Zonagen
Trademark, then Zonagen shall reimburse SP Ltd. for half of its reasonable
out-of-pocket net costs in obtaining the judgment (i.e., court costs and
reasonable attorneys' fees less any recoveries received).
12.2.3 Assistance in Actions. In any action brought pursuant to
---------------------
Section 12.2.1, the Non-Litigating Party shall provide reasonable
assistance and information to the Litigating Party and shall be reimbursed
for its reasonable out-of-pocket costs and expenses.
ARTICLE XIII
TERM AND TERMINATION
13.1 Term and Expiration. This Agreement shall be effective as of the
-------------------
Effective Date and unless terminated earlier by mutual written agreement of the
Parties or pursuant to Sections 13.2 or 13.3 below, the Term of this Agreement
shall continue in effect until expiration of the last to expire Patent Right
incorporating a Valid Claim. The expiration or termination of this Agreement
shall not
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
have the effect of causing the expiration or termination of the Ex-U.S. License
Agreement. Upon expiration of this Agreement, (i) SP Ltd.'s licenses, other
than the licenses to use the Zonagen Trademarks, pursuant to Section 2.1 and 2.2
shall become fully paid-up, perpetual nonexclusive licenses and (ii) SP Ltd.'s
license, pursuant to Section 2. 1, to use the Zonagen Trademarks, shall become a
fully paid-up, perpetual exclusive license (exclusive even as to Zonagen).
13.2 Termination by SP Ltd. Notwithstanding anything contained herein
----------------------
to the contrary, SP Ltd. shall have the unilateral right, but not the
obligation, to terminate this Agreement, in its sole discretion, upon written
notice to Zonagen if any of the following occur:
(a) the results of the *** do not permit the filing of an NDA in
the United States or an HRD in any country of the Territory, for the
Licensed Product prior to ***; or
(b) an NDA supporting Regulatory Approval, in the United States,
of the Licensed Product with *** is not filed with and accepted for
filing by the FDA on or before ***; or
(c) Regulatory Approval permitting the sale of the Licensed
Product with *** in the United States has not been granted on or
before ***; or
(d) the first Regulatory Approval permitting the sale of the
Licensed Product in the United States does not contain labeling that
SP Ltd., in its sole discretion, finds satisfactory; or
(e) after Regulatory Approval permitting the sale of the Licensed
Product in the United States, serious adverse events are reported with
respect to the Licensed Product or the FDA requires a significant
change in the labeling of the Licensed Product; or
(f) a license from a third party is required in order to make,
have made, use or sell the Licensed Product in a country of the
Territory and the total royalty payable by SP Ltd. cumulatively to
Zonagen and such third parties exceeds *** of SP Ltd.'s Net Sales of
the Licensed Product in such country (under this Section 13.2 (f) SP
Ltd. may elect instead to terminate this Agreement with respect to
only those countries where such third party license is required).
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<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
13.3 Termination.
-----------
13.3.1 Termination for Cause. This Agreement may be terminated by
---------------------
notice by either Party at any time during the Term of this Agreement:
(i) subject to Section 14.2, if the other Party is in
breach of its material obligations (other than a breach of SP Ltd.'s
diligence obligations under Section 6.1 hereof) hereunder and has not
cured such breach within ninety (90) days after notice requesting cure
of the breach with reasonable detail of the particulars of the alleged
breach or in the event that the breach cannot be reasonably cured
within such *** period, the other Party has not initiated actions
reasonably expected to cure the cited failure within *** of receiving
notice; or
(ii) upon the filing or institution of bankruptcy,
reorganization, liquidation or receivership proceedings, or upon an
assignment of a substantial portion of the assets for the benefit of
creditors by the other Party, or in the event a receiver or custodian
is appointed for such Party's business, or if a substantial portion of
such Party's business is subject to attachment or similar process;
provided, however, that in the case of any involuntary bankruptcy
-------- -------
proceeding such right to terminate shall only become effective if the
proceeding is not dismissed within *** after the filing thereof.
13.3.2 Effect of Termination for Cause on License.
------------------------------------------
(i) Termination by SP Ltd. In the event SP Ltd.
---------------------
terminates this Agreement under Section 13.3. 1 (i), SP Ltd.'s
licenses pursuant to Sections 2.1 and 2.2 shall become fully paid-up,
perpetual licenses.
(ii) Termination by Zonagen. In the event that Zonagen
----------------------
terminates this Agreement under Section 13.3.1(i), then the rights and
licenses granted to SP Ltd. under Sections 2.1 and 2.2 of this
Agreement shall terminate and all rights to the Patent Rights Zonagen
Know-How, Zonagen Trademarks, Licensed Compounds and Licensed Products
shall revert to Zonagen. In such event, SP Ltd. will transfer to
Zonagen any Regulatory Approvals relating to the Licensed Product in
those countries of the Territory where this Agreement is so
terminated. Additionally, the Parties will negotiate, in good faith,
the grant by SP Ltd. of a license to Zonagen, on appropriate
commercial terms, of any of SP Ltd.'s knowhow solely as such know-how
relates to Zonagen's rights to manufacture and sell the Licensed
Product.
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(iii) Effect of Bankruptcy. In the event SP Ltd. terminates
--------------------
this Agreement under Section 13.3.1(ii) or this Agreement is
otherwise terminated under Section 13.3.1(ii), the Parties agree
that SP Ltd., as a licensee of rights to intellectual property under
this Agreement, shall retain and may fully exercise all of its
rights and elections under Title 11, including as set forth in
Section 14.8 hereof.
13.4 Effect of Termination. Expiration or termination of the Agreement
---------------------
shall not relieve the Parties of any obligation accruing prior to such
expiration or termination, and the provisions of Article IX (other than Section
9.4) and XI shall survive the expiration of the Agreement. The provisions of
Section 9.4 shall survive any termination of this Agreement by SP Ltd. under
Section 13.3.1 because of a breach of this Agreement by Zonagen. Any expiration
or early termination of this Agreement shall be without prejudice to the rights
of either Party against the other accrued or accruing under this Agreement prior
to termination, including the obligation to pay royalties for Licensed
Product(s) or Licensed Compound sold prior to such termination.
ARTICLE XIV
MISCELLANEOUS
14.1 Assignment. Neither this Agreement nor any or all of the rights and
----------
obligations of a Party hereunder shall be assigned, delegated, sold,
transferred, sublicensed (except as otherwise provided herein) or otherwise
disposed of, by operation of law or otherwise, to any third party other than an
Affiliate of such Party, without the prior written consent of the other Party,
and any attempted assignment, delegation, sale, transfer, sublicense or other
disposition, by operation of law or otherwise, of this Agreement or of any
rights or obligations hereunder contrary to this Section 14.1 shall be a
material breach of this Agreement by the attempting Party, and shall be void and
without force or effect; provided, however, either Party may, without such
-------- -------
consent, assign the Agreement and its rights and obligations hereunder in
connection with the transfer or sale of all or substantially all of its assets
related to the division or the subject business, or in the event of its merger
or consolidation or change in control or similar transaction. This Agreement
shall be binding upon, and inure to the benefit of, each Party, its Affiliates,
and its permitted successors and assigns. Each Party shall be responsible for
the compliance by its Affiliates with the terms and conditions of this
Agreement.
14.2 Governing Law. This Agreement shall be governed, interpreted and
-------------
construed in accordance with the laws of the State of New Jersey, Without giving
effect to conflict of law principles. The Parties expressly exclude application
of the United Nations Convention for the International Sale of Goods. The
Parties recognize that a bona fide dispute as to certain matters may from time
to time arise during the term of this Agreement. In the event of the occurrence
of such a dispute (except for a deadlock in a matter being considered by the
JDC, the resolution of which shall be accomplished in accordance with the
provisions of Section 4.8.4 hereof) either Party may, by written notice to the
other Party, have such dispute referred to their respective officers (designated
below) or their successors for attempted resolution by good faith negotiations
within thirty (30) calendar days after such notice is received. Said designated
officers are as follows:
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For SP Ltd.: Executive Vice President,
Schering-Plough Pharmaceuticals
For Zonagen: President of Zonagen
In the event the designated officers are not able to resolve such dispute
through good faith negotiations within such thirty (30) calendar day period,
either Party may invoke the provisions of Schedule 14.2, Part II at any time
within thirty (30) calendar days following the end of such thirty (30) calendar
day period. Notwithstanding the foregoing, nothing in this Section 14.2 shall
prohibit a Party from seeking temporary or injunctive relief from a court of
competent jurisdiction pending the resolution of a dispute in accordance with
the provisions of this Section 14.2
14.3 Waiver. Any delay or failure in enforcing a Party's rights under
------
this Agreement or any waiver as to a particular default or other matter shall
not constitute a waiver of such Party's rights to the future enforcement of its
rights under this Agreement, nor operate to bar the exercise or enforcement
thereof at any time or times thereafter, excepting only as to an express written
and signed waiver as to a particular matter for a particular period of time.
14.4 Independent Relationship. Nothing herein contained shall be deemed
------------------------
to create an employment, agency, joint venture or partnership relationship
between the Parties hereto or any of their agents or employees, or any other
legal arrangement that would impose liability upon one Party for the act or
failure to act of the other Party. Neither Party shall have any power to enter
into any contracts or commitments or to incur any liabilities in the name of, or
on behalf of, the other Party, or to bind the other Party in any respect
whatsoever.
14.5 Export Control. This Agreement is made subject to any restrictions
--------------
concerning the export of products or technical information from the United
States of America which may be imposed upon or related to Zonagen or SP Ltd.
from time to time by the government of the United States of America.
Furthermore, SP Ltd. agrees that it will not export, directly or indirectly, any
technical information acquired from Zonagen under this Agreement or any products
using such technical information to any country for which the United States
government or any agency thereof at the time of export requires an export
license or other governmental approval, without first obtaining the written
consent to do so from the Department of Commerce or other agency of the United
States government when required by an applicable statute or regulation.
14.6 Entire Agreement, Amendment. This Agreement, including the Exhibits
---------------------------
and Schedules hereto and all the covenants, promises, agreements, warranties,
representations, conditions and understandings sets forth the complete, final
and exclusive agreement between the Parties and supersedes and terminates all
prior and contemporaneous agreements and understandings between the Parties,
whether oral or in writing. There are no covenants, promises, agreements,
warranties, representations, conditions or understandings, either oral or
written, between the Parties other than as are set forth herein. No subsequent
alteration, amendment, change, waiver or addition to this Agreement shall be
binding upon the Parties unless reduced to writing and signed by an authorized
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officer of each Party. No understanding, agreement, representation or promise,
not explicitly set forth herein, has been relied on by either Party in deciding
to execute this Agreement.
14.7 Notices. Except as provided under Section 8.8 hereof, any notice
-------
required or permitted to be given or sent under this Agreement shall be hand
delivered or sent by express delivery service or certified or registered mail,
postage prepaid, or by facsimile transmission (with written confirmation copy by
registered first-class mail) to the Parties at the addresses and facsimile
numbers indicated below.
If to Zonagen, to: Zonagen, Inc.
2408 Timberloch Place, B-4
The Woodlands, Texas 77380
Attn.: Joseph S. Podolski, President, CEO
Fax No.: (281) 363-8796
with copies to: Cooley Godward, LLP
Five Palo Alto Square
300 El Camino Real
Palo Alto, CA 94306
Attn: Robert L. Jones
Fax No. (650) 857-0663
If to SP Ltd., to: Schering-Plough Ltd.
Topferstrasse 5
6004 Lucerne
Switzerland
Attn.: President
Fax No.: (41)(41)418 16 30
with copies to: Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attn.: Law Department - Senior Legal Director, Licensing
Fax No.: (908) 298-2739
and
Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attn.: Vice President,
Business Development
Fax No.: (908) 298-5379
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<PAGE>
Any such notice shall be deemed to have been received on the date actually
received. Either Party may change its address or its facsimile number by giving
the other Party written notice, delivered in accordance with this Section.
14.8 Provisions for Insolvency.
-------------------------
14.8.1 Effect on Licenses. All rights and licenses granted under or
------------------
pursuant to this Agreement by Zonagen to SP Ltd. are, for all purposes of
Section 365(n) of Title 11 of the United States Code (with its foreign
equivalent, the "Insolvency Statute"), licenses of rights to "intellectual
property" as defined in the Insolvency Statute. Zonagen agrees that SP
Ltd., as licensee of such rights under this Agreement shall retain and may
fully exercise all of its rights and elections under the Insolvency
Statute. Zonagen agrees during the Term of this Agreement to create and
maintain current copies or, if not amenable to copying, detailed
descriptions or other appropriate embodiments, to the extent feasible, of
all such intellectual property. If a case is commenced by or against
Zonagen under the Insolvency Statute, Zonagen (in any capacity, including
debtor-in-possession) and its successors and assigns (including, without
limitation, an Insolvency Statute Trustee) shall,
(i) as SP Ltd. may elect in a written request, immediately upon
such request:
(A) perform all of the obligations provided in this
Agreement to be performed by Zonagen including, where applicable
and without limitation, providing to SP Ltd. portions of such
intellectual property (including embodiments thereof) held by
Zonagen and such successors and assigns or otherwise available to
them; or
(B) provide to SP Ltd. all such intellectual property
(including all embodiments thereof) held by Zonagen and such
successors and assigns or otherwise available to them; and
(ii) not interfere with the rights of SP Ltd. under this
Agreement, or any agreement supplemental hereto, to such intellectual
property (including such embodiments), including any right to obtain
such intellectual property (or such embodiments) from another entity.
14.8.2 Rights to Intellectual Property. If an Insolvency Statute
-------------------------------
case is commenced by or against Zonagen, and this Agreement is rejected as
provided in the Insolvency Statute, and SP Ltd. elects to retain its rights
hereunder as provided in the Insolvency Statute, then Zonagen (in any
capacity, including debtor-in-possession) and its successors and assigns
(including, without limitation, an Insolvency Statute Trustee) shall
provide to SP Ltd. all such intellectual property (including all
embodiments thereof) held by Zonagen and such successors and assigns, or
otherwise available to them, immediately upon SP Ltd.'s written
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request. Whenever Zonagen or any of its successors or assigns provides to
SP Ltd. any of the intellectual property licensed hereunder (or any
embodiment thereof) pursuant to this Section 14.8, SP Ltd. shall have the
right to perform the obligations of Zonagen hereunder with respect to such
intellectual property, but neither such provision nor such performance by
SP Ltd. shall release Zonagen from any such obligation or liability for
failing to perform it.
14.8.3 SP Ltd.'s Rights. All rights, powers and remedies of SP Ltd.
----------------
provided herein are in addition to and not in substitution for any and all
other rights, powers and remedies now or hereafter existing at law or in
equity (including, without limitation, the Insolvency Statute) in the event
of the commencement of an Insolvency Statute case by or against Zonagen.
SP Ltd., in addition to the rights, power and remedies expressly provided
herein, shall be entitled to exercise all other such rights and powers and
resort to all other such remedies as may now or hereafter exist at law or
in equity (including, without limitation, the Insolvency Statute) in such
event. The Parties agree that they intend the foregoing SP Ltd. rights to
tend to the maximum extent permitted by law, including, without limitation,
for purposes of the Insolvency Statute:
(i) the right of access to any intellectual property (including
all embodiments thereof) of Zonagen, or any third party with whom
Zonagen contracts to perform an obligation of Zonagen under this
Agreement, and, in the case of the third party, which is necessary for
the development, registration, manufacture and marketing of Licensed
Compounds and/or Licensed Products; and
(ii) the right to contract directly with any third party
described in (i) to complete the contracted work.
14.8.4 Deemed Grant of Rights. In the event of any insolvency of
----------------------
Zonagen and if any statute and/or regulation in any country in the
Territory requires that there be a specific grant or specific clause(s) in
order for SP Ltd. to obtain the rights and benefits as licensee under this
Agreement which are analogous to those rights under Section 365(n) of Title
11 of the United States Code, then this Agreement shall be deemed to
include any and all such required grant(s), clause(s) and/or requirements.
14.8.5 Security Interests. In addition to any other rights granted
------------------
to SP Ltd. hereunder, with respect to any country in the Territory in which
SP Ltd. reasonably determines that its rights set forth in this Section
14.8 are nonexistent or inadequate to protect SP Ltd.'s interests in the
licenses granted hereunder, Zonagen shall, upon SP Ltd.'s request, execute
a security agreement, or any foreign equivalent, for each country in the
Territory, granting SP Ltd. a secured interest in all intellectual property
licensed to SP Ltd. under this Agreement.
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14.9 Force Majeure. Failure of any Party to perform its obligations
-------------
under this Agreement (except the obligation to make payments when properly due)
shall not subject such Party to any liability or place them in breach of any
term or condition of this Agreement to the other Party if such failure is due to
any cause beyond the reasonable control of such non-performing Party ("force
majeure"), unless conclusive evidence to the contrary is provided. Causes of
nonperformance constituting force majeure shall include, without limitation,
acts of God, fire, explosion, flood, drought, war, riot, sabotage, embargo,
strikes or other labor trouble, failure in whole or in part of suppliers to
deliver on schedule materials, equipment or machinery, interruption of or delay
in transportation, a national health emergency or compliance with any order or
regulation of any government entity acting with color of right. The Party
affected shall promptly notify the other Party of the condition constituting
force majeure as defined herein and shall exert reasonable efforts to eliminate,
cure and overcome any such causes and to resume performance of its obligations
with all possible speed. If a condition constituting force majeure as defined
herein exists for more than ninety (90) consecutive days, the Parties shall meet
to negotiate a mutually satisfactory resolution to the problem, if practicable.
14.10 Severability. If any provision of this Agreement is declared
------------
illegal, invalid or unenforceable by a court having competent jurisdiction, it
is mutually agreed that this Agreement shall endure except for the part declared
invalid or unenforceable by order of such court, provided, however, that in the
-----------------
event that the terms and conditions of this Agreement are materially altered,
the Parties will, in good faith, renegotiate the terms and conditions of this
Agreement to reasonably substitute such invalid or unenforceable provisions in
light of the intent of this Agreement.
14.11 Counterparts. This Agreement shall become binding when any one
------------
or more counterparts hereof, individually or taken together, shall bear the
signatures of each of the Parties hereto. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against either
Party whose signature appears thereon, but all of which taken together shall
constitute but one and the same instrument.
14.12 Captions. The captions of this Agreement are solely for the
--------
convenience of reference and shall not affect its interpretation.
14.13 Recording. Each Party shall have the right, at any time, to
---------
record, register, or otherwise notify this Agreement in appropriate governmental
or regulatory offices anywhere in the world, and each Party shall provide
reasonable assistance to the other in effecting such recording, registering or
notifying,
14.14 Further Actions. Each Party agrees to execute, acknowledge and
---------------
deliver such further instruments, and to do all other acts, as may be necessary
or appropriate in order to carry out the purposes and intent of this Agreement
including, without limitation, any filings with any antitrust agency which may
be required.
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IN WITNESS WHEREOF, this Agreement has been executed by the duly authorized
representatives of the Parties as of the date set forth below.
ZONAGEN, INC. SCHERING-PLOUGH LTD.
By:/s/ Joseph S. Podolski By: /s/ David Poorvin
--------------------------- ----------------------------
Title: President & CEO Title: Vice President
----------------------- -------------------------
Date: November 15, 1997 Date: November 15, 1997
------------------------ --------------------------
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*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
SCHEDULE 1.22
PATENT RIGHTS
-------------
***
-1-
<PAGE>
SCHEDULE 4.4
ADVERSE EVENT REPORTING PROCEDURES
----------------------------------
The Parties hereby agree that the following terms will govern disclosures
of each Party to the other with respect to adverse event reporting relating to
the Licensed Product as clinically tested or marketed by or on behalf of either
Party.
1. An Adverse Event ("AE") is defined as:
a) any experience which is adverse, including what are commonly described
as adverse or undesirable experiences, adverse events, adverse reactions,
side effects, or death due to any cause associated with, or observed in
conjunction with the use of a drug, biological product, or device in
humans, whether or not considered related to the use of that product:
. occurring in the course of the use of a drug, biological product
or device,
. associated with, or observed in conjunction with product
overdose, whether accidental or intentional,
. associated with, or observed in conjunction with product abuse,
and/or
. associated with, or observed in conjunction with product
withdrawal.
b) Any significant failure of expected pharmacological or biologic
therapeutical action (with the exception of in clinical trials).
2. Serious or Non-Serious is defined as:
a) A Serious AE is one that is life threatening or fatal, permanently
disabling, requires or prolongs in-patient hospitalization or prolonged
hospitalization, or is a congenital anomaly, cancer or overdose. In
addition, end organ toxicity, including hematological, renal, hepatic, and
central nervous system AEs, may be considered serious. In laboratory tests
in animals, a serious AE includes any experience suggesting significant
risk for human subjects.
b) A Non-Serious AE is any AE which does not meet the criteria for a
serious AE.
3. Life-threatening is defined as: the patient is at immediate risk of death
from the AE as it occurs.
-1-
<PAGE>
4. End-Organ Toxicity is defined as: A medically significant event or lab
value change in which a patient may not necessarily be hospitalized or disabled,
but is clinically significant enough to warrant monitoring (e.g. seizures, blood
dyscrasias).
5. Expected or unexpected is defined as:
a) Expected AE - An AE which is listed in the Investigator's Brochure for
clinical trials, included in local labeling (e.g., Summary of Licensed
Product Characteristics) for Marketed Drugs, or in countries with no local
labeling, in the Corporate Standard Prescribing Document.
b) Unexpected AE - An AE that does not meet the criteria for an expected
AE or an AE which is listed but differs from that event in terms of
severity or specificity.
6. Associated with or related to the use of the drug is defined as: A
reasonable possibility exists that the AE was caused by the drug.
7 . Unassociated or unrelated to the use of the drug is defined as: A
reasonable possibility exists that the AE may not have been caused by the drug.
8. NDA Holder is defined as: An "Applicant" as defined in 21 CFR Part
314.3(b), for regulatory approval of an Licensed Product in any regulatory
jurisdiction, including a holder of a foreign equivalent thereto.
9. IND Holder is defined as: A "Sponsor" as defined in 21 CFR Part 313.1(b) of
an investigational new drug in any regulatory jurisdiction, including a holder
of a foreign equivalent thereto.
10. Capitalized terms not defined in this Schedule shall have the meaning
assigned thereto in the Agreement.
11. With respect to the Licensed Product, the Parties agree as follows:
All initial reports and any follow-up information (oral or written) for any
and all Serious AEs as defined above (other than with respect to animal
studies), which become known to either Party (other than from disclosure by
or on behalf of the other Party) must be communicated by telephone, telefax
or electronically directly to the other Party and/or the NDA Holder, IND
Holder (individually and collectively referred to as "Holders") within
forty-eight (48) hours of receipt of the information. Written confirmation
of the Serious AE received by such Party should be sent to the other Party
and/or the Holders as soon as it becomes available, but in any event within
forty eight (48)hours of initial report of the Serious AE by such Party.
-2-
<PAGE>
Both Parties shall exchange Medwatch and/or CIOMs forms and other
health authority reports within forty eight hours of submission to any
regulatory agency.
All initial reports and follow-up information received for all Non-
Serious AEs for marketed Licensed Product which become known to a
Party (other than from disclosure by or on behalf of the other Party)
must be communicated in writing, by telefax or electronically to the
other Party on a monthly basis, on Medwatch or CIOMs forms (where
possible).
Each Party shall coordinate and cooperate with the other whenever
practicable to prepare a single written report regarding all Serious
and/or Non-Serious AEs, provided, however, that neither Party shall be
-----------------
obligated to delay reporting of any AE in violation of applicable law
or regulations regarding the reporting of adverse events.
12. The Parties further agree that:
a) a written report be forwarded to the other Party within forty eight
hours of receipt by the Party making the report, for AEs for animal studies
which suggest a potential significant risk for humans;
b) Each Party will give the other Party a print-out or computer disk of
all AEs reported to it and its Affiliates relating to the Licensed Product
within the last year, within 30 days of receipt of a request from the other
Party but not more often than four times a year;
c) if either Party wishes access to AE Reports of the other Party
relating to the Licensed Product, upon request of that Party, the other
Party shall make available its AE records relating to the Licensed Product
(including computer disks) for viewing and copying by the other Party. The
Parties may discuss the transfer of AE Reports by computer disk.
d) disclosure of information hereunder by a Party to the other Party
shall continue as long as either Party and/or its Affiliates or designees
continue to clinically test or market Licensed Product.
e) all written regulatory reports, including periodic NDA, annual IND,
safety updates, or foreign equivalents thereto, etc. shall be sent by a
Party to the other Party within forty eight hours forty of submission to
the appropriate regulatory agency. The Parties shall agree on a procedure
for preparing these reports.
-3-
<PAGE>
13. Each Party shall diligently undertake the following further obligations
where both Parties are or will be commercializing the Licensed Product pursuant
to the Agreement and/or performing clinical trials with respect to the Licensed
Product:
a) upon the Effective Date, each Party shall identify individuals who
shall be responsible for identifying all AE reporting requirements in all
countries of the Territory as set forth in the Agreement, and any
amendments thereto;
b) to immediately consult with the other Party, with respect to the
investigation and handling of any Serious AE disclosed to it by the other
Party or by a third Party and to allow the other Party to review the
Serious AE and to participate in the follow-up investigation;
c) to immediately advise the other Party of any Licensed Product safety
communication received from a health authority and consult with the other
Party with respect to any Licensed Product warning, labeling change or
change to an investigators' brochure involving safety issues proposed by
the other Party, including, but not limited to the safety issues agreed to
by the Parties;
d) to diligently handle in a timely manner the follow-up investigation and
resolution of each AE reported to it;
e) to provide the other Party mutually agreed upon audit rights of its AE
reporting system and documentation, upon prior notice, during normal
business hours, at the expense of the auditing Party and under customary
confidentiality obligations;
f) to meet in a timely fashion from time to time as may be reasonably
required to implement the adverse event reporting and consultation
procedures described in this Schedule 4.4, including identification of
those individuals in each Party's Drug Safety group who will be responsible
for reporting to and receiving AE information from the other Party, and the
development of a written standard operating procedure with respect to
adverse event reporting responsibilities, including reporting
responsibilities to investigators;
g) where possible, to transmit all data electronically;
h) to report to each other any addenda, revisions or changes to the
Agreement (e.g., change in territories, local regulations, addition of new
licensors/licensees to the Agreement, etc.) which might alter the adverse
event reporting responsibilities hereunder;
i) to utilize English as the language of communication and data exchange
between the Parties;
j) to develop a system of exchange of documents and information in the
event that the Agreement involves more than two Parties;
-4-
<PAGE>
k) to work together to develop an electronic system to transmit Adverse
Event data.
14. The Parties may meet after the Effective Date of the Agreement to establish
a separate agreement for adverse event exchange which will supersede this
Schedule 4.4.
-5-
<PAGE>
*** This portion has been omitted based on a request for confidential treatment
pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been
separately filed with the Commission.
SCHEDULE 10.2(M)
ZONAGEN-THIRD PARTY AGREEMENTS
------------------------------
1. ***
2. ***
3. ***
4. ASSIGNMENT AGREEMENT BETWEEN ZONAGEN AND GAMOGEN, INC.
-1-
<PAGE>
SCHEDULE 14.2
DISPUTE RESOLUTION PROCEDURES
-----------------------------
1. Procedures for resolving disputes of the JDC:
a. Within ten (10) business days after the receipt of the notice provided
for in Section 4.7.4 of this Agreement, each Party shall appoint an
independent expert, knowledgeable in the field concerning the disputed
matter (e.g., an expert in the field of developing pharmaceutical products
for female sexual function indications), to serve on the special
arbitration panel. The two independent experts so appointed by the
Parties, shall, within ten (10) business days thereafter, appoint a neutral
third independent expert, knowledgeable in the field concerning the
disputed matter. Such neutral third independent expert shall serve as the
chairperson of the special arbitration panel. Each of the members of the
special arbitration panel shall be required to sign a secrecy agreement
with respect to any information provided by either Party during the special
arbitration procedure.
b. Within five (5) business days after the chairperson of the special
arbitration panel is appointed, each Party shall submit, to each member of
the special arbitration panel and to the other Party, a written statement
setting forth the relevant facts with respect to the disputed matter and
arguments supporting such Party's position with respect to the resolution
of the disputed matter.
c. Within five (5) business days after such written statements are
provided to the special arbitration panel, the panel and appropriate
representatives of each Party shall meet so that the Parties can present
oral arguments to the arbitration panel and the arbitration panel can have
the opportunity to ask questions of the Parties. The location of such
meeting shall be at the facility of SP Ltd.'s Affiliate (Schering
Corporation) in Kenilworth, New Jersey if Zonagen requests the special
arbitration and at Zonagen's facility in The Woodlands, Texas if SP Ltd.
requests the special arbitration. Each Party shall have two (2) hours to
present its arguments to the special arbitration panel and thirty (30)
additional minutes to rebut the arguments made by the other Party. The
Party requesting the special arbitration shall be the first to present its
oral argument to the special arbitration panel.
d. Within five (5) business days after such meeting, the special
arbitration panel shall render a decision on the disputed matter, which
decision shall be reduced to writing by the chairperson of the special
arbitration panel and signed by each member of the special arbitration
panel. The chairperson of the special arbitration panel shall be
responsible for immediately providing a copy of the written decision to
each Party. The decision of the special arbitration panel shall be binding
upon the Parties.
-1-
<PAGE>
e. Nothing contained herein shall be construed to permit the arbitration
panel or any court or any other forum to award punitive, exemplary or any
other damages. By entering into this Agreement to arbitrate, the Parties
expressly waive any claim for punitive, exemplary or any other damages with
respect to the resolution of a deadlock by the JDC.
f. Each Party shall be responsible for its own costs incurred in such
arbitration procedures and the cost of the special arbitration panel shall
be shared equally by the Parties.
II. Procedures for resolving disputes other than disputes of the JDC:
Except as otherwise set forth in Part I above, any dispute, controversy or claim
arising out of or relating to the validity, construction, enforceability or
performance of this Agreement including disputes relating to an alleged breach
or termination of this Agreement (but excluding disputes regarding the validity
of any Patent Rights, which disputes may be submitted to the appropriate
tribunal) shall be settled by binding arbitration in the manner set forth below:
(a) Scope. Subject to and in accordance with the terms of this
-----
Agreement and this Schedule 14.2, all differences, disputes, claims or
controversies arising out of or in any way connected or related to this
Agreement (other than those that are subject to the procedures set forth in
Part I above), whether arising before or after the expiration of the term
of this Agreement, and including, without limitation, its negotiation,
execution, delivery, enforceability, performance, breach, discharge,
interpretation and construction, existence, validity and any damages
resulting therefrom or the rights, privileges, duties and obligations of
the Parties under or in relation to this Agreement (including any dispute
as to whether an issue is arbitrable), which are not otherwise resolved in
accordance with Section 14.2 of this Agreement, shall be referred to
binding arbitration in accordance with the rules of the American
Arbitration Association, as in effect at the time of the arbitration.
(b) Parties to Arbitration. For the purposes of each arbitration
----------------------
under this Agreement, SP Ltd. shall constitute one Party to the arbitration
and Zonagen shall constitute the other Party to the arbitration.
(c) Notice of Arbitration. A Party requesting arbitration hereunder
---------------------
shall give a notice of arbitration to the other Party containing a concise
description of the matter submitted for arbitration, including references
to the relevant provisions of the Agreement and a proposed solution (a
"Notice of Arbitration"). Notice of Arbitration shall be delivered to the
other Party in accordance with Section 14.7 of the Agreement.
(d) Response. The non-requesting Party must respond in writing within
--------
forty-five (45) days of receiving a Notice of Arbitration with an
explanation, including references to the relevant provisions of the
Agreement and a response to the proposed solution and
-2-
<PAGE>
suggested time frame for action. The non-requesting Party may add
additional issues to be resolved.
(e) Meeting. Within fifteen (15) days of receipt of the response from
-------
the non-requesting Party pursuant to Paragraph (d), the Parties shall meet
and discuss in good faith options for resolving the dispute. The
requesting Party must initiate the scheduling of this resolution meeting.
Each Party shall make available appropriate personnel to meet and confer
with the other Party during such fifteen (15) day period.
(f) Selection of Arbitrator. Any and all disputes that cannot be
-----------------------
resolved pursuant to Paragraphs (c), (d) and (e) shall be submitted to an
arbitrator (the "Arbitrator") to be selected by mutual agreement of the
Parties. Unless the Parties otherwise agree, the Arbitrator shall be a
retired judge of a state or federal court, to be chosen from a list of such
retired judges to be prepared jointly by. the Parties, with each Party
entitled to submit the names of three such retired judges for inclusion in
the list. No Arbitrator appointed or selected hereunder shall be an
employee, director or shareholder of, or otherwise have any current or
previous. relationship with, any Party or its respective Affiliates. If
the Parties fail to agree on the selection of the Arbitrator, the
Arbitrator shall be designated by a judge of the Federal District Court in
New Jersey upon application by either Party.
(g) Powers of Arbitrator. The Arbitrator may determine all questions
--------------------
of law and jurisdiction (including questions as to whether a dispute is
arbitrable) and all matters of procedure relating to the arbitration. The
Arbitrator shall have the right to grant legal and equitable relief
(including injunctive relief) and to award costs (including reasonable
legal fees and costs of arbitration) and interest. The Arbitrator is not
empowered to award punitive, exemplary or any similar damages.
(h) Arbitration Procedure. In the event that SP Ltd. is the Party
--------------------------
requesting arbitration, the arbitration shall take place in the State of Texas
unless otherwise agreed by the Parties, at such place and time as the Arbitrator
may fix for the purpose of hearing the evidence and representations that the
Parties may present. In the event that Zonagen is the Party requesting
arbitration, the arbitration shall take place in the State of New Jersey unless
otherwise agreed by the Parties at such place and time as the Arbitrator may fix
for the purpose of hearing the evidence and representations that the Parties may
present. The arbitration proceedings shall be conducted in the English
language. The law applicable to the arbitration shall be the law of the State of
New Jersey. No later than twenty (20) business days after hearing the
representations and evidence of the Parties, the Arbitrator shall make its
determination in writing and deliver one copy to each of the Parties.
(i) Discovery and Hearing. During the meeting referred to in
---------------------
Paragraph (e) of Part II of this Schedule 14.2, the Parties shall negotiate
in good faith the scope and schedule of discovery, relating to depositions,
document production and other discovery devices, taking into account the
nature of the dispute submitted for resolution. If the Parties are unable
to reach agreement as to the scope and schedule of discovery, the
Arbitrator may
-3-
<PAGE>
order such discovery as it deems necessary. To the extent practicable
taking into account the nature of the dispute submitted for resolution,
such discovery shall be completed within sixty (60) days from the date of
the selection of the Arbitrator. At the hearing, which shall commence
within twenty (20) days after completion of discovery unless the Arbitrator
otherwise orders, the Parties may present testimony (either live witness or
deposition), subject to cross-examination, and documentary evidence. To the
extent practicable taking into account the nature of the dispute submitted
for resolution and the availability of the Arbitrator, the hearing shall be
conducted over a period not to exceed thirty (30) consecutive business
days, with each Party entitled to approximately half of the allotted time
unless otherwise ordered by the Arbitrator. The Arbitrator shall have sole
discretion with regard to the admissibility of any evidence and all other
matters relating to the conduct of the hearing.
(j) Witness Lists. At least twenty (20) business days prior to the
-------------
date set for the hearing, each Party shall submit to each other Party and
the Arbitrator a list of all documents on which such Party intends to rely
in any oral or written presentation to the Arbitrator and a list of all
witnesses, if any, such Party intends to call at such hearing and a brief
summary of each witness' testimony. At least five (5) business days prior
to the hearing, each Party must submit to the Arbitrator and serve on each
other Party a proposed findings of fact and conclusions of law on each
issue to be resolved. Following the close of hearings, the Parties shall
each submit such post-hearing briefs to the Arbitrator addressing the
evidence and issues to be resolved as may be required or permitted by the
Arbitrator.
(k) Confidentiality. The arbitration proceedings shall be
---------------
confidential and, except as required by law, no Party shall make, or
instruct the Arbitrator to make, any public announcement with respect to
the proceedings or decision of the Arbitrator without the prior written
consent of the other Party. The existence of any dispute submitted to
arbitration and the award of the Arbitrator shall be kept in confidence by
the Parties and the Arbitrator, except as required in connection with the
enforcement of such award or as otherwise required by law.
(1) Awards and Appeal. Subject to the provisions of this Schedule
-----------------
14.2, the decision of the Arbitrator shall be final and binding upon the
Parties in respect of all matters relating to the arbitration, the conduct
of the Parties during the proceedings, and the final determination of the
issues in the arbitration. There shall be no appeal from the final
determination of the Arbitrator to any court, except in the case of fraud
or bad faith on the part of the Arbitrator or any Party to the arbitration
proceeding in connection with the conduct of such proceedings. Judgment
upon any award rendered by the Arbitrator may be entered in any court
having jurisdiction thereof
(m) Costs of Arbitration. The costs of any arbitration hereunder
--------------------
shall be borne by the Parties in the manner specified by the Arbitrator in
its determination.
-4-
<PAGE>
(n) Performance of the Agreement. During the pendency of the
----------------------------
arbitration proceedings, each Party shall continue to perform its
obligations under this Agreement. Notwithstanding the foregoing, in the
event that SP Ltd. makes payments pursuant to Sections 7.1, 7.2 or 7.3 and
it is subsequently determined by the Arbitrator that SP Ltd. was not
required to make such payment(s) then Zonagen shall promptly repay to SP
Ltd. all such payments. For purposes of this Paragraph (n) the term
"pendency of the arbitration proceeding" shall mean the period starting on
the date on which arbitration proceedings are commenced by a Party in
accordance with Paragraph (c) of Part II of this Schedule 14.2 and ending
on the date on which the Arbitrator delivers its final determination in
writing to the Parties.
-5-
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
Year Ended December 31, 1997
- ----------------------------
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
.
$13,173,375 _ 9,044,382 = $1.46
.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K into the Company's previously
filed Form S-8 dated May 17, 1993, Form S-8 dated August 29, 1994, Form S-8
dated November 4, 1996, Form S-3 dated November 17, 1995 and Form S-3 dated
December 9, 1996.
ARTHUR ANDERSEN LLP
Houston, Texas
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ZONAGEN, INC. SET FORTH IN THE COMPANY'S FORM 10-K FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 73,761,823
<SECURITIES> 0
<RECEIVABLES> 514,734
<ALLOWANCES> 0
<INVENTORY> 206,913
<CURRENT-ASSETS> 74,753,877
<PP&E> 1,384,887
<DEPRECIATION> 827,688
<TOTAL-ASSETS> 76,940,480
<CURRENT-LIABILITIES> 5,962,040
<BONDS> 0
0
0
<COMMON> 11,542
<OTHER-SE> 70,964,259
<TOTAL-LIABILITY-AND-EQUITY> 76,940,480
<SALES> 3,455,876
<TOTAL-REVENUES> 15,416,321
<CGS> 2,312,003
<TOTAL-COSTS> 2,312,003
<OTHER-EXPENSES> 26,055,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 222,289
<INCOME-PRETAX> (13,173,375)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,173,375)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,173,375)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> (1.46)
</TABLE>
