<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1997
REGISTRATION NO. 333-38379
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FOCAL, INC.
(Exact name of Registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3841 94-3142791
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
4 MAGUIRE ROAD
LEXINGTON, MA 02173
(781) 280-7800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
DAVID M. CLAPPER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FOCAL, INC.
4 MAGUIRE ROAD
LEXINGTON, MA 02173
(781) 280-7800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
MARIO M. ROSATI, ESQ. KENNETH J. NOVACK, ESQ.
CHRISTOPHER D. MITCHELL, ESQ. PETER S. LAWRENCE, ESQ.
WILSON SONSINI GOODRICH & ROSATI MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO,
PROFESSIONAL CORPORATION P.C.
650 PAGE MILL ROAD ONE FINANCIAL CENTER
PALO ALTO, CALIFORNIA 94304 BOSTON, MASSACHUSETTS 02111
(650) 493-9300 (617) 542-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PRICE PER SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value..................... 2,875,000 shares $13.00 $37,375,000 $11,326
</TABLE>
(1) Includes 375,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933, as amended.
(3) Entire amount previously paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 11, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
<PAGE>
PROSPECTUS
2,500,000 SHARES
[LOGO]
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby are being sold by Focal,
Inc. ("Focal" or the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $11.00 and $13.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market, subject to notice of
issuance, under the symbol "FOCL." After this offering, the Company's existing
stockholders, including directors, officers and other affiliates of the Company,
will own approximately 81% of the Company's outstanding Common Stock
(approximately 78% if the Underwriters' over-allotment option is exercised).
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total (3)................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $600,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1997.
------------------------
LEHMAN BROTHERS
PIPER JAFFRAY INC.
PACIFIC GROWTH EQUITIES, INC.
, 1997
<PAGE>
Diagram of the human body showing the internal anatomy. Emanating from
different parts of the anatomy are four balloons containing pictures of various
organs undergoing different stages in the FOCALSEAL sealing process. The first
balloon emanates from the bowel area and depicts FOCALSEAL primer being applied
to a bowel anastomosis over the caption "FOCALSEAL for Gastrointestinal
Surgery." The second balloon emanates from the head area and depicts FOCALSEAL
sealant being applied to a suture line in the dural membrane over the caption
"FOCALSEAL for Neurosurgery." The third balloon emanates from the chest area and
depicts the illumination of the FOCALSEAL sealant covering a bypass graft
anastomosis on the heart to initiate photopolymerization over the caption
"FOCALSEAL for Vascular Surgery." The fourth balloon emanates from the chest
area and depicts a lung sealed with FOCALSEAL during an underwater test over the
caption "FOCALSEAL for Lung Surgery."
Series of five pictures depicting each step in the use of FOCALSEAL-L in the
simulated sealing of a lung during surgery. The first picture shows a lung
sealed only with staples being tested underwater for air leaks. The second
picture shows the lung being brushed with the FOCALSEAL primer. The third
picture in the series depicts the lung being brushed with the FOCALSEAL sealant.
The fourth picture depicts the illumination of the primer and sealant in order
to initiate photopolymerization. The final picture in the series shows the
sealed lung being tested underwater for air leaks.
None of the Company's products have been approved by the United States Food
and Drug Administration ("FDA") or any foreign regulatory authority for
marketing in any country. The process of obtaining such approvals may be
lengthy, and there can be no assurance that such approvals will be obtained. The
Company has not offered any of its products for commercial sale or received any
revenues from commercial sales.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING EFFECTING SYNDICATE COVERING TRANSACTIONS, INITIATING
BIDS OR EFFECTING PURCHASES ON THE NASDAQ NATIONAL MARKET FOR THE PURPOSE OF
PREVENTING OR RETARDING A DECLINE IN THE MARKET PRICE OF THE COMMON STOCK, OR
IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
Focal-Registered Trademark-, FocalSeal-Registered Trademark-,
FocalSeal-L-TM-, FocalSeal-S-TM- and the Focal logo are trademarks of the
Company. Trade names and trademarks of other companies appearing in this
Prospectus are the property of their respective holders.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED,
THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND GIVES EFFECT TO (I) THE EXERCISE OF
CERTAIN OUTSTANDING WARRANTS TO PURCHASE 19,496 SHARES OF COMMON STOCK UPON THE
COMPLETION OF THIS OFFERING, (II) THE CONVERSION OF ALL OUTSTANDING SHARES OF
PREFERRED STOCK OF THE COMPANY INTO COMMON STOCK, WHICH WILL OCCUR AUTOMATICALLY
UPON THE COMPLETION OF THIS OFFERING AND (III) A 1 FOR 3.25 REVERSE STOCK SPLIT
OF ALL ISSUED AND OUTSTANDING COMMON STOCK THAT WILL BE EFFECTED PRIOR TO THE
COMPLETION OF THIS OFFERING. SEE "CAPITALIZATION," "DESCRIPTION OF CAPITAL
STOCK" AND "UNDERWRITING."
THE COMPANY
Focal, Inc. ("Focal" or the "Company") develops, manufactures and
commercializes synthetic, absorbable, liquid surgical sealants based on the
Company's proprietary polymer technology. The Company's family of FOCALSEAL
surgical sealant products is currently being developed for use inside the body
with or without sutures and staples to seal leaks resulting from lung, neuro,
cardiovascular and gastrointestinal surgery. FOCALSEAL-L, the Company's first
surgical sealant product, will initially be used to seal air leaks following
lung surgery. The Company has entered into an exclusive marketing and
distribution agreement for its surgical sealant products outside North America
with Ethicon, Inc., a division of Johnson & Johnson ("Ethicon"), a worldwide
leader in surgical wound closure products. The Company anticipates commercial
launch of FOCALSEAL-L for lung surgery indications in Europe through Ethicon in
the first half of 1998.
There are more than 4 million open and minimally invasive lung, neuro,
cardiovascular and gastrointestinal surgical procedures performed annually
worldwide in which air or fluid leaks may arise in an unpredictable and
unexpected manner, and in which the Company's products, if approved, may be
effective in reducing post-surgical leaks. The reported incidence of air and
fluid leaks in these procedures is approximately 79% (intraoperative) and 15%
(persistent postoperative) in lung surgeries, 15% in cranial surgeries, 13% in
spinal surgeries, 5% in large bowel surgeries and 25% in esophageal surgeries.
In many of these surgical procedures, as well as in cardiovascular surgeries,
air and fluid leaks can occur unpredictably and it can be difficult at the
conclusion of surgery for the surgeon to determine whether a particular surgical
site will leak. Accordingly, the Company believes that its FOCALSEAL surgical
sealants may be used prophylactically in many of these procedures. The Company
has conducted clinical trials of FocalSeal-L for lung surgery and intends to
develop products and conduct clinical trials for neuro, cardiovascular and
gastrointestinal surgery indications. Patients with persistent air or fluid
leaks may require prolonged hospitalization, have more complications and higher
levels of post-operative pain, and a higher risk of mortality. Sutures and
staples, the principal products comprising the over $2.0 billion worldwide wound
closure market, do not have inherent sealing capabilities, and therefore cannot
consistently eliminate air and fluid leakage at the wound site. Focal's liquid
surgical sealants adhere rapidly to underlying tissue, expand and contract with
tissue, withstand air and fluid pressure, and are designed to provide an
effective seal to reduce the incidence of air and fluid leaks following surgery.
FOCALSEAL surgical sealants, which are biocompatible, remain intact through the
critical wound healing period and are then absorbed and eliminated by the body.
The Company believes the use of its FOCALSEAL liquid surgical sealants could
potentially shorten patient recovery times and hospital stays and reduce
post-surgical complications.
Focal is currently developing two principal surgical sealant formulations,
FOCALSEAL-L and FOCALSEAL-S, for a broad range of applications inside the body.
The Company has completed a 60-patient, multicenter, randomized, controlled
clinical trial in Europe involving use of FOCALSEAL-L in sealing air leaks
following lung surgery. In the trial, following surgery with standard sutures
and staples and prior to randomization, it was determined that 79% of all
patients had intraoperative air leaks. FOCALSEAL-L was shown to be 100%
effective in sealing intraoperative air leaks in the 30 patients who were
randomized into the treated group. In the other patients, who were randomized
into the untreated group and received sutures and staples alone, only 27% were
free of intraoperative air leaks. In September 1997, the Company initiated a
pivotal, 180-patient, multicenter clinical trial in the United States under a
conditional investigational device exemption ("IDE") to evaluate FOCALSEAL-L in
sealing intraoperative and postoperative air leaks following
3
<PAGE>
lung surgery. The Company expects to submit a Premarket Approval ("PMA")
application to the FDA for lung surgery indications by the end of 1998.
FOCALSEAL-S, the Company's second surgical sealant formulation, is absorbed
by the body more quickly than FOCALSEAL-L and is designed for applications in
which shorter sealing duration is desired. FOCALSEAL-S will initially be used to
seal fluid leaks following neurosurgery. The Company expects to commence a
clinical trial in Europe for this indication in mid-1998. The Company believes,
based upon preclinical evaluation of its polymers, that its FOCALSEAL-L and
FOCALSEAL-S formulations, which are designed to have absorption times that
parallel long-term and short-term synthetic, absorbable polymer sutures,
respectively, will also be widely applicable to cardiovascular surgery,
gastrointestinal surgery and other surgical applications.
Focal is also developing other applications for the liquid formulations of
its polymer technology, including local drug delivery systems and tissue
coatings. In local drug delivery applications, the Company believes that its
polymers can deliver high concentrations of drugs at local disease sites,
thereby potentially enhancing efficacy and reducing toxicity associated with
systemic delivery of drugs. The Company is initially pursuing local delivery of
drugs with the objective of reducing the incidence of restenosis following
coronary angioplasty procedures. The Company has entered into a collaboration
with Novartis Pharmaceuticals, Inc. ("Novartis") and Chiron Corporation
("Chiron") under which these companies are funding development of a
polymer-based local drug delivery system for anti-restenosis agents being
developed by them. In connection with the collaboration, Novartis and Chiron
received worldwide marketing and distribution rights for this indication. In
addition, the Company is developing tissue coatings to prevent the formation of
post-surgical adhesions, excessive scar tissue which attaches to surrounding
tissue and can cause serious complications, particularly in abdominal and
gynecological surgeries. The Company intends to enter into other collaborations
with pharmaceutical companies for additional drug delivery and tissue coating
indications.
Focal's family of surgical sealants and its other products under development
are based on the Company's proprietary synthetic, absorbable, liquid formulation
polymer technology. The Company's polymers are comprised of polyethylene glycol
("PEG"), other synthetic components and water. PEG and other synthetic
components comprise approximately 10-20% of the Company's liquid formulations
and are widely used in other medical products approved for use inside the body,
such as IV-administered pharmaceuticals, synthetic absorbable sutures, bone and
dental cements, pain medications and eye drops. Water comprises the other 80-90%
of Focal's formulations. The Company combines PEG and other synthetic compounds
in various proprietary polymer formulations in order to control characteristics
such as viscosity, setting time, strength, absorption, flexibility and
elasticity. This enables the Company to tailor formulations for particular
applications. A key distinguishing characteristic of the Company's polymer
formulations is that they are applied as liquids and then photopolymerized by
light into solid gels inside the body, a process known as photopolymerization.
The solid gel formed after the light has been applied, is highly flexible,
elastic and transparent and strongly adheres to moist or dry tissue.
The Company believes it has built a strong patent portfolio related to its
photopolymerizable polymer technology. The Company has received, licensed or
believes it has the option or right to license 17 issued United States patents
and six foreign patents corresponding to certain of the issued United States
patents, has 12 additional United States patent applications that have been
allowed and has 21 patent applications pending in the United States, as well as
foreign counterparts of certain of these applications.
The Company's objective is to become a leader in the market for surgical
sealants and in other markets where the Company's novel polymer technology could
address large unmet clinical needs. The Company intends to achieve its goals by
(i) marketing its FOCALSEAL surgical sealant products through Ethicon
internationally and by building a direct sales force in North America; (ii)
leveraging its proprietary polymer technology to develop new products; (iii)
commercializing FOCALSEAL surgical sealants to parallel the existing products in
the market for synthetic absorbable sutures; (iv) funding new research and
development initiatives through corporate collaborations; and (v) retaining
proprietary, and outsourcing non-proprietary, manufacturing processes.
Focal was incorporated in Delaware in June 1991. The Company's principal
executive offices are located at 4 Maguire Road, Lexington, Massachusetts 02173.
Its telephone number is (781) 280-7800.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered......................... 2,500,000 shares
Common Stock to be outstanding after the
offering................................... 12,865,337 shares (1)
Use of proceeds.............................. For research and development, clinical
trials, expansion of manufacturing
capabilities and sales and marketing
activities, capital expenditures, working
capital and general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol....... FOCL
</TABLE>
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Collaborative research revenue............... $ -- $ -- $ 50 $ 968 $ 3,098 $ 2,349 $12,831
Operating expenses:
Research and development................... 1,793 7,405 11,890 9,665 11,680 8,735 10,929
General and administrative................. 466 1,925 2,034 2,098 2,175 1,518 2,106
-------- -------- --------- --------- -------- -------- -------
Total operating expenses..................... 2,259 9,330 13,924 11,763 13,855 10,253 13,035
-------- -------- --------- --------- -------- -------- -------
Loss from operations......................... (2,259) (9,330) (13,874) (10,795) (10,757) (7,904) (204)
Interest income.............................. 6 357 668 443 691 515 731
Interest expense............................. 13 44 79 107 92 71 81
-------- -------- --------- --------- -------- -------- -------
Net income (loss)............................ $ (2,266) $ (9,017) $ (13,285) $ (10,459) $(10,158) $ (7,460) $ 446
-------- -------- --------- --------- -------- -------- -------
-------- -------- --------- --------- -------- -------- -------
Pro forma net income (loss) per share (2).... $ (1.23) $ (.93) $ .04
-------- -------- -------
-------- -------- -------
Shares used in computing pro forma
net income (loss) per share (2)............ 8,271 8,001 10,551
-------- -------- -------
-------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED (3)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities...................................... $ 13,215 $ 40,538
Working capital....................................................................... 9,254 36,577
Total assets.......................................................................... 16,491 43,814
Capital lease obligations, long-term portion.......................................... 1,207 1,207
Total stockholders' equity............................................................ 10,788 38,111
</TABLE>
- ------------------------
(1) Excludes (i) 297,921 shares of Common Stock issuable upon the exercise of
stock options outstanding under the Company's 1992 Incentive Stock Plan at
September 30, 1997, and (ii) 179,586 shares issuable upon the exercise of
warrants that will remain outstanding following the completion of this
offering. See "Management--Incentive Stock Plans," "Certain Transactions,"
"Description of Capital Stock" and Note 5 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for information concerning
calculation of pro forma net income (loss) per share.
(3) Pro forma as adjusted to reflect the sale of the 2,500,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $12.00
per share and the receipt of the estimated net proceeds therefrom and the
automatic conversion of all outstanding shares of Preferred Stock into
8,117,803 shares of Common Stock and the exercise of warrants to purchase
19,496 shares of Common Stock upon the completion of this offering. See "Use
of Proceeds."
------------------------------
THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS" AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS.
5
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON
STOCK OFFERED HEREBY.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY. The Company has incurred net losses in each year since its
inception, including a net loss of approximately $10.2 million during 1996. At
September 30, 1997, the Company had an accumulated deficit of $45 million. The
Company's operating losses have resulted primarily from expenses incurred in
connection with the Company's research and development activities, including
preclinical and clinical trials, development of manufacturing processes and
general and administrative expenses. The Company expects to incur net losses
into 1999 and may incur net losses in subsequent periods, although the amount of
future net losses and time required by the Company to reach profitability are
highly uncertain. The Company is dependent upon corporate partners for funding
of a significant portion of its research and development expenses. If the
Company does not continue to receive funding from its current corporate
partners, or is unable to otherwise obtain third-party funding, operating losses
will increase. Focal does not expect to generate revenues from the sale of
products, if any, until the first half of 1998. The Company's ability to achieve
and sustain profitability will be dependent upon obtaining regulatory approval
for and successfully commercializing its FOCALSEAL surgical sealants, and
developing the manufacturing capacity and sales and marketing capability for its
products. There can be no assurance that Focal will obtain required regulatory
approvals, or successfully develop, manufacture, commercialize and market
products or that the Company will ever record product revenues or achieve
profitability. Profitability, if achieved, may not be sustained. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAINTIES RELATED TO EARLY STAGE OF COMMERCIALIZATION AND
DEVELOPMENT. Except for the FOCALSEAL-L surgical sealant for lung surgery
indications, which the Company expects to begin marketing in Europe in 1998
through Ethicon, all of the Company's products are in early stages of
development or research. To date the Company has not received marketing approval
for its FOCALSEAL-L lung surgical sealant or any other product from the FDA or
any other international regulatory body. The Company's initial product,
FOCALSEAL-L, is not expected to be commercially available in Europe until the
first half of 1998 and in the United States until the end of 1999, at the
earliest. In addition, FOCALSEAL-L and FOCALSEAL-S will require significant
additional research and development efforts before either is suitable for other
indications. The development and commercialization of new bioabsorbable
synthetic polymer products are highly uncertain and subject to a number of
significant risks. Potential products that appear to be promising at early
stages of development may not reach the market for a number of reasons. Such
reasons include the possibilities that the potential products will be found
ineffective or cause harmful side effects during preclinical testing or clinical
trials, fail to receive necessary regulatory approvals, be difficult to
manufacture on a commercial scale, be uneconomical, fail to achieve market
acceptance or be precluded from commercialization by proprietary rights of third
parties. No assurance can be given that any of the Company's development
programs will be successfully completed, that clinical trials will generate
anticipated results or will commence or be completed as planned, that any PMA
application will be accepted or ultimately approved by the FDA, that required
regulatory approvals will be obtained on a timely basis, if at all, or that any
products for which approval is obtained will be commercially successful. If any
of the Company's development programs are not successfully completed, required
regulatory approvals are not obtained, or products for which approvals are
obtained are not commercially successful, the Company's business, financial
condition and results of operations would be materially adversely affected. See
"Business--Products and Product Development Programs."
EARLY STAGE OF CLINICAL TESTING AND LACK OF EXTENSIVE CLINICAL DATA. The
FOCALSEAL-L product for lung surgery is in the early stages of clinical testing
in the United States, and clinical data obtained to date is insufficient to
demonstrate the safety and efficacy of this product under applicable FDA
regulatory guidelines. The Company has completed a 60-patient controlled,
randomized human clinical trial in
6
<PAGE>
Europe involving use of FOCALSEAL-L in lung surgery. Although the Company
believes that the results of this trial are sufficient to obtain marketing
approval in Europe, significant additional clinical data will be required prior
to submission of a PMA application in the United States. The Company has only
recently commenced United States clinical trials of FOCALSEAL-L pursuant to a
conditionally approved IDE issued by the FDA. Based on communications to date,
the FDA may require the Company to pursue certain clinical endpoints that were
not the subject of the European clinical trial. In the event that the Company is
required to pursue these endpoints, it may be more difficult for the Company to
demonstrate the efficacy of FOCALSEAL-L in the United States trial than in the
European trial, which could result in delays or adversely affect the success of
the clinical trial. There can be no assurance that FOCALSEAL-L will receive
marketing approval from the FDA or that any of the Company's other products will
prove to be safe and effective in United States or international clinical trials
under applicable regulatory guidelines. In addition, clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory or international approvals. In particular, during
the Company's European clinical trial of FOCALSEAL-L in lung surgery, a higher
than anticipated incidence of insufficient wound healing at the bronchial stump
was observed in patients in the treated group. The bronchial stump typically
heals through tissue overgrowth from surrounding areas. Based upon its review
and analysis of the clinical data, the Company believes that in those cases in
which FOCALSEAL-L was applied directly to the bronchial stump it may have acted
as a barrier to such tissue overgrowth, thereby slowing natural healing of the
bronchial stump. As a result of this observed clinical event, the labelling for
FOCALSEAL-L in the United States clinical trial indicates that the product may
be applied to all lung tissues other than the bronchial stump. Other unforeseen
circumstances may arise, or adverse events related to the use of the product may
occur, during clinical trials and any such events may require suspension or
termination of clinical trials as well as reporting to the FDA or other
regulatory authorities. If the FOCALSEAL product and the Company's other
products under development do not prove to be safe and effective in clinical
trials or if the Company is otherwise unable to commercialize these products
successfully, the Company's business, financial condition and results of
operations will be materially and adversely affected. See "Business--Products
and Product Development Programs--FOCALSEAL Surgical Sealant Products."
DEPENDENCE UPON FOCALSEAL SURGICAL SEALANTS. The Company expects to
introduce its first commercial product, FOCALSEAL-L for lung surgery
indications, in Europe in the first half of 1998 through its strategic marketing
alliance with Ethicon. The Company anticipates that revenues derived from
European sales of FOCALSEAL-L will account for a substantial majority of the
Company's near term product revenues. Before FOCALSEAL-L can be sold in Europe,
the Company must first obtain a CE mark for marketing in the member countries of
the European Union. Any delays or other difficulties encountered by the Company
in obtaining such CE mark would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company's future success will depend, in significant part, on its ability to
complete successfully additional clinical trials and to obtain regulatory
approval and market acceptance of FOCALSEAL-L in the United States. Although the
Company recently commenced a 180-patient, pivotal, multicenter trial of
FOCALSEAL-L for lung surgery indications in the United States and anticipates
submitting a PMA application to the FDA based on the results of the trial, there
can be no assurance that the FDA will accept the PMA for filing, that the
Company will be able to demonstrate to the FDA's satisfaction that FOCALSEAL-L
is safe and effective, or, if marketing approval were granted by the FDA, that
the Company will commercialize successfully FOCALSEAL-L in the United States.
Failure by the Company to gain marketing approval from the FDA for FOCALSEAL-L
or to be able to commercialize successfully FOCALSEAL-L in the United States
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Uncertainties Related to Early Stage
of Commercialization and Development," "--Early Stage of Clinical Testing and
Lack of Extensive Clinical Data," and "--Uncertainty of Market Acceptance."
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's FOCALSEAL surgical sealants
represent a new method of sealing air and fluid leaks that arise in connection
with surgery, and there can be no assurance that these products will gain
commercial acceptance among physicians, patients and health care payors,
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even if necessary international and United States marketing approvals can be
obtained. The Company believes that recommendations and endorsements by
physicians will be essential for market acceptance of FOCALSEAL, and there can
be no assurance that any such recommendations or endorsements will be obtained.
Physicians will not use the FOCALSEAL surgical sealants unless they determine,
based on clinical data and other factors, that these systems are an effective
means of sealing air and fluid leaks and that the clinical benefits to the
patient and cost savings achieved through use of these systems outweigh their
cost. Such determinations will depend, in part, on the ability of the Company's
FOCALSEAL-L surgical sealant to reduce the time a lung surgery patient must be
connected to a chest tube and the length of hospital stays associated with lung
surgery. Acceptance among physicians may also depend upon the Company's ability
to train thoracic surgeons and other potential users of the Company's products
in the application of liquid surgical sealants, which such physicians typically
have not performed, and the willingness of such users to learn these new
techniques. Failure of the Company's products to achieve significant market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Products and
Product Development Programs--FOCALSEAL Surgical Sealant Products."
DEPENDENCE ON STRATEGIC ALLIANCES. The Company has established strategic
alliances and collaborations with the Ethicon division of Johnson & Johnson in
the field of surgical sealants for all territories outside of North America and
with Novartis and Chiron in the field of local drug delivery for restenosis
prevention worldwide. The Company is dependent upon these corporate partners to
provide certain research and development funding for these programs. Under the
agreement with Ethicon, the Company is dependent upon Ethicon for marketing and
sale of surgical sealants outside North America and for obtaining international
regulatory approvals other than the CE mark, which is the responsibility of the
Company to obtain. Under the agreement with Novartis and Chiron, the Company is
dependent on these companies to collaborate in the development of polymer-based
drug delivery products to be used for local, time-release delivery of
cardiovascular drugs, to conduct preclinical testing and clinical trials and
obtain required regulatory approvals for such drug candidates, and to
manufacture and commercialize any resulting drugs. Failure of these partners to
continue to collaborate with the Company for subsequent development of products,
seek required regulatory approvals or commercialize products would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's strategy for development and
commercialization of certain of its future products may depend upon the Company
entering into additional arrangements with research collaborators, corporate
partners and others, and upon the subsequent success of these third parties in
performing their obligations. There can be no assurance that the Company will be
able to enter into additional strategic alliances on terms favorable to the
Company, or at all. The Company's inability to enter into additional strategic
alliances could have an adverse effect on the Company's business, financial
condition and results of operations.
The Company cannot control the amount and timing of resources which its
corporate partners devote to the Company's programs or potential products. If
any of the Company's corporate partners breach their agreements with the Company
or otherwise fail to conduct their collaborative activities in a timely manner,
the clinical development and/or commercialization of products will be delayed,
and the Company will be required to devote additional resources to product
development and commercialization, or terminate certain development programs.
The Company's strategic alliance with Novartis and Chiron is subject to
termination upon 90 days notice. There can be no assurance that Novartis and
Chiron will not elect to terminate their strategic alliance with the Company. In
addition, if the Company's corporate partners effect a merger with a third
party, there can be no assurance that the strategic alliances will not be
terminated or otherwise materially adversely affected. The termination of any
current or future strategic alliances could have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition, Focal's strategic partners may develop, either alone or with
others, products that compete directly with the development and marketing of the
Company's products. Competing products, either
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developed by the corporate partners or to which the corporate partners have
rights, may result in their withdrawal of support with respect to all or a
portion of the Company's technology, marketing and development efforts, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that disputes
will not arise in the future with respect to the ownership of rights to any
products or technology developed with corporate partners. These and other
possible disagreements between corporate partners and the Company could lead to
delays in or termination of the collaborative research, development or
commercialization of certain products or could require or result in litigation
or arbitration, which would be time-consuming and expensive, and would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Strategic Alliances."
INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. The Company
competes with many domestic and foreign medical device, pharmaceutical and
biopharmaceutical companies. In the surgical sealant area, the Company will
compete with existing methodologies for sealing air and fluid leaks resulting
from surgery, including some traditional wound closure products such as sutures
and staples, marketed by companies such as Johnson & Johnson, United States
Surgical Corporation, American Home Products Corporation and others. Other
products currently being marketed include fibrin glue, sold in Europe and the
Pacific Rim countries by Immuno AG, Cention, Fujisawa and others, and under
development by Baxter Healthcare Corporation, Bristol-Myers Squibb Company,
Vitex and others. Other competitors in the surgical sealant market include
Closure Medical Corporation, B. Braun GmBH and Cryolife. Competitive products
may also be under development by other large medical device, pharmaceutical and
biopharmaceutical companies. The other areas in which Focal is developing
products, such as post-surgical adhesion prevention and restenosis drug
delivery, are intensely competitive markets and the Company will encounter
competition from major medical device, pharmaceutical and biopharmaceutical
companies in such markets. Many of the Company's current and potential
competitors have substantially greater financial, technological, research and
development, regulatory and clinical, marketing and sales, and personnel
resources than the Company. These competitors may also have greater experience
in developing products, conducting clinical trials, obtaining regulatory
approvals, and manufacturing and marketing such products. Certain of these
competitors may obtain patent protection, approval or clearance by the FDA or
foreign countries or product commercialization earlier than the Company, any of
which could materially adversely affect the Company. Furthermore, if the Company
commences significant commercial sales of its products, it will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it currently has limited experience. Finally, there can be no
assurance that the Company's marketing partners will not pursue parallel
development of other technologies or products, which may result in a marketing
partner developing additional products that would compete with the Company's
products.
Other recently developed technologies or procedures are, or may in the
future be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. In such event, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business--Competition and Technological Change."
UNCERTAINTIES RELATED TO PATENTS AND PROPRIETARY TECHNOLOGY. The Company's
success will depend on its ability to obtain patent protection for its products,
preserve its trade secrets, prevent third parties from infringing upon its
proprietary rights, and operate without infringing upon the proprietary rights
of others, both in the United States and internationally. There can be no
assurance that the Company's pending or future patent applications will issue,
or that the claims of the Company's issued patents, or any patents that may
issue in the future, will provide any competitive advantages for the Company's
products or that they will not be successfully challenged, narrowed, invalidated
or circumvented in the future. Moreover,
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litigation and interference or opposition proceedings associated with obtaining,
enforcing or defending patents or trade secrets is expensive and can divert the
efforts of technical and management personnel. The Company has filed patent
applications in certain foreign countries corresponding to certain patent
applications that it has filed in the United States and may file additional
patent applications inside and outside the United States. The Company believes
that obtaining foreign patents may be more difficult than obtaining domestic
patents because of differences in patent laws and believes the protection
afforded by foreign patents or any other foreign intellectual property
protection, if obtained, may be more limited than that provided domestically. In
addition, there can be no assurance that competitors will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use, offer for sale, sell and import its products. The Company
is aware that certain medical device, pharmaceutical and other companies,
universities and research institutions have filed patent applications or have
issued patents relating to compositions and methods for wound closure and
adhesion prevention. In addition, the medical device and pharmaceutical
industries have been characterized by litigation regarding patents and other
intellectual property rights, and many companies in the medical device industry
have employed intellectual property litigation to gain a competitive advantage.
There can be no assurance that litigation will not be brought against the
Company by third parties in the future challenging the Company's patent rights
or claiming infringement by the Company of patents held by the third parties.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, the Company intends to seek
patent protection for its proprietary technology, products and processes. There
can be no assurance as to the success or timeliness in obtaining any such
patents, that the breadth of claims obtained, if any, will provide adequate
protection of the Company's proprietary technologies, products and processes, or
that the Company will be able to adequately enforce any such claims to protect
its proprietary technology, products and processes. Because patent applications
in the United States are confidential until the patents issue, and publication
of discoveries in the scientific and patent literature tends to lag behind
actual discoveries by several months, the Company cannot be certain that Company
inventors or licensors were the first to conceive of inventions covered by
pending patent applications or that the Company was the first to file patent
applications for such inventions.
The Company may desire to or may be required to obtain licenses to patents
or proprietary rights of others. No assurance can be given that any licenses
required under any patents or proprietary rights of third parties would be made
available on terms acceptable to the Company, or at all. If the Company does not
obtain such licenses, it could encounter delays in product introductions while
it attempts to design around or otherwise avoid such patents, or it could find
that the development, manufacture or sale of products requiring such licenses is
foreclosed. Litigation may be necessary to defend against or assert claims of
patent infringement or invalidity, to enforce or defend patents issued to the
Company, to protect trade secrets or know-how owned by the Company, or to
determine the scope and validity of the proprietary rights of others. In
addition, interference proceedings in the United States Patent and Trademark
Office, or opposition proceedings in a foreign patent office, may be necessary
to determine the priority of inventions with respect to patent applications of
the Company or its licensors. Litigation, interference or opposition proceedings
could result in substantial costs to and diversion of effort by the Company, and
adverse determinations in any such proceedings could prevent the Company from
manufacturing, marketing or selling its products and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and
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<PAGE>
certain, but not all, commercial partners and consultants. There can be no
assurance that relevant inventions will not be developed by a person not bound
by an invention assignment agreement. There can be no assurance that binding
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors. See "Business--Patents and
Proprietary Rights."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS. Clinical
testing, manufacture, promotion and sale of the Company's products are subject
to extensive regulation by numerous governmental authorities in the United
States, principally the FDA, and corresponding foreign regulatory agencies. The
Federal Food, Drug, and Cosmetic Act ("FDC Act"), and other federal and state
statutes and regulations govern or influence the testing, manufacture, labeling,
advertising, distribution and promotion of drugs and medical devices.
Noncompliance with applicable requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, refusal to authorize the marketing of new products or to allow the
Company to enter into supply contracts, and criminal prosecution.
The Company's FOCALSEAL surgical sealant product will be regulated as a
class III medical device for which FDA approval of a premarket approval ("PMA")
application must be obtained prior to commercial distribution in the United
States. A PMA application must be supported by extensive information, including
preclinical and clinical trial data. The PMA process is expensive, lengthy and
uncertain, and a number of products for which PMA applications have been
submitted by other companies have never been approved for marketing.
If granted, the approval of the PMA application may include significant
limitations on the indicated uses for which a product may be marketed. There can
be no assurance that the Company will be able to obtain necessary PMA
application approvals to market the FOCALSEAL surgical sealant, or any other
products, on a timely basis, if at all. Failure to obtain or delays in receipt
of such approvals, the loss of previously received approvals, or failure to
comply with existing or future regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Although the Company has received a conditionally approved investigational
device exemption ("IDE") from the FDA permitting the Company to conduct clinical
trials of FOCALSEAL for lung surgery in the United States, and such clinical
study has recently commenced, there can be no assurance that data from such
studies will demonstrate the safety and effectiveness of the FOCALSEAL product
or will adequately support a PMA application for the product. In addition, the
Company will be required to obtain additional IDEs for other applications of
FOCALSEAL and for other products that the Company develops that are regulated by
the FDA as medical devices. There can be no assurance that data, typically the
results of animal and laboratory testing, that may be provided by the Company in
support of future IDE submissions will be deemed adequate for the purposes of
obtaining IDE approval or that the Company will obtain approval to conduct
clinical studies of any such future product. Furthermore, even if IDE approval
is obtained and clinical studies are conducted, there can be no assurance that
data from such studies will demonstrate the safety and effectiveness of any such
product or will adequately support a PMA application for any such product. See
"--Early Stage of Clinical Testing and Lack of Extensive Clinical Data."
The drug delivery products that the Company is developing, including
products under development with collaborative partners for restenosis drug
delivery, are likely to be regulated as drugs requiring FDA approval of an
investigational new drug ("IND") prior to clinical testing and of a new drug
application ("NDA") prior to commercialization in the United States. The new
drug approval process is generally considered more onerous, costly and lengthy
than the PMA process, requiring more extensive preclinical and clinical testing,
and many products for which NDAs have been submitted by other companies have
never been approved for marketing. There can be no assurance that the Company
will be able to obtain necessary or timely IND or NDA approval for any product
for which it is required. Failure to obtain or
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<PAGE>
delays in the receipt of NDA approval, when required, could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
The FDA and other regulatory agency requirements for manufacturing, product
testing and marketing vary depending upon whether the product is a medical
device or drug. Manufacturers of medical devices and drugs are also required to
comply with the applicable FDA good manufacturing practice ("GMP")
requirements, which include requirements relating to product testing and quality
assurance as well as the corresponding maintenance of records and documentation.
There is no assurance that the Company will be able to comply with the
applicable GMP requirements.
The Company is required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. In addition, the
FDA prohibits a cleared or approved device from being marketed for uncleared or
unapproved uses. If the FDA believes that a company is not in compliance with
law, it can institute proceedings to detain or seize products, issue a recall,
enjoin future violations and assess civil and criminal penalties against the
Company, its officers and its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, regulations
regarding the manufacture and sale of the Company's products are subject to
change. The Company cannot predict the effect, if any, that such changes might
have on its business, financial condition or results of operations.
The Company is subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations in
the future or that such laws or regulations will not have a material adverse
effect upon the Company's ability to do business.
International sales of the Company's products are subject to the regulatory
agency product registration requirements of each country. The regulatory review
process varies from country to country. In order to market the FOCALSEAL
surgical sealant and other products being developed by the Company in the member
countries of the European Union, the Company will be required to obtain CE mark
certification. CE mark certification is an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. The Company will be required to obtain the right to affix the
CE mark to its products in order to sell such products in member countries of
the European Union. In September 1997, the Company completed a CE mark and ISO
9001 standards audit for FOCALSEAL-L, which is one of the principal steps in the
CE mark approval process. The remainder of the CE mark approval process consists
primarily of review by the approving body of additional documentation to be
submitted by the Company in response to observations made during the CE mark
audit. Although the CE mark and ISO 9001 standards audit has been completed,
there can be no assurance that the Company will be successful in completing the
remainder of the CE mark certification process or obtaining CE mark
certification in a timely manner. See "Business--Government Regulation."
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL. Focal will
require substantial additional funding in order to continue its research and
product development programs, including for preclinical testing and clinical
trials of its product candidates, for operating expenses, for the pursuit of
regulatory approvals for its product candidates, and may require additional
funding for establishing manufacturing and marketing capabilities in the future.
The Company believes that its existing capital resources, together with the net
proceeds of this offering, interest income and future payments due under
strategic alliances, will be sufficient to satisfy its current and projected
funding requirements for at least 18 months. However, no assurance can be given
that such net proceeds will be sufficient to conduct its research and
development programs as planned. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its research
and development programs, the magnitude of these programs,
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progress with preclinical testing and clinical trials, the time and costs
involved in obtaining regulatory approvals, if any, the costs involved in filing
and prosecuting patent applications and enforcing patent claims, competing
technological and market developments, the establishment of additional strategic
alliances, the cost of manufacturing facilities and of commercialization
activities, and the cost of product in-licensing and any possible acquisitions.
There can be no assurance that the Company's cash, cash equivalents and
marketable securities, including the net proceeds of this offering, and interest
income earned thereon, together with funding that may be received under the
Company's strategic alliances, will be adequate to satisfy its capital and
operating requirements.
Focal intends to seek additional funding through strategic alliances, and
may seek additional funding through public or private sales of the Company's
securities, including equity securities. In addition, the Company has obtained
equipment lease financing and other forms of debt financing and may continue to
pursue opportunities to obtain additional lease or debt financing in the future.
There can be no assurance, however, that additional equity or debt financing
will be available on reasonable terms, if at all. Any additional equity
financings would be dilutive to the Company's stockholders. If adequate funds
are not available, Focal may be required to curtail significantly one or more of
its research and development programs and/or obtain funds through arrangements
with corporate partners or others that may require Focal to relinquish rights to
certain of its technologies or product candidates. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
LIMITED MANUFACTURING EXPERIENCE. The Company has only limited
manufacturing facilities for clinical and early commercial production of its
products and has limited experience in manufacturing its FOCALSEAL surgical
sealants. There can be no assurance that the Company will be able to attract,
train and retain the required personnel or will be able to increase its
manufacturing capability to manufacture commercial quantities of surgical
sealants in a timely manner, or at all. Manufacturers often encounter
difficulties in scaling up production of their products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. The Company anticipates that it will need to
increase significantly its current manufacturing capacity to meet commercial
needs over the next several years and that it may need to establish off-site
manufacturing capacity to meet these anticipated needs. In addition, the Company
expects that it will need to identity and qualify additional sources for
materials and outsourced manufacturing processes. There can be no assurance that
the Company's manufacturing scale-up efforts will be successful or that
reliable, commercial manufacturing can be established or maintained at
commercially reasonable costs on a timely basis, or at all. The Company would
experience supply interruptions in the event it is unable to establish or
maintain commercial levels of polymer synthesis, as the Company's polymer
formulations are proprietary and are not available from third parties. In
addition, there can be no assurance that the Company will not encounter
unanticipated problems and delays in connection with its contract manufacturers
and suppliers. Delays associated with or difficulties encountered in
establishing commercial manufacturing, or problems encountered with contract
manufacturers and suppliers, would result in disruptions of product supply to
the Company's marketing partners and for use in clinical trials. In such event,
Ethicon could, under its agreement with the Company, commence manufacturing of
surgical sealants for sales in all territories outside North America. Any of the
foregoing would have a material adverse affect on the Company's business,
financial condition and results of operations.
The Company purchases raw materials used in its products from various
suppliers. Certain materials and components are currently purchased by the
Company from single sources. These materials have generally been readily
available in the marketplace and have not been the subject of shortages. There
can, however, be no assurance that the Company or its suppliers or contract
manufacturers will not experience materials shortages in the future. Any such
future shortages of materials or components could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. As such, the Company is
subject to inspections by the FDA for compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality
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assurance procedures. In addition, prior to international commercialization, the
Company will be required to attain and maintain compliance with ISO 9001
standards. Failure to either attain or maintain compliance with the applicable
regulatory requirements of various regulatory agencies would have a material
adverse effect on the Company's business financial condition and results of
operations. Further, the Company and the third party manufacturers of its
products are required to comply with various FDA requirements for design,
safety, advertising and labeling. The Company has not yet undergone an FDA GMP
inspection and does not anticipate that it will undergo such an inspection until
after submission of its initial PMA application for FOCALSEAL surgical sealants.
See "Business--Manufacturing."
Complex medical devices, such as the Company's products, can experience
performance problems in the field that require review and possible corrective
action by the manufacturer. There can be no assurance that component failures,
manufacturing errors or design defects that could result in an unsafe condition
or injury to the patient will not occur. If any such failures or defects were
deemed serious, the Company could be required to withdraw or recall products,
which could result in significant costs to the Company. However, there can be no
assurance that market withdrawals or product recalls will not occur in the
future. Any future product problems could result in market withdrawals or
recalls of products, which could have a material adverse affect on the Company's
business, financial condition or results of operations.
LACK OF MARKETING AND SALES CAPABILITIES. The Company currently has no
experience in marketing or selling its products under development and does not
have a marketing and sales staff. In order to achieve commercial success for any
product approved by the FDA, Focal must either develop a marketing and sales
force or enter into arrangements with third parties to market and sell its
products. Although Focal has international marketing arrangements in place for
its surgical sealant products, there can be no assurance that Focal will
successfully develop such marketing capabilities or experience for United States
marketing efforts. If the Company develops its own marketing and sales
capabilities, it will compete with other companies that currently have
experienced and well funded marketing and sales operations. To the extent that
the Company enters into co-promotion or other marketing and sales arrangements
with other companies, any revenues to be received by Focal will be dependent on
the efforts of others, and there can be no assurance that such efforts will be
successful. See "Business--Sales and Marketing."
REIMBURSEMENT AND PRODUCT PRICING. Reimbursement and health care payment
systems in international markets vary significantly by country. In connection
with international product introductions, the Company and its strategic
marketing partners may be required to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner, or at all, and failure to receive such
international reimbursement approvals could have an adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought. In the United States, health care providers, such as
hospitals and physicians, that purchase medical devices such as the Company's
products, generally rely on third-party payors, principally federal Medicare,
state Medicaid and private health insurance plans, to reimburse all or part of
the cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no product or procedure reimbursement codes for the
Company's products. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either governmental or private reimbursement systems. Furthermore,
the Company could be adversely affected by changes in reimbursement policies of
governmental or private health care payors. Failure by physicians, hospitals and
other users of the Company's products to obtain sufficient reimbursement from
health care payors for procedures in which the Company's products are used or
adverse changes in governmental and private third party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
business may be also materially adversely affected by the continuing efforts of
government and third-party payors to contain or reduce the costs of health care
through various means. See "Business--Third Party Reimbursement."
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UNCERTAINTY OF ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT, EMPLOYEES AND
CONSULTANTS. The Company is highly dependent on the principal members of its
management and scientific staff. The loss of services of any of these personnel
could impede the achievement of the Company's development objectives.
Furthermore, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and healthcare companies, universities and
non-profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist the Company in formulating its research and
development strategy. All of Focal's consultants and the members of the
Company's Scientific Advisory Board are employed by employers other than the
Company, and may have commitments to, or advisory or consulting agreements with,
other entities that may limit their availability to the Company. See
"Business--Scientific Advisors" and "Management."
POTENTIAL PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE. The use
of any of the Company's potential products in clinical trials, and the sale of
any approved products, may expose the Company to liability claims resulting from
the use of its products. These claims might be made directly by consumers,
health care providers or by pharmaceutical companies or others selling such
products. Focal has obtained product liability insurance coverage, subject to
certain policy limits, for its clinical trials. The Company intends to expand
its insurance coverage to include the sale of commercial products if marketing
approval is obtained for products in development. However, insurance coverage is
becoming increasingly expensive, and no assurance can be given that the Company
will be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect the Company against losses due to liability. There
can also be no assurance that the Company will be able to obtain commercially
reasonable product liability insurance for any products approved for marketing.
A successful product liability claim or series of claims brought against the
Company could have a material adverse effect on its business, financial
condition and results of operations.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. The Company's research and
development processes involve the controlled use of hazardous materials. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company. The Company
believes that it is in compliance in all material respects with applicable
environmental laws and regulations. Accordingly, it does not expect to make
material capital expenditures for environmental control facilities in the
near-term. However, there can be no assurance that it will not be required to
incur significant costs to comply with environmental laws and regulations in the
future, or that the operations, business or assets of the Company will not be
materially adversely affected by the costs of compliance with current or future
environmental laws or regulations.
BROAD MANAGEMENT DISCRETION OVER USE OF PROCEEDS. The Company expects to
use a majority of the net proceeds to fund research and development activities,
clinical trials, expansion of marketing and sales activities, expansion of
manufacturing capabilities and capital expenditures. The Company is not
currently able to estimate precisely the allocation of the proceeds among such
uses, and a significant portion of the net proceeds have not been designated for
specific uses. In addition, the timing and amount of expenditures will vary
depending upon numerous factors. Accordingly, management of the Company will
have broad discretion with respect to the use of these funds and the
determination of the timing of expenditures. See "Use of Proceeds."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK. Prior to this offering, there has
been no public market for the Company's Common Stock, and there can be no
assurance that a regular trading market will develop and continue after this
offering or that the market price of the Common Stock will not decline below the
15
<PAGE>
initial public offering price. The initial public offering price will be
determined through negotiations between the Company and the representatives of
the Underwriters and may not be indicative of the market price of the Common
Stock following this offering. Among the factors considered in such negotiations
are prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the representatives of
the Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant. See "Underwriting."
VOLATILITY OF COMMON STOCK PRICE. The market prices for securities of
biotechnology and pharmaceutical companies have historically been highly
volatile, and the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new therapeutic products
by the Company or others, clinical trial results, developments concerning
strategic alliance agreements, government regulation, developments in patent or
other proprietary rights, public concern as to the safety of products developed
by the Company or others, future sales of substantial amounts of Common Stock by
existing stockholders, comments by securities analysts and general market
conditions can have an adverse effect on the market price of the Common Stock.
In addition, the realization of any of the risks described in these "Risk
Factors" could have a dramatic and material adverse impact on market price of
the Company's Common Stock.
CONTROL BY EXISTING STOCKHOLDERS. After the completion of this offering,
current stockholders, including certain executive officers and directors of the
Company and their affiliates, will own approximately 81% of the outstanding
Common Stock. As a result, these stockholders will, to the extent they act
together, continue to have the ability to exert significant influence and
control over matters requiring the approval of the Company's stockholders,
including the election of a majority of the Company's Board of Directors. See
"Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of Common Stock (including shares
issued upon the exercise of outstanding options) in the public market after this
offering could materially adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future. Based on the number of
shares of Common Stock outstanding at September 30, 1997 and assuming no
exercise of outstanding options or certain warrants after September 30, 1997,
upon the completion of this offering, the Company will have 12,865,337 shares of
Common Stock outstanding, of which the 2,500,000 shares offered hereby will be
freely tradable (unless held by affiliates of the Company) and the remaining
10,365,337 shares will be restricted securities within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). These shares may be
sold in the public market only if registered, or pursuant to an exemption from
registration, including pursuant to Rules 144, 144(k) or 701 under the
Securities Act. All of the executive officers, directors, all stockholders and
optionholders of the Company are subject to lock-up agreements with the
Representatives or are otherwise subject to agreements with the Company
providing that, pursuant to the terms of such lock-up agreements (each a
"Lock-Up Agreement"), during the 180-day period beginning on the date of this
Prospectus, they will not sell or otherwise dispose of any shares of Common
Stock of the Company. Upon expiration of the Lock-Up Agreements, all of such
10,365,337 shares of Common Stock will become eligible for immediate public
resale, subject in some cases to volume limitations pursuant to Rule 144 at
various times over a period of less than one year following the completion of
this offering, subject in some cases to volume limitations. See "Shares Eligible
for Future Sale" and "Underwriting."
ADVERSE IMPACT OF EXPIRATION OR RELEASE OF SHARES FROM LOCK-UP
AGREEMENTS. The executive officers and directors of the Company and all
stockholders and optionholders of the Company have each agreed that, or are
otherwise subject to an agreement providing that, pursuant to the terms of a
lock-up agreement (the "Lock-Up Agreement"), during the 180-day period beginning
on the date of this Prospectus (the "Lock-Up Period") they will not, without the
prior written consent of Lehman Brothers Inc., directly or indirectly, offer,
sell, contract to sell, hypothecate or otherwise dispose (or enter into any
transaction which is designed to, or could be expected to, result in the
disposition by any person) of any shares of Common
16
<PAGE>
Stock of the Company, or any security convertible into or exercisable for Common
Stock of the Company, or any rights to purchase or acquire, Common Stock of the
Company (other than pursuant to bona fide gifts to persons who agree in writing
to be bound by the provisions of the Lock-up Agreement). Lehman Brothers Inc.
may in its sole discretion and at any time without notice, release all or any
portion of the securities subject to the Lock-Up Agreement. In addition, upon
expiration of the Lock-up Agreement, substantially all of the shares subject to
the Lock-up Agreement will be eligible for immediate sale, other than shares
held by officers, directors and other affiliates of the Company which will be
eligible for sale subject in some cases to volume limitations. Furthermore,
holders of 8,297,389 shares and certain warrants outstanding immediately
following the completion of this offering will be entitled to registration
rights with respect to such shares upon termination of the Lock-Up Agreement.
Sales of shares of Common Stock as a result of the expiration of the Lock-up
Agreement, the exercise of registration rights or the early release of shares
from the Lock-Up Agreement could have a material adverse affect on the market
price of the Company's Common Stock. See "Shares Eligible for Future Sale,"
"Underwriting" and "Description of Capital Stock."
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's
Certificate of Incorporation provides for staggered terms for the members of the
Board of Directors and does not provide for cumulative voting in the election of
directors. In addition, the Board of Directors of the Company may issue shares
of Preferred Stock without stockholder approval on such terms as the Board may
determine. The Company's Bylaws require advance notice of matters of business to
be brought before meetings of stockholders. The Company's Certificate of
Incorporation prohibits stockholders from acting by written consent. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. Further, the Company is subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, restricts certain
transactions and business combinations between a corporation and a stockholder
owning 15% of more of the corporation's outstanding voting stock (an "interested
stockholder") for a period of three years from the date the stockholder becomes
an interested stockholder. The staggered board terms, lack of cumulative voting,
Preferred Stock provision and other provisions of the Company's charter and
Delaware corporate law may discourage certain types of transactions involving an
actual or potential change in control of the Company.
In addition, the Company's Board of Directors has approved a Stockholders
Rights Plan under which a dividend of one right (a "Right") to purchase one
one-thousandth share of the Company's Series A Participating Preferred Stock
("Series A Preferred") for each outstanding share of Common Stock ("Common
Shares") of the Company has been declared and will be distributed to
stockholders of record as of the effective date of this offering. The Rights may
have the effect of rendering it more difficult or discouraging an acquisition of
the Company deemed undesirable by the Company's board of directors. The Rights
may cause substantial dilution to a person or group that attempts to acquire the
Company on terms or in a manner not approved by the Company's Board of
Directors, except pursuant to an offer conditioned upon the negation, purchase
or redemption of the Rights, and may therefore discourage or prevent certain
transactions involving an actual or potential change in control of the Company.
See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION. Upon purchase of Common Stock,
investors will experience an immediate and substantial dilution of $8.91 per
share in the net tangible book value of the Common Stock they acquire in this
offering. Additional dilution is likely to occur upon the exercise of options,
warrants and conversion rights granted by the Company. See "Dilution" and
"Description of Capital Stock-- Registration Rights of Certain Holders."
ABSENCE OF CASH DIVIDENDS. The Company has never paid any cash dividends
and does not anticipate paying cash dividends in the foreseeable future. See
"Dividend Policy."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$12.00 per share are estimated to be $27,300,000 ($31,485,000 if the
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions and estimated offering expenses.
The Company expects to use the majority of the net proceeds to fund research
and development activities, clinical trials, expansion of manufacturing
capabilities and sales and marketing activities, and capital expenditures. The
Company anticipates using $2,500,000 of the net proceeds for the expansion of
its manufacturing facility for its surgical sealant products. The balance of the
net proceeds will be used for working capital and general corporate purposes.
Although the Company may use a portion of the net proceeds for the licensing or
acquisition of new products or technologies from others, the Company currently
has no specific commitments in this regard. The amounts actually expended for
each purpose and the timing of such expenditures may vary significantly
depending upon numerous factors, including the timing of regulatory actions
regarding the Company's potential future products, the costs and timing of
expansion of marketing, sales and manufacturing activities, results of clinical
trials and competition. In addition, there can be no assurance that any product
developed or introduced by the Company will be successfully commercialized or
that the Company will not exceed its current spending expectations. Pending the
foregoing uses, the Company intends to invest the net proceeds of this offering
in short-term, interest-bearing, investment grade securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any dividends on its capital stock.
The Company does not anticipate declaring or paying any cash dividends in the
foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1997 (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company on a
pro forma as adjusted basis to reflect the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby (at an assumed initial public
offering price of $12.00 per share) and receipt of the proceeds therefrom, after
deducting underwriting discounts and commissions and estimated expenses payable
by the Company, and the conversion of all outstanding shares of Preferred Stock
into 8,117,803 shares of Common Stock, the exercise of warrants to purchase
19,496 shares of Common Stock and the restatement of the Company's Certificate
of Incorporation to provide for authorized capital stock consisting of
50,000,000 shares of Common Stock and 5,000,000 shares of undesignated Preferred
Stock upon completion of this offering. This table should be read in conjunction
with "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements, including the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
-----------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Capital lease obligations, long-term portion............................................. $ 1,207 $ 1,207
---------- -----------
Stockholders' equity:
Preferred Stock, par value $.01 per share;
31,681,540 shares authorized; 24,345,247 shares issued and outstanding on an actual
basis; 5,000,000 shares authorized, none issued and outstanding
pro forma as adjusted(1)............................................................. 243 --
Common Stock, par value $.01 per share;
50,000,000 shares authorized; 2,228,038 shares issued and outstanding on an actual
basis, and 12,865,337 shares issued and outstanding pro forma as adjusted(2)(3)...... 22 129
Additional paid-in capital............................................................. 57,987 85,446
Unrealized loss on marketable securities............................................... (11) (11)
Notes receivable from related parties(4)............................................... (1,688) (1,688)
Deferred compensation.................................................................. (733) (733)
Accumulated deficit.................................................................... (45,032) (45,032)
---------- -----------
Total stockholders' equity........................................................... 10,788 38,111
---------- -----------
Total capitalization................................................................. $ 11,995 $ 39,318
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) For information regarding each series of Preferred Stock that will convert
into Common Stock upon the completion of this offering, including
information regarding the conversion ratio for each such series and the pro
forma effect of such conversion, see Note 5 of Notes to Financial
Statements.
(2) Excludes (i) 297,921 shares of Common Stock issuable upon the exercise of
stock options outstanding under the Company's 1992 Incentive Stock Plan at
September 30, 1997, and (ii) 179,586 shares issuable upon the exercise of
warrants that will remain outstanding following the completion of this
offering. See "Management--Incentive Stock Plans," "Certain Transactions,"
"Description of Capital Stock" and Note 5 of Notes to Financial Statements.
(3) For information regarding outstanding options and warrants, including
information regarding the exercise prices and expiration dates thereof, see
Note 5 of Notes to Financial Statements.
(4) The notes receivable from related parties consist of promissory notes
received by the Company in connection with a program implemented in January
1997 under which directors, executive officers and certain other key
employees were permitted to exercise their outstanding options as to both
vested and unvested shares, with unvested shares being subject to a right of
repurchase at cost in favor of the Company in the event of termination of
employment prior to vesting of all then-unvested shares. Under this program,
the participants paid the exercise price for their outstanding options
pursuant to full recourse promissory notes. The notes bear interest at 6.0%
per annum and are due and payable on December 31, 2000. See "Certain
Transactions."
19
<PAGE>
DILUTION
The net tangible book value of the Company, at September 30, 1997, on a pro
forma basis to give effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock and the exercise of warrants to purchase
19,496 shares of Common Stock upon the completion of this offering, was
$12,499,800 or approximately $1.21 per share of Common Stock. "Net tangible book
value" per share represents the amount of the Company's total tangible assets,
reduced by the amount of its total liabilities, divided by the pro forma number
of shares of Common Stock outstanding. After giving effect to the sale of the
2,500,000 shares of Common Stock offered hereby (assuming an initial public
offering price of $12.00 per share), after deducting underwriting discounts and
commissions and estimated offering expenses, the Company's pro forma net
tangible book value at September 30, 1997 would have been $39,799,800, or $3.09
per share. This represents an immediate increase in net tangible book value of
$1.88 per share to existing stockholders and an immediate dilution in net
tangible book value of $8.91 per share to new investors purchasing Common Stock
in the offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed price to public........................................... $ 12.00
Pro forma net tangible book value per share at September 30,
1997.......................................................... $ 1.21
Increase per share attributable to new investors................ 1.88
---------
Pro forma net tangible book value per share after offering........ 3.09
---------
Dilution to new investors......................................... $ 8.91
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share by
existing stockholders and by investors purchasing shares in the offering (at an
assumed initial public offering price of $12.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 10,365,337 81% $ 58,480,384 66% $ 5.64
New investors............................... 2,500,000 19% 30,000,000 34% 12.00
------------ --- ------------- ---
Total..................................... 12,865,337 100% $ 88,480,384 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
The foregoing computations assume no exercise of stock options or warrants
outstanding at September 30, 1997. At September 30, 1997, there were outstanding
stock options to purchase an aggregate of 297,921 shares of Common Stock at a
weighted average exercise price of $2.16 per share and warrants which are not
required to be exercised upon the completion of this offering to purchase an
aggregate of 179,586 shares of Common Stock at a weighted average exercise price
of $10.40 per share. To the extent these stock options and warrants are
exercised, there will be further dilution to purchasers in this offering. See
"Management--Incentive Stock Plans" and Note 5 of Notes to Financial Statements.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for each year in the five year
period ended December 31, 1996 are derived from the financial statements of
Focal, Inc. which have been audited by Ernst & Young LLP, independent auditors.
The financial data for the nine month periods ended September 30, 1997 and 1996
are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which Focal considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1997. This
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements, related notes and other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
-------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996
--------- --------- ---------- ---------- ---------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Collaborative research revenue......................... $ -- $ -- $ 50 $ 968 $ 3,098 $ 2,349
Operating expenses:
Research and development........................... 1,793 7,405 11,890 9,665 11,680 8,735
General and administrative......................... 466 1,925 2,034 2,098 2,175 1,518
--------- --------- ---------- ---------- ---------- ---------
Total operating expenses............................... 2,259 9,330 13,924 11,763 13,855 10,253
--------- --------- ---------- ---------- ---------- ---------
Loss from operations................................... (2,259) (9,330) (13,874) (10,795) (10,757) (7,904)
Interest income........................................ 6 357 668 443 691 515
Interest expense....................................... 13 44 79 107 92 71
--------- --------- ---------- ---------- ---------- ---------
Net income (loss)...................................... $ (2,266) $ (9,017) $ (13,285) $ (10,459) $ (10,158) $ (7,460)
--------- --------- ---------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------- ---------
Pro forma net income (loss) per
share (1)............................................ $ (1.23) $ (.93)
---------- ---------
---------- ---------
Shares used in computing pro forma net income (loss)
per share (1)........................................ 8,271 8,001
---------- ---------
---------- ---------
<CAPTION>
SEPTEMBER
30, 1997
---------
DECEMBER 31,
--------------------------------------------------------
1992 1993 1994 1995 1996 ACTUAL
--------- --------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and marketable securities....... $ 6,945 $ 19,027 $ 12,240 $ 6,948 $ 12,208 $ 13,215
Working capital........................................ 6,320 17,776 10,159 4,401 9,003 9,254
Total assets........................................... 7,173 20,936 15,331 9,306 14,089 16,491
Capital lease obligations, long-term portion........... -- 602 934 462 315 1,207
Total stockholders' equity............................. 6,471 18,556 11,626 5,995 10,099 10,788
<CAPTION>
<S> <C>
1997
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Collaborative research revenue......................... $ 12,831
Operating expenses:
Research and development........................... 10,929
General and administrative......................... 2,106
-----------
Total operating expenses............................... 13,035
-----------
Loss from operations................................... (204)
Interest income........................................ 731
Interest expense....................................... 81
-----------
Net income (loss)...................................... $ 446
-----------
-----------
Pro forma net income (loss) per
share (1)............................................ $ .04
-----------
-----------
Shares used in computing pro forma net income (loss)
per share (1)........................................ 10,551
-----------
-----------
PRO FORMA
AS
ADJUSTED
(2)
-----------
BALANCE SHEET DATA:
<S> <C>
Cash, cash equivalents and marketable securities....... $ 40,538
Working capital........................................ 36,577
Total assets........................................... 43,814
Capital lease obligations, long-term portion........... 1,207
Total stockholders' equity............................. 38,111
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of pro forma net income (loss) per share.
(2) Pro forma as adjusted to reflect the sale of the 2,500,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $12.00
per share and the receipt of the estimated net proceeds therefrom and the
automatic conversion of all outstanding shares of Preferred Stock into
8,117,803 shares of Common Stock and the exercise of warrants to purchase
19,496 shares of Common Stock upon the completion of this offering. See "Use
of Proceeds."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus.
OVERVIEW
The Company was founded in 1991 and is focused on the development,
manufacture and commercialization of synthetic, absorbable, liquid surgical
sealants based on the Company's proprietary polymer technology. Since inception,
the Company has funded its operations primarily through the private placement of
equity securities. In addition, the Company has entered into strategic alliances
with corporate partners and has recorded revenues totaling $16.9 million through
September 30, 1997 in connection with these alliances.
The Company has incurred net losses in each year since its inception,
including net losses of approximately $10.2 million during 1996. At September
30, 1997, the Company had an accumulated deficit of $45 million. The Company's
profitability during the nine months ended September 30, 1997 resulted primarily
from the receipt of a one-time non-refundable payment of $7.0 million as well as
receipt of quarterly research and development funding under the Company's
strategic alliance with Ethicon, Inc., a division of Johnson and Johnson
("Ethicon"), for FOCALSEAL surgical sealants. The Company's operating losses
have resulted primarily from expenses incurred in connection with the Company's
research and development activities, including preclinical and clinical trials,
development of manufacturing processes and general and administrative expenses.
The Company expects to incur net losses into 1999 and may incur net losses in
subsequent periods although the amount of future net losses and time required by
the Company to reach profitability are highly uncertain. The Company is
dependent upon corporate partners for funding of a significant portion of
research and development expenses. If the Company does not continue to receive
funding from its current corporate partners, or is unable to otherwise obtain
third-party funding, net losses will continue to increase. Focal does not expect
to generate revenues from the sale of products until the first half of 1998. The
Company's ability to achieve and sustain profitability will be dependent upon
obtaining regulatory approval for and successfully commercializing its FOCALSEAL
surgical sealants, and developing the manufacturing capacity and sales and
marketing capability for its products. There can be no assurance that Focal will
obtain required regulatory approvals, or successfully develop, manufacture,
commercialize and market products or that the Company will ever record product
revenues or achieve profitability.
To date, the Company has not recorded any product revenues. The Company
expects to introduce its first commercial product, FOCALSEAL-L for lung surgery
indications, in Europe in the first half of 1998 through its strategic marketing
alliance with Ethicon. The Company anticipates that revenues derived from
European sales of the Company's FOCALSEAL surgical sealants will account for a
substantial majority of the Company's near term product revenues. The Company
must obtain a CE mark before Ethicon can market FOCALSEAL in the member
countries of the European Union. Any delays or other difficulties encountered by
the Company in obtaining such CE mark would have a material adverse effect on
the Company's business, financial condition and results of operations.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Revenues for the nine months ended September 30, 1997 increased to $12.8
million from $2.3 million for the nine months ended September 30, 1996, due to
higher collaborative research and development funding, which comprised all of
the Company's revenues during both periods. The increase in the 1997 period was
due primarily to a strategic alliance entered into with Ethicon in January 1997.
Revenues recorded in connection with this strategic alliance for the nine months
ended September 30, 1997 included a one-time non-refundable payment of $7.0
million, as well as funding of $1.25 million per quarter for research and
development activities.
22
<PAGE>
Research and development expenses increased to $10.9 million for the nine
months ended September 30, 1997 from $8.7 million for the nine months ended
September 30, 1996. This increase resulted from the hiring of additional
research and development personnel in 1997, as well as increased clinical trials
and manufacturing start-up costs.
General and administrative expenses increased to $2.1 million for the nine
months ended September 30, 1997 from $1.5 million for the nine months ended
September 30, 1996. General and administrative expenses during these periods
consisted primarily of personnel costs, which increased due to the hiring of
additional administrative personnel.
Interest income increased to $731,000 for the nine months ended September
30, 1997 from $515,000 for the nine months ended September 30, 1996 as a result
of higher average cash balances.
The Company recorded net income of approximately $446,000 for the nine
months ended September 30, 1997. The Company's profitability was primarily the
result of a one-time payment and quarterly funding of research and development
by Ethicon. The Company does not expect profitability to continue in the near
term and anticipates that it will incur net operating losses into 1999.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues for 1996 increased to $3.1 million from $968,000 in 1995. Revenues
during both years consisted of research and development funding from corporate
partners. The increase was due to a strategic alliance signed in April 1996 with
Novartis Corporation and Chiron Corporation. Revenues recorded in connection
with corporate alliances in 1996 include one-time payments, milestone payments
and funding for research and development activities.
Research and development expenses increased to $11.7 million in 1996 from
$9.7 million in 1995, due to the hiring of research personnel and increased
clinical trial expenses.
General and administrative expenses increased to $2.2 million in 1996 from
2.1 million in 1995 and consisted primarily of personnel costs.
Interest income increased to $691,000 in 1996 from $443,000 in 1995 due to
higher cash balances as a result of a $19.7 million private placement completed
in April 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues for 1995 increased to $968,000 from $50,000 for 1994 due to an
increase in collaborative research and development funding. This increase was
due to receipt of funding for a local drug delivery program. Revenues recorded
in connection with this funding arrangement in 1995 included up-front payments
and funding for research and development activities.
Research and development expenses decreased to $9.7 million for 1995 from
$11.9 million for 1994 due to a reduction in personnel in the first quarter of
1995. In addition, the Company incurred significant costs in 1994 in connection
with a clinical trial conducted in Europe. There were no clinical trials
conducted in 1995.
General and administrative expenses were $2.1 million for 1995 and $2.0
million for 1994 and consisted primarily of personnel costs. Increases in
general consulting costs were offset by decreases in certain other
administrative expenses.
Interest income decreased to $443,000 for 1995 from $668,000 for 1994. Cash
balances were higher in 1994 as compared to 1995 due to the completion of a
private placement in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed operations primarily from the
sale of preferred stock in private placements. Through September 30, 1997, the
Company has raised approximately $58.5 million from equity financings and has
received $5.3 million in equipment lease financing. In addition, the Company has
received funding from Novartis, Chiron and Ethicon totaling approximately $17.1
million through September 30, 1997.
23
<PAGE>
Cash provided by operations totaled $2.1 million for the nine months ended
September 30, 1997 as compared to the use of $5.9 million for the same period of
1996. The change in cash from operations was due to the achievement of net
income for the nine months ended September 30, 1997 as compared to a net loss of
$7.4 million for the same period of 1996. Cash used in operations is equal to
the net loss incurred for each period, less non-cash charges such as
depreciation and amortization of property and equipment in addition to any
changes in working capital.
Capital expenditures from inception through September 30, 1997 totaled $5.8
million, representing laboratory equipment, office furniture and equipment,
computers and certain leasehold improvements. The majority of these purchases
have been financed through either direct financing leases or sale and leaseback
arrangements. As of September 30, 1997, the Company did not have any material
commitments for future capital expenditures. In the next 12 to 18 months, the
Company anticipates capital expenditures of approximately $2.5 million for
manufacturing facilities and related equipment. The Company has commitments from
lenders, in the form of term loans and lease lines, totaling $2.5 million to
provide for its expected capital needs during 1997 and 1998. As of September 30,
1997, the Company had drawn down $1.4 million under these credit facilities.
The Company believes that its existing capital resources, together with the
net proceeds of this offering, interest income and future payments due under
strategic alliances, will be sufficient to satisfy its current and projected
funding requirements for at least 18 months. Under the Company's surgical
sealant collaboration agreement with Ethicon, the Company will receive fixed
quarterly research and development funding of $750,000 per quarter through 1998.
The Company also receives quarterly research and development funding under its
collaboration agreement with Novartis and Chiron for local drug delivery;
however, such agreement (including the funding obligations of Novartis and
Chiron) is terminable upon 90 days notice. The Company may receive additional
payments under these agreements upon achievement of specified development
milestones; however, as such payments are dependent upon the achievement of such
milestones, there can be no assurance as to the receipt or timing of any such
payments. Under certain agreements with universities and consultants, the
Company is obligated to make payments for sponsored research and consulting
services. The Company's research funding commitments under these agreements
totalled approximately $402,000 at December 31, 1996. Payments under these
agreements are typically made on a quarterly or monthly basis. There can be no
assurance that the net proceeds of this offering and the Company's other capital
resources will be sufficient to enable the Company to conduct its research and
development programs as planned. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its research
and development programs and the magnitude of these programs, progress with
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, if any, the costs involved in filing and
prosecuting patent applications and enforcing patent claims, competing
technological and market developments, the establishment of additional strategic
alliances, the cost of manufacturing facilities and of commercialization
activities and arrangements, and the cost of product in-licensing and any
possible acquisitions. There can be no assurance that the Company's cash, cash
equivalents and marketable securities including the net proceeds of this
offering, and interest income earned thereon, together with funding that may be
received under the Company's strategic alliances, will be adequate to satisfy
its capital and operating requirements.
Focal intends to seek additional funding through strategic alliances, and
may seek additional funding through public or private sales of the Company's
securities, including equity securities. In addition, the Company has obtained
equipment lease financing and other forms of debt financing and may continue to
pursue opportunities to obtain additional lease or debt financing in the future.
There can be no assurance, however, that additional equity or debt financing
will be available on reasonable terms, if at all. Any additional equity
financings would be dilutive to the Company's stockholders. If adequate funds
are not available, Focal may be required to curtail significantly one or more of
its research and development programs and/or obtain funds through arrangements
with corporate partners or others that may require Focal to relinquish rights to
certain of its technologies or product candidates.
24
<PAGE>
BUSINESS
GENERAL
Focal develops, manufactures and commercializes synthetic, absorbable,
liquid surgical sealants based on the Company's proprietary polymer technology.
The Company's family of FOCALSEAL surgical sealant products is currently being
developed for use inside the body with or without sutures and staples to seal
leaks resulting from lung, neuro, cardiovascular and gastrointestinal surgery.
FOCALSEAL-L, the Company's first surgical sealant product, will initially be
used to seal air leaks following lung surgery. The Company has entered into an
exclusive marketing and distribution agreement for its surgical sealant products
outside North America with Ethicon, a worldwide leader in surgical wound closure
products. The Company anticipates commercial launch of FOCALSEAL-L for lung
surgery indications in Europe through Ethicon in the first half of 1998.
There are more than 4 million open and minimally invasive lung, neuro,
cardiovascular and gastrointestinal surgical procedures performed annually
worldwide in which air or fluid leaks may arise in an unpredictable and
unexpected manner, and in which the Company's products, if approved, may be
effective in reducing post-surgical leaks. The reported incidence of air and
fluid leaks in these procedures is approximately 79% (intraoperative) and 15%
(persistent postoperative) in lung surgeries, 15% in cranial surgeries, 13% in
spinal surgeries, 5% in large bowel surgeries and 25% in esophageal surgeries.
In many of these surgical procedures, as well as in cardiovascular surgeries,
air and fluid leaks can occur unpredictably and it can be difficult at the
conclusion of surgery for the surgeon to determine whether a particular surgical
site will leak. Accordingly, the Company believes that its FOCALSEAL surgical
sealants may be used prophylactically in many of these procedures. The Company
has conducted clinical trials of FocalSeal-L for lung surgery and intends to
develop products and conduct clinical trials for neuro, cardiovascular and
gastrointestinal surgery indications. Patients with persistent air or fluid
leaks may require prolonged hospitalization, have more complications and have
higher levels of post-operative pain, and a higher risk of mortality. Sutures
and staples, the principal products comprising the over $2.0 billion worldwide
wound closure market, do not have inherent sealing capabilities, and therefore
cannot consistently eliminate air and fluid leakage at the wound site. Focal's
liquid surgical sealants adhere rapidly to underlying tissue, expand and
contract with tissue, withstand air and fluid pressure, and are designed to
provide an effective seal to reduce the incidence of air and fluid leaks
following surgery. FOCALSEAL surgical sealants, which are biocompatible remain
intact through the critical wound healing period and are then absorbed and
eliminated by the body. The Company believes the use of its FOCALSEAL liquid
surgical sealants could potentially shorten patient recovery times and hospital
stays and reduce post-surgical complications.
Focal is currently developing two principal surgical sealant formulations,
FOCALSEAL-L and FOCALSEAL-S, for a broad range of applications inside the body.
The Company has completed a 60-patient, multicenter, randomized, controlled
clinical trial in Europe involving use of FOCALSEAL-L in sealing air leaks
following lung surgery. In the trial, following surgery with standard sutures
and staples and prior to randomization, it was determined that 79% of all
patients had intraoperative air leaks. FOCALSEAL-L was shown to be 100%
effective in sealing intraoperative air leaks in the 30 patients who were
randomized into the treated group. In the other patients, who were randomized
into the untreated group and received sutures and staples alone, only 27% were
free of intraoperative air leaks. In September 1997, the Company initiated a
pivotal, 180-patient, multicenter clinical trial in the United States under a
conditional IDE to evaluate FOCALSEAL-L in sealing intraoperative and
postoperative air leaks following lung surgery. The Company expects to submit a
PMA for lung surgery indications to the FDA by the end of 1998.
FOCALSEAL-S, the Company's second surgical sealant formulation, is absorbed
by the body more quickly than FOCALSEAL-L and is designed for applications in
which shorter sealing duration is desired. FOCALSEAL-S will initially be used to
seal fluid leaks following neurosurgery. The Company expects to commence a
clinical trial in Europe for this indication in mid-1998. The Company believes,
based upon preclinical evaluation of its polymers, that its FOCALSEAL-L and
FOCALSEAL-S formulations, which are designed to have
25
<PAGE>
absorption times that parallel long-term and short-term synthetic absorbable
polymer sutures, respectively, will also be widely applicable to cardiovascular
surgery, gastrointestinal surgery and other surgical applications.
Focal is also developing other applications for the liquid formulations of
its polymer technology, including local drug delivery systems and tissue
coatings. In local drug delivery applications, the Company believes that its
polymers can deliver high concentrations of drugs at local disease sites,
thereby potentially enhancing efficacy and reducing toxicity associated with
systemic delivery of drugs. The Company is initially pursuing local delivery of
drugs with the objective of reducing the incidence of restenosis following
coronary angioplasty procedures. The Company has entered into a collaboration
with Novartis and Chiron under which these companies are funding development of
a polymer-based local drug delivery system for anti-restenosis agents being
developed by them. In connection with the collaboration, Novartis and Chiron
received worldwide marketing and distribution rights for this indication. In
addition, the Company is developing tissue coatings to prevent the formation of
post-surgical adhesions, excessive scar tissue which attaches to surrounding
tissue and can cause serious complications, particularly in abdominal and
gynecological surgeries. The Company intends to enter into other collaborations
with pharmaceutical companies for additional drug delivery and tissue coating
indications.
During the past three years, the Company has been engaged primarily in the
development of the polymer formulations for its FOCALSEAL surgical sealant
products and the delivery devices that are used to deliver these products. In
addition, the Company has devoted resources to its other product development
programs and research and development initiatives. In addition, in 1996 the
Company commenced clinical trials of FOCALSEAL-L in Europe and in 1997, the
Company commenced clinical trials of FOCALSEAL-L in the United States.
SURGICAL SEALANT MARKET OPPORTUNITY
Effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of injured and diseased tissue and
the ultimate success of the surgical procedure. Failure to effectively seal
surgical wounds can result in leakage of air in lung surgeries, cerebral spinal
fluid in neurosurgeries, blood in cardiovascular surgeries, and gastrointestinal
contents in gastrointestinal surgeries. Air and fluid leaks resulting from
surgical procedures can lead to significant post-surgical morbidity resulting in
prolonged hospitalization, higher levels of post-operative pain and
complications and a higher mortality rate.
The current annual worldwide market for wound closure products, consisting
primarily of surgical sutures and staples, is estimated at over $2 billion.
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and fluid
leakage at the wound site. This is particularly the case when sutures and
staples are used to close tissues containing air or fluids under pressure, such
as the lobes of the lung, the dural membrane surrounding the brain and spinal
cord, blood vessels and the gastrointestinal tract. In addition, in minimally
invasive surgical procedures, where the physician must operate through small
access devices, it can be more difficult and time-consuming for the physician to
place sutures and staples as compared to open surgical procedures. The Company
believes that the use of surgical sealants with or without sutures and staples
in minimally invasive procedures could enhance the efficacy of these procedures
through more effective and rapid wound closure.
The limitations of sutures and staples in sealing certain air and fluid
leaks have led to the adaptation of other technologies for wound closure. These
alternatives include the use of liquid fibrin glues and nonliquid collagen patch
products. Fibrin glues, which were originally developed as hemostatic agents,
have limited efficacy in many surgical sealant applications because they do not
adhere strongly to, or move and expand with, underlying tissue, particularly
moist tissue. In spite of these limitations, annual international sales of
fibrin glue sealants are estimated at $250 million. Collagen patches have
similar limitations,
26
<PAGE>
in that they are not highly adherent, strong or elastic. In addition, both
collagen patches and fibrin glues are absorbed by enzymatic reaction. Enzymatic
reaction can result in variable absorption time from patient to patient,
depending upon metabolic rates, and can potentially result in absorption prior
to healing of the surgical site. Collagen patches and fibrin glues are derived
from animal by-products, including bovine collagen and bovine and/or human
plasma. These derivatives have resulted in significant safety concerns, and are
reported to be one of the primary reasons fibrin glues have not received FDA
approval for United States commercial sales. Furthermore, the wound closure
industry has undergone a significant shift away from animal derived materials to
synthetic materials due to the more predictable absorption, superior performance
characteristics and safety of synthetic sutures. Currently, the Company
estimates that over 65% of suture material is synthetic, as compared to only
approximately 25% in 1975.
Due to the limitations of sutures and staples in achieving rapid, leakproof
wound closure and the inadequacy of animal by-product sourced glues and patches,
Focal believes that a significant market opportunity exists for its synthetic,
absorbable, liquid, surgical sealants.
FOCAL'S SYNTHETIC POLYMER TECHNOLOGY
Focal's family of surgical sealants and its other products under development
are based on the Company's proprietary synthetic, absorbable, liquid formulation
polymer technology. The Company's polymers are designed to incorporate several
beneficial characteristics, including adherence to tissue, strength, flexibility
and elasticity, consistent absorption, and safety and biocompatibility, which
are critical to their use as surgical sealants and in other clinical
applications.
The Company's proprietary polymer formulations are comprised of polyethylene
glycol ("PEG"), other synthetic components and water. PEG and other synthetic
components comprise approximately 10-20% of the Company's synthetic liquid
formulation polymers and are widely used in other medical products approved for
use inside the body, such as IV-administered pharmaceuticals, synthetic
absorbable sutures, bone and dental cements, pain medications and eye drops.
Water comprises the other 80-90% of Focal's formulations. The Company combines
PEG and other synthetic components in various proprietary polymer formulations
in order to control characteristics such as viscosity, setting time, strength,
absorption, flexibility and elasticity. This enables the Company to tailor
polymers for particular applications. A key distinguishing characteristic of the
Company's polymer formulations is that they are applied as liquids and are
photopolymerized by light into solid gels inside the body, a process known as
photopolymerization. The solid gel formed after the light has been applied is
highly flexible, elastic and transparent and strongly adheres to moist or dry
tissue. The design and macromer composition of the Company's polymers enable
them to polymerize quickly without generating heat, which is a significant
clinical advantage over other IN VIVO polymerizable materials.
The key technological hurdle which the Company overcame in the development
of its synthetic, liquid surgical sealants was the crucial need to adhere
strongly to moist tissue surfaces. The Company's sealants adhere to tissue as a
result of a proprietary two-step priming and sealing process. To use FOCALSEAL,
the physician first applies a liquid primer which penetrates the uneven surfaces
of spongy, porous tissue. Once the primer is brushed on, the sealant is applied
over the primer and both are exposed to a standard wavelength of visible light.
The primer and sealant contain a photoinitiator which enables them to polymerize
rapidly upon exposure to light, a process known as photopolymerization. The
viscosity and rapid photopolymerization characteristics of the Company's
surgical sealants enable the physician to apply the sealant where desired and
avoid significant run off of the material prior to polymerization. Surgeons can
perform the entire surgical sealant application process quickly and efficiently
after limited training.
The key properties of the Company's synthetic liquid polymers are:
- ADHERENCE TO TISSUE. The Company's FOCALSEAL surgical sealants adhere
strongly to both moist and dry tissue, a requirement for effective
sealants which, to the Company's knowledge, has not been adequately
demonstrated by alternative technologies in clinical applications. The
combination of a
27
<PAGE>
viscous liquid formulation polymer incorporating a photoinitiator enables
the Company's polymers to adhere to tissue when applied as a liquid and to
polymerize rapidly when exposed to light.
- STRENGTH, FLEXIBILITY AND ELASTICITY. The composition of the Company's
polymers provides a high degree of strength, flexibility and elasticity,
enabling them to stretch with the tissue to which they are applied. These
qualities are especially significant when the polymers are used in areas
where resistance to air and fluid pressure is critical, including the
lungs, the dural membrane surrounding the brain, the vascular system and
the gastrointestinal tract.
- CUSTOMIZABLE POLYMER CHARACTERISTICS. By modifying the chemical
composition of its polymers, the Company is able to control
characteristics such as viscosity, setting time, strength, absorption,
flexibility and elasticity. The customizable nature of the Company's
polymer technology enables Focal to design and develop products with
characteristics and properties that are tailored for specific clinical
indications.
- HYDROLYTIC ABSORPTION. The Company's synthetic polymers are designed to
be predictably broken down by water, a process known as hydrolysis, and
are absorbed by the body over a specified period of time depending upon
their chemical composition. As a result, the Company's polymers should
have a relatively consistent absorption profile from patient to patient.
Collagen patches and fibrin glues are absorbed by enzymatic reaction,
which can vary significantly from patient to patient depending upon an
individual's metabolism, and can potentially result in these products
being absorbed before the wound site is completely healed.
- SAFETY AND BIOCOMPATIBILITY. Focal's synthetic polymers are comprised of
materials which are commonly found in other medical products approved for
use in humans. The PEG backbone allows the resulting formulations to be
water-soluble and biocompatible, resulting in minimal reaction with the
tissue to which the polymer is applied. In addition, the absence of animal
or human derived by-products eliminates safety concerns related to
transmission of blood borne diseases such as HIV and hepatitis.
Preclinical toxicology testing of FOCALSEAL-L and FOCALSEAL-S, and initial
clinical trials of FOCALSEAL-L in Europe, indicate that these biomaterial
formulations are nontoxic.
- TRANSPARENCY. The Company's polymers are transparent, enabling the
physician to observe the underlying tissue to which the polymers have
adhered to confirm sufficient coverage of the wound site. Other products
used as surgical sealants, including fibrin glues and collagen patches,
are not transparent.
The Company has also developed proprietary systems to deliver its surgical
sealants and other products to the wound site. Easy to use brush applicators
have been designed by the Company to apply its FOCALSEAL surgical sealants and
primer over tissue surfaces. The Company also employs a light source and light
wand to generate and deliver consistent amounts of light necessary for
photopolymerization of its surgical sealants. The Company has also developed a
proprietary double balloon catheter system for use with its restenosis drug
delivery polymers. This catheter system is designed for use with standard
guidewires used in interventional cardiology procedures.
The Company believes it has built a strong patent portfolio related to its
photopolymerizable polymer technology. The Company has received, licensed or
believes it has the option or right to license 17 issued United States patents
and six foreign patents corresponding to certain of the issued United States
patents, has 12 additional United States patent applications that have been
allowed and has 21 patent applications pending in the United States, as well as
foreign counterparts of certain of these applications. These patents and patent
applications cover certain aspects of the Company's photopolymerizable polymer
formulations, surgical sealant compositions and methods, and designs for
delivery devices.
28
<PAGE>
BUSINESS STRATEGY
The Company's objective is to become a leader in the market for surgical
sealants and in other markets where the Company's novel polymer technology could
address large unmet clinical needs. The following are key elements of the
Company's strategy:
- MARKET FOCALSEAL SURGICAL SEALANT PRODUCTS THROUGH ETHICON INTERNATIONALLY
AND ESTABLISH ITS OWN DIRECT SALES FORCE IN NORTH AMERICA. The Company
will market and sell its surgical sealant products internationally through
Ethicon and intends to develop its own direct sales force for North
America concurrent with receipt of appropriate marketing approvals. The
Company's agreement with Ethicon will enable the Company to introduce its
surgical sealant products internationally through Ethicon's extensive
sales, marketing and distribution infrastructure. The Company believes
that international commercialization of its surgical sealants may
contribute to more rapid adoption in the United States following receipt
of FDA approvals.
- DEVELOP NEW PRODUCTS BY LEVERAGING ITS PROPRIETARY POLYMER
TECHNOLOGY. Focal's versatile polymers provide a broad technology
platform for the development of new products. The Company's novel
synthetic polymer technology allows for the modification of formulations
yielding properties well-suited to a variety of indications, including
surgical sealants, post-surgical adhesion prevention and local drug
delivery.
- COMMERCIALIZE FOCALSEAL SURGICAL SEALANTS TO PARALLEL THE EXISTING MARKET
FOR SYNTHETIC ABSORBABLE SUTURES. The Company intends to develop
formulations for FOCALSEAL surgical sealants to parallel the absorption
times of long- and short-term synthetic absorbable polymer sutures. The
Company is developing FOCALSEAL-L, a long-term absorbable sealant
initially for use in lung surgery indications, where long-term absorbable
sutures are typically used, and FOCALSEAL-S, a short-term absorbable
sealant intially for use in neurosurgery indications, where short-term
absorbable sutures are typically used. The Company believes this strategy
may result in accelerated adoption of the Company's sealant products by
practitioners.
- FUND NEW RESEARCH AND DEVELOPMENT INITIATIVES THROUGH CORPORATE
COLLABORATIONS. The Company intends to obtain funding for major research
and development initiatives through strategic relationships with corporate
partners. Through September 30, 1997, the Company's strategic
relationships with Ethicon for surgical sealants and Novartis and Chiron
for restenosis drug delivery have provided the Company with over $17.1
million of research and development funding for these programs. The
Company may, however, commence future research and development initiatives
on its own and may seek strategic partner funding for such initiatives as
programs develop or if a strategic relationship can provide significant
advantages for product development, clinical or regulatory support or
marketing and distribution.
- RETAIN PROPRIETARY, AND OUTSOURCE NON-PROPRIETARY, MANUFACTURING
PROCESSES. The Company intends to manufacture its proprietary polymer
formulations in-house, and use third-party contract manufacturers for most
nonproprietary, high volume processes and the provision of system
components. The Company believes that this strategy will enable the
Company to protect its intellectual property, accelerate manufacturing
scale-up and reduce costs as production volume increases.
- EXPANSION OF OPERATIONS. The Company intends to expand its corporate
operations over the next several years to accommodate anticipated
commercialization of its FOCALSEAL surgical sealant products. The Company
intends to expand its manufacturing capacity, either at the Company's
current facility or at a new location and develop a direct sales force in
the United States. The Company has budgeted capital expenditures of
approximately $2.5 million for expansion of surgical sealant manufacturing
capacity. The Company will also incur expenditures in connection with
development of a United States sales force. Expansion of manufacturing and
sales and marketing
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<PAGE>
efforts will require the Company to recruit, hire and train additional
manufacturing, sales and marketing personnel.
PRODUCTS AND PRODUCT DEVELOPMENT PROGRAMS
The following table summarizes the status of the Company's products and
research and product development programs:
<TABLE>
<CAPTION>
MARKETING RIGHTS
PRODUCT ------------------------------------------
DEVELOPMENT PROGRAM INDICATION STATUS NORTH AMERICA INTERNATIONAL
-------------------- ------------------- ---------------------------------------- ------------------------ ---------------
<S> <C> <C> <C> <C>
Surgical Sealants
--------------------
FOCALSEAL-L Lung surgery Awaiting European marketing approval; Focal Ethicon
Pivotal U.S. clinical trial underway
FOCALSEAL-S Neurosurgery Preclinical (1); European clinical trial Focal Ethicon
expected to be initiated in mid-1998
FOCALSEAL-L or S Cardiovascular Preclinical(1) Focal Ethicon
surgery
FOCALSEAL-L or S Gastrointestinal Preclinical(1) Focal Ethicon
surgery
<CAPTION>
Local Drug
Delivery -----------
<S> <C> <C> <C> <C>
Restenosis Cardiovascular Preclinical(1) (2) Novartis/ Chiron Novartis/
prevention restenosis Chiron
Tissue Coatings
--------------------
Post-surgical Gynecological, Preclinical(1) Focal (3)
adhesion abdominal and neuro
prevention adhesions
</TABLE>
(1) "Preclinical" refers to formulation development and laboratory
experimentation in animal models, including animal efficacy, safety and
toxicology testing.
(2) The Company is currently involved in preclinical development of a drug
delivery system based on its polymer technology. In addition, the Company's
marketing partners are engaged in preclinical development of anti-restenosis
compounds which may be delivered using the Company's drug delivery system.
The Company's ability to develop a restenosis drug delivery product will be
dependent not only on the Company's development efforts but on the
development efforts of the Company's collaborative partners, the safety and
efficacy of any anti-restenosis compounds they develop and the ability of
the Company's marketing partners to conduct clinical trials of, obtain
regulatory approvals for and successfully commercialize any such products.
(3) The Company and Ethicon are negotiating a possible additional collaboration
for this field and there can be no assurance that the Company will
successfully enter into this collaboration.
FOCALSEAL SURGICAL SEALANT PRODUCTS
Focal is developing its FOCALSEAL-L and FOCALSEAL-S liquid surgical sealants
for use inside the body with or without sutures and staples to seal leaks
resulting from lung, neuro, cardiovascular and gastrointestinal surgery.
FOCALSEAL is expected to be used as an adjunct to sutures and staples in most
indications; however, the Company believes there are numerous occasions where
FOCALSEAL can be used in lieu of sutures and staples. In lung surgery,
FOCALSEAL-L can be used to seal air leaks in areas of the lung where sutures and
staples are ineffective. In neurosurgery, FOCALSEAL-S can potentially reduce the
number of sutures needed to close the dura in cranial procedures and can replace
sutures in spinal surgery where their use can be ill-
30
<PAGE>
advised due to the proximity of the spinal cord. The FOCALSEAL surgical sealant
system consists of a procedure kit containing primer and sealant solutions and
disposable applicators, a light source used for photopolymerization of the
polymer, and a reusable light wand. The Company's surgical sealant products will
be marketed outside North America by Ethicon, a world leader in surgical wound
closure products. The Company has retained North American marketing rights to
all of its FOCALSEAL surgical sealants.
FOCALSEAL-L FOR LUNG SURGERY. The Company is developing FOCALSEAL-L to seal
air leaks resulting from lung surgery. During lung surgery, air leaks can
develop in the lung tissue that has been traumatized during surgery and can
unpredictably occur along staple and suture lines. Approximately 260,000 lung
surgery procedures, primarily for the treatment of lung cancer, are performed
worldwide each year including 130,000 such procedures in the United States.
According to the Company's European clinical trial data, 79% of patients
undergoing lung surgery experience intraoperative air leaks that are not
resolved with sutures or staples. Approximately 15% of lung surgery patients
have air leaks that persist longer than seven days and approximately 5-10% of
patients have air leaks that are severe enough to warrant additional surgical
intervention.
As air leaks from the lung it accumulates in the thoracic cavity, making
breathing difficult as the lung cannot expand and contract normally. As a
result, patients require insertion of chest drainage tubes to vent accumulated
air. These chest tubes prolong pain and limit patient mobility. In addition to
undergoing prolonged hospitalization until the air leaks are resolved, patients
with persistent air leaks must receive more intense nursing observation and care
while in the hospital than patients who do not experience air leaks. This
additional hospitalization and more intensive care, as well as the additional
surgical procedures needed for patients whose air leaks are severely prolonged,
result in substantial additional health care costs. Because it is often not
possible to determine at the conclusion of surgery which air leaks are likely to
be prolonged or sustained, the Company believes that FOCALSEAL-L may be used
prophylactically in major lung surgery procedures.
The Company has completed a 60-patient, multicenter, controlled, randomized
clinical trial in Europe involving use of FOCALSEAL-L in sealing air leaks
following lung surgery. Of the 60 patients in the study, the initial four were
pilot patients and the remaining 56 were randomized into the treated or
nontreated group. In the study, prior to randomization, it was determined that
79% of the patients had air leaks following the use of standard sutures and
staples. FOCALSEAL-L was 100% effective in sealing intraoperative air leaks in
the 30 patients who were randomized into the treated group. By contrast, of the
patients in the untreated group who received sutures and staples alone, only 27%
were free of intraoperative air leaks.
The Company is awaiting CE mark approval for European commercialization and
anticipates receiving such approval in late-1997. In September 1997, the Company
completed a CE mark and ISO 9001 standards site audit, which is one of the
principal steps in the CE mark approval process. Subject to receipt of CE mark
approval, the Company expects to commercially introduce FOCALSEAL-L for lung
surgeries in Europe in the first half of 1998 through its strategic marketing
alliance with Ethicon. See "--Strategic Alliances--Ethicon--a division of
Johnson & Johnson."
The protocol for the European clinical trial called for application of
FOCALSEAL-L to all lung tissues that could potentially leak postoperatively.
This included the end of the bronchial segment, known as the bronchial stump,
leading to the diseased lung lobe that was removed during surgery. In lung
surgeries, the bronchial stump is carefully closed with sutures or staples.
During the trial, a higher than anticipated incidence of insufficient wound
healing at the bronchial stump was observed in patients in the treated group.
The bronchial stump typically heals through tissue overgrowth from surrounding
areas. Based upon its review and analysis of the clinical data, the Company
believes that in those cases in which FOCALSEAL-L was applied directly to the
bronchial stump it may have acted as a barrier to such tissue overgrowth,
thereby slowing natural healing of the bronchial stump. As a result of this
observed clinical event, the protocol for the United States clinical trial of
FOCALSEAL-L prohibits its use on the bronchial stump. The clinical data from the
Company's European trial indicates that this limitation will not result in
reduced
31
<PAGE>
efficacy of the product. Intraoperative air leaks rarely occur at the bronchial
stump, and were not observed there during the study. These clinical observations
were provided to the European regulatory body as part of the CE mark approval
process and to the FDA as part of the IDE submission for the Company's United
States clinical trial.
In September 1997, pursuant to a conditionally approved IDE, the Company
initiated a 180-patient, pivotal, multicenter clinical trial in the United
States involving the use of FOCALSEAL-L in sealing intraoperative and
postoperative air leaks following lung surgery. The IDE allows for enrollment of
patients at up to seven sites and the Company plans to initially conduct the
study at four clinical sites. The Company believes that enrollment in this
clinical trial will be completed in the first half of 1998 and that it will
submit a PMA to the FDA for FOCALSEAL-L by the end of 1998. Based on
communications to date, the FDA may require the Company to pursue clinical trial
endpoints that were not the subject of the European clinical trial which could
result in delays or adversely affect the success of the clinical trial. In the
event that the Company is required to pursue these endpoints, it may be more
difficult for the Company to demonstrate the efficacy of FOCALSEAL-L in the
United States trial than in the European trial, which could result in delays in
or adversely affect the success of the clinical trial. Approval of a PMA
application for FOCALSEAL-L will be required prior to commercial sales in the
United States.
FOCALSEAL-S FOR NEUROSURGERY. The Company is developing FOCALSEAL-S to seal
the dura, a membrane that encapsulates the brain and spinal cord and contains
cerebral spinal fluid ("CSF") for cushioning and support. In cranial surgeries,
the neurosurgeon must open the cranium and penetrate the dura. Following
surgery, the neurosurgeon must meticulously suture the dura in an attempt to
achieve leakproof closure, a process that requires the use of up to hundreds of
small sutures. Approximately 185,000 cranial surgeries are performed annually in
the United States, and the Company estimates that 370,000 of such procedures are
performed annually worldwide. Leakage of CSF has been reported to occur in
approximately 15% of these procedures. CSF leakage can result in infections,
including meningitis, caused by the passage of infectious agents through the
dural leak, as well as debilitating headaches resulting from settling of the
brain onto the spinal cord due to the loss of CSF. The Company believes that,
because CSF leaks can occur unpredictably in cranial surgeries, FOCALSEAL-S may
be used prophylactically in cranial surgery procedures.
In 1996, neurosurgeons at two major universities demonstrated the safety and
efficacy of FOCALSEAL-S in sealing CSF leaks in cranial surgeries in a
randomized, controlled large animal study. This work was presented at the 1997
meetings of the American Association of Neurological Surgeons and the Southern
Neurological Society. The Company expects to initiate a human clinical trial of
FOCALSEAL-S in cranial surgery applications in Europe in mid-1998.
In spinal surgeries, the surgeon seeks to avoid penetration of the dura.
According to published literature, inadvertent penetration of the dura occurs in
up to approximately 13% of the approximately 800,000 spinal surgeries that are
performed annually worldwide. Penetration of the dura can result in leakage of
CSF with potential complications similar to those that can arise in cranial
surgeries. When inadvertent penetration of the dura occurs in spinal surgeries,
the surgeon generally does not elect to use sutures to close the dural leak due
to the risk of injuring the spinal cord with the suturing needle.
CARDIOVASCULAR SURGICAL SEALANT. Focal is evaluating use of its FOCALSEAL
surgical sealants for use in sealing anastomoses (the attachment of vessels in
surgical procedures) and arteriotomies (the surgical removal of a portion of an
artery for use in a bypass graft) in cardiovascular surgeries, of which
approximately 1.3 million are performed annually worldwide. These procedures
include both open and minimally invasive coronary artery bypass graft ("CABG")
surgeries and other vascular surgical procedures. In most cardiovascular
surgical procedures, vascular anastomoses are closed with sutures. These
anastomoses use both blood vessel grafts from the patient's own veins or
arteries, which occasionally leak, and synthetic grafts, which regularly leak.
In minimally invasive CABG surgeries, achievement of a leakproof vascular
anastomosis can be particularly difficult and time consuming because the small
access ports through which the surgeon must operate can make placement of
sutures difficult. Failure to achieve a
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leakproof vascular graft anastomosis can result in sudden blood leaks that may
potentially be life-threatening. These complications can add significant costs
to cardiovascular procedures by increasing the level of care required and
prolonging hospitalization. The Company's sealants have been shown to be
effective in sealing high pressure vascular leaks in several preclinical large
animal models. The Company and Ethicon are currently preparing the preclinical
development plans for this indication.
GASTROINTESTINAL SURGICAL SEALANT. Focal is evaluating use of its FOCALSEAL
surgical sealants to prevent leakage of gastrointestinal contents following
gastrointestinal surgery. Leakage can occur as a result of incomplete
anastomosis of the portions of the digestive tract being operated upon and may
result in infections, delayed healing or fibrosis. Clinically significant
gastrointestinal tract leakage is most prevalent and unpredictable in esophageal
and large bowel surgeries. Approximately 1.5 million gastrointestinal surgeries
are performed annually worldwide, including approximately 400,000 esophageal and
large bowel surgeries. Postoperative leaks are reported to occur up to 5% of
large bowel surgeries and up to 25% of esophageal surgeries. The Company
believes that, due to the unpredictable nature of leaks in these procedures,
FOCALSEAL surgical sealant may be used prophylactically. The Company's sealants
have been shown to be effective in sealing gastrointestinal leaks in several
preclinical large animal models. The Company and Ethicon are currently preparing
the preclinical development plans for this indication.
LOCAL DRUG DELIVERY FOR CARDIOVASCULAR RESTENOSIS PREVENTION
Focal's polymers have properties that enable them to incorporate and deliver
drugs over a sustained period of time at local disease sites. Focal is currently
developing a drug delivery system that is designed to coat the interior wall of
the coronary artery (with or without a metallic stent) with a synthetic polymer
following angioplasty procedures to provide a depot for sustained local delivery
of drugs. These drugs can potentially reduce the proliferation of tissue that
leads to the renarrowing of the artery, a condition known as restenosis. The
Company has developed a proprietary delivery device, consisting of a double
balloon catheter with a fiber optic cable, for depositing and photopolymerizing
its polymer coating. Focal has entered into a collaboration with Novartis and
Chiron to develop a system for local delivery of their anti-restenosis
compounds.
The Company has demonstrated in large animal studies the ability to coat the
interior wall of the coronary artery with an adherent coating that remains in
place for up to 14 days. The Company has also shown in preclinical animal
studies the ability to locally deliver drugs from this polymer coating over a
period of up to 14 days. Focal's drug delivery product will require substantial
additional preclinical development work and animal studies before human clinical
trials can be commenced. Furthermore, the utility of Focal's drug delivery
product will be dependent upon the efficacy of the anti-restenosis compounds
that will be delivered to the angioplasty site using Focal's product.
Accordingly, this project will require substantial additional development
funding which will be provided primarily by the Company's strategic partners,
and has a very high degree of development risk. In addition, the Company's
agreement with Novartis and Chiron may be terminated by such parties upon 90
days notice with or without cause at any time, including any time prior to
development of a product or commencement of human clinical trials. In the event
of any such termination, the Company anticipates that it would terminate or
significantly scale back this research program.
TISSUE COATING FOR POST-SURGICAL ADHESION PREVENTION
The Company is exploring the development of its synthetic, liquid
formulation polymers as coatings that could be applied to surgical sites with
the objective of preventing the growth of post-surgical adhesions. Post-surgical
adhesions develop as a result of wound healing and scar formation triggered by
surgical trauma to tissue. These adhesions develop as part of the body's normal
healing process when surgical sites are in proximity to other tissues and are
typically most serious in gynecological and abdominal surgeries. There are
approximately 1 million gynecological and 1 million abdominal surgical
procedures performed annually worldwide in which post-surgical adhesion
formation may occur. Depending upon the
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type of surgical procedure, adhesions can become symptomatic and cause serious
complications, including infertility, abdominal pain and bowel obstruction, and
reduced mobility.
In connection with the Company's collaborative agreement with Ethicon for
surgical sealants, the Company and Ethicon are negotiating a possible additional
collaboration in this area. There can be no assurance that the Company will
successfully enter into this collaboration.
OTHER RESEARCH AND DEVELOPMENT INITIATIVES
The Company has identified several additional potential applications for its
proprietary synthetic, liquid formulation polymer technology. These include
tissue and membrane reinforcement, periodontal infection control, orthopedic
surgery, other drug delivery applications, vascular grafts and nonvascular
stenting. All of these projects are at an early research stage, and the Company
is not currently devoting a significant amount of resources to any of these
projects. Accordingly, there can be no assurance that the Company will continue
any of these research initiatives, that any of such research initiatives will
result in the identification of product formulations that demonstrate sufficient
promise in animal models to enable them to become candidates to enter human
clinical trials, or that any products for which the Company is able to seek and
obtain regulatory approvals and introduce commercially either in the United
States or internationally will result from these efforts.
RESEARCH AND DEVELOPMENT EXPENDITURES
During the years ended December 31, 1994, 1995 and 1996 and the nine months
ended September 30, 1997, the Company incurred expenses of $11.9, $9.7, $11.7
and $10.9 million, respectively, on research and development activities,
including amounts funded by the Company's strategic partners.
STRATEGIC ALLIANCES
Focal's commercial strategy is to develop its products both independently
and in collaboration with strategic corporate partners, including pharmaceutical
companies and medical device companies. The Company's strategic corporate
relationships are described below.
ETHICON (A DIVISION OF JOHNSON & JOHNSON)
In January 1997, the Company entered into an exclusive Distribution, License
and Supply Agreement with Ethicon, Inc., a division of Johnson & Johnson, for
the research, development and commercialization of the Company's surgical
sealant products (the "Ethicon Agreement"). Ethicon received marketing rights
for all surgical sealant indications in all territories outside North America,
while the Company retained manufacturing rights worldwide and marketing rights
for North America and receives a royalty on all Ethicon sales. The Ethicon
Agreement outlines the basis and timetable for the development, supply,
marketing, packaging and distribution of FOCALSEAL-L and FOCALSEAL-S for use
intraoperatively as surgical sealants for lung surgery and neurosurgery
indications and other indications. The Ethicon Agreement also establishes a
framework for additional funding for the development of cardiovascular,
gastrointestinal and other surgical sealant indications. Ethicon will continue
to receive marketing rights outside North America to new surgical sealants as
they are developed.
The Ethicon Agreement provided the Company a one-time, non-refundable
payment of $7.0 million for research and development. During 1997 and 1998,
Ethicon is also obligated to provide Focal with development funding and, if and
to the extent certain regulatory milestones are achieved, milestone payments.
The initial payment, research and development funding and milestone payments for
the FOCALSEAL-L and FOCALSEAL-S surgical sealants will aggregate $18.0 million
over the term of the agreement. Through September 30, 1997, the Company had
received $12.0 million from Ethicon under the Ethicon Agreement.
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Focal is responsible for obtaining the CE mark for its FOCALSEAL-L and
FOCALSEAL-S sealants for lung surgery and neurosurgery indications,
respectively. Ethicon is responsible for obtaining regulatory clearances and
approvals in Japan and countries outside of the European Union. Focal is
responsible for manufacturing products covered by the collaboration. Ethicon
will pay Focal a specified percentage of net sales of surgical sealant products
manufactured by Focal and shipped to Ethicon. In addition, in the event Focal is
unable to achieve specified supply targets or is in non-compliance with the
manufacturing standards established for the CE mark and by Ethicon, Ethicon has
the right to manufacture surgical sealants for sale in all territories outside
North America. Such manufacturing rights, if they are exercised by Ethicon, will
be royalty-bearing and non-exclusive.
The agreement is terminable upon specified events including material breach
by either party or bankruptcy or insolvency of either party. In addition,
Ethicon may terminate the agreement at any time after January 2000 upon 12
months' prior written notice with or without cause.
In addition, in connection with the Ethicon Agreement, the Company and
Ethicon are negotiating a possible additional collaboration in the post-surgical
adhesions prevention area. There can be no assurance that the Company will
successfully enter into this collaboration.
NOVARTIS PHARMACEUTICALS, INC. AND CHIRON CORPORATION
The Company entered into a strategic alliance with Novartis and Chiron in
April 1996 for the development of non-surgical, vascular restenosis prevention
therapy products. The agreement grants Novartis and Chiron a worldwide license
for the use of the Focal polymer-based drug delivery technology in the
restenosis field. Focal retains manufacturing rights for its drug delivery
products developed under the collaboration, provided it is able to meet the
product supply requirements of Novartis or Chiron. Supply of pharmaceuticals
will be the responsibility of Novartis and Chiron.
Under the terms of the agreement, Novartis and Chiron have agreed to fund
research and development expenses and make certain milestone payments upon
achievement of certain preclinical, clinical, regulatory and commercial
milestones. In addition, Novartis and Chiron have agreed to pay for all expenses
incurred for human clinical testing of the products in development under the
collaboration. Focal will contribute its local drug delivery technology,
including its liquid, synthetic, bioabsorbable polymers and its delivery
catheters. Novartis and Chiron will pay Focal a specified percentage of net
sales of products incorporating Focal's drug delivery technology. Novartis and
Chiron have worldwide exclusive marketing rights for the products under
development. Through September 30, 1997, Focal had received $5.1 million in
research and development funding from Novartis and Chiron.
Either Novartis or Chiron have the right to terminate its respective
participation in the research collaboration with the Company upon 90 days
notice, with or without cause, without affecting the rights of the other
parties. Termination of the agreement will relieve Novartis and Chiron of
obligations to make any additional payments for unaccrued research and
development expenses, milestone payments, clinical trial costs or royalties and
transfer payments for products manufactured by Focal. In the event of
termination of funding by Novartis and Chiron, the Company anticipates that it
would terminate or significantly scale back its restenosis drug delivery
research program.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are important
to its business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to its business and that provide a competitive advantage. Focal also
relies on trade secrets, general know-how, in-licensing opportunities and
continuing technological innovation.
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The Company has received, licensed or believes it has the option or right to
license 17 issued United States patents and six foreign patents corresponding to
certain of the issued United States patents, has 12 additional United States
patent applications that have been allowed and has 21 patent applications
pending in the United States, as well as foreign counterparts of certain of
these applications. The issued United States patents have expiration dates
ranging from 2010 to 2015. These patents and patent applications cover certain
aspects of the Company's photopolymerizable polymer formulations, surgical
sealant compositions and methods, and designs for delivery devices. These
patents and patent applications are either held directly by Focal, or the
Company has licensed or believes it has rights to license these patents. The
Company has licensed from the University of Texas and Endoluminal Therapeutics,
Inc. (a company controlled by one of the Company's founding scientists)
worldwide rights to certain technologies which are the subject of issued patents
and pending patent applications based upon technologies developed by two of the
Company's founders. These licenses are terminable in the event of failure by the
Company to pay scheduled royalties, failure to commercialize products in the
fields covered by these licenses and under certain other conditions. Because of
the substantial length of time and expense associated with bringing new products
through the development and regulatory approval processes in order to reach the
marketplace, the medical products industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. Accordingly, the Company intends to seek patent protection for its
proprietary technology, products and processes.
The Company's success will depend in part on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
There can be no assurance that the Company's pending or future patent
applications will issue, or that the claims of the Company's issued patents, or
any patents that may issue in the future will provide any competitive advantages
for the Company's products or that they will not be successfully challenged,
narrowed, invalidated or circumvented in the future. Moreover, litigation and
interference or opposition proceedings associated with enforcing or defending
patents or trade secrets is expensive and can divert the efforts of technical
and management personnel. The Company has filed patent applications in certain
foreign countries corresponding to certain patent applications that it filed in
the United States and may file additional patent applications inside and outside
the United States. The Company believes that obtaining foreign patents may be
more difficult than obtaining domestic patents because of differences in patent
laws and believes the protection afforded by foreign patents or any other
foreign intellectual property protection, if obtained, may be more limited than
that provided domestically. In addition, there can be no assurance that
competitors will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use, import and sell its
products. The Company is aware that certain medical device, pharmaceutical and
other companies, universities and research institutions have filed patent
applications or have issued patents relating to the compositions and methods for
wound closure and adhesion prevention. In addition, the medical device and
pharmaceutical industry has been characterized by extensive litigation regarding
patents and other intellectual property rights, and many companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that litigation will not be
brought against the Company by third parties in the future challenging the
Company's patent rights or claiming infringement by the Company of patents held
by the third parties. Because patent applications in the United States are
confidential until the patents issue, and publication of discoveries in the
scientific and patent literature tends to lag behind actual discoveries by
several months, the Company cannot be certain that Company inventors or
licensors were the first to conceive of inventions covered by pending patent
applications or that Company was the first to file patent applications for such
inventions.
The Company may be required or find it desirable to obtain licenses to
patents or proprietary rights of others. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on terms acceptable to the Company, or at all. If the Company
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design
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around such patents, or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed. Litigation may be necessary to
defend against or assert claims of patent infringement or invalidity, to enforce
or defend patents issued to the Company, to protect trade secrets or know-how
owned by the Company, or to determine the scope and validity of the proprietary
rights of others. In addition, interference proceedings declared by the United
States Patent and Trademark Office, or opposition proceedings in a foreign
patent office, may be necessary to determine the priority of inventions with
respect to patent applications of the Company or its licensors. Litigation,
interference or opposition proceedings could result in substantial costs to and
diversion of effort by the Company, and adverse determinations in any such
proceedings could have a material adverse effect on the business, financial
condition or results of operations of the Company.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
GOVERNMENT REGULATION
UNITED STATES
The Company's proposed products and its research and development activities
are subject to regulation by numerous governmental authorities, principally, the
FDA and corresponding state and foreign regulatory agencies. The Federal Food,
Drug, and Cosmetic Act (the "FDC Act"), as amended, the regulations promulgated
thereunder, and other federal and state statutes and regulations, govern, among
other things, the preclinical and clinical testing, manufacture, safety,
efficacy, labeling, storage, record keeping, advertising and promotion of
medical devices and drugs, including the products currently under development by
the Company. Product development and approval within this regulatory framework
take a number of years and involves the expenditure of substantial resources.
In the United States, medical devices are classified into three different
classes, class I, II and III, on the basis of controls deemed necessary to
reasonably ensure the safety and effectiveness of the device. Class I devices
are subject to general controls (E.G., labeling, premarket notification and
adherence to FDA's good manufacturing practices ("GMPs")) and class II devices
are subject to general and special controls (E.G.,performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness (E.G., life-sustaining, life-supporting
and implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices).
Before a new medical device can be marketed, marketing clearance must be
obtained through a premarket notification under Section 510(k) of the FDC Act or
a premarket approval ("PMA") application under Section 515 of the FDA Act. A
510(k) clearance will typically be granted by the FDA if it can be established
that the device is substantially equivalent to a "predicate device," which is a
legally marketed class I or II device or a preamendment class III device (I.E.
one that has been marketed since a date prior to May 28, 1976) for which the FDA
has not called for PMAs. The FDA has been requiring an increasingly rigorous
demonstration of substantial equivalence and this may include a requirement to
submit human clinical trial data. It generally takes four to twelve months from
the date of a 510(k) submission to obtain clearance, but it may take longer.
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The FDA may determine that a medical device is not substantially equivalent
to a predicate device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information, could
prevent or delay the market introduction of new products that fall into this
category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness, or that constitute a major change in the intended use of the
device, will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device, or if it is a
preamendment class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising literature, and any training materials. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. The FDA review of a PMA application generally takes one to three years
from the date the PMA is accepted for filing, but may take significantly longer.
The review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, may be convened to review and evaluate the application and provide a
recommendation to the FDA as to whether the device should be approved. The FDA
accords substantial weight to the recommendation but is not bound by it. Toward
the end of the PMA review process, the FDA generally will conduct an inspection
of the manufacturer's facilities to ensure compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. The Company has not yet undergone an FDA GMP
inspection and does not anticipate that it will undergo such an inspection until
after filing of its initial PMA application for FOCALSEAL surgical sealants.
If FDA evaluations of both the PMA application 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 PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required, either for a 510(k)
submission or a PMA application, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) must file an investigational device exemption ("IDE") application prior
to commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and laboratory testing. If the
IDE application is approved by the FDA and one or more
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appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs without the need for FDA approval.
Submission of an IDE does not give assurance that FDA will approve the IDE and,
if it is approved, there can be no assurance that FDA will determine that the
data derived from the studies support the safety and efficacy of the device or
warrant the continuation of clinical studies. Sponsors of clinical trials are
permitted to sell investigational devices distributed in the course of the study
provided such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.
The Company's FOCALSEAL surgical sealant products will be regulated as a
class III medical device and will require PMA approval prior to being marketed
in the United States. Although the Company has received an IDE from the FDA
permitting the Company to conduct clinical trials of FOCALSEAL-L for lung
surgery in the United States, and such clinical study has recently commenced,
there can be no assurance that data from such studies will demonstrate the
safety and effectiveness of the FOCALSEAL-L product or will adequately support a
PMA application for the product. See "Risk Factors--Early Stage of Clinical
Testing and Lack of Extensive Clinical Data." In addition, the Company will be
required to obtain additional IDEs for other applications of FOCALSEAL and for
other products that the Company develops that are regulated by the FDA as
medical devices. There is no assurance that data, typically the results of
animal and laboratory testing, that may be provided by the Company in support of
future IDE applications will be deemed adequate for the purpose of obtaining IDE
approval or that the Company will obtain approval to conduct clinical studies of
any such future product.
If clearance or approval is obtained, any device manufactured or distributed
by the Company will be subject to pervasive and continuing regulation by the
FDA. The Company will be subject to routine inspection by the FDA and will have
to comply with the host of regulatory requirements that usually apply to medical
devices marketed in the United States, including labeling regulations, GMP
requirements, the Medical Device Reporting ("MDR") regulation (which requires a
manufacturer to report to the FDA certain types of adverse events involving its
products), and the FDA's prohibitions against promoting products for unapproved
or "off-label" uses. The Company's failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The President recently signed into law the Food and Drug Administration
Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the Act affecting the
regulation of devices. Among other things, the changes will affect the IDE,
510(k) and PMA processes, and also will affect device standards and data
requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third party review, and the
dissemination of off label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products.
Other products that the Company is developing, including the products for
restenosis drug delivery, are likely to be regulated as drugs requiring FDA
approval of a new drug application ("NDA") prior to commercialization in the
United States. The new drug approval process is generally considered more
onerous, costly and lengthy than the PMA process, often requiring more extensive
preclinical and clinical testing, and many products for which NDAs have been
submitted by other companies have never been approved for marketing.
Before clinical studies of a new drug can begin, an investigational new drug
("IND") application must be submitted to the FDA. FDA regulations provide that
human clinical trials may begin 30 days following submission of an IND
application, unless the FDA advises otherwise or requests additional
information,
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clarification or additional time to review the application. An IND application
contains extensive preclinical data and information about the drug. There can be
no assurance that the Company will develop sufficient data and information to
submit an IND for its restenosis delivery products or that such data and
information if submitted, would be sufficient for the purposes of commencing
clinical studies of the products. Delays in the receipt of or failure to obtain
FDA authorization to begin or continue clinical trials could have a material
adverse effect on the Company's business, financial condition or results of
operations.
Clinical testing of a new drug involves the administration of the drug to
healthy human volunteers or to patients under the supervision of a qualified
principal investigator, usually a physician, pursuant to an FDA reviewed
clinical study protocol and under the auspices of an IRB at each institution at
which the study will be conducted. Human clinical trials carried out pursuant to
an IND, typically are conducted in three sequential phases, but the phases may
overlap. Phase I trials consist of testing the product in a small number of
patients or normal volunteers, primarily for safety, in one or more dosages, as
well as characterization of a drug's pharmacokinetic and/or pharmacodynamic
profile. In Phase II, in addition to safety, the efficacy of the product is
evaluated in a patient population. Phase III trials typically involve additional
testing for safety and clinical efficacy and an expanded population at
geographically dispersed sites. All clinical studies must be conducted in
conformance with FDA's bioresearch monitoring regulations and the FDA may order
the temporary or permanent discontinuance of a clinical trial at any time, for a
variety of reasons. There is no assurance that if the Company is permitted to
commence clinical trials that the data collected from one phase of clinical
trials will support continuing to the next phase clinical trials.
Data from clinical trials must be submitted to the FDA in an NDA to
demonstrate the safety and effectiveness of the drug. The NDA must also include
information pertaining to the preparation of the drug substance, analytical
methods, drug product formulation, details on the manufacture of finished
products and proposed product packaging and labeling. The application review
process generally takes one to three years and may take substantially longer if,
among other things, the FDA has questions or concerns about the safety and/or
efficacy of a product. During the review period, an expert advisory committee
may be convened to review the application and provide recommendations as to
whether the drug should be approved. The FDA accords substantial weight to the
panel's recommendation but is not bound by it. The submission of an NDA does not
assure FDA approval for marketing. The FDA ultimately may decide that the
application does not satisfy its regulatory criteria for approval. If an NDA is
approved, its approval may be conditioned on the results of post-approval
clinical tests to confirm safety and efficacy of the drug (so-called Phase IV
clinical trials). There can be no assurance that data from any clinical trials
will demonstrate the safety and effectiveness of the product being studied or
otherwise support NDA approval. Delays in the receipt of or failure to obtain
NDA approval could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the FDA may impose restrictions on the use of the drug that may
make it difficult and expensive to administer. Product approvals may be
withdrawn if compliance with regulatory requirements are not maintained or if
problems occur after the product reaches the market. After a product is approved
for a given indication in an NDA, subsequent new indications or dosage levels
for the same product are reviewed by FDA via the filing and upon approval of a
NDA supplement. The NDA supplement is more focused than the NDA and often deals
primarily with safety and effectiveness data related to the new indication or
dosage. Finally, FDA requires reporting of certain safety and other information
that becomes known to a manufacturer of an approved drug.
If the FDA believes that a company is not in compliance with law, it can
institute proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the Company, its
officers and its employees. Failure to comply with the regulatory requirements
could have material adverse effect on the Company's business, financial
condition and results of operations. In addition, regulations regarding the
manufacture and sale of the Company's products are subject
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to change. The Company cannot predict the effect, if any, that such changes
might have on its business, financial condition or results of operations.
Among the requirements for product approval is the requirement that the
prospective manufacturer conform to the FDA's GMP regulations for drugs. In
complying with the GMP regulations, manufacturers must continue to expend time,
money and effort in product, record keeping and quality control to assure that
the product meets applicable specifications and other requirements. The FDA
periodically inspects device and drug manufacturing facilities in the U.S. in
order to assure compliance with applicable GMP requirements. Failure of the
Company to comply with the GMP regulations or other FDA regulatory requirements
could have a material adverse effect on the Company's business, financial
condition, or results of operations.
INTERNATIONAL
In order for the Company and its strategic partners to market its products
in Europe and other foreign countries, the Company and/or its partners must
obtain required regulatory approvals and comply with extensive regulations
governing safety, quality and manufacturing processes. These regulations vary
significantly from country to country. The time required to obtain approval to
market the Company's products may be longer or shorter than that required in the
United States. In order to market FOCALSEAL surgical sealants and other products
being developed by the Company in the member countries of the European Union,
the Company will be required to obtain CE mark certification. CE mark
certification is an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives. In
September 1997, the Company completed a CE mark and ISO 9001 standards audit,
which is one of the principal steps in the CE mark approval process. The
remainder of the CE mark approval process consists primarily of review by the
approving body of additional documentation submitted by the Company in response
to observations made during the CE mark audit. Although the CE mark and ISO 9001
standards audit has been completed, there can be no assurance that the Company
will be successful in completing the remainder of the CE mark certification
process or obtaining CE mark certification in a timely manner, if at all.
SALES AND MARKETING
The Company intends to market and sell its surgical sealants internationally
through Ethicon and to develop its own direct sales and marketing force for
these products in North America. The Company intends to launch its FOCALSEAL-L
surgical sealant for lung surgery in Europe through Ethicon in the first half of
1998. Johnson & Johnson is one of the leading manufacturers of sutures and
staples worldwide and has a significant sales and marketing presence in Europe,
Latin America and the Pacific Rim. If and when the Company receives marketing
approval in the United States, the Company intends to build a direct sales force
for marketing its surgical sealant products in North America.
The Company's sales and marketing strategy for other products may include
using a combination of the Company's own direct sales force, strategic marketing
partners and distributors. The sales and marketing plans for these products will
be dependent on the Company's success in entering into strategic marketing
relationships, its ability to leverage its own internal sales force to market
additional products beyond the surgical sealant products and its ability to hire
and retain additional specialized sales personnel. There can be no assurance
that the Company will be able to secure any additional strategic marketing
partners or international distributors on terms that are acceptable to the
Company, or at all, or that the Company will be successful in building a direct
sales force in the United States.
MANUFACTURING
The Company has only limited experience in manufacturing its FOCALSEAL
surgical sealants. The Company has recently added manufacturing capacity at its
Lexington, Massachusetts facility in order to meet
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anticipated supply requirements for the planned European commercial introduction
of its FOCALSEAL-L surgical sealant and for the United States clinical trial.
The Company performs certain steps in the FOCALSEAL manufacturing process
internally and relies on outside contractors for others. Certain proprietary
processes, including polymer synthesis, are performed by Focal. The Company uses
outside contractors for nonproprietary, high volume processes including
sterilization and fill and finish. The Company also contracts with third parties
for the manufacture of syringes, applicators, light sources and light wands.
There can be no assurance that the Company will be able to attract, train
and retain the required personnel or will be able to increase its manufacturing
capability to manufacture commercial quantities of surgical sealants in a timely
manner, or at all. Manufacturers often encounter difficulties in scaling up
production of their products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company anticipates that it will need to increase significantly
its current manufacturing capacity to meet commercial needs over the next
several years and that it may need to establish off-site manufacturing capacity
to meet these anticipated needs. In addition, the Company expects that it will
need to identify and qualify additional sources for materials and outsourced
manufacturing processes. There can be no assurance that the Company's
manufacturing scale-up efforts will be successful or that reliable, high-volume
manufacturing can be established or maintained at commercially reasonable costs
on a timely basis, or at all. Furthermore, the Company may be required to
establish an off-site manufacturing facility and qualify such facility under
GMP, ISO 9001 and other applicable regulatory and quality standards. The Company
would experience supply interruptions in the event it is unable to establish or
maintain commercial levels of polymer synthesis, as the Company's polymer
formulations are proprietary and are not available from third parties. In
addition, there can be no assurance that the Company will not encounter
unanticipated problems and delays in connection with its contract manufacturers
and suppliers. Delays associated with or difficulties encountered in
establishing commercial manufacturing, the establishment of new manufacturing
facilities, or problems encountered with contract manufacturers and suppliers,
would result in disruptions of product supply to the Company's marketing
partners and for use in clinical trials. In such event, Ethicon could, under its
agreement with the Company, commence manufacturing of surgical sealants for
sales in all territories outside North America. Any of the foregoing would have
a material adverse affect on the Company's business, financial condition and
results of operations.
The Company purchases raw materials used in its products from various
suppliers. Certain materials and components are currently purchased by the
Company from single sources. These materials have generally been readily
available in the marketplace and have not been the subject of shortages. There
can, however, be no assurance that the Company or its suppliers or contract
manufacturers will not experience material shortages in the future. Any such
future shortages of materials or components could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. As such, the Company is
subject to inspections by the FDA for compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. Further, the Company and the third party
manufacturers of its products are required to comply with various FDA
requirements for design, safety, advertising and labeling. The Company has not
yet undergone an FDA GMP inspection and does not anticipate that it will undergo
such an inspection until after submission of its initial PMA application for
FOCALSEAL surgical sealants.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical sealant area,
the Company will compete with existing methodologies for sealing air and fluid
leaks resulting from surgery, including some traditional wound
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closure products such as sutures and staples, marketed by companies such as
Johnson & Johnson, United States Surgical Corporation, American Home Products
Corporation and others. Other products currently being marketed include fibrin
glue, sold in Europe and the Pacific Rim countries by Immuno AG, Cention and
Fujisawa and under development by Baxter Healthcare Corporation, Bristol-Myers
Squibb Company and Vitex. Other competitors in the surgical sealant market
include Closure Medical Corporation, B. Braun GmBH and Cryolife. Competitive
products may also be under development by other large medical device,
pharmaceutical and biopharmaceutical companies. The other areas in which Focal
is developing products, such as post-surgical adhesion prevention and restenosis
drug delivery, are intensely competitive markets and the Company will encounter
competition from major medical device, pharmaceutical and biopharmaceutical
companies in such markets. Many of the Company's current and potential
ccompetitors have substantially greater financial, technological, research and
development, regulatory and clinical, marketing and sales, and personnel
resources than the Company.
These competitors may also have greater experience in developing products,
conducting clinical trials, obtaining regulatory approvals, and manufacturing
and marketing such products. Certain of these competitors may obtain patent
protection, approval or clearance by the FDA or foreign countries or product
commercialization earlier than the Company, any of which could materially
adversely affect the Company. Furthermore, if the Company commences significant
commercial sales of its products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it currently
has limited experience. Finally, there can be no assurance that the Company's
marketing partners will not pursue parallel development of other technologies or
products, which may result in a marketing partner developing additional products
that would compete with the Company's products.
Other recently developed technologies or procedures are, or may in the
future be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. In such event, the Company's business,
financial condition and results of operations could be materially adversely
affected.
THIRD PARTY REIMBURSEMENT
Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company and its strategic marketing partners may be required
to seek international reimbursement approvals. If required, there can be no
assurance that any such approvals will be obtained in a timely manner, or at
all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no procedure-specific reimbursement codes for the
Company's products. The Company anticipates that hospital administrators and
physicians will justify the additional cost of surgical sealants by the
attendant cost savings and clinical benefits that the Company believes will be
derived from the use of its products.
There can be no assurance that reimbursement for the Company's products will
be available in the United States or in international markets under either
governmental or private reimbursement systems.
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Furthermore, the Company could be adversely affected by changes in reimbursement
policies of governmental or private health care payors. Failure by physicians,
hospitals and other users of the Company's products to obtain sufficient
reimbursement from health care payors for procedures in which the Company's
products are used or adverse changes in governmental and private third party
payors' policies toward reimbursement for such procedures would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's business may be also materially adversely affected by the
continuing efforts of government and third-party payors to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of certain medical products and prescription
pharmaceuticals is subject to government control. In the United States, an
increasing emphasis on managed care has put, and will continue to put, pressure
on pharmaceutical and medical product pricing. Such initiatives and proposals,
if adopted, could decrease the price that the Company receives for any products
it may develop and sell in the future, and thereby have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, to the extent that such proposals or initiatives have a material
adverse effect on other companies that are corporate partners or prospective
corporate partners for certain of the Company's products, the Company's ability
to commercialize its products may be materially adversely affected.
EMPLOYEES
As of September 30, 1997, the Company employed 91 persons of whom 69 were in
research and development, seven were in clinical, regulatory affairs and quality
assurance, and 15 were in management, finance and administration. None of the
Company's current employees is represented by a labor union or is the subject of
a collective bargaining agreement. The Company believes that relations with its
employees are good.
FACILITIES
Focal currently occupies approximately 54,000 square feet of manufacturing,
laboratory and administrative space in Lexington, Massachusetts under a lease
which expires in September 2004. Focal has an option to extend this lease for
several additional five year periods. The Company believes that this facility is
sufficient to meet the Company's requirements through at least mid-1998. The
Company is currently evaluating the possibility of obtaining additional facility
space in the Lexington, Massachusetts area and believes such space can be
obtained on commercially reasonable terms.
SCIENTIFIC ADVISORS
Focal has recruited several physician specialists and experienced
practitioners in various fields pertaining to its products to serve as
scientific advisors. The four founding scientists of Focal are scientific
advisors to the Company, including Jeffrey Hubbell, Ph.D., Professor, Swiss
Federal Institute of Technology, Zurich, Switzerland; Marvin Slepian, M.D.,
Cardiologist, University of Arizona Medical Center; Robert Langer, Ph.D.,
Professor, Massachusetts Institute of Technology; and Henry Brem, M.D.,
Professor, The Johns Hopkins University.
There is no fixed term of service for the scientific advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. In general, members do not serve on an exclusive basis with the
Company and are not obligated to assign inventions to the Company. Drs. Langer,
Brem, Hubbell and Slepian are scientific founders of the Company and certain
inventions of Drs. Hubbell and Slepian were assigned to the Company under the
Company's license agreements with the University of Texas and Endoluminal
Therapeutics, Inc., a company controlled by Dr. Slepian, respectively. Drs.
Langer and Brem also serve as members of the Company's board of directors.
Scientific advisors have from time to time received option grants to purchase
Common Stock of the Company. Scientific Advisors have also
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received cash compensation, with the amount of such compensation dependent on
the time commitment and level of involvement of each advisor. All scientific
advisors receive reimbursement for expenses incurred in traveling to and
attending meetings on behalf of the Company.
The following individuals are scientific advisors to Focal in their
respective areas of specialization identified below.
BIOMATERIALS/POLYMER SCIENCE
<TABLE>
<S> <C>
Jeffrey Hubbell, Ph.D. Swiss Federal Institute of Technology
John Eaton, Ph.D. Baylor University College of Medicine
Joachim Kohn, Ph.D. Rutgers University
Joseph Vacanti, M.D. Boston Children's Hospital
Allan Hoffman, Ph.D. University of Washington
</TABLE>
DRUG DELIVERY AND TISSUE ENGINEERING
<TABLE>
<S> <C>
Elazar Edelman, M.D., Ph.D. Harvard Medical School
Robert Langer, Ph.D. Massachusetts Institute of Technology
Jane Shaw, Ph.D. President of Stable Network; Former President
of Alza Corporation
Jeffrey Isner, M.D. St. Elizabeth's Hospital
</TABLE>
PROCEDURE DEVELOPMENT
<TABLE>
<S> <C>
Joseph LoCicero, M.D. Harvard Medical School
Peter Johnson, M.D. University of Pittsburgh Medical School
Ogan Gurel, M.D. Harvard Medical School
</TABLE>
LEGAL PROCEEDINGS
The Company is not currently a party to any material pending legal
proceedings including any litigation related to patents or intellectual
property.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth the names, ages and positions of the
executive officers, key employees and directors of the Company as of September
30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
David M. Clapper.......................... 46 President, Chief Executive Officer and Director
Arthur J. Coury, Ph.D..................... 56 Vice President, Materials Research
David J. Enscore, Ph.D.................... 46 Vice President, Development & Drug Delivery
Stephen J. Herman......................... 49 Vice President, Operations
Glenn M. Kazo............................. 36 Vice President, Corporate Development
Mary Lou Mooney........................... 41 Vice President, Clinical and Regulatory Affairs
& Quality
Ronald S. Rudowsky........................ 48 Vice President, Marketing and Procedure Development
W. Bradford Smith......................... 42 Vice President, Finance and Administration and
Chief Financial Officer
Henry Brem, M.D. (1)...................... 45 Director
Janet Effland (2)......................... 49 Director
Robert Langer, Ph.D....................... 48 Director
Mark J. Levin (1)......................... 45 Director
Michael J. Levinthal (1).................. 42 Director
Fred E. Silverstein, M.D. (2)............. 55 Director
Jesse I. Treu, Ph.D. (1)(2)............... 50 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
DAVID M. CLAPPER has been President, Chief Executive Officer and a Director
since joining Focal in July 1993. Before joining Focal, Mr. Clapper was employed
at Johnson & Johnson from 1977 until 1993. He served as Vice President and a
Board member at the Critikon, Inc. division of Johnson & Johnson from July 1992
to July 1993. From 1977 to June 1992, Mr. Clapper held a variety of positions,
including Vice President of Sales & Marketing and a Board Member of Ethicon
Endo-Surgery, and Vice President of Product Management and a Board Member at
Ethicon Inc.. Mr. Clapper holds a B.S. in Marketing from Bowling Green State
University.
ARTHUR J. COURY, PH.D. has been Vice President, Materials Research of the
Company since July 1993. From 1976 to June 1993, Dr. Coury held various
positions with Medtronic, Inc., serving most recently as Director, Polymer
Technology and Corporate Research Fellow. He has over 20 years of biomaterials
research and development experience and has been issued 30 patents. Dr. Coury
holds a Ph.D. in Organic Chemistry and an M.B.A. from the University of
Minnesota.
DAVID J. ENSCORE, PH.D. has been Vice President, Development and Drug
Delivery of the Company since September 1995. From 1979 until joining the
Company, Dr. Enscore held several positions with ALZA Corporation, a
biopharmaceutical company, most recently as Executive Director, Transdermal
Product Development. Dr. Enscore has been issued 15 patents. He holds a Ph.D. in
Chemical Engineering from North Carolina State University.
STEPHEN J. HERMAN has been Vice President, Operations of the Company since
August 1992. From March 1990 to May 1992, Mr. Herman served as President and
Chief Executive Officer of Cardiopulmonary Corporation, a medical equipment
development company. From 1982 to 1990, he held various positions with C. R.
Bard, Inc., a medical device company, most recently as President of its critical
care
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division. Mr. Herman previously held product development management positions
with Cobe Laboratories. Mr. Herman holds an M.B.A. from the University of
Colorado and a B.S. in Mechanical Engineering from the University of Missouri.
GLENN M. KAZO has been Vice President, Corporate Development of the Company
since November 1995. During 1995, prior to joining the Company, Mr. Kazo was
Managing Partner of Kazo Associates, a consulting business focusing on health
care strategy and development. From 1981 to 1994, he held various positions with
Enzon, Inc., a biopharmaceutical and drug delivery company, most recently as
Corporate Vice President, Strategic Planning and Public Affairs. Mr. Kazo holds
an M.S. in Biochemistry from Rutgers University.
MARY LOU MOONEY, Vice President, Clinical Affairs, Regulatory Affairs and
Quality, joined the Company in June 1993 as Director, Regulatory Affairs. In
January 1997, Ms. Mooney was promoted to her current position. From March 1991
to June 1993, she held various positions with C.R. Bard Inc., a medical device
company, most recently as Director, Regulatory Affairs and Quality Assurance for
its ventures division. Ms. Mooney has also held regulatory positions with
Cardiac Pacemakers, Inc., Biometric Research Institute, Inc. and Cordis
Corporation. Ms. Mooney holds an M.S. in Biomedical Science from Drexel
University.
RONALD S. RUDOWSKY, Vice President, Marketing and Procedure Development,
joined the Company in January 1994 as Director, Procedure Development. In
January 1997, Mr. Rudowsky was promoted to his current position. From June 1991
to December 1993, he was the Director of Marketing of Ethicon Endo-Surgery, a
medical device company and a division of Johnson & Johnson. Previously, he spent
14 yers in various sales and marketing positions at Ethicon, Inc. Mr. Rudowsky
holds a B.B.A. in Marketing from Marshall University.
W. BRADFORD SMITH, Vice President, Finance and Administration and Chief
Financial Officer, joined the Company as Director of Finance in May 1993. In
March 1994, Mr. Smith was appointed to his current position. From June 1990 to
May 1993, he served as Director of Finance for CytoTherapeutics, Inc., a
biotechnology company. Prior to that, he was Director of Finance at ImmuCell
Corporation, a biotechnology company, a Financial Analyst for a division of
Lockheed Corporation and a Senior Accountant with Coopers & Lybrand. Mr. Smith
holds an M.B.A. from the University of New Hampshire and a B.S. from Tufts
University.
HENRY BREM, M.D. is Director of the Brain Tumor Research Center and
Professor of Neurosurgery, Ophthalmology and Oncology at The Johns Hopkins
University. Dr. Brem has served as a member of the Company's Board of Directors
since June 1991. Dr. Brem is a Scientific Founder of the Company. Dr. Brem holds
an M.D. from Harvard University.
JANET EFFLAND joined the Company's Board of Directors in April 1996. Since
August 1988, Ms. Effland has been Vice President of Patricof & Co. Ventures,
Inc., a venture capital firm. She also serves on the Board of Directors of Cytyc
Corporation and Urologix, Inc., both of which are publicly traded. Ms. Effland
holds a J.D. from Arizona State University.
ROBERT LANGER, PH.D. joined the Company's Board of Directors in January
1996. Dr. Langer has been the Kenneth J. Germeshausen Professor of Chemical and
Biomedical Engineering at the Massachusetts Institute of Technology since 1992.
He is also a member of the National Academy of Sciences, National Academy of
Engineering and the Institute of Medicine. He also serves on the Board of
Directors of Alkermes, Inc., a publicly traded company. Dr. Langer holds a Sc.D.
from the Massachusetts Institute of Technology in Chemical Engineering.
MARK J. LEVIN, President and Chief Executive Officer and a Director of
Millennium Pharmaceuticals, Inc., has served as a Director since the Company's
inception in June 1991. Mr. Levin was the founding Chief Executive Officer of
Focal, Inc., as well as Cell Genesys, Inc., CytoTherapeutics, Inc., Tularik,
Inc. and Millennium Pharmaceuticals, Inc. Mr. Levin was previously a General
Partner with Mayfield Fund, a
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venture capital firm. Mr. Levin is a member of the Board of Directors of
CytoTherapeutics, Inc. Mr. Levin holds a B.S. and M.S. in Chemical Engineering
from Washington University.
MICHAEL J. LEVINTHAL joined the Company's Board of Directors in December
1992. Since 1984, Mr. Levinthal has been a General Partner of Mayfield Fund, a
venture capital firm. He also serves on the Board of Directors of Heartstream,
Inc. and InControl, Inc., both of which are publicly traded. Mr. Levinthal holds
an M.B.A. and an M.S. in Engineering from Stanford University.
FRED E. SILVERSTEIN, M.D. joined the Company's Board of Directors in July
1996. Since 1994, Dr. Silverstein has been a member of Frazier Management LLC, a
merchant banking group. From 1986 to 1994, he was a Professor of Medicine at the
University of Washington where he also held the positions of Director,
Gastrointestinal Endoscopy Service (1975-1991) and Director, Endoscopy Training
Program (1991-1994). Dr. Silverstein also serves on the Board of Directors of
Aradigm Corporation and Vision Sciences, Inc. Dr. Silverstein holds an M.D. from
Columbia University College of Physicians and Surgeons.
JESSE I. TREU, PH.D. was a member of the Company's Board of Directors from
March 1993 until April 1995 and from March 1996 to the present. Since 1986, he
has been a General Partner of Domain Associates, a venture capital management
firm. Dr. Treu also serves on the Board of Directors of GelTex Pharmaceuticals,
Inc., RiboGene, Inc. and Trimeris, Inc. He received his B.S. from Rensselaer
Polytechnic Institute, and holds an M.A. and Ph.D. in Physics from Princeton
University.
BOARD COMPOSITION
The Company currently has authorized eight directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, effective upon the
closing of this offering, the terms of office of the Board of Directors will be
divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 1998; Class II, whose term will expire at
the annual meeting of stockholders to be held in 1999; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2000. The Class
I directors are Mr. Clapper and Dr. Silverstein, the Class II directors are Dr.
Brem, Ms. Effland and Dr. Treu and the Class III directors are Mr. Levin, Dr.
Langer and Mr. Levinthal. At each annual meeting of stockholders after the
initial classification, the successors to directors whose term will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election. In addition, the Company's Bylaws
provide that the authorized number of directors may be changed only by
resolution of the Board of Directors. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the Board of Directors may have the effect
of delaying or preventing changes in control or management of the Company.
Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than nonemployee
directors, devotes substantially full time to the affairs of the Company. The
Company's nonemployee directors devote such time to the affairs of the Company
as is necessary to discharge their duties. There are no family relationships
among any of the directors, officers or key employees of the Company.
BOARD COMMITTEES AND COMPENSATION COMMITTEE INTERLOCKS
The Audit Committee of the Board of Directors (consisting of Ms. Effland,
Dr. Treu and Dr. Silverstein) reviews the internal accounting procedures of the
Company and consults with and reviews the services provided by the Company's
independent accountants. The Compensation Committee of the Board of Directors
(consisting of Mr. Levinthal, Dr. Treu, Dr. Brem and Mr. Levin) reviews and
recommends to the Board the compensation and benefits of all executive officers
of the Company and establishes and reviews general policies relating to
compensation and benefits of employees of the Company.
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Since January 1, 1994, venture capital firms affiliated with directors Treu
and Levinthal have purchased securities of the Company and director Brem
received a loan from the Company in connection with a stock option exercise
program. Dr. Brem also has a consulting agreement with the Company. See "Certain
Transactions."
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. The Company does not provide additional compensation for
committee participation or special assignments of the Board of Directors. From
time to time, certain directors of the Company have received grants of options
to purchase shares of the Company's Common Stock pursuant to the 1992 Incentive
Stock Plan. Beginning on the date of this offering, nonemployee directors of the
Company will be eligible to receive nondiscretionary, automatic grants of
options to purchase shares of the Company's Common Stock pursuant to the 1997
Director Option Plan. See "-- Incentive Stock Plans" and "Certain Transactions."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain
information for the year ended December 31, 1996 regarding the compensation of
the Company's Chief Executive Officer and certain other executive officers of
the Company whose salary and bonus for such fiscal year were in excess of
$100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
1996 ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
-------------------
OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) (#)(1) ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David M. Clapper............................................ 230,000 -- 299,293 --
President and Chief Executive Officer
Stephen J. Herman........................................... 184,800 -- 49,402
Vice President, Operations
David J. Enscore, Ph.D...................................... 152,075 -- 60,965 9,904(2)
Vice President, Development and Drug Delivery
Arthur J. Coury, Ph.D....................................... 171,045 66,636
Vice President, Materials Research
Glenn M. Kazo............................................... 160,000 -- 81,537 18,456(2)
Vice President, Corporate Development
</TABLE>
- ------------------------
(1) Options were granted under the Company's 1992 Incentive Stock Option Plan
and vest over four years as follows: (i) 1/4 of the total after one year and
1/48 of the total at the end of each month thereafter for new hires; and
(ii) 1/48 of the total at the end of each month for subsequent grants. In
each case, vesting is subject to the optionees continued relationship with
the Company.
(2) Consists of reimbursement for relocation expenses.
49
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth each
grant of stock options made during the fiscal year ended December 31, 1996 to
each of the Named Executive Officers:
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED EXERCISE FOR OPTION TERM(4)
OPTIONS DURING FISCAL PRICE EXPIRATION ------------------
NAME GRANTED (#)(1) 1996(%)(2) ($/SH)(3) DATE 5%($) 10%($)
- -------------------------------------------- -------------- ------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David M. Clapper............................ 166,986 13.1% $ 1.20 2/28/06 $126,020 $319,359
132,307 10.4 1.20 8/30/06 99,849 253,036
Stephen J. Herman........................... 5,095 * 1.20 1/05/06 3,845 9,744
28,923 2.3 1.20 3/19/06 21,827 55,315
15,384 1.2 1.20 8/30/06 11,610 29,422
David J. Enscore, Ph.D...................... 1,273 * 1.20 1/05/06 961 2,435
28,923 2.3 1.20 3/19/06 21,827 55,315
30,769 2.4 1.20 8/30/06 23,221 58,845
Arthur J. Coury, Ph.D....................... 5,097 * 1.20 1/05/06 3,847 9,748
23,077 1.8 1.20 8/30/06 17,416 44,135
38,462 3.0 1.20 3/19/06 29,026 73,558
Glenn M. Kazo............................... 27,692 2.2 1.20 1/05/06 20,898 52,961
23,076 1.8 1.20 3/19/06 17,415 44,133
30,769 2.4 1.20 8/30/06 23,221 58,846
</TABLE>
- ------------------------
* Less than one percent (1.0%).
(1) Options were granted under the Company's 1992 Incentive Stock Option Plan
and vest over four years as follows: (i) 1/4 of the total after one year and
1/48 of the total at the end of each month thereafter for new hires; and
(ii) 1/48 of the total at the end of each month for subsequent grants. In
each case, vesting is subject to the optionees continued relationship with
the Company.
(2) Based on an aggregate of 1,275,691 options granted by the Company in the
year ended December 31, 1996 to employees of and consultants to the Company,
including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board of
Directors.
(4) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the Company's Common Stock on the date of grant appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term
for the appreciated stock price. These numbers are calculated based on the
requirements promulgated by the Securities and Exchange Commission and do
not reflect the Company's estimate of future stock price growth.
50
<PAGE>
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES. There were no stock option exercises by any of the Named Executive
Officers during the year ended December 31, 1996. The following table sets forth
for each of the Named Executive Officers the number and value of securities
underlying unexercised options held at December 31, 1996:
AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1996 AND
OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 (#)(1) DECEMBER 31, 1996 ($)(2)
------------------------ ------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
David M. Clapper.......................................... 83,333 16,667 940,413 188,087
47,556 266,367 513,486 2,876,098
Stephen J. Herman......................................... 15,075 43,885 162,772 473,848
David J. Enscore, Ph.D.................................... 17,607 71,051 190,112 767,173
Arthur J. Coury, Ph.D..................................... 32,852 5,610 370,735 63,309
14,287 57,424 154,264 620,036
Glenn M. Kazo............................................. 14,870 66,668 160,559 719,848
</TABLE>
- ------------------------
(1) For each of the Named Executive Officers, the aggregate number of shares
underlying the options reflect options that were granted by the Company at
various times during the period from April 1993 to August 1996. Options were
granted under the Company's 1992 Incentive Stock Option Plan and generally
vest over four years as follows: (i) 1/4 of the total after one year and
1/48 of the total at the end of each month thereafter for new hires; and
(ii) 1/48 of the total at the end of each month for subsequent grants. In
each case, vesting is subject to the optionees continued relationship with
the Company. On January 20, 1997, each of the options was exercised as to
all of the shares underlying the options, vested and unvested. Once
exercised, the unvested shares became subject to the Company's right to
repurchase the shares at the original purchase price. The Company's
repurchase right lapses over time at such times and in such amounts as the
shares would have vested and become exercisable under the option
agreement(s) pursuant to which the options were granted.
(2) Based on a value of $12.00 per share, the assumed initial public offering
price, minus the per share exercise price, multiplied by the number of
shares underlying the option.
INCENTIVE STOCK PLANS
1992 INCENTIVE STOCK PLAN. The Company's 1992 Incentive Stock Plan (the
"1992 Plan") provides for the grant of incentive stock options to employees
(including employee directors) and nonstatutory stock options and stock purchase
rights to employees, employee and nonemployee directors and consultants. A total
of 2,600,000 shares of Common Stock have been reserved for issuance pursuant to
the 1992 Plan. As of September 30, 1997, 1,590,031 shares had been issued upon
the exercise of stock options granted under the 1992 Plan and 297,921 shares
were subject to outstanding options. The 1992 Plan is administered by the Board
of Directors and the Compensation Committee thereof. Options and stock purchase
rights granted under the 1992 Plan will vest as determined by the Board, and may
accelerate and become fully vested in the event of an acquisition of the Company
if so determined. The exercise price of options and stock purchase rights
granted under the 1992 Plan will be as determined by the Board, although the
exercise price of incentive stock options must be at least equal to the fair
market value of the Company's Common Stock on the date of grant. The Board of
Directors may amend or modify the 1992 Plan at any time. The 1992 Plan will
terminate in October 2002, unless terminated earlier by the Board of Directors.
51
<PAGE>
1997 DIRECTOR OPTION PLAN. The Company has adopted a 1997 Director Option
Plan (the "Director Plan"), and has reserved a total of 150,000 shares of Common
Stock for issuance thereunder. On the date of each year's annual stockholders'
meeting, commencing with the 1998 annual meeting of stockholders, each
nonemployee director will automatically be granted a nonstatutory option to
purchase 5,000 shares of Common Stock, providing that he or she shall have
served on the Board of Directors for at least the preceding six months. The
exercise price of each of these options will be equal to the fair market value
of the Common Stock on the date of grant. Each option granted under the Director
Plan will vest on a cumulative monthly basis over a four-year period. In the
event of a change in control of the Company, including a merger of the Company
with or into another corporation, or the sale of all or substantially all of the
assets of the Company, then all shares subject to options granted under the
Director Plan will become fully vested and exercisable unless such options are
assumed by the successor or acquiring company. In the event that a nonemployee
director is involuntarily terminated following such an option assumption, such
option becomes fully vested and exercisable. The Director Plan will terminate in
September 2007, unless terminated earlier in accordance with the provisions of
the Director Plan.
1997 EMPLOYEE STOCK PURCHASE PLAN. The Company has adopted a 1997 Employee
Stock Purchase Plan (the "Purchase Plan"), and has reserved a total of 200,000
shares of Common Stock for issuance thereunder. No shares have been issued under
the Purchase Plan to date. The Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), will
be administered by the Board of Directors of the Company or by a committee
appointed by the Board of Directors. Under the Purchase Plan, the Company will
withhold a specified percentage (not to exceed 15%) of each salary payment to
participating employees over certain offering periods. Any employee who is
currently employed for at least 20 hours per week and for at least five
consecutive months in a calendar year, either by the Company or by a
majority-owned subsidiary of the Company, will be eligible to participate in the
Purchase Plan. Unless the Board of Directors or its committee determines
otherwise, each offering period will run for 24 months and will be divided into
four consecutive purchase periods of approximately six months. The first
offering period and the first purchase period will commence on the date of this
Prospectus. New 24 month offering periods will commence every six months
thereafter. In the event of a change in control of the Company, including a
merger of the Company with or into another corporation, or the sale of all or
substantially all of the assets of the Company, the offering and purchase
periods then in progress will be shortened unless the rights to purchase stock
are assumed by the successor or acquiring company. The price at which Common
Stock will be purchased under the Purchase Plan is equal to 85% of the fair
market value of the Common Stock on the first day of the applicable offering
period or the last day of the applicable purchase period, whichever is lower.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company. The maximum number of shares that a participant may
purchase on the last day of any offering period is determined by dividing the
payroll deductions accumulated during the purchase period by the purchase price.
However, no person may purchase shares under the Purchase Plan to the extent
such person would own 5% or more of the total combined value or voting power of
all classes of the capital stock of the Company or of any of its subsidiaries,
or to the extent that such person's rights to purchase stock under all employee
stock purchase plans would accrue at a rate that exceeds $25,000 worth of stock
for any calendar year. The Board of Directors may amend the Purchase Plan at any
time. The Purchase Plan will terminate in September 2007, unless terminated
earlier in accordance with the provisions of the Purchase Plan.
SECTION 401(K) PLAN
The Company has adopted a Retirement Savings and Investment Plan (the
"401(k) Plan") covering the Company's employees who are located in the United
States and have been employed by the Company for three months or more. Pursuant
to the 401(k) Plan, employees may elect to reduce their current compensation by
up to the statutorily prescribed annual limit ($9,500 in 1997) and to have the
amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan
permits, but does not require, additional
52
<PAGE>
matching contributions by the Company on behalf of all participants in the
401(k) Plan. The Company is not currrently making any contributions to the
401(k) Plan. The 401(k) Plan is intended to qualify under Section 401(k) of the
Code, so that contributions to the 401(k) Plan by employees or by the Company,
and the investment earnings thereon, are not taxable to employees until
withdrawn from the 401(k) Plan, and that contributions by the Company, if any,
will be deductible by the Company when made.
EMPLOYMENT AGREEMENTS
There are no employment agreements between the Company and any of its
executive officers, except that Mr. Clapper is entitled to severance
compensation of 12 months salary and continuation of healthcare benefits in the
event of termination of employment by the Company without cause and Messrs.
Herman, Kazo and Enscore are entitled to receive severance pay of six months
salary in the event of termination by the Company without cause. In addition,
officers of the Company have received loans in connection with stock option
exercises and relocations. See "Certain Transactions."
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i) any
breach of their duty of loyalty to the corporation or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross negligence
on the part of indemnified parties. The Company's Bylaws also permit it to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the Company's
Bylaws. These agreements, among other things, indemnify the Company's directors
and executive officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company
arising out of such person's services as a director or executive officer of the
Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
53
<PAGE>
CERTAIN TRANSACTIONS
In August 1994, the Company issued shares of Series D Preferred Stock in a
financing transaction to certain entities affiliated with directors of the
Company and certain 5% stockholders of the Company at an as-converted purchase
price of $9.71 per share. The number of shares of Common Stock issuable upon
conversion of such shares of Series D Preferred Stock issued to each such entity
is set forth below.
<TABLE>
<CAPTION>
NO. OF
NAME OF INVESTOR SHARES
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Entities Affiliated with Frazier & Company L.P. (Fred E. Silverstein, M.D.)......................... 22,662
Entities Affiliated with Mayfield Fund (Michael J. Levinthal)....................................... 80,347
Domain Partners II, L.P. (Jesse I. Treu, Ph.D.)..................................................... 30,903
Biotechnology Investments Limited (Jesse I. Treu, Ph.D.)............................................ 18,542
5% STOCKHOLDERS
General Electric Pension Trust...................................................................... 206,021
</TABLE>
In connection with the August 1994 financing, the Company issued warrants
exercisable for 87,043 shares of Common Stock at an as converted purchase price
of $13.83 to Frazier & Company L.P. These warrants were issued in consideration
of placement agency services provided by Frazier Investment Securities. Fred
Silverstein, M.D., a director of the Company, is a member of Frazier Management,
L.L.C., an affiliate of Frazier Investment Securities.
In April 1996, the Company issued shares of Series E Preferred Stock in a
financing transaction to certain entities affiliated with directors of the
Company and certain 5% stockholders of the Company at an as-converted purchase
price of $5.66 per share. The number of shares of Common Stock issuable upon
conversion of such shares of Series D Preferred Stock issued to each such entity
is set forth below.
<TABLE>
<CAPTION>
NO. OF
NAME OF INVESTOR SHARES
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Entities Affiliated with Patricof & Co. Ventures (Janet Effland).................................... 1,591,509
Entities Affiliated with Frazier & Company L.P. (Fred E. Silverstein, M.D.)......................... 66,870
Entities Affiliated with Mayfield Fund (Michael J. Levinthal)....................................... 238,571
Domain Partners II, L.P. (Jesse I. Treu, Ph.D.)..................................................... 96,522
Biotechnology Investments Limited (Jesse I. Treu, Ph.D.)............................................ 57,986
5% STOCKHOLDERS
General Electric Pension Trust...................................................................... 128,444
</TABLE>
In January 1997, the Company implemented a program under which directors,
executive officers and certain other key employees were permitted to exercise
their outstanding options as to both vested and unvested shares, with unvested
shares being subject to a right of repurchase at cost in favor of the Company in
the event of termination of employment prior to vesting of all then-unvested
shares. Under this program, the participants paid the exercise price for their
outstanding options pursuant to full recourse promissory notes. The notes bear
interest at 6.0% per annum and are due and payable on December 31, 2000. The
notes received by the Company in connection with this program represent the
notes receivable
54
<PAGE>
from related parties set forth in the capitalization table. See
"Capitalization." The principal amounts of each note payable by a director or
executive officer are set forth below:
<TABLE>
<CAPTION>
DIRECTOR OR EXECUTIVE OFFICER NOTE AMOUNT
<S> <C>
David M. Clapper...................................... $ 448,993
Arthur J. Coury, Ph.D................................. $ 113,733
David J. Enscore, Ph.D................................ $ 106,612
Stephen J. Herman..................................... $ 70,897
Glenn M. Kazo......................................... $ 98,050
Mary Lou Mooney....................................... $ 54,218
Ronald S. Rudowsky.................................... $ 92,223
W. Bradford Smith..................................... $ 102,341
Henry Brem, M.D....................................... $ 51,800
Robert Langer, Ph.D................................... $ 88,800
Mark J. Levin......................................... $ 33,000
</TABLE>
The Company has from time to time made loans to executive officers and key
employees in connection with their employment with the Company to assist them
with respect to relocation expenses. From August 1993 through February 1997, the
Company lent Dr. Coury an aggregate of $120,000. These loans bear interest at
interest rates ranging from 5.0% to 7.0% per annum and are due and payable in
full on December 31, 1999. However, the outstanding principal of these loans and
accrued, unpaid interest thereon will be forgiven on December 31, 1999 if the
value of Dr. Coury's stock and stock options has not attained a certain
threshold on such date. In March, 1995, the Company lent Mr. Rudowsky $20,000.
This loan bears interest at 6.0% per annum and is due and payable in full on
July 1, 1998. However, the outstanding principal of this loan and accrued,
unpaid interest thereon will be forgiven on July 1, 1998 if the value of Mr.
Rudowsky's stock and stock options has not attained a certain threshold by such
date.
The Company has a consulting agreement with Dr. Brem under which it pays Dr.
Brem $30,000 per annum for scientific advisory and consulting services provided
by Dr. Brem. Dr. Brem is a founder and director of the Company and has, from
time to time, been granted options to purchase Common Stock of the Company. See
"Principal Stockholders."
The Company has a consulting agreement with Dr. Langer under which it pays
Dr. Langer $60,000 per annum for scientific advisory and consulting services
provided by Dr. Langer. Dr. Langer is a founder and director of the Company and
has, from time to time, been granted options to purchase Common Stock of the
Company. See "Principal Stockholders."
All future transactions, including any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company regarding
the beneficial ownership of its Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of Common Stock offered by the Company hereby and
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock, for (i) each person known by the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) each of the Company's directors, (iii) each
of the Named Executive Officers and (iv) all directors and executive officers as
a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
(1)
SHARES --------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Entities affiliated with Patricof & Co. Ventures(3)............................ 1,591,509 15.4% 12.4%
(Janet Effland)
2100 Geng Road, Suite 150
Palo Alto, CA 94303
Entities affiliated with Mayfield Fund(2)...................................... 1,530,325 14.8 11.9
(Michael J. Levinthal)
2800 Sand Hill Rd, Suite 250
Menlo Park, CA 94025
Domain Partners II, L.P........................................................ 585,851 5.7 4.6
(Jesse I. Treu, Ph.D.)
c/o Domain Associates
One Palmer Square, Suite 515
Princeton, NJ 05815
General Electric Pension Trust................................................. 849,519 8.2 6.6
3000 Summer Street
Stanford, CT 06904
Entities affiliated with Frazier & Company(4).................................. 523,856 5.1 4.1
(Fred E. Silverstein, M.D.)
601 Union Street, Suite 2110
Seattle, WA 98101
David M. Clapper(5)............................................................ 413,923 4.0 3.2
David Enscore, Ph.D.(5)........................................................ 88,658 * *
Stephen J. Herman(5)........................................................... 120,496 1.2 *
Glenn M. Kazo(5)............................................................... 81,538 * *
Arthur J. Coury, Ph.D.(5)...................................................... 110,173 1.1 *
Henry Brem, M.D.(5)............................................................ 129,230 1.2 1.0
Janet Effland(6)............................................................... 1,591,509 15.4 12.4
Robert Langer, Ph.D.(5)........................................................ 222,523 2.1 1.7
Mark J. Levin(5)............................................................... 46,153 * *
Michael Levinthal(7)........................................................... 1,530,325 14.8 11.9
Fred E. Silverstein, M.D.(8)................................................... 523,856 5.1 4.1
Jesse I. Treu, Ph.D.(9)........................................................ 943,096 9.1 7.3
All directors and executive officers as a group (15 persons)(10)............... 6,018,334 58.1 46.8
</TABLE>
- ------------------------
* Represents beneficial ownership of less than one percent of the Common
Stock.
56
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
The number of shares of Common Stock outstanding used in calculating the
percentage for each listed person includes the shares of Common Stock
underlying options or warrants held by such person that are exercisable
within 60 days of the date of this Prospectus, but excludes shares of Common
Stock underlying options or warrants held by any other person. Percentage of
beneficial ownership is based on 10,365,337 shares of Common Stock
outstanding as of September 30, 1997 (after giving effect to the conversion
of Preferred Stock into Common Stock and the exercise of certain warrants
upon the completion of this offering) and 12,865,337 shares of Common Stock
outstanding after completion of this offering.
(2) Consists of 904,711 shares beneficially owned by Mayfield VI, 382,567 shares
beneficially owned by Mayfield VII, 130,435 shares beneficially owned by
Mayfield Medical Partners, 48,675 shares beneficially owned by Mayfield
Medical Partners (1992), 43,129 shares beneficially owned by Mayfield
Associates and 20,808 shares beneficially owned by Mayfield Associates Fund
II, (the "Mayfield Funds").
(3) Consists of 1,072,833 shares beneficially owned by APA Excelsior IV, L.P.,
309,460 shares beneficially owned by The P/A Fund, 189,323 shares
beneficially owned by APA Excelsior IV/Offshore, L.P. and 19,893 shares
beneficially owned by Patricof Private Investment Club, L.P. (the "Patricof
Funds").
(4) Consists of 398,563 shares beneficially owned by Frazier Healthcare
Investments, L.P., 38,079 shares beneficially owned by Frazier Portfolio
Fund L.P., 171 shares owned by Frazier Management, L.L.C. (the "Frazier
Funds") and an aggregate of 87,043 shares issuable upon the exercise of
warrants held by Frazier & Company L.P.
(5) Includes shares issued pursuant to an early stock option exercise program.
The unvested portion of such shares are subject to a repurchase option in
favor of the company at cost in the event of the termination of such
individual's employment or consultant relationship with the company prior to
vesting. See "Certain Transactions."
(6) Consists of shares beneficially owned by the Patricof Funds. Ms. Effland
disclaims beneficial ownership of the shares beneficially owned by the
Patricof Funds except to the extent of her proportional partnership interest
therein.
(7) Consists of shares beneficially owned by the Mayfield Funds. Mr. Levinthal
disclaims beneficial ownership of the shares beneficially owned by the
Mayfield Funds except to the extent of his proportional partnership interest
therein.
(8) Consists of shares beneficially owned by the Frazier Funds and an aggregate
of 87,043 shares issuable upon the exercise of warrants held by Frazier &
Company L.P. Dr. Silverstein disclaims beneficial ownership of the shares
beneficially owned by the Frazier Funds except to the extent of his
proportional partnership interest therein.
(9) Consists of 585,851 shares beneficially owned by Domain Partners II, L.P.
Dr. Treu is a general partner of One Palmer Square Associates II, L.P., the
general partner of Domain Partners II, L.P. and has indirect beneficial
ownership of these shares. Also includes 357,245 shares owned by
Biotechnology Investments Limited ("BIL"). Pursuant to a contractual
agreement, Domain Associates, of which Dr. Treu is a general partner, is the
U.S. venture capital advisor to BIL. Domain Associates has no voting or
investment power over BIL's shares and Dr. Treu disclaims beneficial
ownership of BIL's shares.
(10) See footnotes 2 through 9.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Restated Certificate of Incorporation, which will become
effective upon the closing of this offering, authorizes the issuance of up to
50,000,000 shares of Common Stock, $0.01 par value per share and authorizes the
issuance of 5,000,000 shares of Preferred Stock, $0.01 par value per share, the
rights and preferences of which may be established from time to time by the
Company's Board of Directors. As of September 30, 1997, 2,228,038 shares of
Common Stock (excluding 19,496 shares of Common Stock issuable upon exercise of
a warrant upon the closing of this offering) were issued and outstanding and
held by 74 stockholders, shares of Preferred Stock convertible into 8,117,803
shares of Common Stock upon the completion of this offering were issued and
outstanding and held by 45 stockholders and warrants to purchase 179,586 shares
of Common Stock were issued and outstanding and held by six holders.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividends Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock would be
entitled to share in the Company's assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted the
holders of any outstanding shares of Preferred Stock. Holders of Common Stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
by the Company in this offering, when issued and paid for, will be, fully paid
and nonassessable. The rights, preferences and privileges of the holders of
Common Stock are subject to, and may be adversely affected by the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate in the future.
PREFERRED STOCK
Upon the closing of this offering, the Board of Directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of 5,000,000 shares of
Preferred Stock, $0.01 par value per share, in one or more series, each of such
series to have such rights and preferences, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as
shall be determined by the Board of Directors. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
holders of any Preferred Stock that may be issued in the future. Issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any shares of
Preferred Stock.
WARRANTS
Upon the completion of this offering, the Company will have outstanding
warrants to purchase 179,586 shares of Common Stock at a weighted average
exercise price of $10.40 per share. These warrants have net exercise provisions
under which the holder may, in lieu of payment of the exercise price in cash,
surrender the warrant and receive a net amount of shares, based on the fair
market value of the Company's Common Stock at the time of exercise of the
warrant, after deducting the aggregate exercise price. These warrants expire on
dates ranging from September 1998 to February 2006.
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CERTAIN CHARTER AND BYLAWS PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUE
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock without
any vote or further action by the stockholders, eliminate the right of
stockholders to act by written consent without a meeting and eliminate
cumulative voting in the election of directors. These provisions may make it
more difficult for stockholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of the Company. In
addition, the Company is subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder; the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and also officers
and by employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; of (iii) on or subsequent to such date,
the business combination is approved by the Board of Directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.
The Company's Certificate of Incorporation provides that, upon the closing
of this offering, the Board of Directors will be divided into three classes of
directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of the
Company and may maintain the incumbency of the board of Directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors. The Company's Certificate of
Incorporation eliminates the right of stockholders to act by written consent
without a meeting and the Company's Bylaws eliminate the right of stockholders
to call special meetings of stockholders. The Certificate of Incorporation and
Bylaws do not provide for cumulative voting in the election of directors. The
authorization of undesignated Preferred Stock makes it possible for the board of
directors to issue Preferred Stock with voting or other rights or preferences
that could impede the success of any attempt to change control of the Company.
These and other provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of the Company. The amendment of any
of these provisions would require approval by holders of at least 66 2/3% of the
outstanding Common Stock.
SHAREHOLDER RIGHTS PLAN
Pursuant to a Preferred Shares Rights Agreement (the "Rights Agreement"),
between the Company and Norwest Bank Minnesota, N.A., as Rights Agent (the
"Rights Agent"), the Company's Board of Directors declared a dividend of one
right (a "Right") to purchase one one-thousandth share of the Company's Series A
Participating Preferred Stock ("Series A Preferred") for each outstanding share
of Common Stock ("Common Shares") of the Company. The dividend is payable on the
effective date of this Offering (the "Record Date") to stockholders of record as
of the close of business on that date. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share of Series A Preferred
at an exercise price of $150.00 (the "Purchase Price"), subject to adjustment.
The following summary of the principal terms of the Rights Agreement is a
general description only and is subject to the detailed terms and conditions of
the Rights Agreement.
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The Rights will not be exercisable until the Distribution Date (defined
below). Until the Distribution Date, certificates for the Rights ("Rights
Certificates") will not be sent to stockholders; instead, the Rights will attach
to and trade only together with the Common Shares. Accordingly, Common Share
certificates outstanding on the Record Date will evidence the Rights related
thereto, and Common Share certificates issued after the Record Date will contain
a notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or the earlier redemption or expiration of the Rights), the
surrender or transfer of any certificates for Common Shares outstanding as of
the Record Date, even without the notation or a copy of the Summary of Rights
being attached thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. The Rights
will separate from the Common Shares, Rights Certificates will be issued and the
Rights will become exercisable upon the earlier of: (i) 10 days (or such later
date as may be determined by a majority of the Board of Directors, excluding
directors affiliated with the Acquiring Person, as defined below (the
"Continuing Directors")) following a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding Common Shares; or (ii) 10 business days (or such later date as may
be determined by a majority of the Continuing Directors) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Shares.
The earlier of such dates is referred to as the "Distribution Date." As soon as
practicable following the Distribution Date, separate Rights Certificates will
be mailed to holders of record of the Common Shares as of the close of business
on the Distribution Date and such separate Rights Certificates alone will
evidence the Rights from and after the Distribution Date. All Common Shares
issued prior to the Distribution Date will be issued with Rights. Common Shares
issued after the Distribution Date may be issued with Rights if such shares are
issued (i) upon the conversion of outstanding convertible debentures or any
other convertible securities issued after adoption of the Rights Agreement or
(ii) pursuant to the exercise of stock options or under employee benefit plans
or arrangements unless such issuance would result in (or create a risk that)
such options, plans or arrangements would not qualify for otherwise available
special tax treatment. Except as otherwise determined by the Board of Directors,
no other Common Shares issued after the Distribution Date will be issued with
Rights. The Rights will expire on the earliest of (i) January 28, 2007 (the
"Final Expiration Date"), (ii) redemption or exchange of the Rights as described
below, or (iii) consummation of an acquisition of the Company satisfying certain
conditions by a person who acquired shares pursuant to a Permitted Offer as
described below.
Following the Distribution Date, and until one of the further events
described below, holders of the Rights will be entitled to receive, upon
exercise and the payment of $150.00 per Right, one one-thousandth of a share of
the Series A Preferred. In the event that the Company does not have sufficient
Series A
Preferred available for all Rights to be exercised, or the Board decides that
such action is necessary and not contrary to the interests of Rights holders,
the Company may instead substitute cash, assets or other securities for the
Series A Preferred for which the Rights would have been exercisable under this
provision or as described below. Unless the Rights are earlier redeemed, in the
event that an Acquiring Person becomes the beneficial owner of 15% or more of
the Company's Common Shares then outstanding (other than pursuant to a Permitted
Offer), then each holder of a Right which has not theretofore been exercised
(other than Rights beneficially owned by the Acquiring Person, which will
thereafter be void) will thereafter have the right to receive, upon exercise,
Common Shares having a value equal to two times the Purchase Price. Rights are
not exercisable following the occurrence of an event as described above until
such time as the Rights are no longer redeemable by the Company as set forth
below. Unless the Rights are earlier redeemed, in the event that, after the
Shares Acquisition Date (as defined below), (i) the Company is acquired in a
merger or other business combination transaction, or (ii) the Company
consummates a merger or other business combination transaction in which the
Company is the continuing or surviving corporation, or (iii) 50% or more of the
Company's assets or earning power are sold, each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by the
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<PAGE>
Acquiring Person, which will thereafter be void) will thereafter have the right
to receive, upon exercise, shares of common stock of (i) the corporation
acquiring the Company or (ii) the Company or (iii) the purchaser of 50% or more
of the Company's assets or earning power, respectively, such shares in each case
having a value equal to two times the Purchase Price (unless the transaction
satisfies certain conditions and is consummated with a person who acquired
shares pursuant to a Permitted Offer, in which case the Rights will expire). A
Permitted Offer means a tender offer for all outstanding Common Shares that has
been determined by a majority of the Continuing Directors to be fair and
otherwise in the best interests of the Company and its stockholders. Where the
Board of Directors has determined that a tender offer constitutes a Permitted
Offer, the Rights will not become exercisable to purchase Common Shares or
shares of the acquiring company (as the case may be) at the discounted price
described above.
At any time after the acquisition by an Acquiring Person of 15% or more of
the Company's outstanding Common Shares and prior to the acquisition by such
Acquiring Person of 50% or more of the Company's outstanding Common Shares, the
Board of Directors of the Company may exchange the Rights (other than Rights
owned by the Acquiring Person), in whole or in part, at an exchange ratio of one
Common Share per Right. At any time on or prior to the close of business on the
earlier of (i) the 10th day following the acquisition by an Acquiring Person of
15% or more of the Company's outstanding Common Shares (the "Shares Acquisition
Date") or such later date as may be determined by a majority of the Continuing
Directors and publicly announced by the Company, or (ii) the Final Expiration
Date of the Rights, the Company may redeem the Rights in whole, but not in part,
at a price of $.001 per Right.
The Purchase Price payable, the number of Rights, and the number of Series A
Preferred or Common Shares or other securities or property issuable upon
exercise of the Rights are subject to adjustment from time to time in connection
with the dilutive issuances by the Company as set forth in the Rights Agreement.
With certain exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments require an adjustment of at least 1% in such
Purchase Price.
No fractional portion less than integral multiples of one Common Share will
be issued upon exercise of a Right and in lieu thereof, an adjustment in cash
will be made based on the market price of the Common Shares on the last trading
date prior to the date of exercise.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company (other than any rights resulting from such
holder's ownership of Common Shares), including, without limitation, the right
to vote or to receive dividends.
The provisions of the Rights Agreement may be supplemented or amended by the
Board of Directors in any manner prior to the close of business on the date of
the acquisition by an Acquiring Person of 15% or more of the Company's
outstanding Common Shares without the approval of Rights holders. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board in order to cure any ambiguity, defect or inconsistency, to make changes
which do not adversely affect the interests of holders of Rights (excluding the
interests of any Acquiring Person), or to shorten or lengthen any time period
under the Rights Agreement; provided, however, that no amendment to adjust the
time period governing redemption shall be made at such time as the Rights are
not redeemable.
Series A Preferred purchasable upon exercise of the Rights will not be
redeemable. Each share of Series A Preferred will be entitled to an aggregate
dividend of 1,000 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Series A Preferred will be entitled to a minimum
preferential liquidation payment equal to $150,000 per share. Each share of
Series A Preferred will have 1,000 votes, voting together with the Common
Shares. In the event of any merger, consolidation or other transaction in which
the Common Shares are changed or exchanged, each share of Series A Preferred
will be entitled to receive 1,000 times the amount received per Common Share.
These rights are protected by customary anti-dilution provisions.
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<PAGE>
Because of the nature of the dividend, liquidation and voting rights of the
shares of Series A Preferred, the value of the one one-thousandth interest in a
share of Series A Preferred purchasable upon exercise of each Right should
approximate the value of one Common Share.
The Rights approved by the Board are designed to protect and maximize the
value of the outstanding equity interests in the Company in the event of an
unsolicited attempt by an acquiror to take over the Company in a manner or on
terms not approved by the Board of Directors. Takeover attempts frequently
include coercive tactics to deprive the Company's Board of Directors and its
stockholders of any real opportunity to determine the destiny of the Company or
to evaluate and protect the long-term value of the Company. The Rights are not
intended to prevent a takeover of the Company. The Rights may be redeemed by the
Company at $.001 per Right within ten days (or such later date as may be
determined by a majority of the Continuing Directors) after the accumulation of
15% or more of the Company's shares by a single acquiror or group. Accordingly,
the Rights should not interfere with any merger or business combination approved
by the Board of Directors. Issuance of the Rights does not in any way weaken the
financial strength of the Company or interfere with its business plans. The
issuance of the Rights themselves has no dilutive effect, will not affect
reported earnings per share, should not be taxable to the Company or to its
stockholders, and will not change the way in which the Company's shares are
presently traded. The Company's Board of Directors believes that the Rights
represent a sound and reasonable means of addressing the complex issues of
corporate policy created by the current takeover environment. However, the
Rights may have the effect of rendering more difficult or discouraging an
acquisition of the Company deemed undesirable by the Board of Directors. The
Rights may cause substantial dilution to a person or group that attempts to
acquire the Company on terms or in a manner not approved by the Company's Board
of Directors, except pursuant to an offer conditioned upon the negation,
purchase or redemption of the Rights.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Norwest
Bank Minnesota, N.A. Its telephone number is 800-468-9716.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time. Sales
of substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.
Upon the completion of this offering, the Company will have 12,865,337
shares of Common Stock outstanding, assuming no exercise of options after
September 30, 1997. Of these shares, the 2,500,000 shares sold in this offering
will be freely tradable without restriction under the Securities Act, unless
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act. The remaining 10,365,337 shares of Common Stock held by
existing stockholders were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. These
shares may be sold in the public market only if registered, or pursuant to an
exemption from registration, including Rule 144, 144(k) or 701 under the
Securities Act. All of the directors and executive officers and substantially
all of the stockholders and optionholders of the Company have each agreed not to
offer, sell, contract to sell, hypothecate or otherwise dispose (or enter into
any transaction which is designed to, or could be expected to, result in the
disposition by any person) of, directly or indirectly, any shares of Common
Stock (including, without limitation, shares which may be deemed to be
beneficially owned in accordance with the Rules and Regulations of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended), or any security convertible into or exercisable for Common Stock of
the Company, or any rights to purchase or acquire, Common Stock of the Company
(other than pursuant to bona fide gifts to persons who agree in writing to be
bound by the provisions of the agreement) for a period of 180 days from the date
of this Prospectus without the prior written consent of Lehman Brothers Inc. In
addition, all of the stockholders and optionholders are subject to separate
180-day lockup agreements with the Company (all such agreements are collectively
referred to as the "Lock-Up Agreements"). The Company is subject to a similar
180-day agreement with the Representatives, except that the Company may issue
shares upon the exercise of stock options granted prior to the date of this
Prospectus, and may grant additional options or stock purchase rights under its
employee compensation plans, provided that, without the prior written consent of
the Representatives, the shares issuable upon exercise of such options or stock
purchase rights may not be resold during such 180-day period. However, Lehman
Brothers Inc. may in its sole discretion and at any time without notice, release
all or any portion of the securities subject to the Lock-Up Agreements.
Upon expiration of the Lock-Up Agreements, approximately 10,365,337 shares
of Common Stock as well as an additional approximately 176,087 shares issuable
upon exercise of vested options will become eligible for immediate public
resale, subject in some cases to vesting provisions applicable to certain
outstanding shares of Common Stock and volume limitations applicable to
securities held by persons who may be deemed to be affiliates of the Company
pursuant to Rule 144. In addition, 8,297,389 of the shares outstanding
immediately following the completion of this offering will be entitled to
registration rights with respect to such shares upon the release of the Lock-Up
Agreements. The number of shares sold in the public market could increase if
such rights are exercised.
As of September 30, 1997, 297,921 shares were subject to outstanding
options. All of these shares are subject to the Lock-Up Agreements described
above. Approximately 90 days after the date of this Prospectus, the Company
intends to file a Registration Statement on Form S-8 covering shares issuable
under the Company's 1992 Incentive Stock Plan (including shares subject to then
outstanding options under such plans), 1997 Director Option Plan and 1997
Employee Stock Purchase Plan, thus permitting the resale of such shares in the
public market without restriction under the Securities Act after expiration of
the applicable Lock-Up Agreements.
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In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 129,000 shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 8,297,389 shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain rights with respect to
the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between the Company and the holders of
Registrable Securities. The holders of at least 40% of the Registrable
Securities may require, on two occasions, that the Company use its best efforts
to register the Registrable Securities for public resale, provided, among other
limitations, that the proposed aggregate selling price to the public is at least
$5.0 million. If the Company registers any of its Common Stock either for its
own account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of Common Stock in
the registration, subject to the ability of the underwriters to limit the number
of shares included in the offering (but to not less than 20% of the offering,
except in the case of this Offering). The holders of the Registrable Securities
may also require the Company, on four occasions, but not more than once during
any 12-month period, to register all or a portion of their Registrable
Securities on Form S-3 when use of such form becomes available to the Company,
provided, among other limitations, that the proposed aggregate selling price
(net of any underwriters' discounts or commissions) is at least $1.0 million.
All registration expenses must be borne by the Company and all selling expenses
relating to Registrable Securities must be borne by the holders of the
securities being registered. The holders of Registrable Securities have waived
their right to have shares of Common Stock registered under the Securities Act
as part of this Offering and for a period of 180 days following this Offering.
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UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, the Underwriters named below,
for whom Lehman Brothers Inc., Piper Jaffray Inc. and Pacific Growth Equities,
Inc. are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to each
Underwriter, the aggregate number of shares set forth opposite the name of each
such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Lehman Brothers Inc..................................................................................
Piper Jaffray Inc....................................................................................
Pacific Growth Equities, Inc.........................................................................
----------
Total............................................................................................ 2,500,000
----------
----------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the initial public offering price
set forth on the cover page hereof, and to certain dealers at such initial
public offering price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other Underwriters or to certain other brokers or
dealers. After the initial offering to the public, the offering price and other
selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions, including the condition that no stop order suspending the
effectiveness of the Registration Statement is in effect and no proceedings for
such purpose are pending or threatened by the Securities and Exchange Commission
and that there has been no material adverse change or any development involving
a prospective material adverse change in the condition of the Company from that
set forth in the Registration Statement otherwise than as set forth or
contemplated in this Prospectus, and that certain certificates, opinions and
letters have been received from the Company and its counsel and independent
auditors. The Underwriters are obligated to take and pay for all of the above
shares of Common Stock if any such shares are taken.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 375,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that such option is exercised, each
Underwriter will be committed, subject to certain conditions, to purchase a
number of the additional shares of Common Stock that is proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
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All of the directors and executive officers and substantially all of the
stockholders and optionholders of the Company have each agreed not to offer,
sell, contract to sell, hypothecate or otherwise dispose (or enter into any
transaction which is designed to, or could be expected to, result in the
disposition by any person) of, directly or indirectly, any shares of Common
Stock (including, without limitation, shares which may be deemed to be
beneficially owned in accordance with the Rules and Regulations of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended), or any security convertible into or exercisable for Common Stock, or
any rights to purchase or acquire, Common Stock of the Company (other than
pursuant to bona fide gifts to persons who agree in writing to be bound by the
provisions of the agreement) for a period of 180 days from the date of this
Prospectus without the prior written consent of Lehman Brothers Inc. In
addition, all of the stockholders and optionholders are subject to separate
180-day lock-up agreements with the Company. Except for the Common Stock to be
sold in the offering, the Company has agreed, with certain limited exceptions
relating to the grant of options and issuance of Common Stock pursuant to the
Company's stock option plans and stock purchase plans, not to offer for sale,
sell or otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any person at
any time in the future of), directly or indirectly, any shares of Common Stock
or other capital stock or any securities convertible into or exchangeable or
exercisable for, or any rights to acquire, Common Stock or other capital stock,
prior to the expiration of 180 days from the date of this Prospectus without the
prior written consent of Lehman Brothers Inc. on behalf of the Representatives.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
Until the distribution of the shares is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. In addition, if the Representatives over-allot (sell more shares
of Common Stock than are set forth on the cover page of this Prospectus), and
thereby create a short position in the Common Stock in connection with this
offering, the Representatives may reduce that short position by purchasing
Common Stock in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of the Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of this offering. In general, purchases of shares
of Common Stock for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the Common Stock to be higher than it might
otherwise be in the absence of such purchases. The imposition of a penalty bid
might have an effect on the price of a security to the extent that it were to
discourage resales of the security by purchasers in the offering. Neither the
Company nor any of the Underwriters makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the Common Stock. In addition, neither the Company nor
any of the Underwriters makes any representation that the Representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, will be the Company's historical
performance, capital structure, estimates of the business potential and earnings
prospects of the Company, an assessment of the Company's management,
consideration of the above factors in relation to market valuation of companies
in related businesses and other factors deemed relevant.
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LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the Underwriters
by Mintz, Levin, Cohn, Ferris, Glovksy and Popeo, P.C., Boston, Massachusetts.
Mario M. Rosati and Christopher D. Mitchell, Secretary and Assistant Secretary
of the Company, respectively, are members of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
EXPERTS
Certain legal matters with respect to information contained in this
Prospectus under the captions "Risk Factors--Uncertainties Related to Patents
and Proprietary Technology" and "Business--Patents and Proprietary Rights" will
be passed upon for the Company by Arnall, Golden & Gregory LLP, Atlanta,
Georgia, patent counsel to the Company.
The financial statements of Focal, Inc. at December 31, 1995 and 1996, and
for each of the three years in the period ended December 31, 1996, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") Washington, D.C. 20549, a Registration Statement on Form S-1,
including amendments thereto, the Registration Statement under the Securities
Act, with respect to the Securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules filed therewith. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to such
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract,
agreement or other document referred to are not necessarily complete and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected without charge at
the principal office of the Commission, at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at its regional offices in New York
(Seven World Trade Center, New York, New York, 10007) and in Chicago (Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60611), and
copies of all or any part thereof may be obtained from such office upon the
payment of prescribed fees. Such information is also available electronically by
means of the Commission's web site on the Internet at http://www.sec.gov. The
Company intends to distribute to its stockholders annual reports containing
financial statements audited by its independent auditors and will make available
copies of quarterly reports for the first three quarters of each fiscal year
containing unaudited financial statements.
67
<PAGE>
FOCAL, INC.
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Balance Sheets....................................................................... F-3
Statements of Operations............................................................. F-4
Statements of Stockholders' Equity................................................... F-5
Statements of Cash Flows............................................................. F-6
Notes to Financial Statements........................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
and Stockholders
Focal, Inc.
We have audited the accompanying balance sheets of Focal, Inc. as of
December 31, 1995 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, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Focal, Inc. at December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 7, 1997, except as
to the first paragraph of
Note 10, as to which the
date is December 8, 1997.
F-2
<PAGE>
FOCAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1995 1996
-------------- ------------- SEPTEMBER 30
1997
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 5,000,306 $ 5,465,471 $ 5,160,698
Marketable securities........................................... 1,947,600 6,742,718 8,054,492
Accrued interest receivable..................................... 48,429 158,435 193,959
Prepaid expenses and other assets............................... 253,735 311,881 340,232
-------------- ------------- --------------
Total current assets.............................................. 7,250,070 12,678,505 13,749,381
Notes receivable from related parties............................. 166,546 265,150 377,786
Property and equipment............................................ 2,967,069 3,732,451 5,789,937
Accumulated depreciation and amortization......................... (1,655,241) (2,598,662) (3,438,419)
-------------- ------------- --------------
Net property and equipment........................................ 1,311,828 1,133,789 2,351,518
Other assets...................................................... 577,715 12,049 12,528
-------------- ------------- --------------
Total assets...................................................... $ 9,306,159 $ 14,089,493 $ 16,491,213
-------------- ------------- --------------
-------------- ------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 614,498 $ 501,604 $ 445,901
Accrued liabilities............................................. 1,549,021 1,864,990 1,929,087
Deferred revenue................................................ -- 655,333 1,373,500
Current portion of capital lease obligations.................... 685,525 653,932 746,991
-------------- ------------- --------------
Total current liabilities......................................... 2,849,044 3,675,859 4,495,479
Capital lease obligations......................................... 461,958 314,607 1,207,386
Commitments and contingent liabilities
Stockholders' equity:
Convertible preferred stock, issuable in series; $.01 par value;
21,150,000 and 31,681,540 shares authorized; 14,561,046,
24,345,247 and 24,345,247 (unaudited) shares issued and
outstanding at December 31, 1995 and 1996, and September 30,
1997, respectively; aggregate liquidation preference of
$56,304,650 at December 31, 1996................................ 145,610 243,452 243,452
Common stock, $.01 par value; 30,000,000 and 50,000,000 shares
authorized at December 31, 1995 and 1996, respectively; 664,504,
723,344, and 2,228,038 (unaudited) shares issued and outstanding
at December 31, 1995 and 1996, and September 30, 1997,
respectively.................................................... 6,645 7,233 22,280
Additional paid-in capital........................................ 41,215,682 56,303,958 57,987,019
Accumulated deficit............................................... (35,320,380) (45,478,469) (45,032,638)
Notes receivable from related parties............................. -- -- (1,688,057)
Deferred compensation............................................. -- (934,104) (732,610)
Unrealized loss on marketable securities.......................... (52,400) (43,043) (11,098)
-------------- ------------- --------------
Total stockholders' equity........................................ 5,995,157 10,099,027 10,788,348
-------------- ------------- --------------
Total liabilities and stockholders' equity........................ $ 9,306,159 $ 14,089,493 $ 16,491,213
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
FOCAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
---------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
-------------- -------------- -------------- ------------- -------------
(UNAUDITED)
Collaborative research revenue.... $ 50,000 $ 968,543 $ 3,098,289 $ 2,349,328 $ 12,831,123
Operating expenses:
Research and development........ 11,890,001 9,665,091 11,679,942 8,735,308 10,929,321
General and administrative...... 2,033,819 2,098,138 2,174,911 1,517,502 2,105,944
-------------- -------------- -------------- ------------- -------------
Total operating expenses.......... 13,923,820 11,763,229 13,854,853 10,252,810 13,035,265
-------------- -------------- -------------- ------------- -------------
Loss from operations.............. (13,873,820) (10,794,686) (10,756,564) (7,903,482) (204,142)
Other income (expense):
Interest income................. 667,970 442,505 690,745 515,458 730,893
Interest expense................ (79,014) (106,895) (92,270) (71,614) (80,920)
-------------- -------------- -------------- ------------- -------------
588,956 335,610 598,475 443,844 649,973
-------------- -------------- -------------- ------------- -------------
Net income (loss)................. $ (13,284,864) $ (10,459,076) $ (10,158,089) $ (7,459,638) $ 445,831
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
Pro forma net income (loss) per
share (unaudited)............... $ (1.23) $ (.93) $ .04
-------------- ------------- -------------
-------------- ------------- -------------
Shares used in computing pro forma
net income (loss) per share
(unaudited)..................... 8,271,430 8,001,252 10,550,795
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
FOCAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
CONVERTIBLE RECEIVABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM
-------------------- ---------------------- PAID-IN ACCUMULATED RELATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT PARTIES
--------- --------- --------- ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994................ 11,292,255 $ 112,923 646,559 $ 6,466 $30,012,576 ($11,576,440) $ --
Issuance of Series D convertible preferred
stock at $3.70 per share (net of issuance
costs of $16,132)........................ 1,730,840 17,308 -- -- 6,370,668 -- --
Exercise of stock options.................. -- -- 1,103 11 1,722 -- --
Repurchase of common stock for cash at $.01
per share................................ -- -- (8,333) (83) (188) -- --
Unrealized loss on marketable securities... -- -- -- -- -- -- --
Net loss................................... -- -- -- -- -- (13,284,864) --
--------- --------- --------- ----------- ---------- ------------ --------------
Balances at December 31, 1994.............. 13,023,095 130,231 639,329 6,394 36,384,778 (24,861,304) --
Issuance of Series E convertible preferred
stock at $3.15 per share (net of issuance
costs of $30,406)........................ 1,537,951 15,379 -- -- 4,798,761 -- --
Exercise of stock options.................. -- -- 25,175 251 32,143 -- --
Unrealized loss on marketable securities... -- -- -- -- -- -- --
Net loss................................... -- -- -- -- -- (10,459,076) --
--------- --------- --------- ----------- ---------- ------------ --------------
Balances at December 31, 1995.............. 14,561,046 145,610 664,504 6,645 41,215,682 (35,320,380) --
Issuance of Series E convertible preferred
stock at $1.74 per share (net of
placement fees and issuance costs of
$798,659)................................ 9,784,201 97,842 -- -- 13,959,510 -- --
Exercise of stock options.................. -- -- 58,840 588 54,129 -- --
Unrealized gain on marketable securities... -- -- -- -- -- -- --
Deferred compensation...................... -- -- -- -- 1,074,637 -- --
Amortization of deferred compensation...... -- -- -- -- -- -- --
Net loss................................... -- -- -- -- -- (10,158,089) --
--------- --------- --------- ----------- ---------- ------------ --------------
Balances at December 31, 1996.............. 24,345,247 243,452 723,344 7,233 56,303,958 (45,478,469) --
Exercise of stock options (unaudited)...... -- -- 9,919 99 9,952 -- --
Exercise of stock options for notes
receivable (unaudited)................... -- -- 1,494,775 14,948 1,673,109 -- (1,688,057)
Unrealized gain on marketable securities
(unaudited).............................. -- -- -- -- -- -- --
Amortization of deferred compensation
(unaudited).............................. -- -- -- -- -- -- --
Net income (unaudited)..................... -- -- -- -- -- 445,831 --
--------- --------- --------- ----------- ---------- ------------ --------------
Balances at September 30, 1997
(unaudited).............................. 24,345,247 $ 243,452 2,228,038 $ 22,280 $57,987,019 ($45,032,638) $(1,688,057)
--------- --------- --------- ----------- ---------- ------------ --------------
--------- --------- --------- ----------- ---------- ------------ --------------
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON TOTAL
DEFERRED MARKETABLE STOCKHOLDERS'
COMPENSATION SECURITIES EQUITY
------------- ----------- ------------
<S> <C> <C> <C>
Balances at January 1, 1994................ $ -- $ -- $18,555,525
Issuance of Series D convertible preferred
stock at $3.70 per share (net of issuance
costs of $16,132)........................ -- -- 6,387,976
Exercise of stock options.................. -- -- 1,733
Repurchase of common stock for cash at $.01
per share................................ -- -- (271)
Unrealized loss on marketable securities... -- (34,346) (34,346)
Net loss................................... -- -- (13,284,864)
------------- ----------- ------------
Balances at December 31, 1994.............. -- (34,346) 11,625,753
Issuance of Series E convertible preferred
stock at $3.15 per share (net of issuance
costs of $30,406)........................ -- -- 4,814,140
Exercise of stock options.................. -- -- 32,394
Unrealized loss on marketable securities... -- (18,054) (18,054)
Net loss................................... -- -- (10,459,076)
------------- ----------- ------------
Balances at December 31, 1995.............. -- (52,400) 5,995,157
Issuance of Series E convertible preferred
stock at $1.74 per share (net of
placement fees and issuance costs of
$798,659)................................ -- -- 14,057,352
Exercise of stock options.................. -- -- 54,717
Unrealized gain on marketable securities... -- 9,357 9,357
Deferred compensation...................... (1,074,637) -- --
Amortization of deferred compensation...... 140,533 -- 140,533
Net loss................................... -- -- (10,158,089)
------------- ----------- ------------
Balances at December 31, 1996.............. (934,104) (43,043) 10,099,027
Exercise of stock options (unaudited)...... -- -- 10,051
Exercise of stock options for notes
receivable (unaudited)................... -- -- --
Unrealized gain on marketable securities
(unaudited).............................. -- 31,945 31,945
Amortization of deferred compensation
(unaudited).............................. 201,494 -- 201,494
Net income (unaudited)..................... -- -- 445,831
------------- ----------- ------------
Balances at September 30, 1997
(unaudited).............................. $ (732,610) $ (11,098) $10,788,348
------------- ----------- ------------
------------- ----------- ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
FOCAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $(13,284,864) $(10,459,076) $(10,158,089) $(7,459,638) $ 445,831
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................ 542,026 872,842 969,868 732,233 839,757
Amortization of deferred compensation................ -- -- 140,533 77,285 201,494
Interest earned on notes receivable.................. (6,663) (8,096) (10,604) (7,236) (82,636)
Loss on sale of equipment, furniture and fixtures.... -- -- 3,647 3,647 --
Increase (decrease) in cash arising from changes of
operating assets and liabilities:
Accrued interest receivable........................ 48,071 135,384 (110,006) (149,176) (35,524)
Prepaid expenses and other assets.................. (182,983) 99,729 (58,146) (123,025) (28,351)
Accounts payable................................... (280,350) 73,343 (112,894) 28,148 (55,703)
Accrued liabilities................................ 875,191 48,199 315,969 331,231 64,097
Deferred revenue................................... -- -- 655,333 670,000 718,167
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) operating activities.... (12,289,572) (9,237,675) (8,364,389) (5,896,531) 2,067,132
INVESTING ACTIVITIES
Purchase of marketable securities...................... (11,985,343) -- (12,760,761) (8,991,906) (9,549,829)
Sale of marketable securities.......................... 13,813,105 5,929,346 7,975,000 1,800,000 8,270,000
Issuance of notes receivable........................... (20,000) (50,000) (88,000) (88,000) (30,000)
Repayment of notes receivable.......................... -- 45,000 -- -- --
Purchase of property and equipment..................... (296,405) (280,426) (388,683) (342,282) (1,677,847)
Proceeds from sale of property and equipment........... -- -- 2,150 2,150 --
Other assets........................................... (535,431) (42,284) 565,666 37,322 (479)
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) investing activities.... 975,926 5,601,636 (4,694,628) (7,582,716) (2,988,155)
FINANCING ACTIVITIES
Proceeds from the issuance of convertible preferred
stock, net of issuance costs......................... 6,387,976 4,464,140 14,057,352 14,057,352 --
Proceeds from lease financing.......................... 528,266 312,426 372,356 372,356 1,407,310
Principal payments on capital lease obligations........ (528,666) (867,595) (960,243) (722,217) (801,111)
Proceeds from issuance of common stock, net of
repurchases.......................................... 1,462 32,394 54,717 17,997 10,051
Proceeds from notes payable and advances............... -- 350,000 -- -- --
----------- ----------- ----------- ---------- ----------
Net cash provided by financing activities.............. 6,389,038 4,291,365 13,524,182 13,725,488 616,250
----------- ----------- ----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents... (4,924,608) 655,326 465,165 246,241 (304,773)
Cash and cash equivalents at beginning of the period... 9,269,588 4,344,980 5,000,306 5,000,306 5,465,471
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents at end of the period......... $ 4,344,980 $ 5,000,306 $ 5,465,471 $5,246,547 $5,160,698
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Property acquired under capital lease
obligations...................................... $ 730,996 $ 39,165 $ 408,943 $ 282,372 $ 379,639
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Interest paid...................................... $ 79,014 $ 106,895 $ 92,270 $ 71,614 $ 80,920
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Focal, Inc. (the Company) develops, manufactures and commercializes
synthetic, absorbable, liquid surgical sealants based on the Company's
proprietary polymer technology. The Company's family of FOCALSEAL surgical
sealant products is currently being developed for use inside the body with or
without sutures and staples to seal leaks resulting from lung surgery,
neurosurgery, cardiovascular surgery and gastrointestinal surgery.
During 1996 and early 1997, the Company entered into two collaborative
research agreements, which have provided significant revenues, and began
clinical trials in one of its product development programs. As a result, the
Company has concluded that it is no longer in its development stage.
REVERSE STOCK SPLIT
All common share and per common share amounts included in the accompanying
financial statements and notes thereto have been retroactively restated to give
effect to a 1 for 3.25 reverse stock split, effected in the form of a reverse
stock dividend. See Note 10.
INTERIM FINANCIAL STATEMENTS
The financial information at September 30, 1997, and for the nine months
ended September 30, 1996 and 1997, is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and of
the operating results and cash flows for these periods. Results of the 1997
period are not necessarily indicative of results that may be expected for the
entire year.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include funds held in investments with original
maturities of three months or less. Marketable securities consist of investments
in agencies of the U.S. government, investment grade corporate notes and other
investments with original maturities of greater than three months.
The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified such
holdings as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.
CONCENTRATION OF CREDIT RISK
The Company invests its cash equivalents and marketable securities with
institutions that have strong credit ratings. The Company has developed
guidelines relative to investment risk and liquidity.
F-7
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over estimated useful lives of 3-5 years. Property and
equipment under capital leases are amortized using the straight-line method over
the lease term, typically 3-4 years.
COLLABORATIVE RESEARCH REVENUE
Revenues from collaborative research agreements are recognized as earned
upon the incurrence of reimbursable expenses or the achievement of certain
milestones. Payments received in advance of research performed are designated as
deferred revenue.
RESEARCH AND DEVELOPMENT COSTS AND PATENT COSTS
All research and development costs, including the cost of acquiring patents
and licensing fees paid in connection with university technology licensing
agreements, are expensed as incurred.
STOCK BASED COMPENSATION
The Company accounts for its stock based compensation arrangements under the
provisions of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,"
rather than the alternative fair value accounting method provided for under FAS
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." Under APB 25, when the
exercise price of options granted to employees and non-employee directors under
these plans equals the market price of the underlying stock on the date of
grant, no compensation expense is recorded.
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and income tax basis of assets and liabilities as well as net
operating loss carryforwards and are measured using the enacted tax rates and
laws that will be in effect when the differences reverse. Deferred tax assets
may be reduced by a valuation allowance to reflect the uncertainty associated
with their ultimate realization.
UNAUDITED PRO FORMA NET INCOME (LOSS) PER SHARE
The unaudited pro forma net income (loss) per share is computed using the
weighted average number of outstanding common shares and common share
equivalents, assuming conversion of all convertible preferred shares and certain
warrants into common shares (at date of original issuance), which will
automatically occur upon completion of the initial public offering, as
contemplated herein, and the exercise of stock options and warrants (using the
treasury stock method and the assumed initial public offering price per share as
contemplated herein). Common share equivalents are excluded from the calculation
when their effect is anti-dilutive; however, pursuant to the requirements of the
Securities and Exchange Commission, common shares and common share equivalents
issued by the Company during the twelve-month period prior to the proposed
offering have been included in the calculation as if they were outstanding for
all periods presented whether or not they are anti-dilutive. Historical earnings
per share have not been presented since such amounts are not deemed meaningful
due to the significant change in the Company's capital structure that will occur
in connection with this offering.
F-8
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1996, the Company adopted Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption of this Statement had
no impact on the financial position or results of operations of the Company as
no indicators of impairment currently exist.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE (FAS 128), which will be adopted on December 31,
1997. FAS 128 requires companies to change the method currently used to compute
earnings per share and to restate all prior periods for comparability. Although
the Statement has not yet been applied, the adoption of FAS 128 is not expected
to have a material impact on the Company's earnings per share.
In June 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME and Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. Statement No. 130 establishes standards for the reporting
and display of comprehensive income and its components. Statement No. 131
establishes standards for the way that public companies report information about
operating segments in financial statements. This Statement supersedes Statement
No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE, but retains
the requirements to report information about major customers. Statements 130 and
131 are effective for the Company in fiscal 1998. The Company does not believe
that the adoption of these Statements will have a material effect on the
Company's financial statements.
2. MARKETABLE SECURITIES
Available-for-sale securities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
U.S. government securities due within one year............... $ 2,000,000 $ 13,700 $ (66,100) $ 1,947,600
------------ ----------- ----------- ------------
Total debt securities included in marketable securities...... $ 2,000,000 $ 13,700 $ (66,100) $ 1,947,600
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. government securities due within one year............... $ 2,000,000 $ 9,100 $ (50,900) $ 1,958,200
Corporate notes due within one year.......................... 4,785,760 -- (1,242) 4,784,518
------------ ----------- ----------- ------------
Total debt securities included in marketable securities...... $ 6,785,760 $ 9,100 $ (52,142) $ 6,742,718
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
Amortized cost basis was used in computing the cost of marketable securities
sold.
F-9
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Laboratory equipment.................................................................. $ 2,035,970 $ 2,688,806
Office equipment, computers and software.............................................. 526,424 635,013
Furniture and fixtures................................................................ 404,675 408,632
------------ ------------
$ 2,967,069 $ 3,732,451
------------ ------------
------------ ------------
</TABLE>
Depreciation and amortization expense was $542,026, $872,842 and $969,868
for the years ended December 31, 1994, 1995 and 1996, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Accrued university research funding and outside scientific services................... $ 727,948 $ 840,142
Accrued payroll-related expenses...................................................... 190,315 283,747
Accrued professional fees............................................................. 130,902 183,488
Accrued other......................................................................... 499,856 557,613
------------ ------------
$ 1,549,021 $ 1,864,990
------------ ------------
------------ ------------
</TABLE>
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The following table summarizes share information with respect to all series
of convertible preferred stock outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
CONVERSION
PREFERRED SHARES FACTOR NUMBER OF
-------------------------- INTO COMMON SHARES
ISSUED AND COMMON AFTER
AUTHORIZED OUTSTANDING SHARES CONVERSION
------------ ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Series A................................................ 1,000,000 1,000,000 .3077 307,700
Series B................................................ 666,667 666,667 .3077 205,133
Series C................................................ 4,261,467 4,220,183 .3321 1,401,522
Series D................................................ 7,553,406 7,136,245 .3811 2,719,622
Series E................................................ 18,200,000 11,322,152 .3077 3,483,826
------------ ------------ ---------------
31,681,540 24,345,247 8,117,803
------------ ------------ ---------------
------------ ------------ ---------------
</TABLE>
The holders of the Series A, B, C, D and E convertible preferred stock (the
"preferred stock") are entitled to receive noncumulative dividends, when and if
declared by the Board of Directors, at a rate of $.04, $.06, $0.174, $0.296 and
$0.139 per share, per annum, respectively. Additional dividends, if declared,
will be distributed first to the holders of common stock in an amount equal to
the sum of the dividends
F-10
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
paid to the holders of the preferred stock, and then to the holders of preferred
stock and common stock on an equal basis. No dividends have ever been declared
or paid by the Company.
The preferred stock will be automatically converted into 8,117,803 shares of
common stock upon the consummation of an underwritten public offering of the
Company's common stock at a price per share of at least $5 and with aggregate
net proceeds of at least $20,000,000 or the consent of at least 70% of the
holders of the outstanding shares of preferred stock, which consent was obtained
for the purposes of the offering contemplated herein. The holders of preferred
stock are entitled to one vote for each share of common stock into which the
preferred stock is convertible. In addition to the voting rights of the common
stockholders, the holders of preferred shares have the right, voting as a
separate class, to elect a majority of members of the Board of Directors.
The Series A, B, C, D and E convertible preferred stocks have liquidation
preferences of $.50, $.75, $2.18, $3.70 and $1.74 per share, respectively, plus
all dividends declared and unpaid. After payment of these liquidation
preferences, the holders of common and preferred stock shall be entitled to
receive all remaining assets of the corporation.
In 1996, the Company received gross proceeds totaling $14.9 million from the
sale of Series E Preferred Stock at $1.74 per share, bringing the total gross
proceeds from Series E Preferred Stock financing to $19.7 million. Investors who
purchased shares of Series E Preferred Stock in December 1995 at a price of
$3.15 per share, received a full antidilutive adjustment to $1.74 per share.
WARRANTS
The Company grants warrants to secure lease financing, to raise capital, to
obtain letters of credit and as a form of compensation to various consultants.
At December 31, 1996, the Company has the following preferred stock warrants
outstanding:
<TABLE>
<CAPTION>
WARRANT SHARES EXERCISE PRICE EXPIRATION DATE
- ---------- ------------------------------------------ -------------- ------------------------------------------
<S> <C> <C> <C>
Series C 41,284 (convertible into 13,710 shares of $ 2.18 At closing of an initial public offering
common stock) or at the time of a merger or
consolidation which results in a per share
value of $9.75 or more.
Series D 417,161 (convertible into 158,980 shares $ 3.70-$4.255 Various times through February 2004
of common stock)
Series E 22,414 (convertible into 6,896 shares of $ 1.74 February 2006
common stock)
</TABLE>
During 1996, the Company granted warrants for the purchase of 19,496 shares
of common stock in connection with the sale of Series E convertible preferred
stock. The warrants have an exercise price of $1.20 per share and expire upon
the earlier of an initial public offering of the Company's common stock or April
2000.
STOCK OPTIONS
The 1992 Incentive Stock Plan ("the 1992 Plan") authorizes the grant of
incentive stock options and nonqualified stock options to employees and
nonqualified stock options to consultants. Including the
F-11
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
additional 603,692 shares reserved on October 16, 1997 (See Note 10), a total of
2,600,000 shares have been reserved for issuance under the 1992 Plan.
The exercise price of incentive stock options granted under the 1992 Plan
may not be less than 100% of the fair market value of the common stock as of the
grant date, as determined by the Board of Directors. The exercise price of
nonqualified stock options may not be less than 85% of the fair market value of
the common stock as of the grant date. Options issued under the 1992 Plan
generally have a four year vesting period, unless otherwise determined by the
Board of Directors. The term of stock options granted under the 1992 Plan may
not exceed ten years. Subject to the approval of the Board of Directors, the
Plan allows option holders the right to immediately exercise outstanding options
(both vested and unvested), with the subsequent share issuances being subject to
a repurchase option by the Company under certain conditions according to the
original vesting schedule and exercise price.
For certain options granted, the Company recognizes as compensation expense
the excess of the deemed value for accounting purposes of the common stock
issuable upon exercise of such options over the aggregate exercise price of such
options. In connection with these grants, $1,075,000 of deferred compensation
has been recorded. This compensation expense is being amortized over the vesting
period of each option.
In 1995, the Board approved the cancellation of 157,129 options with
exercise prices ranging from $2.44--$3.25 per common share and the issuance of
157,129 new options at $1.20 per common share.
In January 1997, the Board of Directors approved a program under which
directors, executive officers and certain other key employees were permitted to
exercise options to purchase 1,494,775 common shares in exchange for four-year
notes with an interest rate of 6% per annum as permitted by the 1992 Plan. The
notes are full recourse and principal and accrued interest are payable upon the
maturity of the note. Under certain conditions, the shares are subject to a
repurchase option by the Company according to the original vesting schedule. At
September 30, 1997, 787,192 shares issued under the 1992 Plan are subject to the
Company's repurchase option and $1,688,057 of notes receivable are outstanding
and included in the stockholders' equity section of the accompanying financial
statements.
F-12
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents the activity of the 1992 Plan for the years
ended December 31, 1994, 1995 and 1996 and the nine-month period ended September
30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NINE-MONTH
PERIOD
ENDED
SEPTEMBER
1994 1995 1996 30, 1997
---------------------------- -------------------------- -------------------------- ---------
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- --------------- --------- --------------- --------- ---------------
OPTIONS
---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period.............. 391,826 $ .78 544,787 $ 1.37 557,894 $ .94 1,712,650
Granted............... 155,692 2.83 239,692 1.63 1,275,691 1.20 106,969
Exercised............. (1,103) 1.56 (25,176) 1.30 (58,840) .85 (1,504,694)
Canceled.............. (1,628) 2.44 (201,409) 2.63 (62,095) 1.17 (17,004)
----------- ----- --------- ----- --------- ----- ---------
Outstanding at end of
period.............. 544,787 $ 1.37 557,894 $ .94 1,712,650 $ 1.14 297,921
----------- ----- --------- ----- --------- ----- ---------
----------- ----- --------- ----- --------- ----- ---------
Options exercisable at
end of period....... 179,708 $ 1.07 272,979 $ .88 537,121 $ 1.01 130,582
----------- ----- --------- ----- --------- ----- ---------
----------- ----- --------- ----- --------- ----- ---------
Weighted average fair
value per share of
options granted
during the period... $ .62 $ .46
----- -----
----- -----
<CAPTION>
<S> <C>
WEIGHTED
AVERAGE
EXERCISE PRICE
---------------
<S> <C>
Outstanding at
beginning of
period.............. $ 1.13
Granted............... 4.13
Exercised............. 1.13
Canceled.............. 2.06
-----
Outstanding at end of
period.............. $ 2.16
-----
-----
Options exercisable at
end of period....... $ 1.28
-----
-----
Weighted average fair
value per share of
options granted
during the period...
</TABLE>
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- --------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ .72 248,677 6.5 $ .72 219,701 $ .72
1.20 1,463,973 9.4 1.20 317,420 1.20
----------- -----------
1,712,650 537,121
----------- -----------
----------- -----------
</TABLE>
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123"). If the compensation cost for the option plans had been determined
based on the fair value at the grant date for grants in 1995 and 1996,
consistent with the provisions of FAS 123, the pro forma net loss and net loss
per share for 1995 and 1996, would not have differed materially from reported
amounts.
F-13
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options and warrants issued at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
OPTIONS GRANTED
-------------
<S> <C> <C>
1995 1996
----- -----
Expected life (years)........................................................... 5.0 5.0
Interest rate................................................................... 6.6 6.6
Volatility...................................................................... 0.3 0.3
</TABLE>
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
The effects on 1995 and 1996 pro forma net loss of expensing the estimated
fair value of stock options are not necessarily representative of the effects on
reporting the results of operations for future years as the periods presented
include only one and two years, respectively, of option grants under the
Company's plans.
COMMON STOCK RESERVED FOR ISSUANCE
At December 31, 1996, the Company has reserved 10,313,192 shares of common
stock for issuance upon the conversion of the outstanding shares of convertible
preferred stock and for the exercise of all outstanding warrants and authorized
common stock options.
6. COMMITMENTS
The Company has a ten-year lease agreement expiring in 2004 for its
principal facility. In connection with this lease, the lessor funded
approximately $4,367,000 of leasehold improvements which are reimbursed as part
of the minimum lease payments. The Company has certain options to purchase the
building and the leasehold improvements.
As of December 31, 1996, the Company was required to provide a $1.2 million
letter of credit collateralizing these leasehold improvements. In addition, the
Company was required to comply with certain financial covenants. At December 31,
1996, the Company was in compliance with such covenants. Effective September
1997, the letter of credit requirement under the Company's facility operating
lease was terminated.
The Company leases the majority of its equipment, furniture and fixtures
under capital leases. Included in property and equipment at December 31, 1995
and 1996, respectively, were assets with a cost basis of $2,711,818 and
$3,492,118 acquired under capital leases. Accumulated amortization as of
December 31, 1995 and 1996, respectively, related to these assets was $1,552,848
and $2,485,480.
F-14
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1996, the Company's future minimum lease payments under
capital and operating leases are as follows:
<TABLE>
<CAPTION>
BUILDING
CAPITAL OPERATING
LEASES LEASE
---------- ------------
<S> <C> <C>
1997................................................................................... $ 699,287 $ 1,068,752
1998................................................................................... 293,376 1,095,809
1999................................................................................... 35,248 1,109,337
2000................................................................................... -- 1,109,337
2001................................................................................... -- 1,109,337
Thereafter............................................................................. -- 3,084,498
---------- ------------
Total minimum lease payments........................................................... 1,027,911 $ 8,577,070
------------
------------
Less interest 59,372
----------
Present value of minimum lease payments................................................ 968,539
Less capital lease obligations due within one year..................................... 653,932
----------
Capital lease obligations--long-term portion........................................... $ 314,607
----------
----------
</TABLE>
Effective April 1997, the Company received commitments totaling $2.5 million
from a leasing company for the financing of equipment and leasehold
improvements. Under this agreement, the term for financing equipment purchases
and leasehold improvements is 48 months and 36 months, respectively. The
interest rate is established as of the commencement date for each new drawdown,
based on a treasury security index, and is fixed for the term of the financing.
There is a fixed percentage buy-out provision at the end of the lease period.
The lease financings are collateralized by the equipment and leasehold
improvements being financed. As of September 30, 1997, there were $1,290,117 in
outstanding borrowings under this financing arrangement. There are no financial
covenants in connection with this lease financing.
Total rent expense was $632,000, $1,023,770 and $1,078,803 in 1994, 1995 and
1996, respectively.
7. RESEARCH AND DEVELOPMENT AND LICENSING AGREEMENTS
In January 1997, the Company entered into a distribution and licensing
agreement with the Ethicon, Inc. division of Johnson & Johnson ("Ethicon") for
the research, development and commercialization of the Company's surgical
sealant products. Ethicon received marketing rights to all territories outside
North America in exchange for (a) a one-time, nonrefundable payment to the
Company for past research and development expenditures; (b) fixed quarterly
funding for two years to be applied toward future research and development
costs; (c) funding of certain additional research and development expenses; (d)
payments upon achievement of specific milestones; and (e) specified percentages
of product sales, if any, representing a combined royalty and product cost
payment. The Company retained worldwide manufacturing rights and North American
marketing rights. The term of the Ethicon Agreement extends until January 2007,
subject to one year extensions at Ethicon's discretion. In addition, Ethicon may
terminate the agreement at any time after January 2000 upon 12 months prior
written notice with or without cause.
In April 1996, the Company entered into a collaboration and license
agreement with Novartis and Chiron for the research, development and
commercialization of products for the treatment and prevention of restenosis and
received a one-time, nonrefundable payment at that time. The terms of this
agreement provide for quarterly research and development funding from Novartis
and Chiron on the basis of full-time equivalent personnel engaged on the
project. During 1996, the Company recorded approximately
F-15
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RESEARCH AND DEVELOPMENT AND LICENSING AGREEMENTS (CONTINUED)
$2,898,000 of revenue under this agreement. In addition, this agreement allows
for certain preclinical and commercial milestone payments and a combined royalty
and product cost payment on sales once a product has been commercialized.
Novartis and Chiron received exclusive worldwide marketing rights for the
products developed under the agreement and the Company retained worldwide
manufacturing rights. Novartis and Chiron have the right to terminate the
research collaboration with the Company upon 90 days notice, with or without
cause.
The Company entered into a collaborative research agreement with F.
Hoffmann-LaRoche Ltd. for the prevention of restenosis in 1995. Under this
agreement, Hoffmann-LaRoche made a one time, nonrefundable payment to the
Company in 1995 and the Company performed certain preclinical development
studies. During 1995 and 1996, the Company received payments totaling
approximately $1,000,000 in connection with this agreement based upon the
achievement of certain milestones. This agreement expired in March 1997.
The Company has collaborative research agreements and technology licensing
agreements with certain universities. The Company has worldwide exclusive
licenses to the technologies developed under these agreements, in exchange for
funding certain research and payment of licensing fees and royalties on
applicable product sales. Research and development expense and licensing fees
incurred under these agreements during the years ended December 31, 1994, 1995
and 1996, totaled $306,000, $295,000, and $156,000, respectively. In connection
with these agreements, the Company has research funding commitments totaling
approximately $402,000 at December 31, 1996.
8. INCOME TAXES
Due to net losses incurred by the Company in each year since its inception,
no provision for income taxes has been recorded. At December 31, 1996, the
Company had tax net operating loss carryforwards of approximately $43.8 million
and federal and state research and development tax credit carryforwards of
approximately $1.6 million which expire at various times through 2011.
Significant components of the Company's deferred tax assets as of December
31 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating losses............................................................. $ 13,793,000 $ 17,528,000
Research and development tax credits............................................. 1,278,000 1,567,000
Other............................................................................ 292,000 545,000
------------- -------------
15,363,000 19,640,000
Valuation allowance.............................................................. (15,363,000) (19,640,000)
------------- -------------
Net deferred tax assets............................................................ $ -- $ --
------------- -------------
------------- -------------
</TABLE>
For financial reporting purposes, a valuation allowance has been provided
since realization of such deferred tax assets is not considered probable at this
time. The valuation allowance changed by $4,277,000 during 1996, due primarily
to the increase in tax credits and net operating loss carryforwards.
Additionally, the future utilization of the net operating loss carryforwards may
be subject to limitations under the change in stock ownership provisions of the
Internal Revenue Code.
F-16
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS
A total of $68,800 was paid to the spouse of a member of the Company's Board
of Directors for certain recruiting services performed in 1995.
In connection with an employment agreement, interest-bearing loans
aggregating $90,000 have been made to an officer of the Company. Principal and
accrued interest are payable in full if the aggregate fair value of the common
stock owned by the officer exceeds a certain threshold. In the event that the
fair value of the common stock owned by the officer does not reach this
threshold on the earlier of twelve months from the effective date of an initial
public offering of the Company's common stock or December 31, 1999, the
outstanding balance of the loan shall be forgiven. Other officer and nonofficer
employee notes receivable, certain of which notes contain similar repayment
terms as those described above, are outstanding and included in notes receivable
from related parties in the accompanying financial statements.
Certain participants in the Company's Preferred Stock financing transactions
include venture capital funds affiliated with members of the Company's board of
directors.
10. SUBSEQUENT EVENTS
On October 16, 1997, the Board of Directors approved a 1 for 3.25 reverse
stock split of common shares effected in the form of a reverse stock dividend
which became effective on December 8, 1997. All common share and per common
share amounts included in the accompanying financial statements and notes
thereto have been retroactively restated to give effect to the reverse stock
split.
On October 16, 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (Purchase Plan) and reserved 200,000 shares of common stock for
issuance thereunder. Under the Purchase Plan eligible employees may purchase
common shares at a price per share equal to 85% of the lower of the fair market
value of the common stock at the beginning of a two year offering period or the
end of each six month purchase period included in such offering period.
Participation in the offering period is limited to 10% of the employee's
compensation or $25,000 in any calendar year. The first offering period will
commence on the date of this prospectus and the Purchase Plan will terminate in
2007. The Board of Directors also approved the reservation of an additional
603,692 shares of common stock under the Company's 1992 Incentive Stock Plan.
On October 16, 1997, the Board of Directors adopted the 1997 Director Option
Plan (the "Director Plan") and reserved 150,000 shares of common stock for
issuance thereunder. Effective with the 1998 annual meeting of stockholders and
annually thereafter, each nonemployee director will automatically be granted a
nonstatutory option to purchase 5,000 shares of common stock. The exercise price
of each of these options will be equal to the fair market value of the common
stock on the date of grant. Each option granted under the Director Plan will
vest on a cumulative monthly basis over a four-year period. The Director Plan
will terminate in September 2007, unless terminated earlier in accordance with
the provisions of the Director Plan.
On October 16, 1997, the Board of Directors approved the authorization of an
additional 5,000,000 shares of preferred stock, $.01 par value, issuable in one
or more series, each of such series to have such rights and preferences,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors.
On October 16, 1997, the Board of Directors adopted a Shareholder Rights
Plan (the "Rights Plan") designed to protect shareholders from unsolicited
attempts to acquire the Company on terms that do not
F-17
<PAGE>
FOCAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
maximize stockholder value. In connection with the Rights Plan, the Board of
Directors will designate a certain number of shares of the Company's preferred
stock as Series A Participating Preferred Stock. Under the Rights Plan, a right
to purchase one one-thousandth of one share of the Series A Preferred Stock (the
"Rights") will be distributed as a dividend for each share of common stock. The
terms of the Rights Plan provide that the Rights will become exercisable upon
the earlier of the tenth day after any person or group acquires 15% or more of
the Company's outstanding common stock or the tenth business day after any
person or group commences a tender or exchange offer which would, if completed,
result in the offer or owning 15% or more of the Company's outstanding common
stock. The Rights may generally be redeemed by action of the Board of Directors
at $0.001 per Right at any time prior to the tenth day following the public
announcement that any person or group has acquired 15% or more of the
outstanding common stock of the Company. The Rights expire on January 28, 2007.
The Rights have certain anti-takeover effects in that they would cause
substantial dilution to the party attempting to acquire the Company.
In certain circumstances, the Rights allow the Company's stockholders to
purchase the number of shares of the Company's common stock having a market
value at the time of the transaction equal to twice the exercise price of the
Rights, or in certain circumstances, the stockholders would be able to acquire
that number of shares of the acquirer's common stock having a market value, at
the time of the transaction, equal to twice the exercise price of the Rights.
The Company will continue to issue Rights with future issuances of common stock.
F-18
<PAGE>
A picture of the FOCALSEAL Surgical Sealant System including the primer and
sealant contained in the disposable applicators and the reusable light wand and
cable, and light source used to photopolymerize the FOCALSEAL sealant and
primer.
None of the Company's products have been approved by the United States Food
and Drug Administration ("FDA") or any foreign regulatory authority for
marketing in any country. The process of obtaining such approvals may be
lengthy, and there can be no assurance that such approvals will be obtained. The
Company has not offered any of its products for commercial sale or received any
revenues from commercial sales.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................................. 22
Business.................................................................. 25
Management................................................................ 46
Certain Transactions...................................................... 54
Principal Stockholders.................................................... 56
Description of Capital Stock.............................................. 58
Shares Eligible for Future Sale........................................... 63
Underwriting.............................................................. 65
Legal Matters............................................................. 67
Experts................................................................... 67
Additional Information.................................................... 67
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
, 1997
---------------------
LEHMAN BROTHERS
PIPER JAFFRAY INC.
PACIFIC GROWTH EQUITIES, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee......................................................... $ 11,326
NASD filing fee.............................................................. 4,238
Nasdaq National Market listing fee........................................... 40,000
Printing and engraving costs................................................. 125,000
Legal fees and expenses...................................................... 250,000
Accounting fees and expenses................................................. 100,000
Blue Sky fees and expenses................................................... 5,000
Transfer Agent and Registrar fees............................................ 5,000
Miscellaneous expenses....................................................... 59,436
---------
Total.................................................................... $ 600,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). The Registrant's Restated
Certificate of Incorporation to be filed upon the closing of the offering to
which this Registration Statement relates (Exhibits 3.1 and 3.2 hereto) and the
Registrant's Bylaws (Exhibist 3.3 and 3.4 hereto) provide for indemnification of
the Registrant's directors, officers, employees and other agents to the extent
and under the circumstances permitted by the Delaware General Corporation Law.
The Registrant also intends to enter into agreements with its directors and
executive officers that will require the Registrant among other things to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors to the fullest extent not prohibited by Delaware
law.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant, its directors and officers, and by the Registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Act, and affords certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1994, the Registrant has issued and sold the following
unregistered securities:
In February 1994, the Company issued a warrant to purchase 24,324 shares of
Series D Preferred Stock at a purchase price of $3.70 per share in connection
with an equipment leasing arrangement.
In August 1994, the Company issued 1,730,840 shares of Series D Preferred
Stock at a price of $3.70 per share to a group of 18 venture capital and
institutional investors. All investors participating in such financing were
accredited investors within the meaning of Rule 501(a) under the Securities Act.
In August 1994, the Company issued a warrant to purchase 5,000 shares of
Series D Preferred Stock at an exercise price of $3.70 per share in connection
with obtaining a letter of credit from a commercial bank.
II-1
<PAGE>
In November 1994, the Company issued warrants to purchase an aggregate of
25,000 shares of Series D Preferred Stock at an exercise price of $4.255 per
share as compensation for placement agency services provided in connection with
the Company's August 1994 financing.
In April 1996, the Company issued 11,322,152 shares of Series E Preferred
Stock at a price of $1.74 per share to a group of 34 venture capital and
institutional investors, including shares of Series E Preferred Stock reissued
in exchange for an aggregate of 1,537,951 shares of Series E Preferred Stock
issued in December 1995 at a price of $3.15 per share. All investors
participating in such financing were accredited investors within the meaning of
Rule 501(a) under the Securities Act.
In April 1996, the Company issued a warrant to purchase 63,362 shares of
Common Stock at a purchase price of $0.37 per share as compensation for
placement agency services provided in connection with the Company's April 1996
financing.
Since the Company's inception through September 30, 1997, the Company has
issued 5,167,601 shares of Common Stock upon exercise of stock options granted
to employees and consultants of the Company under the Company's 1992 Incentive
Stock Plan. The exercise price of such options ranged from $0.22 to $1.25 per
share.
The foregoing share and per share amounts do not give effect to the
Company's 1 for 3.25 reverse stock split that will be effected in connection
with the offering of the shares registered hereunder and the conversion of
Preferred Stock into Common Stock that will occur upon completion of such
offering.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act, as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------
<C> <S>
1.1* Underwriting Agreement.
3.1* Certificate of Incorporation of Focal, Inc., a Delaware corporation, as currently in effect.
3.2* Form of Restated Certificate of Incorporation of the Registrant to be filed after the closing of
the offering made under this Registration Statement.
3.3* Bylaws of the Registrant, as currently in effect.
3.4* Bylaws of the Registrant, as proposed to be amended in connection with this offering.
4.1* Specimen Common Stock Certificate.
4.2* Representative Form of Common Stock Purchase Warrant.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.2* 1992 Incentive Stock Plan, as amended, and form of Stock Option Agreement thereunder.
10.3* 1997 Employee Stock Purchase Plan and forms of agreements thereunder.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.4* 1997 Directors' Option Plan and forms of agreements thereunder.
10.5* Restated Investors Rights Agreement dated April 12, 1996 among the Registrant and certain
stockholders of the Registrant.
10.6* Lease Agreement dated April 4, 1994 between Registrant and The Mutual Life Insurance Company of
New York relating to lease of facility located at 4 Maguire Road, Lexington, MA, as amended to
date.
10.7* Master Lease Agreement dated October 30, 1992 between Registrant and Comdisco, Inc.
10.8* Master Lease Agreement dated February 28, 1994 between Registrant and MMC/GATX Limited
Partnership I.
10.9* Master Loan and Security Agreement dated April 18, 1997 between Registrant and Transamerica
Leasing.
10.10+ Patent and Technology License Agreement dated June 11, 1992 between Registrant and University of
Texas.
10.11+ Exclusive License Agreement dated August 7, 1992 among Registrant, Marvin Slepian, M.D. and
Endoluminal Therapeutics, Inc.
10.12+ Collaboration and License Agreement dated April 25, 1996 between Registrant, Ciba Corporation and
Chiron Corporation.
10.13+ Distribution, License and Supply Agreement dated January 2, 1997 between Registrant and Ethicon,
Inc.
10.14* Agreement for Consulting Services dated November 15, 1991 between Registrant and Robert Langer,
Ph.D.
10.15* Agreement for Consulting Services dated August 7, 1992 between Registrant and Marvin Slepian,
M.D.
10.16* Agreement for Consulting Services and Sabbatical Employment dated June 1, 1992 between Registrant
and Jeffrey Hubbell.
10.17 [reserved]
10.18* Form of Restricted Stock Purchase Agreement.
10.19* Loan Agreement dated March 29, 1995 between Registrant and Ronald Rudowsky.
10.20* Loan Agreement dated February 28, 1997 between Registrant and Arthur Coury, Ph.D.
10.21* Form of Preferred Shares Rights Agreement between Registrant and Norwest Bank Minnesota N.A.
11.1* Calculation of earnings per share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
23.3* Consent of Arnall Golden & Gregory, LLP.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ------------------------
* Exhibit previously filed.
+ Confidential treatment has been requested for certain portions of this
Exhibit.
(B) FINANCIAL STATEMENT SCHEDULES
None
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(a) It will provide to the Underwriters at the closing as specified in the
Underwriting Agreement, certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lexington, State of
Massachusetts, on the 10th day of December, 1997.
FOCAL, INC.
By: /s/ DAVID M. CLAPPER*
-----------------------------------------
David M. Clapper, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- ----------------
President, Chief Executive
/s/ DAVID M. CLAPPER* Officer and Director December 10,
- ------------------------------ (Principal Executive 1997
(David M. Clapper) Officer)
Vice President, Finance and
/s/ W. BRADFORD SMITH Chief Financial Officer December 10,
- ------------------------------ (Principal Financial and 1997
(W. Bradford Smith) Accounting Officer)
/s/ HENRY BREM* Director
- ------------------------------ December 10,
(Henry Brem, M.D.) 1997
/s/ JANET EFFLAND* Director
- ------------------------------ December 10,
(Janet Effland) 1997
/s/ ROBERT LANGER* Director
- ------------------------------ December 10,
(Robert Langer, Ph.D.) 1997
/s/ MARK J. LEVIN* Director
- ------------------------------ December 10,
(Mark J. Levin) 1997
/s/ MICHAEL J. LEVINTHAL* Director
- ------------------------------ December 10,
(Michael J. Levinthal) 1997
II-5
<PAGE>
<TABLE>
<C> <S> <C>
/s/ FRED E. SILVERSTEIN* Director
- ------------------------------ December 10,
(Fred E. Silverstein, M.D.) 1997
/s/ JESSE I. TREU* Director
- ------------------------------ December 10,
(Jesse I. Treu, Ph.D.) 1997
</TABLE>
*By: /s/ W. BRADFORD SMITH
-------------------------
(W. Bradford Smith,
ATTORNEY-IN-FACT)
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
1.1* Underwriting Agreement.........................................................................
3.1* Certificate of Incorporation of Focal, Inc., a Delaware corporation, as currently in effect....
3.2* Form of Restated Certificate of Incorporation of the Registrant to be filed after the closing
of the offering made under this Registration Statement.......................................
3.3* Bylaws of the Registrant, as currently in effect...............................................
3.4* Bylaws of the Registrant, as proposed to be amended in connection with
this offering................................................................................
4.1* Specimen Common Stock Certificate..............................................................
4.2* Representative Form of Common Stock Purchase Warrant...........................................
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation..........................
10.1* Form of Indemnification Agreement between the Registrant and each of its directors and
officers.....................................................................................
10.2* 1992 Incentive Stock Plan, as amended, and form of Stock Option Agreement thereunder...........
10.3* 1997 Employee Stock Purchase Plan and forms of agreements thereunder...........................
10.4* 1997 Directors' Option Plan and forms of agreements thereunder.................................
10.5* Restated Investors Rights Agreement dated April 12, 1996 among the Registrant and certain
stockholders of the Registrant...............................................................
10.6* Lease Agreement dated April 4, 1994 between Registrant and The Mutual Life Insurance Company of
New York relating to lease of facility located at 4 Maguire Road, Lexington, MA, as amended
to date......................................................................................
10.7* Master Lease Agreement dated October 30, 1992 between Registrant and
Comdisco, Inc................................................................................
10.8* Master Lease Agreement dated February 28, 1994 between Registrant and
MMC/GATX Limited Partnership I...............................................................
10.9* Master Loan and Security Agreement dated April 18, 1997 between Registrant and Transamerica
Leasing......................................................................................
10.10+ Patent and Technology License Agreement dated June 11, 1992 between Registrant and University
of Texas.....................................................................................
10.11+ Exclusive License Agreement dated August 7, 1992 among Registrant,
Marvin Slepian, M.D. and Endoluminal Therapeutics, Inc.......................................
10.12+ Collaboration and License Agreement dated April 25, 1996 between Registrant,
Ciba Corporation and Chiron Corporation......................................................
10.13+ Distribution, License and Supply Agreement dated January 2, 1997 between Registrant and
Ethicon, Inc.................................................................................
10.14* Agreement for Consulting Services dated November 15, 1991 between Registrant and Robert Langer,
Ph.D.........................................................................................
10.15* Agreement for Consulting Services dated August 7, 1992 between Registrant and Marvin Slepian,
M.D..........................................................................................
10.16* Agreement for Consulting Services and Sabbatical Employment dated June 1, 1992 between
Registrant and Jeffrey Hubbell...............................................................
10.17 [reserved].....................................................................................
10.18* Form of Restricted Stock Purchase Agreement....................................................
10.19* Loan Agreement dated March 29, 1995 between Registrant and Ronald Rudowsky.....................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
10.20* Loan Agreement dated February 28, 1997 between Registrant and
Arthur Coury, Ph.D...........................................................................
10.21* Form of Preferred Shares Rights Agreement between Registrant and Norwest Bank Minnesota N.A....
11.1* Calculation of earnings per share..............................................................
23.1 Consent of Ernst & Young LLP, Independent Auditors.............................................
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1)..........................
23.3* Consent of Arnall Golden & Gregory, LLP........................................................
24.1* Power of Attorney..............................................................................
27.1* Financial Data Schedule........................................................................
</TABLE>
- ------------------------
* Exhibit previously filed.
+ Confidential treatment has been requested for certain portions of this
Exhibit.
<PAGE>
EXHIBIT 10.10
PATENT AND TECHNOLOGY LICENSE AGREEMENT
THIS PATENT AND TECHNOLOGY LICENSE AGREEMENT ("LICENSE AGREEMENT") is
made by and between the BOARD OF REGENTS ("BOARD") OF THE UNIVERSITY OF TEXAS
SYSTEM ("SYSTEM"), an agency of the State of Texas, whose address is 201 West
7th Street, Austin, Texas 78701, on behalf of THE UNIVERSITY OF TEXAS AT
AUSTIN ("UNIVERSITY"), which is a component institution of SYSTEM, and PEGAS
PHARMACEUTICALS, INC., a corporation duly organized and existing under the
laws of Delaware, whose address is 2200 Sand Hill Road, Menlo Park,
California 94025 ("LICENSEE").
W I T N E S S E T H:
Whereas BOARD owns certain PATENT RIGHTS and TECHNOLOGY RIGHTS related to
LICENSED SUBJECT MATTER which were developed at UNIVERSITY prior to the
effective date of this LICENSE AGREEMENT and, in addition, may be developed
at UNIVERSITY pursuant to the RESEARCH AGREEMENT;
Whereas BOARD desires to have the LICENSED SUBJECT MATTER developed and
used for the benefit of LICENSEE, the inventor(s), BOARD, and the public as
outlined in the Intellectual Property Policy promulgated by the BOARD; and
Whereas LICENSEE wishes to obtain a license from BOARD to practice
LICENSED SUBJECT MATTER.
NOW, THEREFORE, in consideration of the mutual covenants and premises
herein contained, the parties hereto agree as follows:
I. EFFECTIVE DATE
This LICENSE AGREEMENT shall be effective as of June 11, 1992 ("EFFECTIVE
DATE"), subject to approval by BOARD.
II. DEFINITIONS
As used in this LICENSE AGREEMENT, the following terms shall have the
meanings indicated:
2.1 "LICENSED FIELD" shall mean treatment of any medical condition of
humans including without limitation treatment of post-surgical adhesions and
other fibrosis or scarring conditions, treatment by means of leave-behind
materials after open and other less invasive surgical procedures (such as
localized drug delivery vehicles, adhesives, sealers, glues and polymers),
treatment by means of localized drug release, and treatment by arterial
plugging after angioplasty or other percutaneous procedures in interventional
cardiology by means of angioplasty catheters of any type.
<PAGE>
The "LICENSED FIELD", however, shall not include treatment of medical
conditions of humans by means of (a) coated medical devices, such as contact
lens, non-angioplasty catheter, vascular graft, heart valve, pump bladder,
ventricular assist device, hemodialysis membrane, heat exchanger or blood
pump, except any type of angioplasty catheter, endoscope, laparoscope,
intravascular stent, or controlled release device for drug delivery, (b) cell
encapsulation, (c) the systemic release of therapeutic substances, or (d) the
use of polymeric systems to prolong the systemic half-life of therapeutic
substances. BOARD shall be free to license PATENT RIGHTS and TECHNOLOGY
RIGHTS to other parties in all fields of use outside the LICENSED FIELD.
2.2 "LICENSED PRODUCT" shall mean any product, component or material the
manufacture, use or sale of which would infringe a VALID CLAIM.
2.3 "LICENSED SUBJECT MATTER" shall mean inventions, discoveries and
information covered by PATENT RIGHTS or TECHNOLOGY RIGHTS within the LICENSED
FIELD.
2.4 "LICENSED TERRITORY" shall mean the entire world.
2.5 "NET SALES" shall mean the gross revenues actually received by
LICENSEE or SUBSIDIARIES from the SALE of LICENSED PRODUCTS, less (a) normal
and customary rebates, and cash and trade discounts, (b) sales, use and/or
other excise taxes or duties actually paid, (c) the cost of any packages and
packing, (d) insurance costs and outbound transportation charges prepaid or
allowed, (e) import and/or export duties actually paid, and (f) amounts
allowed or credited due to returns (not to exceed the original billing or
invoice amount).
2.6 "PATENT RIGHTS" shall mean any and all rights in and to inventions,
discoveries or information relating to the manufacture, use or sale of
biomedical hydrogels or surface coatings covered by patents and/or patent
applications whether domestic or foreign, and all divisions, continuations,
continuations-in-part, reissues, reexaminations or extensions thereof, and
any letters patents that issue thereon, conceived or reduced to practice
either prior to the EFFECTIVE DATE and which name Dr. Jeffery A. Hubbell as
either sole or joint inventor, or after the EFFECTIVE DATE and arising out of
or in connection with the RESEARCH PROGRAM, and which BOARD has or may have
the right to license or sublicense to LICENSEE under this LICENSE AGREEMENT.
The PATENT RIGHTS in existence in the LICENSED TERRITORY as of the EFFECTIVE
DATE are set forth on Schedule A attached hereto and incorporated herein.
2.7 "RESEARCH AGREEMENT" shall mean a certain Sponsored Research
Agreement by and between the UNIVERSITY and LICENSEE effective as of June 1,
1992.
-2-
<PAGE>
2.8 "RESEARCH PROGRAM" shall mean the Research Program conducted by
UNIVERSITY under the direction of Professor Jeffery A. Hubbell pursuant to
the RESEARCH AGREEMENT in accordance with the description set forth in
Attachment A attached thereto.
2.9 "SALE" or "SELL" or "SOLD" shall mean the transfer or disposition of
a LICENSED PRODUCT for value to a party other than LICENSEE or a SUBSIDIARY,
which transfer or disposition would, but for the rights and license granted
hereunder, infringe a VALID CLAIM in the country in which such LICENSED
PRODUCT is transferred or disposed.
2.10 "SUBSIDIARY" shall mean any corporation or other entity that is
directly or indirectly controlling, controlled by or under common control
with LICENSEE. For the purpose of this definition, "control" shall mean the
direct or indirect ownership of more than fifty percent (50%) of the shares
of the subject entity entitled to vote in the election of directors (or, in
the case of an entity that is not a corporation, for the election of the
corresponding managing authority).
2.11 "TECHNOLOGY RIGHTS" shall mean any and all rights in any technical
information, know-how, process, procedure, composition, device, method,
formula, protocol, technique, software, design, drawing or data relating to
biomedical hydrogels or surface coatings which is not covered by the PATENT
RIGHTS but which is necessary for practicing an invention, discovery or
information covered by the PATENT RIGHTS, conceived or reduced to practice
either prior to the EFFECTIVE DATE, or after the EFFECTIVE DATE and arising
out of or in connection with the RESEARCH PROGRAM, and which BOARD has or may
have the right to license or sublicense to LICENSEE under this LICENSE
AGREEMENT.
2.12 "VALID CLAIM" shall mean either (a) a claim of an issued and
unexpired patent included within the PATENT RIGHTS, which has not been held
unenforceable, unpatentable or invalid by a court or other governmental
agency of competent jurisdiction, and which has not been admitted to be
invalid or unenforceable through reissue, disclaimer or otherwise, or (b) a
claim in a hypothetical issued patent corresponding to a pending claim in a
patent application within the PATENT RIGHTS, provided that if such pending
claim has not issued as a claim of an issued patent within the PATENT RIGHTS
within six (6) years after the filing date from which such patent application
takes priority, such pending claim shall not be a VALID CLAIM for purposes of
this LICENSE AGREEMENT. In the event that a claim of an issued patent within
the PATENT RIGHTS is held by a court or other governmental agency of
competent jurisdiction to be unenforceable, unpatentable or invalid, and such
holding is reversed on appeal by a higher court or agency of competition
jurisdiction, such claim shall be reinstated as a VALID CLAIM hereunder.
III. REPRESENTATIONS AND WARRANTIES
3.1 Except for the rights, if any, of the Government of the United
States of America, as set forth in Paragraph 3.2, BOARD represents and
warrants that (a) BOARD is the owner of the entire right, title, and interest
in and to LICENSED SUBJECT MATTER, (b) BOARD has the sole
-3-
<PAGE>
right and authority to enter into this LICENSE AGREEMENT and grant the rights
and licenses hereunder, (c) BOARD has not previously granted and will not
grant any rights in the LICENSED SUBJECT MATTER or LICENSED PRODUCTS that are
inconsistent with the rights and licenses granted to LICENSEE herein, (d) to
the best of BOARD's knowledge, as of the EFFECTIVE DATE, but without research
into the matter, the LICENSED PRODUCTS do not infringe any patent rights,
trade secrets or other proprietary rights of any third party, and (e)
SCHEDULE A includes all patents and patent applications within the PATENT
RIGHTS existing as of the EFFECTIVE DATE, and BOARD owns no rights in any
other patent or patent application, the claims of which would dominate the
claims of a patent or patent application within the PATENTS RIGHTS as applied
to the LICENSED FIELD.
3.2 LICENSEE understands that the LICENSED SUBJECT MATTER may have been
developed under a funding agreement with the Government of the United States
of America and, if so, that the Government may have certain rights relative
thereto. This LICENSE AGREEMENT is explicitly made subject to the
Government's rights under any such Government funding agreement and any
applicable law or regulation. To the extent that there is a conflict between
any such Government funding agreement, applicable law or regulation, and this
LICENSE AGREEMENT, the terms of such Government funding agreement, applicable
law or regulation shall prevail.
3.3 NEITHER PARTY MAKES ANY REPRESENTATIONS OTHER THAN THOSE EXPRESSLY
STATED IN THIS LICENSE AGREEMENT, AND SPECIFICALLY, BOARD MAKES NO EXPRESS OR
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
IV. LICENSE
4.1 Subject to the terms and conditions of this LICENSE AGREEMENT, BOARD
hereby grants to LICENSEE a royalty-bearing, exclusive right and license
under LICENSED SUBJECT MATTER to manufacture, have manufactured, use and sell
LICENSED PRODUCTS, to practice any method, process or procedure within the
PATENT RIGHTS or the TECHNOLOGY RIGHTS, and to otherwise exploit the LICENSED
SUBJECT MATTER, within the LICENSED TERRITORY for use within the LICENSED
FIELD. This grant shall be subject to the payment by LICENSEE to BOARD of
all consideration as provided in this LICENSE AGREEMENT, and shall be further
subject to rights retained by BOARD to:
(a) Subject to Article XII below, and Articles VI and VII of the
RESEARCH AGREEMENT, publish the general scientific findings from research
related to LICENSED SUBJECT MATTER; and
(b) Use any information contained in LICENSED SUBJECT MATTER for
research, teaching and other educationally-related purposes.
* Confidential treatment has been requested for marked portion
-4-
<PAGE>
4.2 LICENSEE may extend the right and license granted to LICENSEE under
Paragraph 4.1 to any SUBSIDIARY provided that such SUBSIDIARY consents to be
bound by this LICENSE AGREEMENT to the same extent as LICENSEE.
4.3 LICENSEE and any SUBSIDIARY may grant and authorize sublicenses
within the scope of the right and license granted to LICENSEE pursuant to
this LICENSE AGREEMENT; provided, however, that any such right and license
granted to a sublicensee shall not include the right to grant sublicenses.
LICENSEE and any SUBSIDIARY, if applicable, shall monitor the operations of
their respective sublicensees in connection with the obligations of LICENSEE
and any SUBSIDIARY pursuant to this LICENSE AGREEMENT, and shall take all
reasonable steps to ensure that such sublicensees comply fully with such
obligations. LICENSEE shall promptly inform BOARD of the name and address of
each such sublicensee. Upon termination of this LICENSE AGREEMENT, any and
all existing sublicenses granted by LICENSEE or any SUBSIDIARY, if
applicable, shall survive; provided that such sublicensees promptly agree in
writing to be bound by the terms of this LICENSE AGREEMENT.
4.4 The right and license under the LICENSED SUBJECT MATTER granted to
LICENSEE pursuant to Paragraph 4.1 shall inure to the benefit of and may be
extended to any customer, direct or indirect, of LICENSED PRODUCTS
manufactured by or for LICENSEE, SUBSIDIARIES and/or sublicensees of either
LICENSEE or a SUBSIDIARY hereunder insofar as the inventions, discoveries and
information covered by the LICENSED SUBJECT MATTER may be practiced by such
customer in connection with application or use of such LICENSED PRODUCTS.
4.5 BOARD agrees to promptly provide to LICENSEE copies of all
documented information in BOARD's possession pertaining to LICENSED PRODUCTS
and the manufacture or use of LICENSED PRODUCTS that in each case BOARD has
the right to provide to LICENSEE, including without limitation all
preclinical and clinical trial data, if any, and related reports,
manufacturing information and the like. Subject to Article XII, LICENSEE
shall have the right to use and disclose such information to the extent
reasonably necessary to exploit the rights and license granted to LICENSEE
under this LICENSE AGREEMENT.
4.6 If at any time during the term of this LICENSE AGREEMENT BOARD
establishes a bona fide detailed plan to develop a product covered by the
LICENSED SUBJECT MATTER (a "PRODUCT"), or receives such a plan from a
reputable third party with resources reasonably necessary to develop and
commercialize such PRODUCT, BOARD may give written notice to LICENSEE of such
event. If LICENSEE is not then developing, producing or using a LICENSED
PRODUCT that is substantially similar to or intended for a similar purpose as
the PRODUCT that BOARD or such third party proposes to develop, and the
development or sublicensing of such a PRODUCT is not within LICENSEE's
business plans or activities for development and commercialization on a
schedule that either reasonably approximates that of such third party or is
more favorable than that of such third party, LICENSEE shall elect one of the
following options following BOARD's notice:
-5-
<PAGE>
(a) Undertake reasonable efforts to sponsor research toward the
development of such PRODUCT (directly or indirectly through third parties),
and thereafter develop, produce, sell, use or sublicense such PRODUCT; or
(b) Release its rights under this LICENSE AGREEMENT to such PRODUCT.
Following BOARD's notice to LICENSEE under this Paragraph 4.6, BOARD shall
provide to LICENSEE a written research plan for the development of the
PRODUCT in sufficient detail to enable LICENSEE to determine its capability
to develop such PRODUCT, together with such other information as LICENSEE may
reasonably request for purposes of such determination. LICENSEE shall have
one hundred twenty days (120) after receipt of such plan and information to
notify BOARD of LICENSEE's election under this Paragraph 4.6.
V. PAYMENTS AND REPORTS
5.1 In consideration of the rights and license granted by BOARD to
LICENSEE under this LICENSE AGREEMENT, LICENSEE agrees to pay BOARD a
non-refundable, non-creditable license fee equal to [*]. LICENSEE shall pay
such fee in accordance with the following schedule:
(a) Within ten (10) days after the EFFECTIVE DATE, [*];
(b) Upon the first anniversary of the EFFECTIVE DATE, [*];
(c) Upon the second anniversary of the EFFECTIVE DATE, [*];
(d) Upon the third anniversary of the EFFECTIVE DATE, [*]; and
(e) Upon the fourth anniversary of the EFFECTIVE DATE, [*].
5.2 In further consideration of the rights and license granted by BOARD
to LICENSEE under this LICENSE AGREEMENT, LICENSEE agrees to pay BOARD in
connection with the development of the first LICENSED PRODUCT [*] in
accordance with the following schedule:
(a) Upon submission of an Investigation New Drug application ("IND"),
or the equivalent thereof, to the United States of America Food and Drug
Administration ("FDA")
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for the first LICENSED PRODUCT by LICENSEE or a SUBSIDIARY or a sublicensee
of either LICENSEE or a SUBSIDIARY, [*];
(b) Upon completion of Phase I human clinical trials of the first
LICENSED PRODUCT by LICENSEE or a SUBSIDIARY or a sublicensee of either
LICENSEE or a SUBSIDIARY, [*];
(c) Upon completion of Phase III human clinical trials of the first
LICENSED PRODUCT by LICENSEE or a SUBSIDIARY or a sublicensee of either
LICENSEE or a SUBSIDIARY, [*];
(d) Upon submission of a New Drug Application ("NDA"), or the
equivalent thereof, to the FDA for the first LICENSED PRODUCT by LICENSEE
or a SUBSIDIARY or a sublicensee of either LICENSEE or a SUBSIDIARY, [*];
and
(e) Upon the first commercial SALE of the first LICENSED PRODUCT by
LICENSEE or a SUBSIDIARY or a sublicensee of either LICENSEE or a
SUBSIDIARY, [*].
All payments made to BOARD by LICENSEE pursuant to this Paragraph 5.2 shall
be non-refundable and non-creditable payments and shall apply to the
development of the first LICENSED PRODUCT only.
5.3 In further consideration of the rights and license granted by BOARD to
LICENSEE under this LICENSE AGREEMENT, LICENSEE agrees to pay BOARD:
(a) [*] of any SUBLICENSE FEES received by LICENSEE or SUBSIDIARIES
in connection with the grant of a sublicense to a third party relating to
the manufacture, use or sale of a LICENSED PRODUCT in any medical treatment
within the LICENSED FIELD, except treatment of post-surgical adhesions; and
(b) [*] of any SUBLICENSE FEES received by LICENSEE or SUBSIDIARIES
in connection with the grant of a sublicense to a third party relating to
the manufacture, use or sale of a LICENSED PRODUCT in the treatment of
post-surgical adhesions.
"SUBLICENSEE FEES" shall mean all cash license fees paid or payable to
LICENSEE upon execution of a sublicense between LICENSEE or a SUBSIDIARY and
a third party relating to LICENSED PRODUCTS, but such fees shall not include
advances against future royalties that are to be credited against future
running royalties to be paid by sublicensee on sale of LICENSED PRODUCTS,
LICENSED PRODUCT development funds, equity investments, or scientific
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benchmark payments or payments for past research expenditures relating to
development of LICENSED PRODUCTS.
5.4 In further consideration of the rights and license granted by BOARD to
LICENSEE under this LICENSE AGREEMENT, except as otherwise provided in
Paragraph 5.5, LICENSEE agrees to pay to BOARD a running royalty equal to:
(a) [*] of NET SALES attributed to SALES of LICENSED PRODUCTS by
LICENSEE and/or SUBSIDIARIES; and
(b) [*] of NET SALES attributed to SALES of LICENSED PRODUCTS by
sublicensees of either LICENSEE or a SUBSIDIARY.
5.5 In the event that a LICENSED PRODUCT is approved for marketing by
the FDA, or other similar government agencies in the LICENSED TERRITORY, with
a label claim for use in the treatment of post-surgical adhesions, LICENSEE
agrees to pay to BOARD a running royalty equal to:
(a) [*] of NET SALES attributed to SALES of LICENSED PRODUCTS by
LICENSEE and/or SUBSIDIARIES for use of such LICENSED PRODUCTS in treatment
of post-surgical adhesions; and
(b) [*] of NET SALES attributed to SALES of LICENSED PRODUCTS by
sublicensees of either LICENSEE or a SUBSIDIARY for use of such LICENSED
PRODUCTS in treatment of post-surgical adhesions.
5.6 The running royalties under Paragraph 5.4 and Paragraph 5.5 shall be
payable only for SALES of LICENSED PRODUCTS by LICENSEE, SUBSIDIARIES or
sublicensees of either LICENSEE or a SUBSIDIARY beginning upon the date of
the first SALE of such LICENSED PRODUCT in any country in the LICENSED
TERRITORY by LICENSEE, SUBSIDIARIES or sublicensees of either LICENSEE or a
SUBSIDIARY after obtaining approval for marketing of such LICENSED PRODUCTS
by the FDA, or other similar government agencies, in such country, and
continuing until the date that SALES of such LICENSED PRODUCTS would not
infringe a VALID CLAIM in the country in which such SALES occur.
5.7 Notwithstanding the foregoing, if LICENSEE is required to pay
royalties to third parties in connection with the SALE of LICENSED PRODUCTS
either under license agreements for other technologies which LICENSEE, in
LICENSEE's reasonable judgment, determines are desirable to be incorporated
in such LICENSED PRODUCTS, or under license agreements with third parties
that are joint owners of patent applications or patents within the PATENT
RIGHTS, and the total royalties to be paid by LICENSEE to BOARD and third
parties would exceed [*] on SALES of LICENSED PRODUCTS by LICENSEE and/or
SUBSIDIARIES, or [*] on SALES of LICENSED PRODUCTS by sublicensees of either
LICENSEE or a
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SUBSIDIARY, the amounts to be paid under Paragraph 5.4 and/or Paragraph 5.5
shall be reduced in accordance with the following formulas:
(a) Royalties payable on SALES by LICENSEE and/or SUBSIDIARIES of
LICENSED PRODUCTS shall equal [*] of NET SALES payable as royalties
to BOARD and third parties on SALES by LICENSEE and/or SUBSIDIARIES of
LICENSED PRODUCTS (prior to the adjustment hereunder and any similar
adjustment in the amount to be paid to such third parties). However,
after adjustment in accordance with this Paragraph 5.7(a) (which adjustment
shall be made after deduction in royalties pursuant to Paragraph 7.3, if
any), royalties payable to BOARD on SALES of LICENSED PRODUCTS by LICENSEE
and/or SUBSIDIARIES shall not be less than [*] of NET SALES attributed to
such SALES, unless LICENSEE, pursuant to Paragraph 5.8, converts the
license granted to LICENSEE under Paragraph 4.1 to a non-exclusive license.
(b) Royalties payable on SALES by sublicensees of either LICENSEE
or a SUBSIDIARY of LICENSED PRODUCTS shall equal [*] of NET SALES payable
as royalties to BOARD and third parties on SALES by sublicensees of either
LICENSEE or a SUBSIDIARY of LICENSED PRODUCTS (prior to the adjustment
hereunder and any similar adjustment in the amount to be paid to such
third parties). However, after adjustment in accordance with this
Paragraph 5.7(b) (which adjustment shall be made after deduction in
royalties pursuant to Paragraph 7.3, if any), royalties payable to BOARD
on SALES of LICENSED PRODUCTS by sublicensees of either LICENSEE or a
SUBSIDIARY shall not be less than [*] of NET SALES attributed to such
SALES.
Notwithstanding the foregoing, the adjustment in this Paragraph 5.7 shall not
apply if such adjustment would increase the amounts payable under Paragraph
5.4 or Paragraph 5.5 above.
5.8 Effective upon written notice to BOARD, LICENSEE may convert the
license granted to LICENSEE under Paragraph 4.1 to a non-exclusive license.
In such event, the amounts to be paid to BOARD under Paragraph 5.4 and
Paragraph 5.5 following such notice, after any adjustment under Paragraph
5.7, if applicable, shall be reduced by [*]; provided, however, that in no
event shall the amounts payable to BOARD under Paragraph 5.4 and Paragraph
5.5 be less than [*] of NET SALES.
5.9 In the event that more than one patent within the PATENT RIGHTS is
applicable to any LICENSED PRODUCT subject to royalties under this Article V,
then only one royalty shall be paid to BOARD in respect of such quantity of
the LICENSED PRODUCTS and in any event duplication of the running royalty
shall be avoided. It is understood that royalties shall only be payable
under this Article V with respect to LICENSED PRODUCTS whose sale would
infringe a
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VALID CLAIM in the country in which such LICENSED PRODUCT is SOLD. No
royalty shall be payable under Paragraph 5.4 or Paragraph 5.5 above with
respect to the SALE of LICENSED PRODUCTS between or among LICENSEE and
SUBSIDIARIES, provided that such LICENSED PRODUCTS are to be resold to
unrelated third parties, or with respect to any fees or other payments paid
between or among LICENSEE and SUBSIDIARIES; nor shall a royalty be payable
under Paragraph 5.4 or Paragraph 5.5 with respect to SALES of LICENSED
PRODUCTS for use in clinical trials or as samples, or for LICENSED PRODUCTS
that are otherwise SOLD at a price less than [*]. "MANUFACTURING COST" shall
mean the fully burdened cost of manufacturing a LICENSED PRODUCT including
without limitation the direct cost of labor, materials and allocable
pharmaceutical manufacturing overheads in accordance with generally accepted
accounting principles consistently applied.
5.10 LICENSEE shall keep complete and accurate records of SALES by
LICENSEE, SUBSIDIARIES and sublicensees of either LICENSEE or a SUBSIDIARY
and NET SALES, and any SUBLICENSEE FEES received by LICENSEE or SUBSIDIARIES,
in sufficient detail to enable the amounts payable hereunder to be
determined. Upon BOARD's written request, but not more frequently than once
per calendar year, LICENSEE shall permit representatives or agents of BOARD,
at BOARD's expense, to examine such records during LICENSEE's regular
business hours for the purpose of and to the extent necessary to verify any
report required under this LICENSE AGREEMENT with respect to SALES and
SUBLICENSEE FEES made not more than three (3) years prior to the date of
BOARD's request. In the event that the amounts due to BOARD are determined
to have been underpaid, LICENSEE shall pay to BOARD any amount due and
unpaid, together with interest on such amount at the prime rate in effect at
Bank of America NT&SA, San Francisco, California, or at the maximum rate
permitted by law, whichever is lower.
5.11 In each calendar year during the term of this LICENSE AGREEMENT
first beginning after commercialization of a LICENSED PRODUCT or receipt by
LICENSEE or SUBSIDIARIES of any SUBLICENSEE FEES, within ninety (90) days
after March 31, June 30, September 30 and December 31, LICENSEE shall deliver
to BOARD at the address listed in Paragraph 5.13, a true and accurate report,
giving such particulars of the business conducted by LICENSEE, SUBSIDIARIES
and sublicensees of either LICENSEE or a SUBSIDIARY, if any, during the
preceding three (3) calendar months under this LICENSE AGREEMENT as are
pertinent to an account for payments hereunder. Such report shall include at
least (a) the total number of SALES; (b) the total of NET SALES; (c) the
total amount of SUBLICENSEE FEES received by LICENSEE and SUBSIDIARIES; (d)
the calculation of amounts due BOARD pursuant to this Article V; and (e) the
total amount so calculated and due BOARD. Simultaneously with the delivery
of each such report, LICENSEE shall pay to BOARD the total royalties amount,
if any, due to BOARD for the period of such report. If no royalties are due,
LICENSEE shall so report.
5.12 Upon the request of BOARD but not more frequently than once per
calendar year, LICENSEE shall deliver to BOARD a written report as to
LICENSEE's efforts and accomplishments during the preceding year in
commercializing LICENSED SUBJECT MATTER in the LICENSED TERRITORY and its
commercialization plans for the upcoming year.
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5.13 All amounts payable hereunder by LICENSEE shall be payable in United
States of America Dollars. If any currency conversion shall be required in
connection with the payment of royalties hereunder, such conversion shall be
made by using the exchange rates used by LICENSEE in calculating LICENSEE's
own revenues for financial reporting purposes. Any income or other tax that
LICENSEE, SUBSIDIARIES, or sublicensees of either LICENSEE or a SUBSIDIARY
are required by statute to withhold with respect to the amounts payable under
this LICENSE AGREEMENT shall be deducted from such amounts, and LICENSEE
shall furnish BOARD with proper evidence of the taxes paid. Checks shall be
made payable to The University of Texas at Austin and mailed to: Executive
Vice President and Provost, The University of Texas at Austin, Main Building
201, Austin, Texas, 78712-1111, Attention: Patricia C. Ohlendorf.
VI. TERM AND TERMINATION
6.1 The term of this LICENSE AGREEMENT shall commence on the EFFECTIVE
DATE and continue in full force and effect until expiration, revocation or
invalidation of the last patent within the PATENT RIGHTS licensed to
LICENSEE, unless terminated earlier pursuant to this Article VI.
Notwithstanding the above, upon the expiration, but not an earlier
termination of this LICENSE AGREEMENT, LICENSEE shall have a non-exclusive,
fully paid-up right and license under the LICENSED SUBJECT MATTER to use and
exploit the TECHNOLOGY RIGHTS.
6.2 This LICENSE AGREEMENT will terminate:
(a) Upon BOARD's written notice to LICENSEE after ninety (90) days
written notice to LICENSEE if LICENSEE breaches or defaults on any
material obligation under this LICENSE AGREEMENT; provided that such
ninety (90) day notice specifies the nature of the breach; and provided
further that LICENSEE may avoid such termination if before the end of
such ninety (90) day period LICENSEE notifies BOARD in writing that such
breach or default has been cured and states the manner of such cure.
However, if LICENSEE disputes such breach in writing within such ninety
(90) day period, BOARD shall not have the right to terminate this
LICENSE AGREEMENT unless and until a court of competent jurisdiction has
determined that this LICENSEE AGREEMENT was materially breached and such
determination is final, and LICENSEE fails to cure such breach within
ninety (90) days after such determination. For purposes of this
Paragraph 6.2(a), a determination by a court of competent jurisdiction
shall be deemed final if such determination either is not appealed, or
is appealed to and upheld or otherwise confirmed by a court of appeals
to which an appeal for review of such determination may be made
directly; or
(b) In its entirety or as to any particular patent application or
patent within the PATENT RIGHTS, upon LICENSEE's sixty (60) days prior
written notice to BOARD. From and after the effective date of a
termination under this Paragraph 6.2(b) with respect to a particular
patent application or patent, such patent application and patent shall
cease to be within the PATENT RIGHTS for all purposes of this LICENSE
AGREEMENT. Upon a
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termination of this LICENSE AGREEMENT in its entirety under this
Paragraph 6.2(b), all rights and obligations of LICENSEE and BOARD shall
terminate, except as provided in Paragraphs 6.3, 6.4 and 6.5 below.
6.3 Upon termination of this LICENSE AGREEMENT for any reason, nothing
herein shall be construed to release either party of any obligation matured
prior to the effective date of such termination.
6.4 In the event that this LICENSE AGREEMENT is terminated for any
reason, LICENSEE, SUBSIDIARIES and customers of either LICENSEE or a
SUBSIDIARY may, after the effective date of such termination, sell or
otherwise dispose of all LICENSED PRODUCTS and parts therefor that LICENSEE,
SUBSIDIARIES and customers of either LICENSEE or a SUBSIDIARY may have on
hand on the effective date of such termination, subject to LICENSEE's payment
to BOARD of royalties pursuant to Article V of this LICENSE AGREEMENT. Upon
termination of this LICENSE AGREEMENT for any reason, any sublicense granted
by LICENSEE or SUBSIDIARY, if any, under this LICENSE AGREEMENT shall
survive, provided that the sublicensee promptly agrees in writing to be bound
by the terms of this LICENSE AGREEMENT.
6.5 Articles II, VI, IX, X, XI, XII and XV shall survive the expiration
and any termination of this Agreement. Except as otherwise provided in this
Article VI, all rights and obligations of the parties under this Agreement
shall terminate upon the expiration or termination of this Agreement.
VII. INFRINGEMENT
7.1 In the event that any of the PATENT RIGHTS are infringed by a third
party, LICENSEE and/or a sublicensee of either LICENSEE or a SUBSIDIARY shall
have, subject to Paragraph 7.2, the first right and obligation to institute
and prosecute any action or proceeding to enforce the PATENT RIGHTS with
respect to such infringement including without limitation settlement
discussions relating to, and any declaratory judgment action arising from,
such infringement by competent counsel of LICENSEE's choice or, if
applicable, such sublicensee's choice. If LICENSEE or, if applicable, a
sublicensee of either LICENSEE or a SUBSIDIARY institutes and prosecutes any
such action or proceeding, LICENSEE or such sublicensee, if applicable, shall
have an exclusive right to control such action or proceeding. In the event
that LICENSEE or a sublicensee of either LICENSEE or a SUBSIDIARY commences
an action to enforce the PATENT RIGHTS, LICENSEE shall have the right during
the pendency of the action to withhold [*] of the royalties payable to BOARD
hereunder based on the SALE of the LICENSED PRODUCTS covered by the patent or
patent within the PATENT RIGHTS in dispute to offset LICENSEE's and such
sublicensee's out-of-pocket legal expenses incurred in connection with such
action or proceeding. Any portion of such withheld royalties that is not so
applied, shall be promptly paid to BOARD after such action or proceeding is
resolved or abandoned. Any amounts recovered from third parties by LICENSEE
or a sublicensee of
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either LICENSEE or a SUBSIDIARY with respect to the PATENT RIGHTS in such
action or proceeding shall be applied first to reimburse any outstanding
legal expenses of the action or proceeding incurred by LICENSEE or such
sublicensee, and then to reimburse BOARD for any royalties or fees withheld
under this Paragraph 7.1 with respect to such action or proceeding. Any
amounts remaining shall be included in NET SALES for purposes of calculating
royalties owed pursuant to Paragraph 5.4 and/or Paragraph 5.5, as applicable.
7.2 In the event that any of the PATENT RIGHTS are infringed by a third
party, and LICENSEE and/or a sublicensee of either LICENSEE or a SUBSIDIARY,
if appropriate, has not instituted action or proceedings against such third
party to enforce the PATENT RIGHTS, or has not concluded settlement
discussions with such third party, or LICENSEE or a SUBSIDIARY has not
granted to such third party sublicense rights under the PATENT RIGHTS, within
one (1) year of LICENSEE's or such sublicensee's receipt of information of
such third party's infringement of the PATENT RIGHTS, BOARD and LICENSEE and
such sublicensee, if appropriate, will consult with one another in an effort
to determine whether the infringement is a substantial infringement of the
PATENT RIGHTS and whether a reasonably prudent licensee would have instituted
such action or proceedings, concluded such settlement negotiations, and/or
granted such sublicense rights within such one (1) year period in light of
all relevant business and economic factors (including without limitation the
projected cost of such action or proceedings, the likelihood of success on
the merits, the probable amount of any damage award, the prospects for
satisfaction of any judgment against the alleged infringer, the possibility
of counterclaims against BOARD, LICENSEE and/or such sublicensee, the
diversion of LICENSEE's and/or such sublicensee human and economic resources,
the impact of any possible adverse outcome on LICENSEE and/or such
sublicensee, and the effect any publicity might have on the respective
reputations and goodwill of BOARD and LICENSEE and/or such sublicensee). If
after such consultation BOARD and LICENSEE and such sublicensee, if
appropriate, have not reached agreement and LICENSEE and/or such sublicensee,
if appropriate, does not institute action or proceedings against, or enter
into settlement negotiations with, or grant sublicense rights to a
substantial infringer, BOARD shall have the right to enforce the PATENT
RIGHTS relating to infringement by such a substantial infringer on behalf of
BOARD and LICENSEE and/or such sublicensee. Any amounts recovered from third
parties by BOARD with respect to the PATENT RIGHTS in such action or
proceeding shall be retained by BOARD.
7.3 LICENSEE shall notify BOARD promptly in writing of any claim
asserted against LICENSEE, SUBSIDIARIES and/or a sublicensee of either
LICENSEE or a SUBSIDIARY by any third party alleging infringement of any
patent owned by such third party in connection with manufacture, use or sale
of LICENSED PRODUCTS or practice, of any method, process or procedure within
the PATENT RIGHTS. Notwithstanding anything herein to the contrary, if in
LICENSEE's reasonable judgment, the manufacture, use or sale of LICENSED
PRODUCTS or the practice of any method, process or procedure within the
PATENT RIGHTS by LICENSEE, SUBSIDIARIES or sublicensees of either LICENSEE or
a SUBSIDIARY would infringe a BLOCKING PATENT owned or controlled by a third
party, LICENSEE shall have the right to deduct from the royalties payable to
BOARD under Article V the amount which LICENSEE, SUBSIDIARIES or a
sublicensee of either LICENSEE or a SUBSIDIARY, as the case may be, shall
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pay or shall continue to pay to such third party for rights and license under
such BLOCKING PATENT to manufacture, use or sell such LICENSED PRODUCTS or
practice of any method, process or procedure within the PATENT RIGHTS.
"BLOCKING PATENT" shall mean any issued and unexpired patent not within the
PATENT RIGHTS the claims of which cover a LICENSED PRODUCT or any method,
process or procedure within the PATENT RIGHTS and, but for rights and license
granted by the party that owns or controls such patent, would be infringed by
the manufacture, use or sale of such LICENSED PRODUCT or the practice of any
method, process or procedure within the PATENT RIGHTS. However, by reason of
this Paragraph 7.3, the royalty payable to BOARD under Paragraph 5.4(a)
and/or Paragraph 5.5(a) shall not be reduced to less than [*] of NET SALES
attributed to SALES of LICENSED PRODUCTS by LICENSEE and/or SUBSIDIARIES, and
the royalty payable to BOARD under Paragraph 5.4(b) and/or Paragraph 5.5(b)
shall not be reduced to less than [*] of NET SALES attributed to SALES of
LICENSED PRODUCTS by sublicensees of either LICENSEE or a SUBSIDIARY. The
reduction in royalty pursuant to this Paragraph 7.3 shall be made prior to
calculating any adjustment under Paragraph 5.7. In the event that LICENSEE,
SUBSIDIARIES or a sublicensee of either LICENSEE or a SUBSIDIARY receives a
claim from a third party alleging an infringement for which LICENSEE would be
entitled to deduct royalties under this Paragraph 7.3, LICENSEE shall have
the right to withhold [*] of the royalties payable to BOARD hereunder and
apply such amounts against LICENSEE's and such sublicensee's out-of-pocket
expenses incurred in defending such claim. Any withheld amounts that are not
so used shall promptly be reimbursed to BOARD after the resolution of such
claim.
7.4 In any suit, action or other proceeding in connection with
enforcement and/or defense of the PATENT RIGHTS, the parties shall cooperate
fully, including without limitation, subject to the statutory authority of
the Attorney General of the State of Texas as applicable to BOARD, by joining
as a party plaintiff and executing such documents as the party prosecuting
such suit, action or other proceeding may reasonably request. Upon the
request and at the expense of the party prosecuting such suit, action or
other proceeding, the other party shall make available at reasonable times
and under appropriate conditions all relevant personnel, records, papers,
information, samples, specimens and other similar materials in such other
party's possession.
VIII. ASSIGNMENT
This LICENSE AGREEMENT may not be assigned by LICENSEE without the prior
written consent of BOARD, except to a party that succeeds to all or
substantially all of LICENSEE's business or assets relating to this LICENSE
AGREEMENT whether by sale, merger, operation of law or otherwise; provided
that such assignee or transferee promptly agrees in writing to be bound by
the terms and conditions of this LICENSE AGREEMENT. BOARD may assign its
right to receive payments hereunder.
IX. PATENT MARKING
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LICENSEE agrees to mark permanently and legibly all products and
documentation manufactured, used or sold by LICENSEE under this LICENSE
AGREEMENT with such patent notice as may be permitted or required under Title
35, United States Code.
X. INDEMNIFICATION AND INSURANCE
10.1 LICENSEE shall hold harmless and indemnify BOARD, SYSTEM,
UNIVERSITY, the Regents of the SYSTEM, officers, employees and agents from
and against amounts paid to third parties as a result of claims, demands, or
causes of action whatsoever, including without limitation those arising on
account of any injury or death of persons or damage to property caused by, or
arising out of, or resulting from, the exercise or practice of the rights and
license granted under this LICENSE AGREEMENT by LICENSEE or its officers,
employees, agents or representatives; provided that (a) LICENSEE receives
prompt notice of any such claim, demand or cause of action, (b) LICENSEE
shall not be obligated to indemnify any party in connection with any
settlement for any claim, demand or cause of action unless LICENSEE consents
in writing to such settlement, and (c) subject to the statutory duty of the
Texas Attorney General, LICENSEE shall have the first right to defend any
such claim, demand or cause of action and, if LICENSEE elects to exercise
such first right, the exclusive right to control the defense thereof.
10.2 During the term of human clinical trials intended for purposes of
obtaining approval for marketing of LICENSED PRODUCTS by the FDA, or other
similar government agencies in the LICENSED TERRITORY, LICENSEE shall
maintain, at LICENSEE's expense, at least [*] of product liability insurance
per occurrence from an insurance company or companies reasonably satisfactory
to BOARD. The insurance policy relating to such coverage shall name BOARD as
an additional party insured by way of endorsement or otherwise. After
initiation of such human clinical trials, and on an annual basis thereafter,
LICENSEE shall deliver or cause to be delivered to BOARD an insurance
certificate evidencing the insurance coverage required pursuant to this
Paragraph 10.2. Prior to commercialization of any LICENSED PRODUCTS,
LICENSEE and BOARD shall negotiate in good faith an appropriate minimum level
of insurance coverage based upon usual and customary standards in the medical
products industry relevant to such LICENSED PRODUCTS.
XI. USE OF BOARD AND COMPONENTS'S NAME
LICENSEE shall not use the name of The University of Texas at Austin,
SYSTEM, BOARD, or Regents on LICENSED PRODUCTS or in advertising products
that incorporate or are covered by the PATENT RIGHTS or the TECHNOLOGY RIGHTS
without BOARD's express written consent.
XII. CONFIDENTIAL INFORMATION
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The parties may, from time to time, in connection with this LICENSE
AGREEMENT and the work contemplated under the RESEARCH AGREEMENT, disclose to
each other CONFIDENTIAL INFORMATION. "CONFIDENTIAL INFORMATION" shall mean
any information disclosed in writing by a party to either this LICENSE
AGREEMENT or the RESEARCH AGREEMENT to any of the other parties to either
this LICENSE AGREEMENT or the RESEARCH AGREEMENT, and marked by the
disclosing party with the legend "CONFIDENTIAL" or other similar legend
sufficient to identify such information as confidential proprietary
information of the disclosing party. Each party will use best efforts to
prevent the disclosure of the other party's CONFIDENTIAL INFORMATION to third
parties; provided that LICENSEE may disclose BOARD's CONFIDENTIAL INFORMATION
to the extent reasonably necessary to exploit the rights and license granted
to LICENSEE hereunder or pursuant to the RESEARCH AGREEMENT; and provided
further that the recipient party's obligations under this Article XII shall
not apply to CONFIDENTIAL INFORMATION that:
(a) is disclosed orally; provided, however, that the recipient
party's obligations under this Article XII shall apply to information
disclosed orally if such information is reduced to writing and marked
with the legend "CONFIDENTIAL" by the disclosing party within thirty
(30) days after disclosure thereof;
(b) is in the recipient party's possession at the time of disclosure
thereof as demonstrated by documentary evidence;
(c) is or later becomes part of the public domain through no fault of
the recipient party;
(d) is received from a third party having no obligations of
confidentiality to the disclosing party;
(e) is developed independently by the recipient party without access
to the disclosing party's CONFIDENTIAL INFORMATION; or
(f) is required by law or regulation to be disclosed; provided,
however, that the party subject to such disclosure requirement has
provided written notice to the other party promptly to enable such other
party to seek a protective order or otherwise prevent disclosure of such
CONFIDENTIAL INFORMATION.
In the event that LICENSEE reasonably determines that disclosure of
CONFIDENTIAL INFORMATION is necessary to exploit the rights and license
granted to LICENSEE hereunder or pursuant to the RESEARCH AGREEMENT, LICENSEE
agrees that LICENSEE shall not disclose to a third party CONFIDENTIAL
INFORMATION of any of the other parties to either this LICENSE AGREEMENT or
the RESEARCH AGREEMENT, unless either such third party has executed a
confidentiality agreement with LICENSEE containing terms and conditions
substantially similar to this Article XII, or, with respect to governmental
agencies or other regulatory bodies, other
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usual and customary procedures in the medical products industry are utilized
to protect such CONFIDENTIAL INFORMATION. The obligations of the parties
pursuant to this Article XII with respect to CONFIDENTIAL INFORMATION of the
other party shall continue in full force and effect for a period of five (5)
years after expiration or termination of the later of either this LICENSE
AGREEMENT or the RESEARCH AGREEMENT.
XIII. PATENTS AND INVENTIONS
13.1 BOARD shall have the right to file and prosecute any patent
application and maintain any patent that may issue therefrom within the
PATENT RIGHTS, and LICENSEE shall pay BOARD's expenses relating to filing and
prosecuting of such patent applications and maintaining such patents, unless
LICENSEE elects not to pay such expenses pursuant to LICENSEE's rights under
Paragraph 13.5. In addition, in the event that LICENSEE desires that BOARD
file a patent application on any invention arising out of or in connection
with the RESEARCH PROGRAM and BOARD elects to do so, BOARD shall have the
right to file and prosecute such patent application and maintain any patent
that may issue therefrom, and LICENSEE shall pay BOARD's expenses relating to
filing and prosecuting of such patent applications and maintaining such
patents, unless LICENSEE elects not to pay such expenses pursuant to
LICENSEE's rights under Paragraph 13.5. LICENSEE shall pay BOARD's expenses
relating to filing and prosecuting of such patent applications and
maintaining such patents within thirty (30) days after receipt of BOARD's
written invoice. Subject to the rights and license granted to LICENSEE
pursuant to Article IV of this LICENSE AGREEMENT, BOARD shall own all right,
title and interest in and to any patent applications, and any patents that
may issue therefrom, within the PATENT RIGHTS or that disclose inventions
arising out of or in connection with the RESEARCH PROGRAM made solely by
employees of BOARD and jointly by employees of BOARD and LICENSEE. Such
patent applications and patents issuing therefrom shall be deemed to be
patent applications and patents within the PATENT RIGHTS.
13.2 BOARD agrees to consult with LICENSEE in a timely manner concerning
the selection of patent counsel for the purpose of filing and prosecuting
patent applications within the PATENT RIGHTS. BOARD further agrees to
consult with LICENSEE in a timely manner concerning (i) scope and content of
patent applications within the PATENT RIGHTS prior to filing such patent
applications and (ii) content of and proposed responses to official actions
of the United States Patent and Trademark office and foreign patent offices
during prosecution of such patent applications. For purposes of this
Paragraph 13.2, "timely" shall mean sufficiently in advance of any decision
by BOARD or any deadline imposed upon written response by BOARD so as to
allow LICENSEE to meaningfully review such decision or written response and
also provide comments to BOARD in advance of such decision or deadline to
allow LICENSEE's comments to be considered and incorporated into BOARD's
decision or written response.
13.3 BOARD agrees to keep LICENSEE informed in a timely manner of the
contents, status and progress of all patent applications within the PATENT
RIGHTS filed and prosecuted by
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<PAGE>
BOARD. BOARD further agrees that BOARD will not allow any such patent
application or any patent that may issue therefrom to become abandoned until
LICENSEE has determined, and informed BOARD in writing, that LICENSEE does
not desire to continue prosecution or appeal(s) or maintenance of such patent
application or patent. For purposes of this Paragraph 13.3, "timely" shall
mean sufficiently in advance of any decision by BOARD or any deadline imposed
upon written response by BOARD so as to allow LICENSEE to meaningfully review
such decision or written response and also provide comments to BOARD in
advance of such decision or deadline to allow LICENSEE's' comments to be
considered and incorporated into BOARD's decision or written response.
13.4 In the event that BOARD elects not to file any patent application
within the PATENT RIGHTS, or thereafter elects not to continue prosecution of
any such patent application, or elects not to maintain any patent that may
issue therefrom, LICENSEE shall have the right, at LICENSEE's option and
expense, to file for and prosecute such patent application and maintain such
patent using patent counsel selected by LICENSEE and approved by BOARD, such
approval not to be unreasonably withheld. BOARD shall reasonably cooperate
with and assist LICENSEE in connection with any filing, prosecution and
maintenance activities undertaken by LICENSEE in accordance with this
Paragraph 13.4. LICENSEE agrees to consult with BOARD with respect to such
filing, prosecution and maintenance activities and to take into account all
comments provided by BOARD, including without limitation, comments concerning
(i) scope and content of patent applications within the PATENT RIGHTS prior
to filing such patent applications and (ii) content of and proposed responses
to official actions of the United States Patent and Trademark office and
foreign patent offices during prosecution of such patent applications.
13.5 With respect to the filing of any patent application within the
PATENT RIGHTS by either BOARD or LICENSEE, or the prosecution of any such
patent application within the PATENT RIGHTS, or the maintenance of any patent
within the PATENT RIGHTS that may issue therefrom, if LICENSEE elects not to
pay the expenses actually incurred by BOARD in filing and prosecuting such
patent application and maintaining such patent, or if LICENSEE elects not to
file for or continue prosecution of a patent application (whether such patent
application was filed by BOARD or LICENSEE) or maintain any patent that may
issue therefrom within the PATENT RIGHTS pursuant to LICENSEE's rights under
Paragraph 13.4, in any country, LICENSEE shall promptly notify BOARD in
writing sufficiently in advance of any deadline to enable BOARD, at BOARD's
expense, to file for or continue prosecution of such patent application,
and/or maintain such patent. Thereafter, LICENSEE shall have no further
rights or obligations with respect to such patent application and/or such
patent in such country.
XIV. DUE DILIGENCE
14.1 LICENSEE shall use commercially reasonable efforts to bring one or
more LICENSED PRODUCTS to market and to meet the market demand therefor.
BOARD shall have a right after two (2) years from the EFFECTIVE DATE to
terminate the exclusivity of the license
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<PAGE>
granted by BOARD to LICENSEE pursuant to Paragraph 4.1 in any national
political jurisdiction within the LICENSED TERRITORY at any time upon written
notice to LICENSEE if LICENSEE fails to provide written evidence that
LICENSEE has commercialized or is using commercially reasonable efforts to
commercialize a LICENSED PRODUCT within one hundred eighty (180) days after
receiving written notice from BOARD of BOARD's intention to terminate such
exclusivity; provided that termination of such exclusivity shall not occur
unless and until a court of competent jurisdiction has determined that
LICENSEE has not satisfied LICENSEE's obligations hereunder and such
determination is final. For purposes of this Paragraph 14.1, a determination
by a court of competent jurisdiction shall be deemed final if such
determination either is not appealed, or is appealed to and upheld or
otherwise confirmed by a court of appeals to which an appeal for review of
such determination may be made directly. Evidence provided by LICENSEE in
writing that LICENSEE has an ongoing and active research, development,
manufacturing, marketing or sublicensing program (as appropriate), directed
toward production and sale of LICENSED PRODUCTS within either the United
States or Europe shall be deemed satisfactory evidence that LICENSEE has
commercialized or is using commercially reasonable efforts to commercialize a
LICENSED PRODUCT and to meet the market demand therefor. In the event that
termination of the exclusivity of the license granted herein occurs in any
national political jurisdiction pursuant to this Paragraph 14.1, BOARD agrees
to negotiate in good faith with LICENSEE lower royalty rates with respect to
SALES of LICENSED PRODUCTS in such jurisdiction and other terms and
conditions relating to a non-exclusive right and license under LICENSED
SUBJECT MATTER to manufacture, have manufactured, use and sell LICENSED
PRODUCTS, to practice any method, process or procedure within the PATENT
RIGHTS or the TECHNOLOGY RIGHTS, and to otherwise exploit the LICENSED
SUBJECT MATTER, within such national political jurisdiction for use within
the LICENSED FIELD. This Paragraph 14.1 sets forth BOARD's sole remedy for a
failure by LICENSEE to meet LICENSEE's obligations under this Paragraph 14.1.
14.2 If LICENSEE's rights under this LICENSE AGREEMENT become
non-exclusive pursuant to Paragraph 14.1 above, and BOARD grants a license
under the PATENT RIGHTS to a third party for lower fees and/or at a lower
royalty rate than those set forth in Article V above or negotiated in good
faith pursuant to the parties obligations under Paragraph 14.1, BOARD shall
so notify LICENSEE and the amounts payable by LICENSEE hereunder shall be
reduced to such lower amounts.
XV. GENERAL
15.1 This LICENSE AGREEMENT, together with the RESEARCH AGREEMENT,
constitutes the entire understanding and only agreement between the parties
with respect to the subject matter hereof and supersedes any and all prior
negotiations, representations, agreements, and understandings, written or
oral, that the parties may have reached with respect to the subject matter
hereof. No agreements altering or supplementing the terms hereof may be made
except by means of a written document signed by the duly authorized
representatives of each of the parties hereto.
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<PAGE>
15.2 LICENSEE's sole obligation to bring LICENSED PRODUCTS to market and
meet the market demand therefor is as set forth in Article XIV. Nothing in
this LICENSE AGREEMENT shall be deemed to require LICENSEE to otherwise
exploit the LICENSED SUBJECT MATTER for commercial purposes, or prevent
LICENSEE from commercializing products similar to or competitive with a
LICENSED PRODUCT.
15.3 In the event either party hereto is prevented from or delayed in the
performance of any of its obligations hereunder by reason of acts of God,
war, strikes, riots, storms, fires, or any other cause whatsoever beyond the
reasonable control of the party, the party so prevented or delayed shall be
excused from the performance of any such obligation to the extent and during
the period of such prevention or delay.
15.4 Any notice or other communication required by this LICENSE AGREEMENT
shall be made in writing and given by prepaid, first class, certified mail,
return receipt requested, and shall be deemed to have been served on the date
received by the addressee at the following address or such other address as
may from time to time be designated to the other party in writing:
If to BOARD: BOARD OF REGENTS
The University of Texas System
201 West 7th Street
Austin, Texas 78701
ATTENTION: System Intellectual Property
Office
with a copy to:
Executive Vice President and Provost
The University of Texas at Austin
Main Building 201
Austin, Texas 78712-1111
ATTENTION: Patricia C. Ohlendorf
If to LICENSEE: PEGAS PHARMACEUTICALS, INC.
2200 Sand Hill Road
Menlo Park, California 94025
ATTENTION: Vice President,
Corporate Development
15.5 LICENSEE shall comply with all applicable federal, state and local
laws and regulations in connection with its activities pursuant to this
LICENSE AGREEMENT.
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<PAGE>
15.6 This LICENSE AGREEMENT shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Texas; provided,
however, that all questions with respect to validity of any patents or patent
applications within the PATENT RIGHTS shall be determined in accordance with
the laws of the respective country in the territory in which such patents or
patent applications shall have been granted or filed, as applicable.
15.7 A waiver, express or implied, by either BOARD or LICENSEE of any
right under this LICENSE AGREEMENT or of any failure to perform or breach
hereof by the other party hereto shall not constitute or be deemed to be a
waiver of any other right hereunder or of any other failure to perform or
breach hereof by such other party, whether of a similar or dissimilar nature
thereto.
15.8 Headings included herein are for convenience only, do not form a
part of this LICENSE AGREEMENT and shall not be used in any way to construe
or interpret this LICENSE AGREEMENT.
15.9 If any provision of this LICENSE AGREEMENT shall be found by a court
of competent jurisdiction to be void, invalid or unenforceable, the same
shall be reformed to comply with applicable law or stricken if not so
reformable, so as not to affect the validity or enforceability of the
remainder of this LICENSE AGREEMENT.
15.10 This LICENSE AGREEMENT may be executed in counterparts, each of
which shall be deemed an original, but which together shall constitute one
and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this LICENSE AGREEMENT.
BOARD OF REGENTS OF THE PEGAS PHARMACEUTICALS, INC.
UNIVERSITY OF TEXAS SYSTEM ("LICENSEE")
("BOARD")
By: /s/ Thomas G. Ricks By: /s/ Mark Levin
---------------------------- -----------------------------
Thomas G. Ricks Name: Mark Levin
Acting Vice Chancellor ------------------------
for Asset Management Title: CEO
-----------------------
APPROVED AS TO CONTENT:
By: /s/ William H. Cunningham
----------------------------
William H. Cunningham
President
The University of Texas at Austin
APPROVED AS TO FORM:
By:/s/ Dudley R. Dobie, Jr.
-----------------------------
Dudley R. Dobie, Jr.,
Office of General Counsel
CERTIFICATE OF APPROVAL
I hereby certify that the foregoing Agreement was approved by the Board
of Regents of The University of Texas System on the 11th day of June, 1992
and that the person whose signature appears above is authorized to execute
such Agreement on behalf of the Board.
/s/ Arthur H. Dilly
- -------------------------------------
Executive Secretary, Board of Regents
The University of Texas System
ARTHUR H. DILLY
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<PAGE>
SCHEDULE A
PATENT RIGHTS
COUNTRY FILING DATE
UTSB# SERIAL NO. (PRIORITY) TITLE/INVENTORS
- -------------------------------------------------------------------------------
496 U.S. 843,485 [*] Photopolymerizable
Biodegradable Hydrogels as
Tissue Contracting Materials
and Controlled-Release
Carriers
Hubbell, Jeffery A.
Pathak, Chandrashekhar P.
Sawhney, Amapreet S.
* Confidential treatment has been requested for marked portion
<PAGE>
Ex-10.11
EXCLUSIVE LICENSE AGREEMENT
EXCLUSIVE LICENSE AGREEMENT
By and Among
MARVIN J. SLEPIAN, M.D.,
ENDOLUMINAL THERAPEUTICS, INC.
and
PEGAS PHARMACEUTICALS, INC.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 - DEFINITIONS .................................................. 1
1.1 Affiliate ................................................. 1
1.2 Confidential Information .................................. 1
1.3 Consulting Agreement ...................................... 2
1.4 Contract Research Period .................................. 2
1.5 Field ..................................................... 2
1.6 Net Revenues .............................................. 2
1.7 Other Royalty Product ..................................... 2
1.8 Patented Product(s) ....................................... 3
1.9 Patent Rights ............................................. 3
1.10 Related Technology ........................................ 4
1.11 Research Agreement ........................................ 4
1.12 Stock Purchase Agreement .................................. 4
1.13 Valid Claim ............................................... 4
ARTICLE 2 - LICENSE AND ROYALTY .......................................... 4
2.1 Exclusive License ......................................... 4
2.2 Base Royalties ............................................ 5
2.3 Third Party Royalties ..................................... 5
2.4 Single Royalty; Non-Royalty Sales ......................... 6
2.5 Payment of Royalties ...................................... 7
2.6 Books and Records ......................................... 8
ARTICLE 3 - CONTRACT RESEARCH SERVICES ................................... 8
3.1 Research Funding .......................................... 8
3.2 Payments; Budgets ......................................... 8
3.3 Personnel ................................................. 9
3.4 Equipment ................................................. 9
3.5 Substitute Research Agreement ............................. 9
3.6 Termination of Research Agreement ......................... 10
ARTICLE 4 - DISCLOSURE AND PROTECTION OF PROPRIETARY
RIGHTS ............................................................ 10
4.1 Disclosure ................................................ 10
4.2 Filing, Prosecution and Maintenance by Pegas .............. 11
4.3 Filing, Prosecution and Maintenance by ETI ................ 12
4.4 Confidential Information .................................. 12
4.5 Other Technology .......................................... 13
4.6 Publications .............................................. 15
ARTICLE 5 - WARRANTIES; INFRINGEMENT ..................................... 16
5.1 Warranties ................................................ 16
5.2 Limitation ................................................ 17
5.3 Effect of Representations and Warranties .................. 17
5.4 Infringement by Third Parties ............................. 17
<PAGE>
5.5 Infringement by Patented Product(s); Other
Royalty Products .......................................... 18
ARTICLE 6 - AGREEMENTS OF PEGAS .......................................... 18
6.1 Indemnification ........................................... 18
6.2 Patent Marking ............................................ 19
6.3 Insurance ................................................. 19
ARTICLE 7 - TERM AND TERMINATION ......................................... 20
7.1 Term ...................................................... 20
7.2 Default ................................................... 20
7.3 Termination by Pegas ...................................... 21
7.4 Bankruptcy ................................................ 21
7.5 Survival .................................................. 22
ARTICLE 8 - OTHER AGREEMENTS ............................................. 23
ARTICLE 9 - DUE DILIGENCE ................................................ 23
9.1 Obligation to Exploit ..................................... 23
9.2 Milestones ................................................ 23
9.3 Remedy .................................................... 24
9.4 Adjustment ................................................ 24
ARTICLE 10 - GENERAL ..................................................... 24
10.1 Notices ................................................... 24
10.2 Arbitration ............................................... 25
10.3 Relationship of the Parties ............................... 25
10.4 Force Majeure ............................................. 25
10.5 Governing Law ............................................. 26
10.6 Assignment ................................................ 26
10.7 Waiver .................................................... 26
10.8 Modifications ............................................. 26
10.9 Severability .............................................. 26
10.10 Complete Agreement ........................................ 26
10.11 No Implied Obligations .................................... 26
10.12 No Consequential Damages .................................. 26
10.13 Counterparts and Headings ................................. 27
10.14 Confidential Terms ........................................ 27
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<PAGE>
EXCLUSIVE LICENSE AGREEMENT
THIS AGREEMENT, including the attached Exhibits, (the
"Agreement") is made and entered into effective as of the day of 7th day of
August, 1992 (the "Effective Date"), by and among MARVIN J. SLEPIAN, M.D. ("Dr.
Slepian"), ENDOLUMINAL THERAPEUTICS, INC., a Delaware corporation, ("ETI") and
PEGAS PHARMACEUTICALS, INC., a Delaware corporation ("Pegas").
RECITALS
A. Dr. Slepian has developed technology related to that certain Field
defined below, certain of which technology is the subject of United States,
European and other patent applications.
B. Dr. Slepian is the sole shareholder and director, and an officer, of
ETI and has assigned to ETI all rights in and to such technology, including the
patent rights thereto.
C. Pegas desires to acquire, and ETI is willing to grant to Pegas, an
exclusive license to use such technology and an exclusive license under the
related patent rights, all under the terms set forth below.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE 1
DEFINITIONS
For the purposes of this Agreement, the following defined terms will have
the respective meanings set forth in this Article 1:
1.1 Affiliate. The term "Affiliate" means any person or entity which,
directly or indirectly, owns or controls Pegas, or which is controlled by or
under common control with Pegas. For purposes of this definition, "control"
means the ownership, directly or indirectly, of twenty percent (20%) or more of
the outstanding equity securities of a corporation entitled to vote in the
election of directors or a twenty percent (20%) or greater interest in the net
assets or profits of an entity which is not a corporation.
1.2 Confidential Information. The term "Confidential Information" has the
meaning ascribed in Section 4.4 of this Agreement.
<PAGE>
1.3 Consulting Agreement. The term "Consulting Agreement" means the
certain Agreement for Consulting Services dated August 7th, 1992 between Pegas
and Dr. Slepian in the form of Exhibit E attached hereto.
1.4 Contract Research Period. The term "Contract Research Period" means
the period commencing on the Effective Date and continuing until the end of the
period for which Pegas provides funding to ETI or Dr. Slepian's employer under
Article 3 below, or the termination of the Consulting Agreement, whichever is
later.
1.5 Field. The term "Field" shall mean any products, methods or other
subject matter related to endoluminal, endomural, ectoluminal or other
polymer-based paving systems or devices, or other subject matter described on
Exhibit A hereto in each case for all human applications. Without limiting
the foregoing, it is understood that all inventions covered by Existing
Patent Rights (as defined in 1.9 below) shall be within the Field.
1.6 Net Revenues. The term "Net Revenues" means the gross receipts paid
to Pegas, its Affiliates or sublicensees for sales of Patented Product(s) or
Other Royalty Products (as the case may be) worldwide less (i) all trade,
quantity and cash discounts actually allowed and refunded, (ii) all credits and
allowances actually refunded on account of rejection, returns, billing errors or
retroactive price reductions, (iii) duties and tariffs paid by Pegas, (iv)
freight and transportation costs paid by Pegas, and (v) excise, sale and use
taxes and equivalent taxes paid by Pegas.
1.7 Other Royalty Product. The term "Other Royalty Product" shall mean
any product, component, device, method or process (each, an "Item"), other than
a Patented Product, whose sale or principal intended use:
(a) would infringe, contributorily infringe or induce the
infringement of a claim of a patent application within the Patent Rights
filed in the country in which such Item is sold; or
(b) would infringe, contributorily infringe or induce the
infringement of a claim of a patent application within the Patent Rights
filed in the United States, whether or not such application has also been
filed in the country of sale; or
(c) would not infringe, contributorily infringe or induce the
infringement of a claim of a patent application described in (a) or (b),
but that would be a Patented Product if concurrently sold in the United
States.
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<PAGE>
However, an Item shall not be an "Other Royalty Product" by reason of a patent
application described in (a) or (b) above if such Item is sold more than eight
(8) years after the date from which such patent application takes priority for
filing purposes.
1.8 Patented Product(s). The term "Patented Product(s)" means any Item
whose sale or principal intended use would infringe, contributorily infringe or
induce the infringement of one or more Valid Claims in the country in which such
Item is sold.
1.9 Patent Rights. The term "Patent Rights" shall mean any and all patents
and patent applications (including utility model patents and
applications therefor) and all rights thereunder:
(a) that claim inventions within the Field conceived or developed by
Dr. Slepian, alone or jointly with others, prior to the Effective Date; or
(b) that claim inventions conceived or developed during the Contract
Research Period by Dr. Slepian, alone or jointly with others, which relate
to the Field or were conceived or developed in the course of performing
research in connection with Article 3 below; or
(c) that claim inventions conceived or developed during the Contract
Research Period by ETI employees or third parties acting on behalf of ETI,
which relate to the Field or were conceived or developed in the course of
performing research in connection with Article 3 below.
However, the Patent Rights shall not include any patents or applications, to
the extent that they are owned by the University of Arizona, the Veterans
Administration Medical Center, Tucson, Arizona, or any subsequent primary
employer (but not including consulting and other similar engagements) of Dr.
Slepian by reason of Dr. Slepian's employment by such entity, or to the
extent such patents or applications are owned by Pegas under the Consulting
Agreement or otherwise. It is understood that the applications described in
(a) above include all applications listed in Exhibit C hereto any
continuations, continuations-in-part, divisions and substitutions of such
listed applications; and all patents which may issue upon any of the
foregoing, together with all renewals, reissues and extensions thereof
(together, the "Existing Patent Rights").
It is further understood that the Patent Rights shall not include any patents
or applications to the extent they include claims specifically directed to
subject matter described in Exhibit B hereto provided that the foregoing
shall not be deemed to imply that any subject matter claimed in the Existing
Patent Rights is not within the Patent Rights for all purposes of this
Agreement.
* Confidential treatment has been requested for marked portion
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<PAGE>
1.10 Related Technology. The term "Related Technology" shall mean any
research and development information, inventions, copyrightable materials,
know-how, and all preclinical, clinical and other technical data in the
possession of Dr. Slepian or ETI prior to the Effective Date, or during the
Contract Research Period, in each case which relate directly to the Field or the
Patent Rights and which ETI or Dr. Slepian has the right to provide to Pegas.
1.11 Research Agreement. The term "Research Agreement" shall have the
meaning defined in section 3.1 of this Agreement.
1.12 Stock Purchase Agreement. The term "Stock Purchase Agreement" means
the certain Stock Purchase Agreement dated August 7th, 1992 between Pegas and
Dr. Slepian in the form of Exhibit F attached hereto.
1.13 Valid Claim. The term "Valid Claim" shall mean a claim of an issued
and unexpired patent included within the Patent Rights, which has not been held
unenforceable, unpatentable or invalid by a court or other governmental agency
of competent jurisdiction. In the event that such a holding of unenforceability,
unpatentability or invalidity is reversed on appeal by a higher court or agency
of competent jurisdiction, the subject claim shall be reinstated as a Valid
Claim hereunder.
ARTICLE 2
LICENSE AND ROYALTY
2.1 Exclusive License.
(a) ETI and Dr. Slepian hereby grant to Pegas the exclusive (except
to the extent provided in Section 4.5(b)(ii) herein), worldwide license,
under the Patent Rights and the Related Technology, to develop,
manufacture, use, sell, exploit and otherwise commercialize any products,
to practice any method, process or procedure, and to otherwise exploit the
Patent Rights and the Related Technology within the Field.
(b) The license granted under (a) above shall be exclusive even as
to ETI and Dr. Slepian, and shall include the right to grant and
authorize sublicenses within the Field under the Patent Rights and
Related Technology; provided, however, that such sublicenses shall in
each case include all applicable restrictions and limitations of this
Agreement. Pegas agrees to notify ETI if any sublicenses are granted by
Pegas under the Patent Rights.
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<PAGE>
(c) Notwithstanding (a) above, Dr. Slepian and ETI reserve for
themselves the perpetual right and license to use the Related Technology
and any inventions disclosed and claimed in the Patent Rights for their
own academic research purposes and to perform their obligations under
Article 3 below.
2.2 Base Royalties. In consideration of the rights and licenses granted to
Pegas hereunder, and of the obligations of Dr. Slepian and ETI hereunder, Pegas
agrees to pay ETI as a "Royalty" or "Royalties" the following amounts:
(a) [*] of Net Revenues received by Pegas or its
Affiliates upon their respective sales of Patented Products;
(b) [*] of Net Revenues received by Pegas'
non-Affiliate sublicensees upon their sales of Patented Products; and
(c) [*] of the Net Revenues received by Pegas, its
Affiliates or sublicensees upon their respective sales of Other Royalty
Products.
As to each Patented Product or Other Royalty Product, royalties under this
Section 2.2 shall be payable until the later of either (i) the expiration of the
last-to-expire patent within the Patent Rights, or (ii) fifteen (15) years after
the first accrual of any royalty under this Section 2.2. If a product that has
been sold as a Patented Product in a country ceases to be a Patented Product in
such country prior to the end of the period in clause (ii) above, because all
claims within the Patent Rights that cover such product in such country have
expired, the product shall thereafter be deemed an "Other Royalty Product" in
such country until the end of such period.
2.3 Third Party Royalties. Notwithstanding 2.2 above, if Pegas becomes
obligated to pay to non-Affiliate third parties royalties with respect to a
Patented Product under either (i) license agreements for other technologies
which Pegas, in Pegas' reasonable judgment, determines are desirable to
incorporate in such Patented Product, or (ii) license agreements relating to
patent applications or patents within the Patent Rights that are jointly owned
by Dr. Slepian or ETI, and such third parties which Pegas, in Pegas' reasonable
judgment, determines are desirable with respect to such Patented Product, and
the total royalties to be paid by Pegas to ETI and such third parties would
exceed the amounts to be paid to ETI pursuant to Section 2.2, then the amounts
to be paid to ETI pursuant to Section 2.2 shall be reduced in accordance with
the following formulas:
* Confidential treatment has been requested for marked portion
-5-
<PAGE>
(a) Sales by Pegas and Affiliates. Royalties payable on Net Revenues
received by Pegas and/or its Affiliates from such Patented Product shall
equal [*] as royalties to ETI and such third parties (prior to the
adjustment hereunder and any similar adjustment in the amount to be paid
to such third parties); and
(b) Sales by Sublicensees. Royalties payable on Net Revenues
received by Pegas' non-Affiliate sublicensees from such Patented Product
shall equal [*] as royalties to ETI and such third parties (prior to
the adjustment hereunder and any similar adjustment in the amount to be
paid to such third parties).
Notwithstanding the foregoing, the reductions in (a) and (b) above shall not
reduce [*] the amounts otherwise payable under this Agreement to ETI with
respect to a Patented Product, unless [*] royalty is payable to Non-Affiliate
third parties with respect to such Patented Product; if [*] royalty is
payable to Non-Affiliate third parties with respect to a Patented Product,
the reductions in (a) and (b) may not reduce to [*] of the applicable Net
Revenues the royalties payable to ETI with respect to such Patented Product.
It is understood that the adjustment in this Section 2.3 shall not apply to
increase the amounts payable under Section 2.2 above; nor shall this Section
2.3 apply to royalties payable on Other Royalty Products.
2.4 Single Royalty; Non-Royalty Sales.
(a) It is understood that [*] royalty is payable with respect
to a Patented Product, regardless of how many claims or patents within the
Patent Rights cover such Patented Product, and that [*] royalty shall
be payable under this Article 2 with respect to any particular product
unit. Such royalty shall be the highest applicable royalty under either
(a), (b) or (c) of Section 2.2, subject to reduction in accordance with
Section 2.3. In addition, [*] royalty shall be payable under this
Agreement with respect to sales of Patented Products or Other Royalty
Products among Pegas, its Affiliates and/or sublicensees for resale, upon
the understanding that royalties will be due pursuant to the terms of this
Agreement upon such resale. Nor shall a royalty be payable under this
Article 2 with respect to sales of Patented Products or Other Royalty
Products for use in research and/or development, in clinical trials or as
samples; provided that such research and/or development materials,
clinical trial materials or samples are sold at a
* Confidential treatment has been requested for marked portion
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price of [*]. For purposes of this Section 2.4(a), "Cost" shall mean
the fully burdened cost of manufacturing a Patented Product or Other
Royalty Product, as applicable, including without limitation the direct
cost of labor, materials and allocable pharmaceutical manufacturing
overheads in accordance with generally accepted accounting principles
consistently applied.
(b) It is understood that certain claims of the Patent Rights are
directed to methods for treating patients. If Pegas, Pegas' Affiliates or
sublicensees receive a separate fee from a physician, hospital or similar
direct health care provider for the right to practice a method comprising
a Patented Product or Other Royalty Product, such fee shall be included as
gross receipts from a sale of a Patented Product or Other Royalty Product
(as the case may be) in determining Net Revenues. Otherwise, amounts
received by Pegas, Pegas' Affiliates or sublicensees for a sublicense to
practice such methods shall not be deemed "Net Revenues" and in no event
shall amounts received by a physician, hospital or other direct health
care provider for treatments using such methods be deemed "Net Revenues."
2.5 Payment of Royalties.
(a) Reports; Payments. All accrued Royalties pursuant to Section 2.2
above will be due and payable quarterly. Pegas will render payment to ETI
within ninety (90) days after the end of each calendar quarter for all
Royalties that are due and payable and which accrued during such calendar
quarter. Pegas will provide with each Royalty payment a written statement
in reasonable detail setting forth Patented Products and Other Royalty
Products sold and the computation of the total Net Revenues from
Royalty-bearing worldwide sales during the period covered by such
statement. If any payment is late, Pegas will pay interest at the rate of
one percent (1%) per month or the maximum rate permitted by law, whichever
is lower, on any overdue amount from the date such overdue amount was due
until such overdue amount is paid in full.
(b) Currency. If any currency conversion is required in connection
with the calculation of Royalties hereunder, such conversion shall be made
by using the exchange rates used by Pegas in calculating its own revenues
for financial reporting purposes.
(c) Withholding Taxes. Any withholding or other tax that Pegas or
any of its Affiliates or sublicensees are required by statute to withhold
and pay on behalf of ETI with respect to the Royalties payable to ETI
under this Agreement shall be deducted from said Royalties and promptly
* Confidential treatment has been requested for marked portion
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paid to the taxing authority; provided, however, that in regard to any tax
so deducted, Pegas shall furnish ETI with proper evidence of the taxes
paid on its behalf.
2.6 Books and Records. Pegas will maintain a separate record in detail
reasonably sufficient to enable the Net Revenues and Royalties to be
determined. Pegas will permit such records to be examined at ETI's expense,
upon at least ten (10) days written notice and no more than twice per
calendar year, by an auditor or accountant selected by ETI and to whom Pegas
has no reasonable objection. Such examination may be conducted during
business hours and shall be limited to the extent reasonably necessary to
verify the Net Revenues and Royalties. ETI and Dr. Slepian agree that all
information obtained in the course of such examination shall be deemed
Confidential Information of Pegas. In the event the examination of the
records reveals a shortfall of [*] or more of the total payments due ETI in
the period examined, Pegas will bear the entire cost of the examination of
the records, and will pay the overdue amount plus interest at the rate of one
percent (1%) per month, or the maximum permitted by law, whichever is lower,
from the date such overdue amount was due under Section 2.5(a).
ARTICLE 3
CONTRACT RESEARCH SERVICES
3.1 Research Funding. Pegas agrees to use its best commercial efforts
to enter into a Research Agreement with the University of Arizona and/or the
Veterans Administration Medical Center, Tucson, Arizona, (the "Research
Agreement") to fund research by Dr. Slepian in the amount of [*], plus
standard overhead charges of not more than [*] of such amounts, such funds to
be provided Over a period of [*]. In addition to such funds to be so
provided, Pegas shall provide to ETI an additional amount of [*] in accordance
with Section 3.2. It is understood that, if research is progressing in
accordance with the goals and objectives agreed upon between Pegas and Dr.
Slepian under the Research Agreement, the parties intend to extend the
Research Agreement for [*] at the rate of [*] per year, plus overhead charges
not exceeding [*] (including without limitation any amounts paid directly to
ETI).
3.2 Payments; Budgets. The amounts to be provided directly to ETI under
Section 3.1 above shall be paid in [*] quarterly payments of [*] each, to be
paid within ten (10) days after the beginning of each of the first [*]
calendar quarters commencing after the Effective Date. The parties agree that
such amounts shall be used for Dr.
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Slepian to attend at least [*] scientific meetings per year related to the
Field and for such other matters as the parties shall mutually agree.
3.3 Personnel. Pegas agrees to provide funds for support of a
post-doctoral research fellow and, in addition, a histology-laboratory
technician, each appointed for the purpose of conducting research under the
Research Agreement in Dr. Slepian's laboratory. The amount of such funds for
the post-doctoral research fellow shall not exceed an annual salary equal to
[*] payable in equal monthly installments and less applicable withholding and
other payroll deductions, if any, plus a consulting fee equal to [*] payable
in equal monthly installments. The amount of such funds for the
histology-laboratory technician shall not exceed [*] of the usual and
customary annual salary for similar appointments for similar services in the
Tucson, Arizona area.
3.4 Equipment. For each of the first [*] periods after the Effective
Date, Pegas agrees to acquire and provide to The University of Arizona, or
the Veterans Administration Medical Center, Tucson, Arizona, for use in Dr.
Slepian's laboratory under the Research Agreement (or to a substitute
employer under any substitute agreement entered into under Section 3.5
below), scientific equipment that would be useful in connection with the
activities contemplated under this Article 3. Such equipment shall have a
bona fide delivered and installed purchase price of not more than [*] for
each such period (i.e., a total of [*]). Dr. Slepian shall provide to Pegas a
list of the equipment to be provided, and subject to availability and the
dollar limits in this Section 3.4, Pegas shall promptly provide such
equipment. Upon request by Dr. Slepian after the term of the Research
Agreement or [*] months after the Effective Date, whichever is later, or at
such earlier time as Pegas ceases to conduct all material business or sells
all or substantially all of its assets, Pegas agrees promptly to convey (or
cause the conveyance of) title to such equipment to ETI, without any charge
to ETI. Dr. Slepian will continue to have access to such equipment until
title is so conveyed to ETI. It is understood that Pegas may lease such
equipment from third parties, so long as Pegas obtains the right to convey
title tic such equipment to ETI as required by this Section 3.4.
3.5 Substitute Research Agreement. In the event that Dr. Slepian ceases to
be a faculty member of the University of Arizona and/or a member of the staff of
the Veterans Administration Medical Center, Tucson, Arizona, as applicable to
the Research Agreement, during the term of the Research Agreement, Pegas agrees
to use its best commercial efforts to promptly terminate the Research Agreement
and use its best commercial efforts to enter into a comparable agreement with
any non-
* Confidential treatment has been requested for marked portion
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Affiliate nonprofit academic institution reasonably approved by Pegas and of
which Dr. Slepian becomes a full-time employee within nine (9) months after
ceasing to be a faculty member of the University of Arizona. It is understood
that Pegas' obligation to enter into such an agreement shall be subject to
agreement by the particular institution, and that Pegas shall not be required to
undertake any obligations that are more burdensome than those contained in the
Research Agreement. The total funding provided by Pegas under the Research
Agreement and any, substitute agreement entered into under this Section 3.5 for
purposes of funding research by Dr. Slepian shall not exceed the total amount
originally required under the Research Agreement. It is understood that, in the
event Pegas is obligated to enter into a substitute research agreement under
this Section 3.5, the Contract Research Period shall continue after termination
of the Research Agreement until the end of the term of any substitute research
agreement (and any extensions thereof), or the end of the period for which
Pegas provides funding to ETI under this Article 3, or the termination of the
Consulting Agreement, whichever is later.
3.6 Termination of Research Agreement. Pegas agrees not to terminate, or
cause the termination of, the Research Agreement to be entered into pursuant to
Section 3.1, or any substitute research agreement entered into pursuant to
Section 3.5, if applicable, prior to the second anniversary of the Effective
Date, except as provided in either (i) Section 3.5 above or (ii) as a result of
a material failure by The University of Arizona, or the Veterans Administration
Medical Center, Tucson, Arizona, or any non-Affiliate nonprofit academic
institution of which Dr. Slepian becomes a full-time employee, if applicable
pursuant to Section 3.5, or Dr. Slepian to comply with the provisions of the
Research Agreement or any substitute research agreement, if applicable, which
failure has not been cured within thirty (30) days after a written notice
thereof by Pegas. if Pegas terminates the Research Agreement by reason of Dr.
Slepian's failure to comply, as provided in (ii) above, Pegas, obligations under
this Article 3 shall terminate as of the effective date of such termination. It
is understood, however, that Pegas' obligation under Section 3.4 above to make
available to Dr. Slepian the equipment described therein shall not terminate by
reason of a termination of the Research Agreement under Section 3.5 above.
ARTICLE 4
DISCLOSURE AND PROTECTION OF PROPRIETARY RIGHTS
4.1 Disclosure. ETI and Dr. Slepian will promptly disclose to Pegas all
aspects of the Related Technology and any inventions covered by the Patent
Rights as of the Effective Date and as may
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be conceived or developed from time to time throughout the term of this
Agreement, together with copies of all laboratory notebooks and other written
materials describing such Related Technology and/or inventions. In addition, ETI
agrees to provide to Pegas complete copies of all patent applications within the
Patent Rights, and all written materials pertaining thereto, including without
limitation files of any patent counsel involved in such applications. Upon
request by Pegas, Dr. Slepian and ETI agree to provide reasonable assistance to
Pegas and its representatives in understanding any or all such items. Pegas
agrees to pay reasonable out-of-pocket costs paid to non-employee third parties
by ETI and Dr. Slepian to provide materials or assistance requested by Pegas
under this Section 4.1, provided that ETI or Dr. Slepian obtained Pegas' prior
written approval of such expenditures.
4.2 Filing, Prosecution and Maintenance by Pegas.
(a) Pegas will have the right, in its discretion, to take
responsibility for, and control of, the filing for, prosecution and
maintenance of the Patent Rights in ETI's or Slepian's name, with the
input and participation of ETI and Dr. Slepian. Dr. Slepian and ETI
shall cooperate with and assist Pegas in connection with the filing for,
prosecution and maintenance of the Patent Rights, and in evidencing and
perfecting the rights granted to Pegas under this Agreement, and Pegas
shall keep ETI fully informed as to the status of the Patent Rights.
(b) Pegas agrees to reimburse ETI for legal fees and expenses
incurred in connection with the prosecution of the Patent Rights and
negotiating this Agreement prior to the Effective Date, up to [*], as
follows: [*] of such amount shall be paid in [*] quarterly installments
of [*] each during the first [*] after the Effective Date. The remainder
shall be paid in [*] installments of [*] each, due on May 1 of each of
the years [*].
(c) Pegas shall have the right to deduct from Royalties payable to
ETI under Article 2 with respect to a Patented Product or Other Royalty
Product [*] of the out-of-pocket costs paid by Pegas to non-employee
third parties to file for, prosecute, and maintain the Patent Rights (not
including the past expenses of ETI and Dr. Slepian reimbursed by Pegas
under paragraph (b) above) relating to such Patented Product or Other
Royalty Product in any country; provided, however, that the amount
deducted from such Royalties in any given quarterly payment shall not
exceed [*] of the Royalty that would
* Confidential treatment has been requested for marked portion
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otherwise be due for such Patented Product or Other Royalty Product.
4.3 Filing, Prosecution and Maintenance by ETI. In the event Pegas elects
not to pursue a patent application within ninety (90) days after receipt of all
information and materials therefor from Dr. Slepian and ETI pursuant to Section
4.1, or elects not to maintain an issued patent, within the Patent Rights in any
particular country, ETI may pursue the same in such country at its own expense.
In such event Pegas will, at ETI's request, cooperate with ETI in obtaining
and/or maintaining such patents, including but not limited to providing ETI with
applicable documents and information in Pegas' possession, as reasonably
requested by ETI. Pegas agrees to inform ETI of its decision to abandon such a
patent or application in any country at least ninety (90) days prior to the date
such abandonment would be effective, to enable ETI to continue the prosecution
or maintenance of such application or patent. Notwithstanding the above, such
patent applications and patents shall remain within the Patent Rights. In the
event that Pegas exploits such patent applications and patents, Pegas shall
reimburse Dr. Slepian and ETI for legal fees and expenses incurred in connection
with the filing, prosecution and maintenance of such patent applications and
patents.
4.4 Confidential Information.
(a) General. The term "Confidential Information" as used in this
Agreement will include all proprietary information concerning the Patent
Rights or Related Technology. With respect to the obligations of ETI and
Dr. Slepian under this Section 4.4, "Confidential Information" shall also
include any information provided by Pegas to Dr. Slepian or ETI in a
tangible form marked "confidential" or with a similar designation or that
Pegas disclosed to ETI or Dr. Slepian orally and confirmed such
information in writing as confidential within a reasonable time after its
initial disclosure. Each party agrees to maintain the confidentiality of
the Confidential Information, not to disclose such Confidential
Information to third parties, and to take all reasonable efforts to make
the Confidential Information known only to those employees who need to
have access to the Confidential Information. Notwithstanding the
foregoing, Pegas may disclose information concerning the Patent Rights or
Related Technology to actual or prospective sublicensees, and to such
other persons and in such other manner as Pegas deems reasonably necessary
in connection with its business.
(b) Exceptions. However, neither ETI nor Dr. Slepian, on the one
hand, nor Pegas, on the other hand, will have any obligation of confidence
under this Agreement with respect to any information which:
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(i) was at the time of disclosure thereof, already known to
such party other than from the disclosing party; or
(ii) without breach of this Agreement, has been published or
is otherwise available to the public at any time whether before or
after the time of disclosure to such party; or
(iii) is at any time lawfully received by such party from a
third party who has no obligation of confidence to a party hereto in
respect thereof.
Any information which is within (i), (ii) or (iii) above shall not be
included within the definition of Confidential Information for purposes of
this Section 4.4. Notwithstanding the foregoing, it is understood that Dr.
Slepian and ETI shall not be relieved of their obligations under this
Section 4.4 not to disclose to third parties information concerning the
Patent Rights or Related Technology by reason of (i) or (iii) above.
4.5 Other Technology.
(a) For a period of five (5) years after the Effective Date, ETI and
Dr. Slepian (each, a "Licensor") hereby grant to Pegas a right of first
refusal with respect to the grant of any license or other rights by either
Licensor to any technology that either Licensor develops or owns during
such period and that is not licensed to Pegas under this Agreement. If
during such period, either Licensor proposes to grant such a license or
right, it shall notify Pegas in writing, with the terms and conditions on
which such Licensor proposes to grant such license or rights, together
with the name of the party to whom such license or rights would be
granted. Pegas shall have a period of ninety (90) days to elect to
acquire the license or rights on the terms and conditions specified in the
notice, and both Licensors agree to be available to Pegas during such
period and to provide all reasonable assistance to enable Pegas to
evaluate the subject technology. If Pegas does not notify the proposing
Licensor in writing that Pegas wishes to acquire such license or rights
during the ninety (90) day period, the Licensor may grant the license or
other rights to the party named in such initial notice; provided that such
license or other rights are granted on terms that are not materially, less
favorable to the Licensor (or materially more favorable to the third
party) than those offered to Pegas.
(b) If Dr. Slepian conceives and reduces to practice after the
Contract Research Period an invention within the
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Field, Dr. Slepian shall notify Pegas in writing. Following such notice:
(i) Pegas shall have an option to include within the Patent Rights
all worldwide patents and applications claiming such invention. To
exercise such option, Pegas must elect to undertake the prosecution of
applications for such patent rights in the United States and such other
countries as Pegas deems appropriate, which election shall be made by
Pegas so notifying Dr. Slepian in writing within ninety (90) days after
receiving Dr. Slepian's notice describing the invention. During such
ninety (90) day period, Dr. Slepian and ETI shall cooperate with, and
reasonably assist Pegas, in evaluating the invention and patentability
thereof. Upon such election by Pegas, all worldwide patent rights claiming
the subject invention shall be within the Patent Rights for all purposes
of this Agreement, and Pegas shall use diligent efforts to file for,
prosecute and maintain such Patent Rights in all countries for which such
efforts are reasonably justified. In addition, following Pegas' election
to include an invention within the Patent Rights under this Section
4.5(b), Pegas shall use commercially reasonable efforts to develop and
bring to market one or more products based upon such Patent Rights.
(ii) If Pegas does not elect to include such invention within the
Patent Rights in accordance with subparagraph (b) (i) above, Dr. Slepian
or ETI shall be free to license and exploit such invention at his or its
discretion, without Pegas having any right of first refusal with respect
to such invention under paragraph (a) above, but subject to Pegas'
exclusive license under the Patent Rights and the Related Technology
hereunder. In addition, if Dr. Slepian or ETI ("Applicant") has filed a
United States patent application claiming the invention and reasonably
expects to obtain a patent on such application, and a license under the
Patent Rights is necessary to exploit such patent application or such
patent (a "Dominated Patent"), Applicant shall have the right to grant to
a licensee under the Dominated Patent a nonexclusive license to practice
the Patent Rights, subject to the terms and conditions of Exhibit D
hereto. Notwithstanding the foregoing, Applicant shall not have the right
to grant such a license to practice the Patent Rights in connection with
the manufacture, sale or use of a Competitive Product (as defined below),
or to the extent that Pegas has previously granted a sublicense to a third
party for use in the field of the Dominated
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Patent. At least twenty (20) days prior to granting such a license,
Applicant shall provide to Pegas a copy of the license agreement to be
entered into, which shall be regarded and treated as Confidential
Information as provided in Section 4.4(a) herein. As used herein, a
"Competitive Product" shall mean any product or other subject matter that
is related to the treatment or prevention of a cardiovascular or other
vascular disease or condition, or that is competitive with or
complementary to a product or technology that Pegas or its sublicensee is
then developing or reasonably expects to commence development of within
three (3) months after Applicant's request for such a license.
(c) Notwithstanding (a) and (b) above, this Section 4.5 shall not apply
with respect to any invention or technology that is assigned to the University
of Arizona, or the Veterans Administration Medical Center, Tucson, Arizona, or
other non-Affiliate entity to whom Dr. Slepian has an obligation to assign
ownership of the subject technology or invention pursuant to any agreement
entered into by Dr. Slepian either (i) prior to the Effective Date, or (ii)
required to be entered into as a condition of employment. Any notice to Pegas by
Dr. Slepian or ETI under Sections 4.5(a) or (b) above shall describe the subject
technology in reasonable detail, but on a nonconfidential basis; upon request by
Pegas, Dr. Slepian and ETI shall provide a complete written disclosure of the
technology and any related patent rights, which disclosure shall be subject to
the confidentiality provisions of 4.4 above.
4.6 Publications.
(a) Notwithstanding any provision of this Agreement to the contrary, Dr.
Slepian shall have the right to publish academic papers and make scientific
presentations regarding his research, even though such papers or presentations
may disclose Related Technology. However, the parties agree that prior to public
disclosure of any such paper or presentation by Dr. Slepian, Dr. Slepian shall
provide to Pegas a copy of such paper or presentation at the time such paper or
presentation is submitted for publication or presentation, but in any case at
least ninety (90) days prior to the date of the proposed public disclosure, in
order for Pegas to have sufficient time to file any patents that Pegas deems
appropriate.
(b) In the event that Pegas or its personnel propose to make a public
disclosure or publication that pertains to work performed in whole or in part by
Dr. Slepian and to which Pegas has exclusive rights under this Agreement, Pegas
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agrees to give appropriate credit to Dr. Slepian for his contributions.
ARTICLE 5
WARRANTIES; INFRINGEMENT
5.1 Warranties. ETI and Dr. Slepian each represents and warrants to Pegas
the following:
(a) Dr. Slepian and ETI together have the full right and authority
to enter into this Agreement and grant the rights and licenses granted
herein;
(b) As of the Effective Date, ETI owns all right, title and interest
in and to the Patent Rights;
(c) Neither Dr. Slepian nor ETI have previously granted, and neither
will grant during the term of this Agreement, any rights in the Patent
Rights, Related Technology or other inventions that are inconsistent with
the rights and licenses granted to Pegas herein;
(d) As of the Effective Date, to the knowledge of Dr. Slepian and
ETI, but without conducting an independent investigation beyond the
pending applications for Patent Rights: (i) no claim within the existing
Patent Rights is dominated by a claim of any patent or patent application
of a third party in any country; and (ii) the Related Technology does not
and will not infringe any patent rights, trade secret rights or other
proprietary rights of any third party;
(e) As of the Effective Date, to the knowledge of Dr. Slepian and
ETI, except for certain claims made by Cleveland Clinic described in that
certain letter dated July 31, 1992 from Dr. Slepian to Pegas and
incorporated herein by reference; (i) there have been no actions, suits or
claims made or threatened (including, without limitation, claims by former
employers or collaborators) against Dr. Slepian, ETI or, to their
knowledge, any third party, with respect to the Patent Rights, the Related
Technology or the right of Dr. Slepian or ETI to enter into and perform
their obligations under this Agreement and (ii) there has been no legal
action, suit or investigation made, brought or threatened by or against
ETI or Dr. Slepian with respect to any matter that is material to the
performance by Dr. Slepian and ETI of their obligations under this
Agreement in any respect;
(f) To the knowledge of Dr. Slepian and ETI, as of the Effective
Date, all scientific data provided by ETI or Dr.
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Slepian to Pegas in tangible form is accurate, and ETI or Dr. Slepian has
disclosed to Pegas all information known to them that would be material
in evaluating the safety or efficacy of products based upon the
inventions claimed in the Patent Rights existing as of the Effective
Date; and
(g) Exhibit C includes all patents and patent applications in which
Dr. Slepian or ETI have any legal or beneficial right, title or interest
as of the Effective Date; and Exhibit A hereto lists all inventions
conceived by Dr. Slepian prior to the Effective Date that are within
the Field.
5.2 Limitation. EXCEPT FOR THE WARRANTIES IN SECTION 5.1, NEITHER ETI NOR
DR. SLEPIAN MAKES ANY OTHER WARRANTY WITH RESPECT TO THE PATENT RIGHTS OR THE
RELATED TECHNOLOGY, THE OPERATION, PERFORMANCE OR RESULTS OF USING THE PATENT
RIGHTS OR THE RELATED TECHNOLOGY, THE USES TO WHICH THE PATENT RIGHTS OR THE
RELATED TECHNOLOGY MAY BE PUT OR THAT THE PATENTED PRODUCTS OR OTHER ROYALTY
PRODUCTS WILL NOT INFRINGE PATENT RIGHTS OR OTHER RIGHTS OF THIRD PERSONS. THE
WARRANTIES MADE BY DR. SLEPIAN AND ETI IN SECTION 5.1 ARE MADE IN LIEU OF ALL
OTHER EXPRESS OR IMPLIED WARRANTIES INCLUDING BUT NOT LIMITED TO IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE. UNDER NO
CIRCUMSTANCES, DURING OR AFTER THE TERM OF THIS AGREEMENT, WILL ETI OR DR.
SLEPIAN BE RESPONSIBLE FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES INCURRED BY OR
IMPOSED ON PEGAS BY REASON OF THE USE OF THE PATENT RIGHTS OR THE RELATED
TECHNOLOGY OR ARISING OUT OF THE USE, OPERATION OR PERFORMANCE OF ANY OF THE
PATENTED PRODUCTS OR OTHER ROYALTY PRODUCTS MANUFACTURED, USED OR SOLD BY PEGAS,
EXCEPT AS PROVIDED BELOW IN SECTION 5.3.
5.3 Effect of Representations and Warranties. It is understood that if the
representations and warranties made by Dr. Slepian and ETI under Section 5.1 are
not true and accurate, and Pegas incurs damages, liabilities, costs or other
expenses as a result of such falsity, ETI and Dr. Slepian shall indemnify and
hold Pegas harmless from and against any such damages, liabilities, costs or
expenses incurred as a result of such falsity, provided that ETI and/or Dr.
Slepian receives prompt notice of any claim resulting from or related to such
falsity. However, the parties agree that ETI's and Dr. Slepian's liability under
this Section 5.3 shall not exceed the amounts paid and payable to them,
collectively, by Pegas under this Agreement, and that such payments (together
with the right to terminate this Agreement under Section 7.2 below) shall be the
sole remedy available to Pegas in event of a breach of the representations and
warranties made under Section 5.1 above.
5.4 Infringement by Third Parties. If either party determines that a third
party is making, using or selling a product that may infringe the Patent Rights,
that party will notify the
* Confidential treatment has been requested for marked portion
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other party in writing. Pegas shall have the exclusive right (itself or
through others), at its sole option, to bring suit against such alleged
infringer. All recoveries in such suit (whether initiated by Pegas or its
sublicensee, or brought as a counterclaim in a suit commenced by a third
party) will inure to the benefit of Pegas or its designee, less a [*] royalty
payment to ETI; such royalty will equal [*] of the amount recovered net of
all legal expenses. ETI and Dr. Slepian will cooperate with, and assist Pegas
and its designees in, the pursuit of any suit, including without limitation
by joining as a nominal party and executing such documents as may be
reasonably required. Pegas will reimburse ETI and Dr. Slepian for reasonable
out-of-pocket expenses paid to non-employee third parties directly as a
result of assistance so requested by Pegas and shall reasonably compensate
Dr. Slepian's time requested by Pegas for such assistance.
5.5 Infringement by Patented Product(s); Other Royalty Products. If
Pegas or a sublicensee, distributor or dealer is sued by a third party
charging infringement of patent rights that dominate a claim of the Patent
Rights or that cover other Related Technology with respect to the
manufacture, use, distribution or sale of a Patented Product or an Other
Royalty Product, Pegas will promptly notify ETI. As between the parties to
this Agreement, Pegas will be entitled to control the defense in any such
action(s) and withhold [*] of the Royalties related to such Patented Product
or Other Royalty Product (as the case may be) otherwise payable to ETI and
use the withheld Royalties to reimburse the legal defense costs, attorneys'
fees and liability incurred in such infringement suit(s). Notwithstanding,
Pegas agrees to withhold only that portion of such Royalties as may
reasonably be necessary to reimburse amounts in accordance with this Section
5.5. If Pegas is required to pay a royalty to a third party to make, use,
distribute and/or sell a Patented Product or an Other Royalty Product (as the
case may be) as a result of a final judgment or settlement, the royalties
payable to ETI in relation to such Patented Product or Other Royalty Product
will be reduced as provided in Section 2.3. In the event Pegas is successful
in defending against any such claims or actions, once Pegas is compensated
for [*] of its legal defense costs in defending such claims or actions, Pegas
will return any remaining withheld Royalties to ETI.
ARTICLE 6
AGREEMENTS OF PEGAS
6.1 Indemnification. Except for claims covered by Section 5.3 above, Pegas
will, at Pegas's cost and expense, defend, indemnify and hold harmless Dr.
Slepian and his personal representatives and assigns and ETI, its shareholders,
officers,
* Confidential treatment has been requested for marked portion
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directors, employees, agents, representatives, successors and assigns from and
against any and all liabilities, damages, and expenses, including but not
limited to attorneys' fees, paid by such parties to third parties during or
after the term of this Agreement, by reason of any charge, claim or legal action
by any third person, including but not limited to an employee, agent or
representative of Pegas, relating to or arising out of injuries, deaths,
illnesses or related damages sustained or incurred by such person or entity that
results from or in any way, directly or indirectly, is connected with the
manufacture, sale or use of any Patented Product, Other Royalty Product or
Related Technology by Pegas; provided, however, that Pegas will defend and have
sole control over the defense of any action against such parties, and ETI and
Dr. Slepian will promptly notify Pegas of any action related to the Patented
Products, Other Royalty Products or Related Technology of which they become
aware. Notwithstanding the foregoing, Pegas shall have no liability under this
Section 6.1 to the extent that any injury, death, illness or damages are
reasonably attributable to the failure of ETI or Dr. Slepian to disclose to
Pegas material information known to ETI or Dr. Slepian (and not known to Pegas)
regarding the safety of such products or technology.
6.2 Patent Marking. Pegas will mark all Patented Products and Other
Royalty Products sold by it with the number of any applicable patent within the
Patent Rights in such form as satisfies the marking provisions of the United
States, and any other applicable patent laws and regulations. Until such time as
an applied for patent is issued, Other Royalty Products will be marked to
disclose that a patent application is pending. Pegas will comply with, and this
Agreement will be subject to, all laws, rules and regulations of the United
States that may be applicable to the disclosure or export of the Patent Rights
and/or the Related Technology and the sale or export of the Patented Products
and Other Royalty Products.
6.3 Insurance. During the term of this Agreement and for ten (10) years
after the end of the term of this Agreement, Pegas will obtain and maintain at
its expense product liability insurance, in which ETI and Dr. Slepian shall be
named as additional insureds against all claims, demands or causes of action
arising out of alleged defects in or out of the use of Patented Products or
Other Royalty Products made by Pegas. The limits of liability of such insurance
applicable to ETI and Dr. Slepian will not be less than the limits of liability
from time to time generally applicable to Pegas for comparable products
manufactured and sold by Pegas, but in no event will such limits be less than a
combined single limit of [*] prior to the first commercial sale in the
United States of a Patented Product or Other Royalty Product, or less than a
combined single limit of [*] thereafter. Notwithstanding the foregoing,
Pegas shall not be obligated to maintain product liability insurance under this
* Confidential treatment has been requested for marked portion
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<PAGE>
Section 6.3 until the commencement of human clinical trials for a Patented
Product or an Other Royalty Product, or to the extent that Pegas self-insures
such liability and has the financial resources reasonably necessary to do so.
Each insurance policy will provide that it may not be cancelled or
amended without giving at least thirty (30) days prior notice to ETI and Dr.
Slepian. Upon request by ETI or Dr. Slepian, Pegas will provide ETI with a
certificate or certificates of its insurance company or companies evidencing
that such insurance has been obtained and setting forth the limits of liability.
Upon request by ETI or Dr. Slepian, not less than thirty (30) days prior to the
expiration of any such insurance, Pegas will provide ETI with an insurance
certificate or certificates of its insurance company or companies evidencing
that such insurance has been extended or that the new insurance coverage has
been obtained by Pegas and setting forth the limits of liability. With each such
certificate by an insurance company or companies, an officer of Pegas will
certify that the limits of liability applicable to ETI and Dr. Slepian are not
less than the limits of liability generally applicable to Pegas for comparable
products manufactured and sold by it. The insurance coverage obtained by Pegas
for ETI and Dr. Slepian, pursuant to the provisions of this Section, will be
provided by the same insurance companies that provide comprehensive general
liability insurance, including product liability insurance, to Pegas for the
Patented Products. If the companies providing insurance for Pegas are changed,
the companies providing insurance for ETI and Dr. Slepian will be changed so
that the same companies are providing insurance for both Pegas and ETI and Dr.
Slepian.
ARTICLE 7
TERM AND TERMINATION
7.1 Term. This Agreement shall become effective as of the Effective Date
and, unless earlier terminated pursuant to the other provisions of this Article
7, shall continue in full force and effect until the later of (i) the expiration
of the last-to-expire patent within the Patent Rights; (ii) the abandonment of
the last patent application within the Patent Rights; or (iii) the date
royalties cease to accrue under Section 2.2 above. Upon the expiration of this
Agreement, Pegas' license under Section 2.1 with respect to Related Technology
shall survive, provided that such license shall thereafter be non-exclusive.
7.2 Default. If either party materially breaches this Agreement (including
a material breach of any warranty under Section 5.1 above, which breach has a
materially adverse effect on the other party), the other party may elect to give
such party written notice describing the alleged default. If the party in
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<PAGE>
default has not cured such default within thirty (30) days after receipt of such
notice or, assuming the default can be cured, commenced to cure such default
within such thirty (30) days after receipt of notice and cured such default
within ninety (90) days after receipt of notice, the notifying party will be
entitled, in addition to any other rights it may have under this Agreement, to
terminate this Agreement by giving notice to take effect immediately. If either
party receives notification from the other of a default and if the party alleged
to be in default notifies the other party in writing within thirty (30) days of
receipt of such default notice that it disputes the asserted default, the matter
will be submitted to arbitration as provided in Section 10.2 of this Agreement.
In such event, the non-breaching party shall not have the right to terminate
this Agreement until it has been determined in such arbitration proceeding that
the other party materially breached this Agreement, and the breaching party
fails to cure such breach within ninety (90) days after the conclusion of such
arbitration proceeding.
7.3 Termination by Pegas. Pegas may terminate this Agreement, in its
entirety or as to any particular patent or patent application within the Patent
Rights, at any time by giving ETI at least thirty (30) days prior written
notice; provided, however, that Pegas shall not exercise its right to terminate
under this Section 7.3 prior to the later of either (i) the second anniversary
of the Effective Date, or (ii) the end of the period for with Pegas provides
funding to ETI or Dr. Slepian's employer under Article 3 herein. From and after
the effective date of a termination under this Section 7.3 with respect to a
particular patent or patent application, such patent(s) and patent
application(s) shall cease to be within the Patent Rights for all purposes of
this Agreement, and all rights and obligations of Pegas with respect to such
patent(s), patent application(s) and products covered thereby shall terminate.
Upon a termination of this Agreement in its entirety under this Section 7.3, all
rights and obligations of the parties shall terminate, except as provided in 7.5
below, and Pegas shall return to ETI all written materials provided by ETI or
Dr. Slepian to Pegas containing Confidential Information of ETI or Dr. Slepian;
provided, however, that Pegas may retain one (1) copy of such Confidential
Information for archival purposes. Upon such a termination of this Agreement,
Pegas will consider granting to ETI a license to improvements made by Pegas with
respect to the products for which Pegas has terminated all of its activities, on
such terms as may be mutually agreed.
7.4 Bankruptcy. To the extent permitted by applicable law, in the event
that:
(a) Pegas (i) applies for or consents to the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of
all or substantial all of its
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property, (ii) makes a general assignment for the benefit of its
creditors, (iii) commences a case under the United States Bankruptcy Code,
or files a petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, or composition or readjustment, with respect to
substantially all of its debts, or (iv) adopts any resolution of its board
of directors or stockholders for the purpose of effecting any of the
foregoing; or
(b) a proceeding or case is commenced without the application or
consent of Pegas that seeks a remedy described in (a) above and such
proceeding or case continues undismissed, or an order, judgment or decree
approving or ordering any of such remedies shall be entered and continue
unstayed and in effect, for a period of sixty (60) days from and after the
date service of process is effected upon Pegas;
then in any such event, all rights under this Agreement will be deemed to have
automatically expired as of a date seven (7) days prior to that event, except
those obligations concerning confidentiality, which shall survive termination of
this Agreement for any reason.
7.5 Survival. The provisions of Articles 1, 5, 6 and 10, and of Sections
3.4, 4.2(b), 4.4 and 4.6, shall survive and continue in effect after the
expiration or any termination of this Agreement, except that:
(a) Upon a termination under Section 7.2 above (or 9.3 below) by
reason of a breach by Pegas, or a termination of this Agreement in its
entirety under Section 7.3 above, the provisions of Article 5 and Section
4.6(a) shall terminate and not so survive;
(b) Upon a termination of this Agreement under Section 7.2 above by
reason of a breach by ETI or Dr. Slepian, all provisions of this Agreement
shall survive, except that Section 4.2(b) and Articles 3 and 9 shall
terminate and not so survive;
(c) Upon any termination of this Agreement, other than under Section
7.3 above, any sublicense granted hereunder shall survive, provided that
upon request by ETI, the sub-licensee promptly agrees in writing to be
bound by the applicable provisions of this Agreement. It is understood
that survival of such sublicense shall not imply any continued license to
Pegas hereunder; and in no event shall ETI or Dr. Slepian be required to
assume any obligations of Pegas that extend beyond or that are in any way
more burdensome than the obligations of ETI or Dr. Slepian to Pegas
hereunder; and
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<PAGE>
(d) ETI's right to receive royalties that accrued prior to any
expiration or termination of this Agreement shall also survive.
ARTICLE 8
OTHER AGREEMENTS
Concurrent with the execution of this Agreement, the parties will cause
the execution of the Consulting Agreement and Stock Purchase Agreement, in the
forms attached hereto as Exhibits E and F, respectively. It is understood that
this Agreement is independent of such Consulting Agreement and such Stock
Purchase Agreement.
ARTICLE 9
DUE DILIGENCE
9.1 Obligation to Exploit. Pegas shall use commercially reasonable
efforts to bring one or more Patented Products and/or Other Royalty Products to
market and to meet the market demand therefor.
9.2 Milestones. Pegas shall be deemed not to have satisfied its
obligations under Section 9.1 above by, directly or through its sublicensees, if
Pegas fails to:
(a) submit an investigational new drug application covering [*]
Patented Product or Other Royalty Product to the United States Food
and Drug Administration ("FDA") or an equivalent application with a
corresponding authority in another country (each, an "IND") within [*]
after the Effective Date; or
(b) submit a New Drug Application covering a Patented Product or
Other Royalty Product to the FDA or an equivalent application with a
corresponding authority in another country (each, an "NDA") within [*]
after submission of an IND for such Patented Product or Other Royalty
Product; or
(c) begin to market such Patented Product or Other Royalty Product
within [*] after receiving approval of such NDA from the FDA or
corresponding authority in another country.
Notwithstanding the foregoing, if Pegas fails to meet the milestones specified
in this Section 9.2, such failure shall not be deemed a breach of Section 9.1
above if prudent and reasonable
* Confidential treatment has been requested for marked portion
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<PAGE>
business considerations, or any event or condition beyond Pegas' reasonable
control, justifies a delay in achieving such milestones. It is understood that
meeting the milestones set forth in this Section 9.2 shall not alone satisfy all
obligation of Pegas under 9.1 above. As used herein, "IND" and "NDA" include
comparable filings with respect to medical devices.
9.3 Remedy. Upon Pegas' failure to perform in accordance with Section 9.1
above (itself or through sublicensees), and Pegas's failure to comply with its
obligations thereunder within one hundred and eighty days (180) of a
determination by an arbitration in accordance with Section 10.2 below that Pegas
did not meet its obligations under Section 9.1, ETI shall have the right to
terminate this Agreement upon written notice to Pegas. Notwithstanding the
foregoing, after Pegas or a sublicensee of Pegas has begun Phase III clinical
trials for a Patented Product or an Other Royalty Product, ETI shall not have a
right to terminate this Agreement under this Section 9.3, but instead, under the
same conditions set forth in the preceding sentence for termination of this
Agreement by ETI under this Section 9.3, ETI shall have the right to convert the
license granted hereunder to a non-exclusive license. This Section 9.3 sets
forth ETI's sole remedy for a failure by Pegas to meet its obligations under
Section 9.1 above.
9.4 Adjustment. If Pegas' rights under this Agreement become non-exclusive
under Section 9.3 above, and ETI grants a license under the Patent Rights to a
third party at a lower royalty rate than that set forth in Article 2 above, ETI
shall so notify PEGAS and the royalty rate payable by PEGAS hereunder shall be
reduced to such lower royalty rate.
ARTICLE 10
GENERAL
10.1 Notices. Any notice required or permitted to be given under this
Agreement will be sufficient if in writing and delivered personally or by
registered or certified mail, postage prepaid and return receipt requested, as
follows (or to such other address as the parties will designate by notice to the
other in accordance with this Section 10.1) and will be deemed to have been
given as of the date of personal delivery, or as of the date on the receipt or
as of the date returned unclaimed if sent by registered or certified mail:
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If to Pegas: Pegas Pharmaceuticals, Inc.
2200 Sand Hill Road
Menlo Park, California 94025
Attention: Stephen C. Rowe
Vice President,
Corporate Development
If to Dr. Slepian
or ETI: Marvin J. Slepian, M.D.
Endoluminal Therapeutics, Inc.
1201 E. Placita del Cervato
Tucson, Arizona 85718
10.2 Arbitration. Any dispute, controversy or claim of either party
arising out of, in relation to, or in connection with this Agreement will be
finally settled by binding arbitration under the Licensing Agreement Arbitration
Rules of the American Arbitration Association by one (1) arbitrator appointed in
accordance with such rules. The arbitrator shall apply the laws of the State of
California to the merits of any dispute, controversy or claim, without regard to
conflicts of law principles. Judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof. The place of
arbitration will be Tucson, Arizona if the arbitration is initiated because of a
claim by Pegas of breach by ETI or Dr. Slepian, and shall be in Santa Clara
County, California, if the arbitration is initiated because of a claim by ETI or
Dr. Slepian of breach by Pegas. The parties agree that the arbitrator may grant
injunctive relief. Notwithstanding the foregoing, before appointment of the
arbitrator and in exceptional circumstances even thereafter, either party to
this Agreement may apply to any court of competent jurisdiction for a temporary
restraining order, preliminary injunction, or other interim or conservatory
relief, as necessary, without breach of this Section 10.2 and without any
abridgment of the power of the arbitrator. The parties agree that, any provision
of applicable law notwithstanding, they will not request, and the arbitrator
shall have no authority to award, punitive or exemplary damages against any
party except as provided in Article 5 herein. The costs of any arbitration,
including without limitation administrative and arbitrator's fees, shall be
shared equally by the parties. Each party shall bear the cost of its own
attorneys' fees and expert witness fees, if any.
10.3 Relationship of the Parties. The relationship of the parties is that
of independent contractors, and nothing contained herein will constitute the
parties to be partners, joint venturers, or agents of the other, or to create
the relationship of employer and employee.
10.4 Force Majeure. Neither party will be responsible to the other party
for non-performance or delay in performance of
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<PAGE>
any terms or conditions of this Agreement due to acts of God, acts of
governments, wars, riots, strikes, accidents in transportation, or other causes
beyond its reasonable control even though not similar in nature to those
enumerated.
10.5 Governing Law. This Agreement will be governed by and construed and
enforced in accordance with the laws of the State of California, without regard
to conflicts of law principals.
10.6 Assignment. This Agreement shall not be assignable by a party hereto
without the written consent of Pegas and Dr. Slepian, which consent shall not be
withheld unreasonably. Notwithstanding the foregoing, upon written notice to Dr.
Slepian, Pegas may transfer and assign this Agreement, without such consent, to
an entity that succeeds to substantially all of its business or assets relating
to this Agreement; and upon prior written notice to Pegas, ETI may assign to any
third party its right to receive Royalty payments hereunder. This Agreement
shall inure to and be binding upon successors and assigns of a party hereto.
10.7 Waiver. No waiver of any breach of any provision of this Agreement
will constitute a waiver of any prior, concurrent, or subsequent breach of the
same or any other provisions hereof, and no waiver will be effective unless made
in writing.
10.8 Modifications. This Agreement can be modified or amended only by
written agreement duly signed by the parties.
10.9 Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision will be fully severable; this Agreement will be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part hereof; and the remaining provisions of this
Agreement will remain in full force and effect.
10.10 Complete Agreement. This Agreement sets forth the entire agreement
and understanding of the parties in respect of the transactions contemplated
hereby and supersedes all prior agreements, arrangements and understandings
relating to the subject matter hereof.
10.11 No Implied Obligations. It is understood that nothing in this
Agreement shall be deemed to prevent Pegas from commercializing products similar
to or competitive with Patented Products or Other Royalty Products; provided
that the foregoing does not relieve Pegas of any of its obligations under this
Agreement.
10.12 No Consequential Damages. EXCEPT AS PROVIDED IN ARTICLE 5, IN NO
EVENT SHALL EITHER PARTY BE LIABLE FOR SPECIAL,
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INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF ANY BREACH OF THIS AGREEMENT.
10.13 Counterparts and Headings. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original and both together
shall be deemed to be one and the same agreement. All headings, the cover page
and the table of contents in this Agreement are inserted for convenience of
reference only and shall not affect its meaning or interpretation.
10.14 Confidential Terms. Each party agrees not to disclose any terms of
this Agreement to any third party without Pegas', ETI's and Dr. Slepian's
written consent, except as required by securities or other applicable laws, to
prospective investors and to such party's accountants, attorneys and other
professional advisors.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
MARVIN J. SLEPIAN, M.D. PEGAS PHARMACEUTICALS, INC.
("Dr. Slepian") ("Pegas")
By: /s/ Marvin J. Slepian By: /s/ Stephen C. Rowe
-------------------------- ----------------------------
Marvin J. Slepian, M.D. Stephen C. Rowe
Vice President
Corporate Development
ENDOLUMINAL THERAPEUTICS, INC.
("ETI")
By: /s/ Marvin J. Slepian
--------------------------
Marvin J. Slepian, M.D.
President
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<PAGE>
EXHIBIT A
ADDITIONAL MATTER WITHIN FIELD
The Field also includes subject matter within the categories described
in items 1, 2, 3, 4, 5, 7, 8 and 16 below. The more detailed descriptions
summarize existing inventions, but are not intended to limit those categories.
1. Endoluminal Paving - Solid: 1,2,4,5,6,7,8,9,10,11
Gel: 27,28,29,30
2. Endomural Drug Delivery Systems - 12,13,14,15,16,17,18
3. Ectoluminal Drug Delivery Systems - 24
4. Bloodless Angioplasty - 3
5. Combination Intervention and Paving Systems - 25
7. Stents (other than pure metallic) - 19,21,23
8. Zone Isolation Catheter Systems - 26
16. Anti-sense Therapy - 50
1. ENDOLUMINAL PAVING - SOLID
1. Paving (PEPS) [*]
2. Paving (PEPS)
4. Paving Catheters
[*]
5. Paving Catheters - [*]
[*]
6. Paving Catheters - [*]
* Confidential treatment has been requested for marked portion
<PAGE>
7. Paving Catheters - [*]
The orginal, basic paving catheter
8. Paving Catheters - [*]
[*]
9. Paving Catheter - [*]
[*]
10. Endoluminal Coating Catheter Systems - [*]
[*]
11. Endoluminal Coating Catheter Systems - [*]
[*]
ENDOLUMINAL PAVING - GEL
27. Hydrogel endoluminal drug liner [*]
[*]
28. Elastomeric endoluminal drug liner [*]
[*]
* Confidential treatment has been requested for marked portion
2
<PAGE>
29. Bioerodible Endoluminal Gel paving - [*]
[*]
30. Endoluminal gels with co-mixed particles - [*]
[*]
2. ENDOMURAL DRUG DELIVERY SYSTEMS
12. Endomural Catheter Drug Delivery System - [*]
[*]
13. Endomural Catheter Drug Delivery System - [*]
[*]
* Confidential treatment has been requested for marked portion
3
<PAGE>
14. Endomural Catheter Drug Delivery System - [*]
[*]
15. Endomural Catheter Drug Delivery System - [*]
[*]
16. Endomural Catheter Drug Delivery System - [*]
[*]
17. Endomural Catheter Drug Delivery System - [*]
[*]
* Confidential treatment has been requested for marked portion
4
<PAGE>
18. Endomural Catheter Drug Delivery System - [*]
[*]
3. ECTOLUMINAL DRUG DELIVERY SYSTEMS
24. Ectoluminal Polymeric Drug delivery system and method - [*]
[*]
4. BLOODLESS ANGIOPLASTY
3. Focal Endovascular Drug Tx (Dual Balloon, Bloodless PTCA) [*]
5. COMBINATION INTERVENTION AND PAVING SYSTEMS
25. Method and devices for Treating Obstructive Endoluminal Disease
"Pave and Shave" [*]
[*]
7. STENTS (OTHER THAN PURE METALLIC)
19. Temporary Stent - [*]
[*]
* Confidential treatment has been requested for marked portion
5
<PAGE>
21. "Combo" Stent - [*]
23. Polymeric Biodegradable Stents - [*]
[*]
8. ZONE ISOLATION CATHETER SYSTEMS
26. Isolation Catheter/Guidewire system - [*]
[*]
16. ANTI-SENSE THERAPY
50. Method of Preventing and Treating Restenosis via use of anti-sense
RNA [*]
[*]
* Confidential treatment has been requested for marked portion
6
<PAGE>
EXHIBIT B
EXCLUDED INVENTIONS
<PAGE>
EXCLUDED INVENTIONS
6. Mechanical Temporary Luminal Support Systems - 20
9. Biological Drug Delivery Systems - 31, 32
10. Tubular Compliance Determination Method and Systems - 33
11. Atherectomy Devices - 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44
12. Lesion Passivation (Pre- and Post-) Therapy Systems - 45, 46
13. Novel Angioplasty Balloon Systems - 47
14. Ultrasound Imaging Catheter Systems - 48
15. Organ Regeneration - 49
17. Oil Spill Containment Systems - 51
<PAGE>
EXHIBIT C
EXISTING PATENT RIGHTS
COUNTRY TITLE SERIAL NO. FILING DATE
------- ----- ---------- -----------
[*]
* Confidential treatment has been requested for marked portion
<PAGE>
PCT METHOD AND PCT/US91/ [*]
(EPC, JAPAN) APPARATUS FOR 01242
TREATMENT OF FOCAL
DISEASE IN HOLLOW
TUBULAR ORGANS AND
OTHER TISSUE LUMENS
-2-
* Confidential treatment has been requested for marked portion
<PAGE>
APPENDIX F
Form of Stock Purchase Agreement
see attatched
<PAGE>
EXHIBIT D
License Terms
In the event that Dr. Slepian or ETI ("Grantor") exercises the right to
grant an additional license under the Patent Rights to a licensee of a Dominated
Patent, the license under the Patent Rights shall be subject to and limited by,
and Grantor shall be bound by, the provisions set forth below. All capitalized
terms used in this Exhibit D and not otherwise defined shall have the meanings
assigned to them in the Agreement to which this Exhibit D is attached.
1. The license(s) to be granted by Grantor under the Patent Rights shall
be subject to the following:
(a) the license shall be a nonexclusive license under the Patent Rights to
practice inventions claimed in the Dominated Patent, and shall be granted only
to a licensee of Grantor under the Dominated Patent (a "Permitted Licensee");
(b) the license may include the right to grant sublicenses, but only to
manufacture, sell and/or use products developed in substantial part by the
Permitted Licensee;
(c) the license (and any sublicense) shall not include the right to
practice the Patent Rights at any time during the term of the license in
connection with the manufacture, sale or use of a Competitive Product; and
(d) the license shall not be assignable, except to a party that succeeds
to substantially all of the business or assets of the Permitted Licensee.
2. In the event that Grantor grants a license as contemplated under 1
above, Grantor shall be bound by the following:
(a) Grantor shall pay to Pegas a royalty on sales of Patented Products and
Other Royalty Products by the Permitted Licensee, or any sublicensee of the
Permitted Licensee, as follows:
(i) [*] of Net Sales received by the Permitted Licensee or its
affiliates upon their respective sales of Patented Products;
(ii) [*] of Net Sales received by the Permitted Licensee's
non-affiliate sublicensees upon their sales of Patented Products; and
* Confidential treatment has been requested for marked portion
<PAGE>
(iii) [*] of the Net Revenues received by the Permitted Licensee,
its affiliates and sublicensees upon their respective sales of Other
Royalty Products.
Royalties under this Exhibit D shall be payable until the later of (1) the
expiration of the last-to-expire patent within the Patent Rights, or (2) fifteen
(15) years after the first accrual of any royalty under this Exhibit D on sales
by the Permitted Licensee. If a product that has been sold as a Patented Product
in a country ceases to be a Patented Product in such country prior to the end of
the period in clause (2) above, because all claims within the Patent Rights that
cover such product in such country have expired, the product shall thereafter be
deemed an "Other Royalty Product" in such country until the end of such period.
(b) "Net Sales" shall mean the gross receipts paid to the Permitted
Licensee, its affiliates or sublicensees for sales of Patented Product(s) or
Other Royalty Products (as the case may be) worldwide less (i) all trade,
quantity and cash discounts actually allowed and refunded, (ii) all credits and
allowances actually refunded on account of rejection, returns, billing errors or
retroactive price reductions, (iii) duties and tariffs paid by the seller, (iv)
freight and transportation costs paid by the seller, and (v) excise, sale and
use taxes and equivalent taxes paid by the seller.
(c) Sections 2.4 through 2.6 of the Agreement shall apply to Grantor with
respect to the royalties described above, mutatis mutandis; provided that the
currency rate for conversion under 2.5(c) shall be the rate used by the
Permitted Licensee in its report to Grantor.
* Confidential treatment has been requested for marked portion
-2-
<PAGE>
APPENDIX E
Form of Consulting Agreement
see attached
<PAGE>
[LETTERHEAD]
August 22, 1997
Marvin J. Slepian, M.D.
5001 North Summit Ridge
Tucson, AZ 85750
Dear Dr. Slepian:
We are pleased to have you continue to participate as a consultant and
advisor to Focal, Inc. I hope that you will agree that our work together over
the past four years has been interesting and rewarding; I know that I personally
have been pleased with the valuable input that you have provided to the company.
As part of this consulting arrangement, you will continue as a consultant and
advisor to Focal in the field of interventional cardiology, restenosis therapy
and endoluminal paving.
As a consultant, we will pay you $20,000 annually, to be paid monthly to
the University of Arizona. Focal will pay the University a overhead charge not
to exceed 20% for their role in disbursing these fees to you. This letter is an
amendment to the May 5, 1997 Letter Ammendment to the Agreement for Consulting
Services first dated and executed on August 7, 1992 and serves to extend the
term of this agreement for one year.
As a consultant you shall:
1. Advise Focal on the direction for the scientific program for
restenosis therapy and be available for review of the company's
research plans and results;
2. Be available to consult to the company in the area of physician and
patient needs in the field of interventional cardiology;
3. Attend outside meetings and scientific conferences as requested by
the company to support the scientific, financial and regulatory
advancements of the company; and
4. Agree to avoid conflicts of interest, and notify Focal prior to
working with any other company in the areas of the interventional
cardiology, restenosis therapy or endoluminal paving.
To continue your consultancy, please sign below and return one of the
originals to me; the other is for your files. Your consultancy will have a
duration of one year, effective on August 1, 1997 and ending July 31, 1998,
unless either you or Focal terminates this consulting agreement. The term of the
agreement may be extended by written agreement, and the agreement may be
terminated by either party for any reason on 30 days notice.
<PAGE>
M. Slepian, M.D.
August 22, 1997
Page 2
All of us at Focal are pleased to have you continue as a consultant.
Sincerely,
/s/ Laurence A. Roth
-----------------------------------
Laurence A. Roth
Director, Cardiovascular Programs
Accepted and Agreed to:
For Focal, Inc.
/s/ Marvin J. Slepian /s/ [Illegible]
- ---------------------------- ----------------------------
Marvin J. Slepian, M.D. Name
9/2/97 8/29/97
- ---------------------------- ----------------------------
Date Date
<PAGE>
EXHIBIT 10.12
COLLABORATION AND LICENSE AGREEMENT
This COLLABORATION AND LICENSE AGREEMENT (the "Agreement"), effective as of
April 25, 1996 (the "Effective Date"), is made by and between Focal, Inc., a
Delaware corporation having offices at 4 Maguire Road, Lexington, Massachusetts
02173 ("Focal"), Ciba-Geigy Corporation, a New York corporation having offices
at 556 Morris Ave., Summit, New Jersey 07901 ("Ciba"), and Chiron Corporation, a
Delaware corporation having offices at 4560 Horton Street, Emeryville,
California 94608 ("Chiron"). Chiron and Ciba are sometimes hereinafter referred
to collectively as "Ciba/Chiron."
BACKGROUND
A. Focal is developing its FocalGell-TM- polymer and associated catheter
delivery system for use in the prophylaxis, treatment and/or inhibition of
diseases in humans.
B. The parties wish to enter into a research collaboration to conduct
preclinical research with respect to certain products utilizing Hydrogel
Polymers for the prophylaxis, treatment and/or inhibition of vascular restenosis
and/or stenosis, all as further described herein in humans.
C. Focal is willing to grant to Chiron and Ciba, and Chiron and Ciba wish
to obtain licenses under Focal's patents and proprietary technology with respect
to commercialization of such products, subject to Focal's right and commitment
to manufacture and supply such products to Chiron and Ciba, all on the terms and
conditions set forth below.
NOW THEREFORE, for and in consideration of the covenants, conditions, and
undertakings hereinafter set forth, it is agreed by and between the parties as
follows:
1
DEFINITIONS
1.1 "Affiliate" shall mean any entity which controls, is controlled by or
is under common control with a party hereto. An entity shall be regarded as in
control of another entity for purposes of this definition if it owns or controls
more than fifty percent (50%) of the shares of the subject entity entitled to
vote in the election of directors (or, in the case of an entity that is not a
corporation, for the election of the corresponding managing authority). A
"Controlled Affiliate" shall mean an entity that is controlled (as defined
above) by a party to this Agreement. Notwithstanding the foregoing, Ciba and
its Affiliates shall not be deemed Affiliates of Chiron and its Affiliates for
the purposes of this Agreement unless and until such time as Ciba is authorized
to control the management and affairs of Chiron pursuant to that certain
Governance Agreement between Ciba and Chiron dated as of November 20, 1994 as
amended or otherwise modified from time to time.
<PAGE>
1.2 "Angioplasty" shall mean any percutaneous transluminal procedure
within a blood vessel (including, for all purposes of this Agreement, an artery
or a vein, whether natural, grafted or prosthetic) which is performed to remove
or reduce an obstruction within such blood vessel for the purpose of improving
the flow of blood within such blood vessel. For purposes of this Agreement,
"Angioplasty" shall include without limitation percutaneous transluminal
coronary angioplasty (PTCA) or balloon angioplasty, atherectomy (rotational,
excisional, or laser) and stenting.
1.3 "Ciba/Chiron Compound" shall mean a compound that is a drug
(including, without limitation, a biologic, antisense molecule, ribozyme or
genetic sequence) or potential drug candidate, which in each case is or was
discovered, developed or acquired by Ciba or Chiron, including, in each case,
all modifications and derivatives of such a compound. Notwithstanding the
foregoing, it is understood and agreed that "Ciba/Chiron Compound" shall not
include the Combination Product defined in Section 12.1.1 below or subject
matter owned by Focal under Section 12.1.3 below.
1.4 "Product Development" shall mean for purposes of this Agreement all
toxicology, pharmacology, safety, animal efficacy and preclinical studies (other
than those preclinical studies included under the Research), clinical trials,
regulatory affairs and all other activities reasonably required to obtain all
governmental approvals required to market a Product within the Field in the
Major Countries.
1.5 "Control" shall mean possession of the ability to grant the rights
provided for herein without violating the terms of any agreement or other
arrangements with a third party.
1.6 "Delivery Systems" shall mean Energy Sources, catheters and other
components, which in each case were, or are developed by or for Focal, for use
in the local delivery of Products within the Field. As used herein, "Energy
Source" shall mean the instrument that generates light or other energy sources
to polymerize Hydrogel Polymer, together with any fiber optic cables or other
components for the delivery of the light or other energy sources to the
catheter.
1.7 "Developing Party" shall mean, as to each Product, Chiron or Ciba or
Chiron and Ciba jointly. As to Products which contain a Ciba/Chiron Compound
provided by only one party, such party shall be the Developing Party. As to all
other Products, Chiron and Ciba shall determine and shall notify Focal in
writing prior to the commencement of any Research with respect to such Product
of the identity of the Developing Party for such Product. Unless Focal is
otherwise notified in writing, the Developing Party of the First Generation
Products shall be Chiron and Ciba jointly.
1.8 "FDA" shall mean the U.S. Food and Drug Administration.
1.9 "Field" shall mean the percutaneous in vivo intraluminal deposition
within blood vessels (as defined in Section 1.2) of Hydrogel Polymer with or
without therapeutically active agents, for the prophylaxis, treatment or
inhibition of (i) restenosis in connection with Angioplasty; [*]. It is
* Confidential treatment has been requested for marked portion
2
<PAGE>
understood and agreed that the Field shall not include without limitation the
application of any such Hydrogel Polymer [*] to stents or other items that
are inserted within blood vessels.
1.10 "First Generation Product" shall mean a First Generation FocalGel
Product and/or a First Generation Radiopharmaceutical Product, together with all
applicable Delivery Systems, for use within the Field.
1.11 "First Generation FocalGel Product" shall mean a formulation comprised
of Hydrogel Polymer alone (but that does not include a Ciba/Chiron Compound or a
Radiopharmaceutical), together with all applicable Delivery Systems, for use
within the Field.
1.12 "First Generation Radiopharmaceutical Product" shall mean a
formulation comprised of Hydrogel Polymer in combination with one or more
Radiopharmaceuticals (but that does not include a Ciba/Chiron Compound),
together with all applicable Delivery Systems, for use within the Field.
1.13 "Focal Technology" shall mean Focal Know-How and Focal Patents.
1.14 "Focal Know-How" shall mean confidential information (as defined in
Article 14), tangible and intangible, and materials, including, but not limited
to: pharmaceutical, chemical, physical, mechanical, biological and biochemical
products; technical and nontechnical data and information, and/or the results of
tests, assays, methods and processes; and drawings, sketches, plans, diagrams,
specifications and/or other documents containing said information and data; in
each case that is Controlled by Focal or its Controlled Affiliates during the
term of this Agreement and which (i) pertains to the development, manufacture,
use or sale of Hydrogel Polymer or any New Polymer licensed to Ciba/Chiron
pursuant to Section 2.4.3 or any Delivery Systems, or the application of
Hydrogel Polymer, New Polymer or Delivery Systems to the development,
manufacture, use or sale of Products; or (ii) is developed by Focal in the
course of performing the Research or in performing its obligations under this
Agreement.
1.15 "Focal Patents" shall mean all patents and all reissues, renewals,
re-examinations and extensions thereof, and patent applications therefor, and
any divisions or continuations, in whole or in part, or foreign counterparts
thereof, which claim or would be infringed by the manufacture, sale or use of
Hydrogel Polymer, any Delivery System or any Product, or which claim Focal
Know-How, and that are Controlled by Focal or its Controlled Affiliates during
the term of this Agreement. Focal Patents include, without limitation, the
patents and patent applications listed in Exhibit E.
1.16 "Fragmentation and Embolization Study" shall have the meaning set
forth in Section 3.3.1 below.
1.17 "Hydrogel Polymer" shall mean (i) [*]; or (ii) any other polymer
Controlled by Focal as of the Effective Date; or discovered or developed as a
result of the Research Program conducted under this Agreement.
* Confidential treatment has been requested for marked portion
3
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1.18 "IND" shall mean an Investigational New Drug Application or an
Investigational Device Exemption for a Product, each as defined in the U.S.
Food, Drug and Cosmetic Act and the regulations promulgated thereunder, or their
foreign equivalents in any country.
1.19 "Major Country" shall mean the United States, Japan, the United
Kingdom, Germany, France or Italy.
1.20 "Manufacturing Committee" shall have the meaning set forth in
Section 3.1.1.
1.21 "NDA" shall mean a New Drug Application, Premarket Approval
Application and/or Product License Application, as required under the U.S. Food,
Drug and Cosmetics Act and the regulations promulgated hereunder, or its foreign
equivalent in a Major Country.
1.22 "Net Sales" shall mean the gross amount billed by Ciba, Chiron, or
their respective Affiliates or Subdistributors, to third parties worldwide for
sales of Products, less (i) allowances for all discounts (including, but not
limited to, cash discounts, pharmacy incentive programs, and all other
substantially similar incentive programs), and rebates (including but not
limited to all governmental and managed healthcare rebates and hospital
performance incentive program chargebacks) actually taken, granted or accrued,
(ii) credits, refunds and returns (including but not limited to wholesaler and
retailer returns), and (iii) in each case if paid or accrued in accordance with
generally accepted accounting practice, by Ciba, Chiron or their respective
Affiliates or Subdistributors: transportation, insurance and postage charges, in
each case, with respect to the shipment of the Product to the purchaser, and
(iv) sales, use and other taxes similarly incurred, duties and other similar
governmental charges, in each case paid with respect to the sale to the
customer. For the removal of doubt, Net Sales shall not include sales by Ciba
or Chiron to Affiliates or Subdistributors for resale. A "sale" shall include a
transfer or other disposition for consideration other than cash, in which case
such consideration shall be valued at the fair market value thereof.
1.23 "Platelet Antagonist" shall mean any drug or substance whose primary
biological activity and intended purpose is the inhibition of the role of
platelets in vascular wound healing, including, but not limited to those
compounds identified in Part II of Exhibit D; and excluding, without
limitation, those compounds identified in Part I of Exhibit D.
Notwithstanding the foregoing, the determination of whether a drug or
substance is a "Platelet Antagonist" shall only be made based upon the known
biological activity and intended purpose at the time the drug or substance is
first selected for inclusion as a Second Generation Product or, in the case
of Section 2.2.2, at the time the same is first selected by Focal or its
licensee (whichever is earlier) for research or commercialization.
1.24 "Production Costs" with respect to units of a Product shall mean the
direct and indirect costs (but excluding general and administrative expenses)
associated with the manufacture and/or preparation of such Product, calculated
in accordance with generally accepted accounting principles in the United
States. With respect to units or portions acquired from a non-Affiliate vendor,
Production Costs shall mean the amounts paid to the vendor plus costs associated
with acquisition from such vendor, in each case including without limitation
freight, insurance, shipping, packaging and other
4
<PAGE>
similar costs associated with acquiring such portions or units for delivery
F.O.B. to the Developing Party's destination point. Prior to the time at which
Ciba and/or Chiron become obligated to reimburse Focal for any Production Costs,
the parties shall mutually agree upon the method of calculating such Production
Costs.
1.25 "Products" shall mean, collectively and individually, the First
Generation Products and Second Generation Products. It is understood that in
no case shall "Product" be deemed to include any product or formulation that
includes either a Roche Product or, except as provided under Section 2.2
below, a Platelet Antagonist.
1.26 "Radiopharmaceutical" shall mean any radionuclide as incorporated into
Hydrogel Polymer, including without limitation the covalent binding of a
radionuclide (e.g., 1(125)), noncovalent immobilization of a radionuclide, or
incorporation of a radioactive form of a therapeutic agent on a carrier molecule
(e.g., 1(125) albumin, polymeric microspheres, etc.). It is understood that a
Radiopharmaceutical shall not be deemed a Ciba/Chiron Compound hereunder.
1.27 "Research Committee" shall have the meaning set forth in
Section 3.1.1.
1.28 "Research" shall mean all activities relating to fragmentation and
embolization studies of the type described in Section 3.3.1 below, and with
respect to each Product, (i) formulation and release studies, (ii) animal
screening activities (for formulation and release, not designed to establish
animal efficacy), (iii) Hydrogel Polymer or New Polymer (as defined in
Section 2.4.3) design, (iv) development of Energy Sources, catheters and other
device components intended for use in the local delivery of Products, and
(v) other activities conducted by Focal as mutually agreed.
1.29 "Research Period" shall mean, for each Product, the period upon
commencement of the Research Program and continuing until completion or
termination of the Research for such Product.
1.30 "Research Plan and Budget" shall mean, for each Product, the plan
and budget for the Research to be conducted by Focal with respect to such
Product attached hereto as Exhibit A, as modified from time to time in
accordance with Section 3.2 below.
1.31 "Research Program" shall mean all Research and other activities
conducted by a party hereto pursuant to a Research Plan and Budget then in
effect.
1.32 "Roche Agreement" shall mean that certain Research Agreement dated
January 31, 1995 between and among Focal, F. Hoffmann-LaRoche, Inc. and F.
Hoffmann-LaRoche Ltd, as amended prior to the Effective Date.
1.33 "Roche Product" shall mean any product or component that would
result in Focal's breach of the Roche Agreement if rights to research,
develop, manufacture, use, sell or market the same were granted to Ciba or
Chiron under this Agreement as of the Effective Date.
5
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1.34 "Second Generation Product" shall mean a formulation comprising
Hydrogel Polymer in combination with a Ciba/Chiron Compound selected pursuant
to Article 3 (whether or not also including a Radiopharmaceutical), together
with all applicable Delivery Systems, in each case for use within the Field.
Notwithstanding the foregoing, except as provided under Section 2.2 below,
Second Generation Products shall not include any such formulation
incorporating Roche Product or Ciba/Chiron Compound that is a Platelet
Antagonist.
1.35 "Committee" shall have the meaning set forth in Section 3.1 below.
1.36 "Subdistributor" shall mean, with respect to a particular Product, a
third party who has obtained through the Developing Party directly or indirectly
the right to distribute, promote and/or market such Product.
2
LICENSE
2.1 Grant. Subject to the terms and conditions of this Agreement, Focal
hereby grants to Chiron and Ciba and their respective Affiliates an exclusive,
worldwide license under the Focal Technology, including Focal Technology which
is licensed from third parties, with right to sublicense, to develop, make, have
made, use, sell and have sold Products for use within the Field and as provided
in Section 2.4.2(b), except that Focal retains the exclusive right to make and
have made all Products in accordance with Article 8 hereof. It is understood
that, as between Ciba and Chiron, the foregoing license to Ciba and its
Affiliates shall be limited to Products for which Ciba is the Developing Party
hereunder, and the license to Chiron and its Affiliates shall be limited to
those Products for which Chiron is the Developing Party hereunder.
Notwithstanding the foregoing, Ciba/Chiron acknowledges that Focal may
obtain Energy Sources included within the Products from third party suppliers,
and the rights granted under this Article 2 with respect to such Energy Sources,
shall be nonexclusive. Such licenses set forth in this Article 2 shall be
subject to such further limitations as are applicable to the rights to Focal
which limitations have been disclosed to Ciba and Chiron in writing prior to
execution of this Agreement.
2.2 Option.
Upon termination of the Roche Agreement, Ciba and Chiron shall have the
following option:
2.2.1 In the event of termination of the Roche Agreement, Focal
shall notify Ciba/Chiron in writing no later than fifteen (15) days after the
effective date of such termination. Commencing upon the date of Focal's
written notice to Ciba/Chiron and for ninety (90) days thereafter (the
"Option Period"), Focal grants to Ciba/Chiron an option to extend the licenses
granted hereunder to include within the definition of Second Generation
Products formulations comprising Hydrogel Polymer in combination with a
Ciba/Chiron Compound that is a Platelet Antagonist solely for use within the
Field. To exercise such option, Ciba or Chiron (the "Exercising Party") shall
either:
6
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(a) Pay to Focal a nonrefundable, noncreditable exercise fee
of [*] ("Option 1"), in which event Focal shall extend the license granted in
Section 2.1 to include Products containing Platelet Antagonists, subject to
the other terms and conditions set forth in Section 2.1 and Article 8; and
Ciba/Chiron shall have no obligation to pursue such a Second Generation
Product or to conduct a Research Program with respect thereto; or
(b) Pay to Focal a nonrefundable, noncreditable exercise fee
of [*] and, to the extent required by this Section 2.2.1(b), commit to
commence a Research Program pursuant to Article 3 with respect to one Second
Generation Product that includes a Platelet Antagonist ("Option 2"). Upon
exercise of Option 2, if Ciba and/or Chiron have not (in the aggregate)
already engaged Focal to perform a Research Program with respect to three
Second Generation Products, the Exercising Party shall be obligated to
establish a Research Program with respect to a Second Generation Product that
incorporates a Platelet Antagonist ("Platelet Antagonist Product"), on the
terms and conditions set forth in Article 3, as one of three Second
Generation Products as to which Ciba/Chiron is required to commence a
Research Program pursuant to Section 3.3.3. Such Platelet Antagonist Product
shall be selected by Ciba/Chiron within sixty (60) days of the date of the
Exercise Notice (as defined below), and the Research Plan and Budget for such
Platelet Antagonist Product shall be established pursuant to Section 3.2.
Such Platelet Antagonist Product shall count toward the three Second
Generation Products contemplated in Sections 3.3.3. If Ciba/Chiron has
already commenced Research Programs with at least three Second Generation
Products, either Ciba or Chiron may, but shall not be required to, add a new
Second Generation Product containing a Platelet Antagonist, or replace an
existing Second Generation Product with a Second Generation Product
containing a Platelet Antagonist.
2.2.2 Ciba or Chiron may exercise Option 1 or Option 2 at any time
during the Option Period by written notice to Focal declaring its intent to
exercise Option 1 or Option 2 ("Exercise Notice") and paying to Focal within
thirty (30) days of such Exercise Notice the amounts required under Section
2.2.1 above. If neither Ciba nor Chiron exercises Option 1 or Option 2 during
the Option Period, it is understood and agreed that Focal may proceed to
research, develop, manufacture, market, sell and/or distribute, and/or grant
to one third party a right or license to research, develop, manufacture,
market, sell and/or distribute, in each case for use within the Field,
products incorporating one (1) or more Platelet Antagonists, including
without limiation the right or license (with right to grant and authorize
sublicenses) to make, have made, use and/or sell products incorporating
Hydrogel Polymer in a formulation with a Platelet Antagonist, with no further
obligation under this Article 2; it being understood that Focal shall not
license a third party to manufacture, market, sell and distribute a product
incorporating a Platelet Antagonist for use within the Field while Focal at
the same time independently manufactures, markets, sells and distributes
other products incorporating Platelet Antagonists for use within the Field.
* Confidential treatment has been requested for marked portion
7
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2.3 Radiopharmaceuticals. Focal shall identify to Ciba and Chiron the
Radiopharmaceutical(s) which Focal proposes to use in the First Generation
Radiopharmaceutical Product. Focal will endeavor to supply
Radiopharmaceutical(s) incorporated into a First Generation Product to Ciba and
Chiron under Article 8; it is understood, however, that Focal has no rights to
any Radiopharmaceutical as of the Effective Date and makes no representation or
warranty that Focal will obtain rights to supply such Radiopharmaceutical.
2.4 Exclusivity of Efforts.
2.4.1 (a) For a period of three (3) years after the Effective
Date, neither Ciba, Chiron nor their Affiliates shall develop, manufacture,
market, sell or otherwise distribute any product, other than Products, which
product is specifically intended by Ciba, Chiron or such Affiliate for use
within the Field at the time of Ciba or Chiron's development, manufacture,
marketing, sale or distribution. Subject to Section 3.3.4, nothing herein shall
preclude preclinical research by Ciba, Chiron or their respective Affiliates
within the Field.
(b) Neither Ciba, Chiron nor their respective Affiliates shall
seek regulatory approval to market or promote any Product for use outside the
Field, and Ciba, Chiron and their respective Affiliates shall market, promote
and distribute the Products only in accordance with applicable laws and
regulations, and only as a combination including the Delivery System. Subject
to the foregoing provisions of this Section 2.4.1(b), the Developing Party shall
not be deemed to have exceeded the scope of the licenses set forth in
Section 2.1 above by reason of off label use of Products outside the Field.
2.4.2 By reason of the license granted in Section 2.1, during the
term of this Agreement, Focal shall not conduct research, develop, manufacture,
market, sell or distribute, or grant to a third party a right or license to
conduct research, develop, manufacture, market, sell or distribute, any product
incorporating any Hydrogel Polymer which product is specifically intended by
Focal or such third party for use within the Field, except as may be approved by
Ciba or Chiron, or as provided below. It is understood that Focal may conduct
research, development, manufacture, marketing, sale or distribution of products
incorporating Hydrogel Polymers for use outside the Field; provided that Focal,
its Controlled Affiliates and licensees with respect to such products shall not
seek regulatory approval to market or promote any such product for use within
the Field, and Focal, its Controlled Affiliates and licensees shall market,
promote and distribute such products only in accordance with applicable laws and
regulations. Focal shall not be deemed to have granted a license within the
Field by reason of off label use of any such product. It is understood that the
foregoing restrictions on licensees apply only to products subject to the
license from Focal.
Notwithstanding the foregoing provisions of this Section 2.4.2:
(a) For so long as the Roche Agreement remains in effect,
nothing in this Agreement shall limit Focal's right to research, develop,
market, sell or distribute Roche Product pursuant to the Roche Agreement, or
grant the rights granted or contemplated in the Roche Agreement with respect
to such Roche Product including without limitation the right or license (with
right to grant and authorize sublicenses) to research, develop, make, have
made, use, market, sell and/or distribute products incorporating Hydrogel
Polymer with such Roche Product.
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(b) This Section 2.4.2 is subject to Section 2.2 and
Section 2.4.3.
2.4.3 Subject to Section 2.2 above, during the term of this
Agreement, Focal hereby grants to each of Ciba and Chiron the right of first
refusal to expand the Field to include within the licenses granted under
Section 2.1 any New Polymer. "New Polymer" shall mean any polymer other than a
Hydrogel Polymer which is discovered, developed, acquired or otherwise
Controlled by Focal or its Controlled Affiliates after the Effective Date and
during the term of this Agreement.
(a) Prior to proceeding, alone or with any third party, or
granting any right or license to a third party, to develop or commercialize any
New Polymer, or product incorporating a New Polymer, specifically intended for
use in the Field, Focal shall notify Ciba and Chiron in writing. The notice
shall include a description of the New Polymer. Upon written request by Ciba or
Chiron within thirty (30) days after receipt of such a notice, the parties shall
commence negotiations in good faith with respect to commercially reasonable
terms under which the licenses in Section 2.1 shall be expanded to include the
New Polymer.
(b) If (i) neither Ciba nor Chiron requests within such thirty
(30) day period to commence such negotiations, or both Ciba and Chiron notify
Focal that they are not interested in including the New Polymer within the
licenses granted hereunder; or (ii) the parties do not enter into a letter of
intent with respect to the New Polymer within ninety (90) days after the date of
Focal's notice; or (iii) the parties do not enter into a definitive written
agreement within ninety (90) days after the parties enter into a letter of
intent pursuant to (ii) above (in each case, the "Negotiation Period"), the New
Polymer shall not be included within the Field, and Focal may proceed to
commercialize such New Polymer itself or grant rights or licenses to third
parties with respect to the New Polymer, on terms not more favorable to the
third party than those terms last offered to Ciba and/or Chiron hereunder.
2.5 No Rights Outside Field. Except as expressly provided in this
Agreement, including without limitation in Sections 2.4.1(b) and 2.4.3, nothing
in this Agreement shall be deemed to grant Ciba or Chiron any rights or licenses
to exploit any Hydrogel Polymer, New Polymer or Focal Technology outside the
Field, and Focal expressly reserves the right to grant exclusive licenses under
the Focal Technology to commercialize any and all products and components
outside the Field. It is understood, without limitation, that if a third party
has independent intellectual property or other rights to commercialize the same
or similar compound as a Ciba/Chiron Compound (other than Hirudin or Tissue
Factor Pathway Inhibitor or derivatives or modifications thereof) outside the
Field, Focal reserves the right to grant exclusive licenses under Focal
Technology to such party for use of such compound outside the Field, subject to
the restrictions set forth in this Agreement on the use of data and information
arising from this Agreement. Subject to Article 8, it is further understood
that neither Ciba nor Chiron grant to Focal any actual or implied rights or
licenses under any Ciba or Chiron patents or intellectual property to
commercialize Ciba/Chiron Compounds.
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3
RESEARCH
3.1 Committees Generally.
3.1.1 As to each Product, the Developing Party and Focal shall
establish the following Committees: a research committee to approve the
Research Plan and Budget and to oversee, review and coordinate the Research
Program with respect to such Product ("Research Committee"); an advisory
development committee to monitor and review the Developing Party's Product
Development with respect to such Product ("Development Committee"); an
advisory manufacturing committee to monitor and review Focal's development of
manufacturing capacity with respect to such Product under the Manufacturing
Plan ("Manufacturing Committee"); and an advisory marketing committee to
monitor and review the Developing Party's activities with respect to the
marketing, promotion and distribution of such Product ("Marketing
Committee"). The Development Committee, Manufacturing Committee and
Marketing Committee are referred to herein collectively and individually as
"Advisory Committees." The Advisory Committees and the Research Committee
are referred to collectively and individually herein as "Committees."
3.1.2 Each Committee shall be comprised of an equal number of
representatives from the Developing Party and Focal, selected by such party,
it being understood that when Ciba and Chiron are jointly the Developing
Party, Ciba and Chiron together shall have a combined number of
representatives on the Committee equal to the number of Focal
representatives. The Developing Party and Focal each may replace its
Committee representatives at any time, with prior written notice to the
other. The Developing Party and Focal each shall bear its own personnel and
travel costs and expenses relating to Committee meetings. With the consent of
the Developing Party and Focal, other representatives of Focal or the
Developing Party may attend Committee meetings as nonvoting observers.
3.1.3 Research Committee.
(a) The Research Committee shall meet quarterly, or as
otherwise agreed by the parties, alternating between the location of Focal
and of the Developing Party, or at such locations as the parties agree. At
its meetings, the Research Committee will (i) monitor the progress of the
Research Program toward its objectives, and (ii) review and approve the
Research Plan and Budget, pursuant to this Article 3. The host party's lead
representative shall chair meetings of the Research Committee and shall be
responsible for preparing the meeting agendas and minutes.
(b) Wherever possible, the decisions of the Research Committee
shall be made by unanimous consent of the Developing Party and Focal.
However, in the event that unanimous decisions cannot be reached, decisions
of the Research Committee as described in Section 3.1.3 shall be by majority
vote (based upon votes being cast by an equal number of representatives of
Focal and the
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Developing Party). There shall be no tie-breaker; and in the event of
deadlock the matter in question shall be referred to selected executive
officers of Focal and the Developing Party for final resolution.
(c) The Research Committee for a Product shall terminate upon
completion or termination of all activities within the Research Program for
such Product, provided that if after termination of the Research Committee
for a Product the Developing Party and Focal desire that additional Research
be performed with respect to such Product, the Developing Party and Focal
shall reconstitute the Research Committee for such Product.
(d) Prior to the earlier of (i) termination of the Research
Committee for a Product, and (ii) commencement of any study which may result
in the achievement of any of the milestones set forth in Section 4.2.1 or
milestones 1 or 2 set forth in Section 4.2.2, the Research Committee for the
Product shall establish the criteria to be used in determining whether the
First Generation Product milestones set forth in Section 4.2.1 below or
milestones 1 and 2 of the Second Generation Product milestones set forth in
Section 4.2.2 below shall have occurred with respect to such Product
("Committee Criteria").
3.1.4 Advisory Committees. After commencement of Product
Development for a particular Product (and in the case of the Marketing
Committee, after the filing of an NDA for such Product), Advisory Committees
for such Product shall meet semi-annually, or as otherwise agreed by Focal
and the Developing Party, alternating between the location of Focal and of
the Developing Party, or at such locations as Focal and the Developing Party
may agree. Focal's participation in the Development Committee and Marketing
Committee shall be advisory only, and the Developing Party shall control
decision-making within the Development Committee and Marketing Committee.
The role of the Development Committee and Marketing Committee shall be to
review development and marketing plans and to provide advisory input with
respect to thereto, but not to make operational or strategic decisions.
Except as otherwise provided under Article 8 below, Developing Party's
participation in the Manufacturing Committee shall be advisory only, and
Focal shall control decision-making within the Manufacturing Committee. When
Focal or the Developing Party's participation is advisory only, the other
party's lead representative shall chair meetings of the Advisory Committee
and shall be responsible for preparing the meeting agendas and minutes.
3.2 Plans and Budgets. The Research Program will be carried out in
accordance with the Research Plan and Budget then in effect. By October 1 of
each calendar year, Focal and/or the Developing Party shall propose to the
Research Committee appropriate modifications, if any, of the Research Plan
and Budget for the next succeeding year, and upon approval of such
modifications of the Research Plan and Budget by the Research Committee, such
modified plans and budgets shall be reflected in the Research Plan and Budget
for purposes of this Agreement. In addition, the Research Committee shall
review the Research Plan and Budget on an ongoing basis and may modify the
Research Plan and Budget as the Research Committee shall approve from time to
time.
3.3 Research Program. Focal shall be primarily responsible for
conducting the Research for each Product, with assistance from Ciba/Chiron.
In each case, such Research shall be conducted solely
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pursuant to a Research Program, as further described in the Research Plans
and Budgets, and Focal shall use its reasonable efforts to diligently perform
the Research Program in accordance with the Research Plan and Budget then in
effect.
3.3.1 Initial Feasibility of First Generation Products and First
Generation Radiopharmaceutical Products.
(a) Within ninety (90) days after the Effective Date, Focal,
Ciba and Chiron shall define and initiate, themselves or by a third party
approved by Focal, Chiron and Ciba, a fragmentation and embolization study
for Hydrogel Polymer ("Fragmentation and Embolization Study"). Upon
completion of the Fragmentation and Embolization Study, the parties shall
meet promptly (in person or by telephone), but in no event more than fifteen
(15) days after such completion, to determine whether the results of the
Fragmentation and Embolization Study meet the study criteria as are mutually
agreed upon in writing by the parties ("Study Criteria"). Subject to Section
3.3.3(b), if the results of the Fragmentation and Embolization Study as
reasonably determined by both Ciba and Chiron meet the Study Criteria, the
parties shall continue with the Research Program with respect to the First
Generation FocalGel Product in accordance with the Research Plan and Budget.
(b) If both Ciba and Chiron determine that the results of the
Fragmentation and Embolization Study meet the Study Criteria, the parties
shall also proceed with a Research Program in accordance with the Research
Plan and Budget to evaluate the First Generation Radiopharmaceutical Product,
which shall include evaluation of use of the Hydrogel Polymer for the
interstitial radiation through local delivery or immobilization of
Radiopharmaceuticals to inhibit cell proliferation, and the Developing Party
shall conduct a commercial assessment of the First Generation
Radiopharmaceutical Product.
(c) If, in the reasonable judgment of both Ciba and Chiron,
the results of the Fragmentation and Embolization Study do not meet the Study
Criteria, Ciba and Chiron shall have the right to terminate this Agreement
pursuant to Section 16.3 promptly after completion of the Fragmentation and
Embolization Study, effective upon thirty (30) days written notice to Focal,
and in such event all rights and licenses granted to Ciba and Chiron
hereunder shall terminate and all such rights and licenses shall revert to
Focal.
3.3.2 Commencement of Research for First Generation Product.
Subject to Section 3.3.3(b), the Research Program with respect to First
Generation FocalGel Product shall be initiated promptly after the Effective
Date in accordance with the Research Plan and Budget. Regardless of whether
or not the First Generation FocalGel Product or the First Generation
Radiopharmaceutical Product are successful or are pursued by Chiron and/or
Ciba, Chiron and Ciba shall retain the exclusive license under Section 2.1 in
the Field unless and until this Agreement is terminated in accordance with
Article 16.
3.3.3 Selection of Second Generation Products.
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(a) At any time and from time to time during the term of this
Agreement, Chiron and/or Ciba may select Ciba/Chiron Compounds to be
incorporated into Second Generation Products. Prior to commencement of
Research or Product Development with respect to a Ciba/Chiron Compound that
the Developing Party intends to include in a Product, the Developing Party
shall notify Focal in writing of the Ciba/Chiron Compound to be included
within such Research or Product Development, together with the biological and
physical characteristics of the Ciba/Chiron Compound, including without
limitation the known chemical structure and mechanisms of action of such
Ciba/Chiron Compound ("Compound Notice"). Within thirty (30) days after
Focal's receipt of the Compound Notice, Focal shall notify the Developing
Party if the Ciba/Chiron Compound described in the Compound Notice is within
the definition of Roche Product. If Focal does not so notify the Developing
Party, Research shall be initiated promptly with respect to such Ciba/Chiron
Compound.
(b) Ciba and Chiron agree to proceed with, and to engage Focal
to perform Research on, at least [*] Second Generation Products;
provided, however, if, in the judgment of Chiron and Ciba, the First
Generation FocalGel Product or the First Generation Radiopharmaceutical
Product is effective, based on the pig efficacy model, and Ciba and Chiron
are diligently proceeding with Product Development of the First Generation
FocalGel Product or the First Generation Radiopharmaceutical Product under
this Agreement, at such time Chiron and/or Ciba may but shall not be
obligated to, continue with evaluation and development of Second Generation
Products. If Chiron and/or Ciba are diligently proceeding with Research or
Product Development of Second Generation Products in accordance with this
Section 3.3.3, Chiron and/or Ciba may, but shall not be obligated to,
continue with Research and Product Development of First Generation Products.
(c) Except as provided in Section 3.3.3(b), the [*] Ciba/Chiron
Compounds to be included within Second Generation Products shall be
determined as follows. Ciba shall select the [*] Ciba/Chiron Compound to be
included in a Second Generation Product, and Ciba shall be the Developing
Party with respect to such Second Generation Product. Such [*] Ciba/Chiron
Compound [*] and shall be delivered to Focal as soon as reasonably
practicable but not later than within thirty (30) days after the Effective
Date. The Research Program on such [*] Second Generation Product shall be
initiated promptly after delivery of the [*] Ciba/Chiron Compound to Focal.
A [*] Ciba/Chiron Compound shall be selected for inclusion in a Second
Generation Product within six (6) months after the Effective Date, and a [*]
Ciba/Chiron Compound shall be selected for inclusion in a Second Generation
Product within twelve (12) months after the Effective Date; provided that if
Ciba or Chiron have not determined by the end of such periods that the
results of the Fragmentation and Embolization Study meet the Study Criteria,
the foregoing periods shall be extended until ninety (90) days after it is
determined that the results of the Fragmentation and Embolization Study meet
the Study Criteria (such six (6) or twelve (12) month period, as applicable
and as so extended, being referred to below as the "Selection Period"); and
provided further that in the event Ciba or Chiron selects for use in a Second
Generation Product a Ciba/Chiron Compound that is within the definition of [*],
as described in Section 3.3.3(a), the Selection Period for such Second
Generation Product, as the case may be, shall be reasonably extended. The
Research with respect to each Second Generation Product shall be initiated
promptly upon selection of such Second Generation Product for inclusion in
the Research Program in accordance with the Research Plan and Budget.
13
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<PAGE>
(d) Upon selection of each Second Generation Product in
accordance with the foregoing, and subject to Focal's right to decline to
participate in the Research and to transfer technology in accordance with
Section 3.3.4, Focal and the Developing Party shall promptly agree upon a
Research Plan and Budget to include a full, active and expedient Research
Program for such selected Second Generation Product.
3.3.4 Focal Right to Perform Research. Notwithstanding Section
2.1 above, or any other provision of this Agreement, Focal shall have the
exclusive right at its election to conduct any and all Research relating to
First Generation Products and Second Generation Products, and Ciba and Chiron
agree not to conduct or have conducted any such Research except to have such
Research performed by Focal hereunder or as otherwise provided in this
Section 3.3.4. If at any time a Developing Party desires that additional
Research be conducted with respect to a Second Generation Product, the
Developing Party shall so notify Focal and provide Focal with a description
of the Research proposed to be performed. If Focal elects to perform such
Research, Focal and the Developing Party shall establish a reasonable
Research Plan and Budget for such Research Program, and Focal shall proceed
with such Research Program in accordance with this Agreement. In the event
that Focal elects not to conduct such Research, the Developing Party may
conduct such Research on its own, and subject to the last sentence of Section
1.25, the product that is the subject of such Research within the Field shall
become one of the "Products" selected by Ciba and Chiron. If the Developing
Party elects to conduct such Research on its own, Focal shall disclose to the
Developing Party Focal Know-How necessary for the Developing Party to perform
the Research Focal declined to perform as provided in this Section 3.3.4
above, and such assistance to the Developing Party as is reasonably necessary
to enable the Developing Party to perform such Research.
3.4 Product Development.
3.4.1 Selection of Products. Subject to Section 3.3.3(b), with
respect to the First Generation FocalGel Product or the First Generation
Radiopharmaceutical Product or any of the first three Second Generation
Products, if in the judgment of the Developing Party such product
demonstrates efficacy, including without limitation demonstration of efficacy
in a pig or other mutually agreed upon large animal model, the Developing
Party shall use reasonable commercial efforts to conduct Product Development
of the Product in question, at the Developing Party's sole expense. Focal
shall be informed with respect to such Product Development. Focal agrees to
provide reasonable mutually agreed technical support as reasonably necessary
pursuant to the Research Plan and Budget; however, except as otherwise
expressly agreed in writing, Focal shall have no obligation to perform
pre-clinical studies other than those contained in the Research Plan and
Budget or clinical studies or other portions of Product Development. It is
understood during the term of this Agreement, the Developing Party may select
a Product for Product Development at any time.
3.4.2 Regulatory Filings. With respect to each Product, the
Developing Party shall determine the most effective regulatory pathway for
obtaining approval to manufacture, market and sell the Product. Unless
otherwise agreed, all regulatory filings shall be prepared, filed and owned
by the Developing Party in the Developing Party's name at the Developing
Party's expense, except for such
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regulatory registrations as Focal is required to hold as manufacturer of the
Product, which shall be prepared, filed and owned by Focal at Focal's
expense. The Developing Party and Focal shall each provide to the other such
reference rights, in each case as may reasonably be required for the
preparation and filing of all such regulatory documents with respect to the
Products, and as otherwise provided in Article 6.
3.5 Diligence. It is understood that nothing contained in the Article 3
shall be deemed to limit Focal's rights under Article 11 or 16 below.
4
DEVELOPMENT PROGRAM FUNDING
4.1 Funding of Research and Development.
4.1.1 Provision of Ciba/Chiron Compounds. As required under the
Research Plans and Budgets with respect to Second Generation Products, the
Developing Party shall supply to Focal free of charge such quantities of
Ciba/Chiron Compounds as are reasonably required for Focal to perform its
obligations under the Research Program.
4.1.2 Research Initiation Payment for First Second Generation
Product. In consideration for the scientific benchmark of initiating the
Research Program with respect to the first Second Generation Product, in
addition to the amounts to be paid under Section 4.1.3 below, within thirty
(30) days following first delivery of a Ciba/Chiron Compound to Focal, Ciba
shall make a nonrefundable initial payment to Focal in the amount of five
hundred thousand dollars ($500,000) ("Research Initiation Fee") creditable as
provided in Section 4.2.2(a).
4.1.3 Ongoing Research Funding. The Developing Party shall pay
to Focal for each Focal full time equivalent conducting the Research in
accordance with the Research Plans and Budgets a full-time equivalent
personnel charge, which incorporates all of Focal's direct and indirect
expenses for such personnel ("FTE Rate"), together with such other costs as
are specifically set forth in the Research Plans and Budgets or approved by
the Research Committee. The parties agree that the FTE Rate for the period
commencing on the Effective Date and expiring on December 31, 1997 shall be
[*] per full-time equivalent person per year. Each subsequent calendar
year after 1997, the FTE Rate shall increase by the percentage change
specified during the most recent calendar year in the Consumer Price Index,
for All Urban Consumers for Boston, Massachusetts, as published by the U.S.
Department of Labor, Bureau of Labor Statistics; provided that for the
adjustment to be made for calendar year 1998, the adjustment shall equal the
increase in the Consumer Price Index over the 1997 calendar year. As used
herein, a "full-time equivalent" (or "FTE") shall mean a full-time person
dedicated to the Research Program, or in the case of less than a full-time
dedicated person, a full-time, equivalent person year, based upon a total of
one thousand eight hundred eighty (1,880) hours per year of work related to
the Research Program, to the extent such full-time equivalent personnel are
included as headcounts in the Research Plan and Budget. The FTEs working on
each Research Program shall be
* Confidential treatment has been requested for marked portion
15
<PAGE>
an appropriate mix of Ph.D. and other scientists and personnel, qualified to
perform the work in question as approved by the Research Committee. The
foregoing amounts to be reimbursed by the Developing Party are referred to
below as the "Research Costs".
4.1.4 Payment. Within thirty (30) days after the Effective
Date, and on or before the first day of each subsequent calendar quarter
during the Research Period, the Developing Party shall pay to Focal the
Research Costs budgeted for the quarter in the Research Plan and Budget then
in effect. Within sixty (60) days following the end of each calendar year
during the Research Period, Focal shall provide to the Developing Party a
summary of the Research Costs actually incurred by Focal during such year.
If the actual Research Cost amounts incurred by Focal in accordance with the
approved Research Plan and Budget for a calendar year were less than the
budgeted amounts paid by the Developing Party to Focal in advance for such
calendar year, the excess shall be recouped by way of a reduction from the
next payments due to Focal under this Section 4.1.4 provided that at the end
of the Research Program any such excess not then recouped shall be repaid by
Focal to the Developing Party within thirty (30) days after the end of the
Research Period.
4.1.5 Reimbursement for Past Research Expenditure. As
reimbursement of past research expenditures incurred by Focal with respect to
research relating to potential Products within the Field, Ciba/Chiron shall
pay to Focal a nonrefundable and noncreditable payment to Focal in the amount
of [*] within ten (10) days following the Effective Date.
4.2 Milestone Payments.
4.2.1 First Generation Product Milestones. Subject to Section
4.2.3(b) below, Ciba/Chiron agree to make the following payments to Focal
upon the first occurrence of each milestone specified below for each of the
First Generation Products:
FIRST GENERATION PRODUCT MILESTONES PAYMENT
----------------------------------- -------
1. Filing of the first IND by Chiron or Ciba
(regardless of where the IND is filed) [*]
2. Demonstration of efficacy at the end of
[*], as determined by the applicable
Committee Criteria. [*]
4.2.2 Second Generation Product Milestones. Ciba/Chiron agree
to make the following payments to Focal with respect to Second Generation
Products upon the occurrence of each milestone specified below:
* Confidential treatment has been requested for marked portion
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SECOND GENERATION PRODUCT MILESTONES PAYMENT
------------------------------------ -------
1. Initial demonstration of formulation and [*]
release of the Second Generation Product
in an animal model, as determined by the
applicable Committee Criteria, for up to a
maximum of [*]:
2. The first demonstration of efficacy of any [*]
Second Generation Product in a pig coronary
model, as determined by the applicable
Committee Criteria:
3. Filing of the first IND, by the Developing [*]
Party (in a major country) or initiation of
human clinical trials in any country, for each
Second Generation Product, up to a maximum of
[*]:
4. Acceptance for filing by the FDA or foreign [*]
equivalent in a Major Country, whichever
occurs first, of an NDA by the Developing
Party for each Second Generation Product, up
to a maximum of [*]:
5. First commercial sale of each Second [*]
Generation Product in the first Major Country,
up to a maximum of [*]:
For any additional Second Generation Products
beyond [*] there will be [*] milestone
payments.
(a) It is understood that milestone 1, 3, 4, and 5 of this
Section 4.2.2 above shall be paid with respect to each Second Generation
Product to meet such milestone, up to a maximum of [*], and milestone 2 of
this Section 4.2.2 above shall be due only with respect to the [*] Second
Generation Product to meet such milestone. In addition, the Research
Initiation Fee paid pursuant to Section 4.1.2 above shall be applied as a
credit to the payment upon the occurrence of milestone 1 of this Section
4.2.2 above for such [*] Second Generation Product (i.e., [*]).
(b) After an aggregate of [*] has been paid by
Ciba/Chiron to Focal with respect to milestone 1 of Section 4.2.2, if a
Second Generation Product for which Ciba/Chiron has paid the fee for
milestone 1 under this Section 4.2.2 does not meet milestone 2 above and all
further research and development of such Second Generation Product is
discontinued, then [*] of the fee paid
* Confidential treatment has been requested for marked portion
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with respect to such Second Generation Product for such milestone 1 shall be
credited against the fee payable for milestone 1 with respect to the next
Second Generation Product to meet such milestone 1; provided, that if
Ciba/Chiron receives such a credit, the amount taken by Ciba/Chiron as such a
credit shall be carried forward and the payments due upon milestone 1 under
4.2.2 above shall be made for Second Generation Products beyond [*] until a
maximum of [*] has been paid hereunder upon the satisfaction of such
milestone with respect to Second Generation Products.
4.2.3 Other.
(a) Focal and the Developing Party agree to promptly notify
the other in writing of its achievement of any milestone. Except as
otherwise provided under paragraph (b) below, if at the time a particular
milestone is achieved under Sections 4.2.1 or 4.2.2, above, any prior
milestones under the same Section 4.2.1 or 4.2.2 have not been achieved with
respect to the same Product, or if the Committee Criteria are not met for a
particular milestone but Ciba or Chiron nonetheless proceeds with Product
Development for the same Product toward the next milestone (or in the case of
milestone 2 under 4.2.1 above, toward [*], the payments for such prior
milestones shall then be due. The payments set forth in Section 4.2.1 and
4.2.2 shall each be due and payable within sixty (60) days after written
notice of the milestone event is delivered to the other party, subject in the
case of a milestone achieved by Focal, to the Developing Party's verification
thereof during such sixty (60) day period.
(b) If, in the course of performing Product Development with
respect to a Second Generation Product or First Generation
Radiopharmaceutical Product, Ciba or Chiron performs a control study using a
First Generation FocalGel Product as a control, and thereby achieves a First
Generation FocalGel Product milestone, but neither Ciba nor Chiron proceeds
with Research or Product Development with respect to such First Generation
FocalGel Product, Ciba and Chiron shall not be obligated to make the
milestone payment that would otherwise be due under Section 4.2.1 for such
First Generation FocalGel Product. However, if in such event Ciba/Chiron
proceed with Research or Product Development of such First Generation
FocalGel Product, milestone 1 for such First Generation FocalGel Product
shall then be due and no further milestones shall be due under Section 4.2.1
for such First Generation FocalGel Product.
5
RECORDKEEPING; PUBLICATION
5.1 Reports and Records.
5.1.1 Records. Each party shall maintain records of work
performed by such party under the Research Program (or cause such records to
be maintained) in sufficient detail and in good scientific manner as will
properly reflect all work done and results achieved in the performance of the
* Confidential treatment has been requested for marked portion
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Research Program (including all data in the form required under any
applicable governmental regulations).
5.1.2 Reports. During the Research Period, Focal shall provide
the Research Committee with a semi-annual written report summarizing the
progress of the Research Program. The Developing Party agrees to provide
Focal with semi-annual written progress reports with respect to the Product
Development performed by such party with respect to each Product during the
preceding semi-annual period. Such reports shall be Confidential Information
of the Developing Party under Article 14.
5.2 Publication. Except as required by law, none of the parties hereto
shall publish or publicly disclose any results, information or data arising
from any Research or Product Development for a First Generation Product or
Second Generation Product without the prior written consent of Focal and the
Developing Party, which consent shall not be unreasonably withheld.
6
USE OF PRECLINICAL AND CLINICAL DATA
6.1 Access by Developing Party. Focal shall allow Developing Party to
have prompt access to all records and data generated in the course of
performing the Research Program on behalf of such Developing Party with
respect to each Product at reasonable times and in a reasonable manner.
Focal shall further provide to the Developing Party access to all data and
records arising from process development and manufacturing activities
conducted by Focal pursuant to Article 8 with respect to each Product at
reasonable times and in a reasonable manner.
6.2 Access by Focal.
(a) The Developing Party shall provide to Focal such preclinical
and clinical data with respect to Products as is necessary for Focal to
conduct its process development, manufacturing and regulatory filing
responsibilities with respect to the Products. All such data shall be deemed
Confidential Information of the Developing Party, subject to Article 14, and
shall be used solely for the purpose for performing Focal's obligations
hereunder with respect to the Products.
(b) The parties recognize that in connection with development of
products which incorporate the same or similar Hydrogel Polymer or New
Polymer as is incorporated into the Products, Focal may be required by the
FDA or other regulatory agencies to provide access to safety information
generated through preclinical and clinical studies by the Developing Party
using such Hydrogel Polymer or New Polymer. The Developing Party agrees to
provide Focal with a copy of each adverse event report filed with the FDA
with respect to a Product containing a Hydrogel Polymer or New Polymer,
except to the extent it can be determined that the adverse event arises from
a Ciba/Chiron Compound; and the Developing Party agrees to permit Focal to
reference its FDA filings with respect to the safety of the Hydrogel Polymer
or the Now Polymer. Nothing herein shall allow Focal direct access to
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preclinical or clinical data with respect to any Product, except for use
solely in connection with Product development and manufacture pursuant to
Section 6.1(a). All information provided to Focal pursuant to this Section
6.2(b) shall be Confidential Information of the Developing Party; may be used
only as provided in this Section 6.2(b); and may be disclosed to third
parties only as necessary for the purposes of this Section 6.2(b), subject to
confidentiality obligations no less restrictive than those set forth in
Article 14.
7
MARKETING ASSISTANCE; OTHER
7.1 Marketing Assistance. On request of the Developing Party, for
twelve (12) months after receipt of government approval to market and
distribute the first Product, Focal will provide reasonable assistance during
Focal's normal business hours, not to exceed three full-time equivalents (as
defined in Section 4.1.3), in training Ciba/Chiron's sales and marketing
personnel in the use of the Products at times and locations to be agreed upon
in writing by the parties. Ciba/Chiron personnel trained by Focal in the use
of the Products shall be responsible for training the remainder of
Ciba/Chiron's sales and marketing force. In addition, Focal will provide
in-service training of interventional cardiologists, and participate in such
customer evaluations and cardiology medical convention exhibitions of
Products, as are agreed upon from time to time during the term of this
Agreement by the parties. Ciba/Chiron shall reimburse Focal for all
reasonable travel, lodging and per diem expenses incurred by Focal in
connection with providing the services set forth in this Section 7.1 within
thirty (30) days after date of invoice.
7.2 Regulatory Reporting. Pursuant to applicable regulations of the FDA
and foreign equivalent agencies, whether with respect to drugs, biologics or
medical devices, each party may be required to report to the FDA or foreign
equivalent agency information that reasonably suggests that a Product may
have caused or contributed to the death or serious injury or has
malfunctioned and that the Product would be likely to cause or contribute to
a death or serious injury if the malfunction were to recur. Focal shall
provide to the Developing Party prompt notice of all adverse events with
respect to Products, whether or not serious as defined in applicable
regulations of the FDA or foreign equivalent, together with sufficient
information about such events to enable the Developing Party to comply with
its regulatory reporting obligations. The Developing Party agrees to provide
Focal with prompt notice of all adverse events with respect to Products,
whether or not serious as defined in applicable regulations of the FDA or
foreign equivalent, together with sufficient information about such events to
enable Focal to comply with its regulatory reporting obligations. The
reports of information on adverse events referred to in this Section 7.2
shall be no more extensive or frequent than is required by the FDA or foreign
equivalent.
8
MANUFACTURING RIGHTS
8.1 Manufacturing. Subject to this Article 8 and the Developing Party's
supply of Ciba/Chiron Compounds as set forth in this Section 8.1 below, Focal
shall manufacture, or have
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manufactured by a third party and supply to the Developing Party, and the
Developing Party shall purchase from Focal, reasonable requirements of
Product, in a form ready for final packaging, for (i) the Developing Party to
perform Product Development of such Product, and (ii) supply of Products for
commercial sale. The Developing Party shall supply without charge to Focal,
in sterile, stable, bulk form, such quantities of Ciba/Chiron Compounds as
are reasonably required for Focal to manufacture Products in accordance with
this Article 8. In the event that Focal elects to utilize a third party to
manufacture a Product for supply to the Developing Party, the Developing
Party shall have the right to approve such third party supplier, which
approval shall not be withheld unreasonably. It is understood that the
expectation of the parties is that Focal shall have the right to utilize
third party manufacturers, and that the Developing Party's consent shall only
be withheld to the extent reasonably necessary to maintain quality, ensure
the availability of sufficient capacity to supply the necessary quantity in a
timely manner in accordance with the Manufacturing Plan as described below,
ensure reasonable protection of the Developing Party's Confidential
Information against disclosure to competitors, and for similar reasonable
concerns.
8.2 Transfer Prices.
8.2.1 Product Development Transfer Price.
(a) The parties agree that Focal's use of Products in the
course of the Research Program will ordinarily be included within the FTE
Rate payable pursuant to Section 4.1.3. In the event that extraordinary
requirements for Products arise pursuant to the Research Program, the cost of
such extraordinary supply shall be a Research Cost subject to approval of
both parties pursuant to the approval of the Research Plan and Budget for the
Product in question.
(b) Focal shall provide to the Developing Party Products for
use in Product Development at a transfer price equal to Focal's Production
Cost thereof, provided that the Production Cost for the Disposable Components
of each Product supplied for use in human clinical trials shall not exceed [*].
For purposes of this Section 8.2.1. "Disposable Components" shall mean only
Hydrogel Polymer and catheter components of Products.
8.2.2 Commercial Transfer Prices. Focal shall provide Products
to Ciba/Chiron for commercial sale at a price equal to [*] Net Sales by
Ciba/Chiron and its Affiliates and Subdistributors set forth in this Section
8.2.2 below:
(i) With respect to First Generation FocalGel Products, [*].
(ii) With respect to First Generation Radiopharmaceutical
Products, [*].
(iii) With respect to Second Generation Products, [*].
* Confidential treatment has been requested for marked portion
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In the event that the Supply Agreement continues after expiration of all
patents governing the Product in a given jurisdiction, the parties shall
negotiate in good faith a reasonable reduction in the transfer price to
reflect the lack of patent coverage in such country.
8.2.3 Energy Source. Notwithstanding the foregoing provisions
of Section 8.2, Energy Sources shall be provided at [*]. In the event that
Focal does not manufacture the Energy Source, but rather obtains it from a
third party, the Developing Party shall have the right to purchase the Energy
Source directly from such third party as mutually agreed by the Developing
Party and such third party.
8.2.4 Promotional Samples. With respect to any Products that
are supplied to Ciba or Chiron for use as samples, or otherwise to be used or
distributed in other than full commercial sales (other than as part of a
Research Program or for use in Product Development), the transfer price for
such Products or other materials shall equal [*] to be mutually agreed upon
by the parties in the Supply Agreement.
8.2.5 Undue Hardship. The parties will review and monitor
Production Costs through the Manufacturing Committee on an ongoing basis with
the goal of maintaining Production Costs at the lowest reasonable level,
including consideration of use of third party suppliers. As of the Effective
Date, both parties believe that the financial terms reflected in this Section
8.2 reflect the agreed balance of interests and burdens between the parties,
and the parties expect to preserve such terms. However, in the event that
the total of actual and reasonably anticipated Net Sales over a period of at
least one (1) year create an unreasonable burden as to the profitability of
this manufacturing arrangement to one party, in relation to the burden to the
profitability to the other, the parties agree to equitably adjust the terms
hereof to remedy such unreasonable burden. In making such adjustments, the
parties shall reasonably consider such factors as the respective
contributions made and risks borne by the parties in connection with the
discovery, research, development and commercialization of the Product in
question, the reasonable expectation of the parties as to profitability of
such Products and the like.
8.3 Supply Agreement. Within one hundred eighty (180) days following
commencement of [*] with respect to each Product, Focal and the Developing
Party shall enter into a mutually agreed upon Supply Agreement for [*]
commercial supply of such Product on commercially reasonable terms, including
without limitation those set forth in this Article 8. The Supply Agreement
shall include reasonable and customary terms for ordering, forecasting,
provisional payment and reconciliation and the like.
8.4 Manufacturing Rights.
8.4.1 Focal shall at all times supply in accordance with the
Supply Agreement quantities of Products ordered by the Developing Party, its
Affiliates and Subdistributors, manufactured in compliance with all agreed
upon specifications and all applicable legal and regulatory requirements and
all warranties of Focal as set forth in the Supply Agreement; provided,
however, that if Focal fails to supply to the Developing Party reasonable
quantities of a Product, or fails to comply with the
* Confidential treatment has been requested for marked portion
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Manufacturing Plan (as defined below), in accordance with the Supply
Agreement, or Focal elects not to supply a Product or component thereof, the
Developing Party shall have the right to manufacture, or have manufactured
for it by a third party, such Product or component. However, the Developing
Party's right to manufacture or have manufactured such Product or component
shall be subject to its payment of a commercially reasonable royalty to
Focal, to be negotiated by the parties in good faith in lieu of the transfer
prices set forth in Section 8.2 for such Product or component; and in the
event the Developing Party has such Product or component manufactured by a
third party, such right shall be further subject to having in place
reasonable protections to ensure against unauthorized use and disclosure of
Focal confidential information. It is further understood that
notwithstanding the provisions of Section 2.1 and 2.2, the Developing Party
shall not have the right to sublicense to a third party the right to both
manufacture and sell Products, without Focal's consent which shall not be
unreasonably withheld.
8.4.2 The Supply Agreement shall include provisions to implement
the right of the Developing Party to manufacture or have manufactured
Products under Section 8.4. 1, including without limitation provisions for
the transfer of all Focal Know-how necessary for the manufacture of Products,
and requirements on the part of Focal to provide all necessary assistance to
the Developing Party reasonably necessary to enable it to assume the
manufacture of Products.
8.4.3 Manufacturing Plans.
(a) Focal represents and warrants that it currently has
sufficient capacity to supply all requirements of Ciba and/or Chiron for
Products for [*].
(b) As soon as reasonably practicable following commencement
of [*], Focal shall prepare a reasonable manufacturing plan for development
by Focal of the necessary capacity to supply the reasonable requirements of
the Developing Party for the [*].
(c) As soon as is reasonably practicable following
commencement of [*], Focal shall present for review and comment in the
Manufacturing Committee and approval by the Developing Party, which approval
shall not be unreasonably withheld, a process and manufacturing development
plan pursuant to which Focal will (i) supply all of the Developing Party's
reasonable requirements of such Product for [*]; (ii)
conduct or have conducted commercial manufacture of Products; and (iii)
create and qualify a second site or source of supply for commercial sale of
such Product ("Manufacturing Plan"). Each Manufacturing Plan provided
pursuant to this Section 8.4.3 shall include milestones and timelines and
shall be incorporated within the Supply Agreement for such Product.
Ciba/Chiron shall reimburse Focal for all direct and indirect costs and
expenses (excluding general and administrative expense); calculated in
accordance with generally accepted accounting principles in the United
States, which are incurred by Focal in accordance with a budget reasonably
agreed upon by the parties and the Manufacturing Committee for process
development, manufacturing scale-up, obtaining regulatory approvals and other
activities, in each case to the extent specific for the manufacture of
Products within the Field and reasonably
* Confidential treatment has been requested for marked portion
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necessary to manufacture or have manufactured and supply Products hereunder,
and obtain required regulatory approvals thereof, in accordance with
applicable laws.
(d) Focal shall provide quarterly reports to the
Developing Party through the Manufacturing Committee of the status of its
activities pursuant to this Section 8.4.3. The Developing Party shall have
the right to inspect the manufacturing facilities of Focal or any third party
supplier of a Product or component, during reasonable business hours, to
assess compliance with this Article 8 and the Supply Agreement.
9
THIRD PARTY ROYALTIES AND IMPROVEMENTS
9.1 Without limiting Section 13.2(a), Focal shall be responsible for the
payment of any royalties, license fees, or milestone payments due, and for
the performance of all other obligations, to third parties under those
licenses and/or agreements listed on Exhibit C attached hereto with respect
to the marketing, sale or distribution of Products by Ciba, Chiron or the
Affiliates or Subdistributors of Ciba or Chiron.
9.2 Without limiting Section 2.4.3, if during the term of this
Agreement, Focal acquires from a third party any additional Focal Technology,
other than the Focal Technology existing as of the Effective Date, which is
known to be useful in connection with the manufacture, use or sale of
Hydrogel Polymers, New Polymers or Products in the Field, Focal will make
available such additional technology for use within the Field under this
Agreement on mutually agreed upon terms and conditions intended to cause Ciba
and/or Chiron to bear a fair share of the acquisition cost of such additional
technology in relation to Focal and other third party licensees of Focal with
respect to such technology.
10
PAYMENTS; BOOKS AND RECORDS
10.1 Reports and Payments. The Supply Agreements to be entered into
under Section 8.3 above shall include provisions for quarterly written
reports to be made by the Developing Party to Focal within sixty (60) days
after the end of each calendar quarter, stating in each such report the
invoiced price and quantity of all Product sold, and the aggregate Net Sales
of such Product sold during such calendar quarter.
10.2 Payment Method. All payments to Focal under this Agreement shall be
made by check or bank wire transfer in immediately available funds to an
account designated by Focal. All payments hereunder shall be made in U.S.
dollars. Any payments due hereunder which are not paid on the date such
payments are due under this Agreement shall bear interest at the lesser of
one and one-half percent (1%) per month or the maximum rate permitted by law,
calculated on the number of days such payment is delinquent. This Section
10.2 shall in no way limit any other remedies available to Focal.
* Confidential treatment has been requested for marked portion
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10.3 Currency Conversion. If Net Sales are made in currency other than
U.S. dollars, for the purpose of calculating payments hereunder such Net
Sales shall be converted to U.S. dollars using the standard exchange rate
into U.S. dollars used by the Developing Party for financial reporting
purposes.
10.4 Withholding Taxes.
10.4.1 (a) If any withholding taxes become payable solely by
reason of an assignment under this Agreement by Ciba or Chiron to a foreign
Affiliate, the transfer prices and payments due hereunder shall be net of and
shall not include any amounts due with respect to such withholding taxes.
Accordingly, payments shall be made without deduction for any such
withholding taxes and the Developing Party shall be responsible for the
payment of all such taxes. If laws or regulations require that taxes be
withheld on payments to Focal under Article 4, 8 or 9, the paying party, will
(i) timely pay the taxes to the proper taxing authority, and (ii) send proof
of payment to Focal within sixty (60) days following payment. If Focal uses
a foreign tax credit received by Focal as a result of the payment of
withholding taxes by Ciba or Chiron and thereby reduces the amount of U.S.
income tax that Focal otherwise would have paid, Focal shall refund to Ciba
or Chiron, as applicable, the amount of such reduction with respect to such
foreign tax credit.
(b) If withholding taxes are payable with respect to payments
to Focal for any reason other than that set forth in Section 10.4.1 (a), the
Developing Party shall pay such withholding taxes and deduct the amount
thereof from the amounts otherwise due to Focal hereunder. The Developing
Party shall provide Focal with a written statement of any such taxes paid
with respect to Focal's tax liability.
10.5 Records; Inspection. Ciba, Chiron and Affiliates of Ciba and Chiron
shall keep complete, true and accurate books of account and records for the
purpose of determining the amounts payable under Articles 8, 9 and 10 and
Focal shall keep complete, true and accurate records of Research performed by
Focal hereunder, the Research Costs thereof, the activities of Focal pursuant
to Article 8 and the costs thereof, and the Production Costs of all Products
and components. Such books and records shall be kept at the principal place
of business of Ciba, Chiron or Focal or the Affiliate of Ciba, Chiron, or
Focal as the case may be, for at least three (3) years following the end of
the calendar quarter to which they pertain. Such records will be open for
inspection, during such three (3) year period by an independent certified
public accountant selected by Focal for inspections conducted by Focal, or a
representative selected by Ciba or Chiron with respect to inspections
conducted by Ciba or Chiron, and reasonably acceptable to the audited party,
such acceptance not be unreasonably withheld for the purpose of verifying the
amounts payable by Ciba/Chiron pursuant to Articles 8, 9 and 1 0, the amounts
of reimbursement payable under this Agreement with respect to Research Costs,
under Article 8 or the amounts of Production Costs, or other matters
reasonably necessary in connection with Research, process development or
manufacturing records maintained by Focal, as applicable. Such inspections
may be made no more than once each calendar year, during normal business
hours, as mutually agreed by Focal and Ciba or Chiron. The inspecting
accountant will be under confidentiality obligations to the audited party to
report to Focal only the amounts payable to Focal hereunder with respect to
Net Sales during the period in question, in the case of an audit by Focal,
and such matters as are the subject of the
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audit, including, but not limited to, FTE calculation Research Costs and
Production Costs in the case of an audit by Ciba or Chiron. Inspections
conducted under this Section 10.5 shall be at the expense of the auditing
party, unless a variation or error producing an underpayment in amounts
payable exceeding five percent (5%) of the amount paid for any period covered
by the inspection is established in the course of any such inspection,
whereupon all costs relating to the inspection for such period and any unpaid
amounts that are discovered will be paid by the audited party, together with
interest on such unpaid amounts at the rate specified in Section 10.2 above.
11
DUE DILIGENCE
The Developing Party shall use its reasonable commercial efforts to (i)
conduct expeditiously all Product Development for Products following
successful completion of the Research Program and other required preclinical
research to the extent required in the Major Countries; (ii) upon successful
completion of Product Development, apply for NDA approval in the Major
Countries; and (iii) upon receipt of NDA and other requisite marketing
approvals, subject to availability of Product supply, maximize Net Sales of
such Products in all Major Countries and other countries of the world in
which it is commercially reasonable to market the Products, all in a manner
consistent with the marketing of other products by the Developing Party.
12
INTELLECTUAL PROPERTY
12.1 Ownership of Inventions. Focal and the Developing Party shall each
promptly disclose to the other parties all Inventions as defined below.
Rights to such Inventions shall be as follows:
12.1.1 Definitions. For the purposes of this Section 12.1:
(a) "Patent Rights" shall mean patent applications, including
continuations (in whole or in part), divisionals, reissues, reexaminations
and foreign counterparts thereof, and issued patents on such applications, to
the extent the same claim and disclose Inventions;
(b) "Combination Product" shall mean a novel and possibly
patentably distinct composition of matter arising within a Research Program
or Product Development that comprises (i) a Ciba/Chiron Compound that is
supplied by Ciba or Chiron to Focal as a potential component of a Second
Generation Product, and (ii) a Focal Hydrogel Polymer as defined in Section
12.1.1(d) below;
(c) "Inventions" shall mean inventions or discoveries that are
first conceived, or first conceived and reduced to practice, (i) within a
Research Program or Product Development, or (ii) in the case of inventions or
discoveries by Ciba or Chiron, that are made using a Focal Hydrogel Polymer.
As used herein, references to Inventions shall include all Patent Rights and
other non-patent intellectual property rights to such Inventions necessary to
exploit such Patent Rights;
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(d) "Focal Hydrogel Polymer" shall mean a Hydrogel Polymer or
a Hydrogel Polymer formulation (i) supplied by Focal to Ciba or Chiron,
whether during the Research, Product Development, under the terms of Article
8, or otherwise, or (ii) disclosed in writing by Focal as a potential
component of a Product (in each case other than a Combination Product).
12.1.2 The Developing Party retains, and Focal hereby assigns to
the Developing Party, Focal's entire right, title and interest in and to
Inventions that are first conceived, or first conceived and reduced to
practice, by Focal alone or jointly with any other party hereto, to the
extent such Inventions consist of (a) chemical modifications of a Ciba/Chiron
Compound (i) which is supplied by Ciba or Chiron to Focal or (ii) which is
disclosed in writing by Ciba or Chiron to Focal as a potential component of a
Second Generation Product (in each case other than a Combination Product), or
(b) methods of manufacture or use of such a Ciba/Chiron Compound.
12.1.3 Focal retains, and each of Ciba and Chiron hereby assigns
to Focal, all right, title and interest, subject to Ciba's and Chiron's
rights in the Field under this Agreement, in and to Inventions that are first
conceived, or first conceived and reduced to practice, by Ciba or Chiron,
alone or jointly with any other party hereto, to the extent such Inventions
consist of (a) chemical modifications to a Focal Hydrogel Polymer (other than
a Combination Product) or (b) methods of manufacture or use of such a Focal
Hydrogel Polymer.
12.1.4 Except as may be otherwise mutually agreed to in writing
and subject to the rights and obligations of Article 2 and Article 8, the
Developing Party and Focal shall jointly own, but agree not to commercialize,
Patent Rights to any Invention to the extent such Invention consists of a
Combination Product or to the use of a Combination Product. Such restriction
on commercialization of Patent Rights under this Section 12.1.4 shall survive
any termination of this Agreement with respect to a Combination Product
during the term of any patents claiming the Combination Product or the use of
a Combination Product. It is understood that to the extent components of a
Combination Product may be exploited for purposes other than the combination
of a Ciba/Chiron Compound described in 12.1.1(b)(i) and a Focal Hydrogel
Polymer, described in Section 12.1.1.(b)(ii), such components and
exploitation shall not be covered by this Section 12.1.4, but shall instead
be covered by Sections 12.1.2, 12.1.3 and 12.1.5.
12.1.5 To the extent that ownership of an Invention is not
provided for under Sections 12.1.1, 12.1.2, 12.1.3 and 12.1.4 above, rights
to such Inventions shall be as follows:
(i) If the Invention is first conceived or first conceived and
reduced to practice by Focal alone, such Invention will be considered part of
the Focal Technology and will be solely owned by Focal subject to Ciba's and
Chiron's rights within the Field under this Agreement.
Focal hereby grants to Ciba and Chiron a royalty free,
fully paid, non-exclusive, worldwide, irrevocable license, with the right to
grant and authorize sublicenses, under the Inventions described in this
paragraph (i) to make, have made, use and sell products for [*].
* Confidential treatment has been requested for marked portion
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(ii) If the Invention is first conceived or first conceived and
reduced to practice by the Developing Party alone, such Invention will be
solely owned by the Developing Party.
The Developing Party hereby grants to Focal a royalty
free, fully paid, nonexclusive, worldwide, irrevocable license, with the
right to grant and authorize sublicenses (subject to the following sentence),
under the Inventions described in this paragraph (ii) to make, have made, use
and sell products, processes and or services involving a Hydrogel Polymer,
outside of the Field. Notwithstanding the foregoing, no Invention described
in this paragraph (ii) shall be sublicensed or otherwise made available to
[*].
(iii) If the Invention is first conceived or first
conceived and reduced to practice by the Developing Party jointly with Focal,
such Invention will be jointly owned by the inventing parties. The
Developing Party shall have the exclusive rights set forth in Article 2.
Except as provided in Article 2,
(a) Focal shall have the exclusive right under the
Inventions described in this paragraph (iii), with the right to grant and
authorize licenses and sublicenses (subject to paragraph (c) below), to make,
use, and sell products, processes and/or services, involving the use of Focal
Hydrogel Polymer, outside the Field.
(b) Each party will have a royalty-free right to make,
have made, use and sell the Invention, with the right to grant and authorize
licenses and sublicenses (subject to paragraphs (c) and (d) below) for all
other purposes.
(c) Notwithstanding the foregoing, no Invention described
in this Section 12.1.5(iii) shall be sublicensed or otherwise made available
[*].
(d) Prior to granting any license to Inventions governed
by this Section 12.1.5(iii) to a third party to develop a product for local
delivery, Ciba and/or Chiron, as the case may be, agree to offer Focal a
right of first refusal to develop such product for local delivery, under the
following terms. This paragraph (d) shall not apply to any license to such
an Invention by Ciba or Chiron to a third party for the manufacture, use or
sale of a product, including a product for local delivery, which is developed
by Ciba or Chiron, as the case may be.
Prior to granting any sublicense governed by this paragraph (d) to a
third party, Ciba or Chiron, as the case may be, shall notify Focal in
writing, describing the proposed sublicense and development project. Upon
written request by Focal within thirty (30) days after receipt of such a
notice, if Focal has the capability of performing the development project in
question, the parties shall commence negotiations in good faith with respect
to commercially reasonable terms under which the proposed license would be
granted to Focal rather than a third party.
* Confidential treatment has been requested for marked portion
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If (i) Focal does not request within such thirty (30) day period to
commence such negotiations, or Focal notifies Ciba or Chiron, as the case may
be, that Focal is not interested in obtaining the license in question; or
(ii) the parties do not enter into a letter of intent with respect to license
in question within ninety (90) days after the date of the notice from Ciba or
Chiron, as the case may be; or (iii) the parties do not enter into a
definitive written agreement within ninety (90) days after the parties enter
into a letter of intent pursuant to (ii) above, then Ciba or Chiron, as the
case may be, shall be free to proceed with the license in question to a third
party, on terms not more favorable to the third party than those terms last
offered to Focal hereunder.
12.1.6 Resolution of Ownership Disputes
(i) Any dispute regarding ownership of a particular Invention
shall be referred to the Research Committee or Advisory Committee, as
appropriate, for resolution. The Research Committee or Advisory Committee,
as the case may be, shall use all reasonable efforts to resolve such disputes
within sixty (60) days after such referral, including referral of questions
to outside independent experts where the Research Committee or Advisory
Committee, as the case may be, deems appropriate.
(ii) In the event the dispute cannot be resolved pursuant to
12.1.6 (i) hereinabove, the dispute shall be referred to the Chief Executive
Officer (CEO) of Focal and a senior executive of Ciba or Chiron, as
appropriate.
(iii) In the event the dispute cannot be resolved pursuant
to 12.1.6 (ii) hereinabove, the parties shall enter into non-binding
mediation. The mediation shall be conducted by an independent mediator
acceptable to the parties. Either party may serve upon the other party a
written demand for mediation and such mediation shall commence within thirty
(30) days of the other party's receipt of such demand, unless otherwise
authorized by the parties. Each party shall make available to the mediation
an authorized representative with the capacity to bind such party, and the
mediation shall be conducted as deemed appropriate by the mediator.
(iv) In the event the dispute cannot be resolved pursuant to
12.1.6 (iii) hereinabove, the dispute shall be referred to arbitration in
accordance with the rules then prevailing of the Center for Public Resources
("CPR"), 680 Fifth Avenue, New York, NY 10019, unless otherwise mutually
agreed. Unless otherwise agreed by the parties, the arbitration panel shall
consist of one neutral arbitrator selected in accordance with the CPR rules.
The results of the arbitration shall be binding upon the parties.
12.1.7 Rights and Obligations. Focal's interest in Patent Rights
to all Inventions shall be subject to the exclusive licenses granted to Ciba
and Chiron in the Field under Article 2. Except as expressly provided in
Article 2, this Article 12, or otherwise in this Agreement, it is understood
that no party shall have any obligation to account to any other party for
profits, or to obtain any approval of any other party to license or exploit
an Invention by reason of joint ownership of any Invention.
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12.1.8 Each party retains all right, title and interest to
inventions or discoveries, other than Inventions as defined in Section 12.1.1
(c), which are conceived or reduced to practice by it, whether solely or
jointly with third parties, except as specifically provided in this Agreement.
12.2 Patent Prosecution.
12.2.1 Focal Sole Inventions. Focal shall have the right, at its
expense, to control the preparing, filing, prosecuting and maintenance
worldwide of the patent applications and patents owned solely by Focal
pursuant to Section 12.1.3 or 12.1.5(i) above, in such countries as it deems
appropriate, and the conduct of any interferences, reexaminations, reissues,
oppositions or requests for patent term extensions using counsel of its
choice all at its expense. Focal agrees to make such additional foreign
filings as may be requested by Ciba and/or Chiron, to the extent it is able
to do so under applicable law, and subject to reimbursement by Ciba and/or
Chiron of costs with respect to such additional foreign filings; and provided
further that in the event a patent or application within the Focal Technology
applicable to Products within the Field is the subject of an interference,
request for reexamination, opposition or similar proceeding, Ciba and/or
Chiron shall reimburse Focal [*] of Focal's out-of-pocket costs of such
proceeding; provided, however, if Focal enters into an agreement granting
exclusive rights to a third party to sell products covered by the patent or
application that is the subject of such proceeding, Ciba and/or Chiron's
reimbursement shall be reduced [*] (e.g., Ciba and/or Chiron's percentage
would be reduced to [*], or [*].
12.2.2 Joint Inventions. The parties shall jointly pursue Patent
Rights for Inventions that are owned jointly by Ciba and/or Chiron, and Focal
under Sections 12.1.4 and 12.1.5 (iii) above by counsel mutually agreed to by
the joint owners, and the joint owners agree to take all reasonable action to
cooperate fully with each other in this regard. The joint owners [*]
the out-of-pocket expenses in connection with such activities as they are
incurred. If one joint owner elects [*] of expenses, the remaining joint
owner(s) shall have the right to file, prosecute and maintain such Patent
Rights in the name of such remaining joint owner(s).
12.2.3 Ciba and/or Chiron Sole Invention. Each of Ciba and
Chiron shall have the right, at Ciba and Chiron's expense, to control the
preparing, filing, prosecuting and maintenance worldwide of the patent
applications and patents owned solely by Ciba or Chiron, respectively,
pursuant to Section 12.1.2 or 12.1.5(ii) above, in such countries as Ciba or
Chiron deems appropriate, and the conduct of any interferences,
reexaminations, reissues, oppositions or requests for patent term extensions
for the Inventions owned by Ciba and Chiron pursuant to Section 12.1.2 or
12.1.5 above using counsel of its choice.
12.2.4 Cooperation.
(a) Focal shall keep Ciba and Chiron reasonably informed in a
timely manner as to the status of patent matters pertaining to the Focal
Patents, including Inventions made in the course of performing a Research
Program, including providing Ciba and Chiron copies of any significant
* Confidential treatment has been requested for marked portion
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documents that Focal receives from or sends to patent offices, such as
amendments and responses to official actions, notices of interferences,
reexaminations, oppositions or requests for patent term extensions, all as
reasonably requested by any other party hereto. Focal shall provide each of
Ciba and Chiron with copies of the complete patent prosecution files of the
Focal Patents and patent applications within sixty (60) days of the Effective
Date of this Agreement. Each of Ciba and Chiron shall have the right, but
not the obligation, to advise Focal on the prosecution and maintenance of the
Focal Patents and applications. It is understood, however, the Developing
Party's period of review shall not delay filings or submissions to meet
deadlines to preserve Focal's patent rights.
(b) Ciba and/or Chiron shall advise Focal in a timely manner
as to the status of all patent matters to which Focal has rights under
12.1.5(ii). Upon Focal's request, Ciba and Chiron promptly shall provide
Focal with copies of the complete patent prosecution files of patents and
patent applications for Inventions described in Sections 12.1.5(ii). Focal
shall have the right, but not the obligation, to advise Ciba and Chiron on
the prosecution and maintenance of patents and patent applications for
Inventions described in Sections 12.1.5(ii). It is understood, however,
Focal's period of review shall not delay filings or submissions to meet
deadlines to preserve Ciba and Chiron's patent rights.
12.3 Defense of Third Party Infringement Claims. If the manufacture,
preparation, sale or use of any Product pursuant to this Agreement results in
a claim, suit or proceeding (collectively, "Actions") alleging patent
infringement of a third party patent against Focal, Ciba or Chiron (or their
respective Affiliates or Subdistributors), such party shall promptly notify
the other parties hereto in writing. Except as otherwise provided in Article
15, the party subject to such Action shall have the exclusive right to defend
and control the defense of any such Action using counsel of its own choice,
at such party's own expense; provided, however, that the other parties may
participate in the defense and/or settlement thereof at its own expense with
counsel of its choice. The party defending the Action shall have the right,
but not the obligation, to defend the Action in the name of itself and the
other parties as may reasonably be required by law. The party subject to the
Action agrees to keep the other parties hereto reasonably informed of all
material developments in connection with any such Action, and shall not
compromise or settle such Action in a manner which would adversely impact the
other party or parties hereto without the prior written consent of such
party, which consent shall not be unreasonably withheld.
12.4 Enforcement. Subject to the provisions of this Section 12.4, in
the event that Focal, or Ciba and/or Chiron reasonably believes that any
Focal Technology necessary for the manufacture, use or sale of a Product is
infringed or misappropriated by a third party or is subject to a declaratory
judgement action arising from such infringement in such country, in each case
with respect to the manufacture, sale or use of a product within the Field,
such party shall promptly notify the other parties hereto, and thereafter the
parties shall consult with one another and keep the others reasonably
informed to the extent such infringement significantly affects the commercial
exploitation of Products. Focal will use commercially reasonable efforts
generally to enforce the Focal Technology with respect to substantial
continuing infringements of the Focal Technology, by initiating legal action,
licensing the infringing activities or otherwise as appropriate after
consultation with Ciba and Chiron. It is understood, however, that such
obligation shall not be deemed to require Focal to take such actions with
31
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respect to each such infringement, and Focal may take into account strategic
and other considerations in determining which infringers to take action
against, as well as when and whether to do so. Notwithstanding the foregoing
provisions of this Section 12.4 and the provisions set forth in Sections
12.4.1, 12.4.2, or 12.4.3 below, unless and until Ciba and/or Chiron
exercises the Option pursuant to Section 2.2 above, the provisions of this
Section 12.4 shall not apply to infringement of Focal Technology by a third
party with respect to Platelet Antagonists or Roche Product.
12.4.1 In the event of a commercially significant infringement of
Focal Technology by a third party within the Field, Focal may, at the request
of Chiron and/or Ciba or at its own election, initiate an enforcement action
against such third party. Ciba and/or Chiron shall have the right to
participate in such action, which shall be conducted by counsel selected by
Focal and approved by Ciba and/or Chiron (which approval shall not be
withheld unreasonably), and Focal shall be responsible for the direction of
said counsel. Focal and Ciba and/or Chiron each shall pay [*] of the
reasonable out-of-pocket costs and expenses (including attorneys' and
professional fees) of actions initiated pursuant to this Section 12.4.1. Any
recoveries in an action initiated pursuant to this Section 12.4.1 shall be
applied first to reimburse the parties for all expenses of such action, and
any remaining recoveries from such Action applicable to the Field shall be
split between Focal and Ciba and/or Chiron with Ciba and/or Chiron retaining
[*] of the remaining recoveries applicable to the Field and Focal retaining
[*] of the remaining recoveries applicable to the Field; and Focal retaining
all of the remaining recoveries not applicable to the Field.
12.4.2 In the event that Focal elects not to initiate an action
to enforce the Focal Technology against a commercially significant
infringement by a third party in a country, which infringement consists of
the manufacture, sale or use of a product within the Field, within one
hundred eighty (180) days of a request by Ciba and/or Chiron to initiate such
action, Ciba and/or Chiron may initiate the requested action against such
infringement at its own expense with Focal's prior written approval, which
approval shall not be unreasonably withheld. Focal shall cooperate in such
action, and Ciba and/or Chiron shall keep Focal reasonably informed of the
progress of any such enforcement action. Ciba and/or Chiron shall reimburse
Focal's reasonable out-of-pocket costs and expenses necessary for such
cooperation. Focal shall have the right to participate in any such action
with counsel of its own choice at its own expense. Any recoveries with
respect to such action shall be retained by Ciba and/or Chiron, as
appropriate.
12.4.3 In the case of any third party infringement of Focal
Technology not governed by this Article 12, Focal shall have the right, but
not the obligation, to bring an action against such third party at Focal's
sole expense, and to retain any recoveries arising from such action.
12.5 Third Party Rights. The provisions of Sections 12.2.1 and 12.4
shall be subject to and limited by any agreements pursuant to which Focal
acquired any particular Focal Technology. As of the date of this Agreement,
all such agreements are identified in Exhibit C. Notwithstanding the
foregoing, Focal shall use reasonable commercial efforts to preserve for Ciba
and Chiron the rights granted under this Article 12 with respect to Focal
Technology owned by third party licensors, and shall keep Ciba and Chiron
reasonably informed of, and cooperate with Ciba and Chiron in connection
with,
* Confidential treatment has been requested for marked portion
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the filing, prosecution, maintenance and enforcement of Focal Patents owned
by such third party licensors.
13
REPRESENTATIONS AND WARRANTIES AND COVENANTS
13.1 Focal Warranties. Focal warrants and represents to Ciba and Chiron
that (i) it has the full right and authority to enter into this Agreement and
grant the rights granted herein; (ii) it has not previously granted and will
not grant any rights in conflict with the rights granted herein; (iii) to its
knowledge and belief, there are no existing or threatened actions, suits or
claims pending against it with respect to its right to enter into and perform
its obligations under this Agreement; (iv) it has not previously granted, and
will not grant during the term of this Agreement, any right, license or
interest in or to the Focal Technology, or any portion thereof, to
manufacture, sell or use a product in the Field, except to the extent
expressly authorized under this Agreement; (v) the agreements listed in
Exhibit C constitute a complete and accurate list of all agreements between
Focal and third parties pertaining to the Field that are in existence as of
the Effective Date.
Focal further represents and warrants as follows:
(a) Subject to the agreements listed in Exhibit C, Focal Controls all
patent rights set forth in Exhibit C.
(b) All of the license agreements in Exhibit C are in full force and
effect and as of the Effective Date, Focal has not received notice of any
asserted breach under any such license agreement, and Focal is not in breach
of its obligations under any such license agreement.
(c) As of the Effective Date, Focal has no Affiliates.
(d) As of the Effective Date, except as previously disclosed to Ciba and
Chiron, Focal does not know of any patent or trade secret rights which would
be infringed by the manufacture, use or sale of Hydrogel Polymer for use in
the Field, except for intellectual property licensed under the Agreements
listed in Exhibit C. As used herein, "to know" means specific knowledge of a
particular patent or trade secret.
13.2 Focal Covenants. Focal hereby agrees that during the term of this
Agreement,
(a) Focal shall, at Focal's sole expense, comply with all of its
obligations as licensee under all third party license agreements in Exhibit
C; and
(b) Focal shall not terminate any such license agreement in Exhibit
C without the prior written consent of Ciba/Chiron; and
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(c) Focal shall provide to Chiron and Ciba, promptly upon receipt
by Focal, any notices of default or termination received from the licensor
under any such third party license agreement in Exhibit C.
Focal acknowledges and agrees that any material breach by Focal under, or any
termination (without the consent of Ciba/Chiron) of, any third party license
agreement identified in Exhibit C shall be deemed a breach of Focal's
obligations under this Agreement.
13.3 Ciba/Chiron Warranties. Ciba and Chiron warrant and represent to
Focal that (i) each has the full right and authority to enter into this
Agreement and grant the rights granted herein; (ii) each has not previously
granted and will not grant any rights in conflict with the rights granted
herein; and (iii) to each of Ciba's and Chiron's knowledge and belief, there
are no existing or threatened actions, suits or claims pending against it
with respect to its right to enter into and perform its obligations under
this Agreement.
13.4 Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS
ARTICLE 13, FOCAL, CIBA AND CHIRON EXPRESSLY DISCLAIM ANY WARRANTIES,
EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE RESEARCH,
PRODUCT DEVELOPMENT, AND THE FOCAL AND CIBA AND/OR CHIRON INTELLECTUAL
PROPERTY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, OR
FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF FOCAL TECHNOLOGY, PATENTED OR
UNPATENTED, AND NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES.
14
CONFIDENTIALITY
14.1 Confidential Information. Except as expressly provided herein, the
parties agree that, for the term of this Agreement and for the longer of five
(5) years after the termination of this Agreement or ten (10) years after the
Effective Date, the receiving party, including Affiliates and Consultants,
shall not publish or otherwise disclose and shall not use for any purpose any
confidential information furnished to it by any other party hereto pursuant
to this Agreement (including confidential information provided prior to the
Effective Date) which if disclosed in tangible form is marked "Confidential"
or with other similar designation to indicate its confidential or proprietary
nature, or if disclosed orally is orally confirmed as confidential or
proprietary by the party disclosing such information at the time of such
disclosure ("Confidential Information"). As used herein, Confidential
Information shall include all confidential or proprietary biological,
chemical or other materials provided to any other party hereunder.
Notwithstanding the foregoing, Confidential Information shall not include
information that, in each case as demonstrated by written documentation:
(a) was already known to the receiving party, other than under
an obligation of confidentiality to the disclosing party, at the time of
disclosure;
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(b) was generally available to the public or otherwise part of
the public domain at the time of its disclosure to the receiving party;
(c) became generally available to the public or otherwise part
of the public domain after its disclosure and other than through any act or
omission of the receiving party in breach of this Agreement; or
(d) was subsequently lawfully disclosed to the receiving party
by a person other than a party hereto or developed by the receiving party
without reference to any information or materials disclosed by the disclosing
party.
14.2 Permitted Disclosures. Notwithstanding the provisions of Section
14.1 above, the receiving party may disclose Confidential Information of the
disclosing party to its consultants, Affiliates, Subdistributors and
permitted sublicensees and subcontractors, provided that such disclosures are
under confidentiality restrictions no less stringent than those contained
herein. The receiving party may disclose Confidential Information of the
disclosing party to the extent such disclosure is required by applicable law,
regulation or court order, including without limitation filing and
prosecution of patents, prosecuting or defending litigation, submitting
information to tax or other governmental authorities, and/or manufacturing,
marketing and/or selling Products, or as reasonably necessary to exercise
other rights provided under this Agreement, (including rights under Article
12) provided that to the extent it may legally do so, the receiving party
will give reasonable advance written notice to the disclosing party of such
disclosure and, save to the extent inappropriate in the case of patent
applications, will use its reasonable efforts to secure confidential
treatment of such Confidential Information prior to its disclosure (whether
through protective orders or otherwise). The parties further shall have the
right to disclose Confidential Information of other parties hereto to the
extent reasonably necessary to carry out performance of this Agreement,
provided that the disclosing party uses at least the degree of care that it
uses with respect to its own Confidential Information, but in no event less
than reasonable care.
14.3 Confidentiality as to Ciba and Chiron. Since Chiron and Ciba are
jointly the Developing Party of the First Generation Products, Chiron, Ciba
and Focal all intend that information relating to the First Generations
Products will be disclosed to and used by all three parties in connection
with their activities under this Agreement. Similarly, all three parties
shall have access to, and the right to use, in accordance with this
Agreement, all information related to Second Generation Products as to which
Chiron and Ciba are jointly the Developing Party. With regard to Ciba/Chiron
Compounds owned by Chiron or Ciba individually, and with respect to Second
Generation Products as to which Chiron or Ciba is individually the Developing
Party, the party (Chiron or Ciba) which does not own the Ciba/Chiron Compound
or is not the Developing Party is referred to as the "Non Developing Party".
Focal agrees not to disclose to the non-Developing Party any Confidential
Information of the Developing Party, and Focal agrees not to use Confidential
Information of the Developing Party in connection with Second Generation
Products of the non-Developing Party, except to the extent authorized under
Section 6.2.
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15
INDEMNIFICATION
15.1 Indemnification of Focal. The Developing Party with respect to a
Product shall indemnify each of Focal and its Affiliates and the directors,
officers, and employees of Focal and such Affiliates and the licensors,
successors and assigns of any of the foregoing (the "Focal Indemnities"), and
hold each Focal Indemnitee harmless from and against any and all liabilities,
damages, settlements, claims, actions, suits, penalties, fines, costs or
expenses (including, without limitation, reasonable attorneys' fees and other
expenses of litigation) (any of the foregoing, a "Claim") incurred by any Focal
Indemnitee, arising from or occurring as a result of (a) the development,
marketing, sale or use of any Product, or the manufacture by the Developing
Party, its Affiliates, contractors or licensees of any Product, except to the
extent such claim is subject to indemnification by Focal pursuant to
Section 15.2; or (b) the negligence or willful misconduct of the Developing
Party.
15.2 Indemnification of Ciba/Chiron. Focal shall indemnify each of Ciba,
Chiron and their respective Affiliates and the directors, officers, and
employees of Ciba, Chiron and such Affiliates and the successors and assigns of
any of the foregoing (the "Ciba/Chiron Indemnities"), and hold each Ciba/Chiron
Indemnitee harmless from and against any and all liabilities, damages,
settlements, claims, actions, suits, penalties, fines, costs or expenses
(including, without limitation, reasonable attorneys' fees and other expenses of
litigation) (any of the foregoing, a "Claim") incurred by any Ciba/Chiron
Indemnitee, arising from or occurring as a result of or relating to (a) the
failure by Focal, its Affiliates or contractors to manufacture Products supplied
by Focal hereunder in accordance with the warranties set forth in the Supply
Agreement or with applicable law of the Major Countries; or (b) the negligence
or willful misconduct of Focal.
15.3 Procedure. A party (the "Indemnitee") that intends to claim
indemnification under this Article shall promptly notify the indemnifying party
(the "Indemnitor") in writing of any loss, claim, damage, liability or action in
respect of which the Indemnitee or any of its Affiliates, sublicensees or their
directors, officers, employees or agents intend to claim such indemnification,
and the Indemnitor shall have control of the defense and/or settlement thereof,
subject to the limitations set forth herein; provided that the Indemnitee shall
have the right to participate in the defense through its own counsel at the
Indemnitee's expense. The indemnity agreement in this Article 15 shall not
apply to amounts paid in settlement of any loss, claim, damage, liability or
action if such settlement is effected without the consent of the Indemnitor,
which consent shall not be withheld unreasonably. The failure to deliver
written notice to the Indemnitor within a reasonable time after the commencement
of any such action, if prejudicial to its ability to defend such action, shall
relieve such Indemnitor of any liability to the Indemnitee under this Article 15
but the omission so to deliver written notice to the Indemnitor shall not
relieve the Indemnitor of any liability that it may have to any Indemnitee
otherwise than under this Article 15. The Indemnitor shall not settle or
compromise any indemnified claim in a manner which would adversely impact the
Indemnitee without the Indemnitee's prior written consent, which shall not be
unreasonably withheld. The Indemnitee under this Article 15, its employees and
agents, shall cooperate fully with the Indemnitor and its legal representatives
at the Indemnitor's expense in the investigation of any action, claim or
liability covered by this indemnification.
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16
TERM AND TERMINATION
16.1 Term. This Agreement shall become effective as of the Effective Date
and, unless earlier terminated pursuant to the other provisions of this
Article 16, shall continue in full force and effect, until the last to expire or
be abandoned of the patents and patent applications within the Focal Technology,
or the date payments are no longer due under Articles 8 and 9 for such products
in such country, whichever is later. Upon expiration, but not earlier
termination of this Agreement, the licenses granted to Ciba and Chiron hereunder
shall become fully paid up, perpetual and nonexclusive. The Supply Agreement
entered into pursuant to Article 8 shall have a mutually agreed upon term and
mutually agreed upon renewal rights.
16.2 Termination for Cause. Either Focal or Ciba/Chiron may terminate this
Agreement in the event the other shall have materially breached or defaulted in
the performance of any of its material obligations hereunder, and such default
shall have continued for sixty (60) days after written notice thereof was
provided to the breaching party by the nonbreaching party. Any termination
shall become effective at the end of such sixty (60) day period unless the
breaching party (or any other party on its behalf) has cured any such breach or
default prior to the expiration of the sixty (60) day period.
16.3 Termination Upon Notice.
16.3.1 Ciba/Chiron may terminate this Agreement in its entirety
upon ninety (90) days prior written notice; provided, however, that such notice
of termination may not be given prior to three (3) months after the Effective
Date. Notwithstanding the foregoing, if the Fragmentation and Embolization
Study fails to meet the Study Criteria, as set forth in Section 3.3.1,
Ciba/Chiron shall have the right to terminate this Agreement upon thirty (30)
days prior written notice as set forth in Section 3.3.1(c).
16.3.2 Subject to the provisions of Article 11, Chiron and/or Ciba,
as Developing Party, shall have the right, at any time in its sole discretion to
discontinue development of any Product, and such discontinuation shall not be
deemed a termination of this Agreement or the licenses granted hereunder.
Ciba/Chiron shall promptly notify Focal of any such decision.
16.3.3 If at any time no First Generation Product or Second
Generation Product is included and being actively pursued within either the
Research or Product Development, and at such time neither a First Generation
Product nor Second Generation Product is being actively marketed and promoted
commercially by Ciba or Chiron, or their respective Affiliates or
Subdistributors under this Agreement, Focal shall have the right to terminate
this Agreement effective upon ninety (90) days written notice to Ciba and
Chiron. For purposes of this Section 16.3.3, "actively pursuing" a Product
shall mean devoting such resources to the Research and Product Development of
such Product as is reasonably required to complete such Product Development and
to obtain regulatory approvals to market the Product in Major Countries in an
expeditious manner in accordance with a reasonable plan for
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obtaining regulatory approvals (recognizing that approval in some Major
Countries may be sought after approval has been obtained and marketing commenced
in others); and "actively marketing and promoting" a Product shall mean devoting
such resources as are required to promote the Product in accordance with a
reasonable marketing plan in the Major Countries and other countries of the
world in which it is commercially reasonable to market the Products.
16.4 Effect of Termination or Expiration.
16.4.1 Accrued Obligations. Termination of this Agreement for any
reason shall not release any party hereto from any liability which, at the time
of such termination, has already accrued to the other party or which is
attributable to a period prior to such termination, nor preclude either party
from pursuing all rights and remedies it may have hereunder or at law or in
equity with respect to any breach of this Agreement. Subject to any liability
for damages by reason of a breach of this Agreement by Focal, Focal may retain
any amounts paid to it prior to the effective date of any termination of this
Agreement.
16.4.2 Return of Materials and Information. Upon any termination
or expiration of this Agreement, upon request of the disclosing party, each
receiving party shall return to the disclosing party or destroy all Confidential
Information owned by the other party, except to the extent the returning party
retains the right to use such Confidential Information under the surviving
provisions of this Agreement. Notwithstanding the foregoing, the receiving
party shall have the right to retain one copy of the Confidential Information
for archival purposes.
16.4.3 Survival. Articles 1, 14, 15, 16 and 17 and Sections 6.2,
7.2, 10.4, 10.5, 12.1 (excluding the first sentence of 12.1.7); first sentence
of 12.2.1, 12.2.2, and the first sentence of 12.5 shall survive expiration or
termination of this Agreement for any reason. Upon the expiration, but not an
earlier termination of this Agreement, Section 6.1, Article 8, first sentence of
12.1.7 and the Supply Agreement shall survive for the period specified in the
Supply Agreement, and the Supply Agreement shall provide for the transfer to the
Developing Party upon expiration thereof of any Focal Know-how necessary to
manufacture or have manufactured the Products then being supplied thereunder.
Upon the termination by any party hereto pursuant to Section 16.3 or by Focal
pursuant to Section 16.2, Section 5.2 shall survive only as Section 5.2 applies
to Ciba and Chiron's activities thereunder. Except as otherwise set forth in
the second sentence of Section 16.1 or Section 16.4.4 below, all other rights
including without limitation all licenses and obligations shall terminate upon
the expiration or earlier termination of this Agreement.
16.4.4 Other.
Without limiting the foregoing provisions of Section 16.4.3 above or
this Section 16.4.4 below, upon termination of this Agreement by Focal
pursuant to Section 16.3.3 or by Ciba and Chiron pursuant to Section 1 6.3.1,
(i) rights to First Generation Products shall revert to Focal; and (ii) Ciba
and Chiron shall transfer to Focal, all regulatory filings, regulatory,
approvals, other correspondence with regulatory authorities and other
preclinical or clinical data and information that relates to First
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Generation Products obtained or
generated in the course of performing Research or Product Development, subject
to payment by Focal of mutually agreed upon compensation to Ciba and Chiron for
value created by them with respect to such First Generation Products. Focal may
use and disclose any data, information and other information and other items
described in this Section 16.4.3 for any purpose. Under no circumstances will
Ciba or Chiron be obligated to provide to Focal any data or information on
Second Generation Products except as provided in Section 6.2(b) and Section 7.2.
17
MISCELLANEOUS
17.1 Bankruptcy. All licenses granted under this Agreement are deemed to
be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of
right to "intellectual property" as defined in Section 101 of such Code. The
parties agree that the licensee may fully exercise all of its rights and
elections under the Bankruptcy Code. The parties further agree that, in the
event a licensee elects to retain its rights as a licensee under such Code, the
licensee shall be entitled to complete access to all Focal Know-How, and copies
of any Focal Know-how in tangible form, all as necessary for the manufacture of
Products licensed to it hereunder. Such copies of Focal Know-how shall be
delivered to the licensee not later than (a) the commencement of bankruptcy
proceedings against the licensor, upon written request, unless the licensor
elects to perform its obligations under this Agreement, or (b) if not delivered
under (a) above, upon the rejection of this Agreement by or on behalf of the
licensor, upon written request.
17.2 Governing Law. This Agreement and any dispute arising from the
performance or breach hereof shall be governed by and construed and enforced in
accordance with, the laws of the State of New York, without reference to
conflicts of laws principles.
17.3 Force Majeure. Nonperformance of any party (except for payment
obligations) shall be excused to the extent that performance is rendered
impossible by strike, fire, earthquake, flood, governmental acts or orders or
restrictions, delay or failure of suppliers, or any other reason where failure
to perform is beyond the reasonable control and not caused by the negligence or
willful misconduct of the nonperforming party (each a "Force Majeure Event").
The party whose performance is prevented by a Force Majeure Event such event
shall promptly inform the other parties of its occurrence, and shall keep the
other parties informed of its progress in resolving the Force Majeure Event. In
the event that any Force Majeure Event prevents performance for more than sixty
(60) days, the parties shall reasonably negotiate alternative methods of
enabling the performance of this Agreement to continue, including authorizing
another party hereto to perform the obligations in question or obtaining such
performance from a third party, all on reasonable commercial terms.
17.4 Joint and Several Liability. Where obligations under this Agreement
are obligations of "Ciba/Chiron" or are obligations of the "Developing Party"
where the Developing Party is Ciba and Chiron jointly, each of Ciba and Chiron
shall be jointly and severally liable to Focal with respect to the performance
and any breach of such obligations. It is further understood and agreed that
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notwithstanding that an obligation of Focal hereunder is expressly stated as
being to "Ciba/Chiron" or the "Developing Party" where the Developing Party is
Ciba and Chiron jointly, the satisfaction or performance by Focal of any such
obligations to Ciba or Chiron shall be deemed to satisfy all obligations of
Focal to both Ciba and Chiron and the Developing Party.
17.5 No Implied Waivers; Rights Cumulative. No failure on the part of any
party to exercise and no delay in exercising any right under this Agreement, or
provided by statute or at law or in equity or otherwise, shall impair, prejudice
or constitute a waiver of any such right, nor shall any partial exercise of any
such right preclude any other or further exercise thereof or the exercise of any
other right.
17.6 Independent Contractors. Nothing contained in this Agreement is
intended implicitly, or is to be construed, to constitute Focal and Ciba and/or
Chiron as partners in the legal sense. No party hereto shall have any express
or implied right or authority to assume or create any obligations on behalf of
or in the name of any other party or to bind any other party to any contract,
agreement or undertaking with any third party.
17.7 Notices. All notices, requests and other communications hereunder
shall be in writing and shall be personally delivered or sent by registered or
certified mail, return receipt requested, postage prepaid, in each case to the
respective address specified below, or such other address as may be specified in
writing to the other parties hereto:
Ciba: Ciba-Geigy Corporation
556 Morris Avenue
Summit, New Jersey 07901
Attn: Office of the President
with a copy to: General Counsel
Chiron: Chiron Corporation
4560 Horton Street
Emeryville, CA 94608
Attn: President, Chiron Technologies
with a copy to: General Counsel
Focal: Focal, Inc.
4 Maguire Road
Lexington, Massachusetts 02173
Attn: Glenn Kazo
with a copy to: Wilson, Sonsini, Goodrich & Rosati
Professional Corporation
650 Page Mill Road
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Palo Alto, California 94304-1050
Attention: Kenneth A. Clark, Esq.
17.8 Affiliates; Assignment; Change of Control.
17.8.1 This Agreement shall not be assignable by any party to any
third party hereto without the written consent of the other parties hereto;
except that any party hereto may assign this Agreement without any other party's
consent (i) to an Affiliate of the assigning party or (ii) subject to
Section 17.8.2, to an entity that acquires substantially all of the business or
assets of the assigning party relating to the Products, in each case whether by
merger, acquisition, or otherwise. Any assignment not permitted hereunder shall
be deemed null and void. In the event a party hereto assigns this Agreement to
an Affiliate, or its Affiliate exercises any rights granted to such Affiliate
hereunder, the party shall guarantee the performance of such Affiliate, and any
action or inaction of the Affiliate shall be deemed an action or inaction of
such party.
17.8.2 Focal agrees to notify Ciba and Chiron prior to the closing
of any sale, merger, reorganization or other transaction which would result in
(i) a transfer of all or substantially all of the assets of Focal relating to
the subject matter of this Agreement; or (ii) a change in the ownership or
control of more than 50% of the equity interests or voting interests in Focal
being held by a third party (each a "Change of Control"). Unless Ciba and
Chiron consent to the Change of Control of Focal within thirty (30) days after
receipt of notice thereof from Focal, which consent shall not be unreasonably
withheld, if Focal is so acquired by a third party that is developing or
commercializing a product specifically intended for use within the Field, Focal
shall, at its election, either (i) have the Second Generation Products
manufactured by a third party manufacturer reasonably acceptable to Ciba/Chiron
as set forth in Section 8.1, or (ii) terminate Focal's manufacturing rights
under Article 8 with respect to Second Generation Products, subject to payment
of a royalty to Focal, and subject to the Developing Party's right to
manufacture or have manufactured such Product or component, all as provided in
Section 8.4.1.
17.8.3 Subject to the foregoing, this Agreement shall be binding on
and inure to the benefit of the permitted successors and assigns of the parties.
17.9 Modification. No amendment or modification of any provision of this
Agreement shall be effective unless in writing signed by the party to be
charged.
17.10 Severability. If any provision hereof should be held invalid,
illegal or unenforceable in any jurisdiction, all other provisions hereof shall
remain in full force and effect in such jurisdiction, to the extent such
remaining provisions are consistent with the intentions of the parties as
evidenced by this Agreement as a whole, and such remaining provisions shall be
liberally construed in order to carry out the intentions of the parties hereto.
Such invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of such provision in any other jurisdiction. The
parties will negotiate in good faith a valid, substitute provision that most
nearly reflects the original intent of the parties.
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17.11 Publicity. Each of the parties hereto agrees not to disclose to
any third party the financial terms of this Agreement without the prior written
consent of the other parties hereto, except to advisors, investors and others on
a need-to-know basis under circumstances that reasonably ensure the
confidentiality thereof, or to the extent required by law. Notwithstanding the
foregoing, if the parties agree upon and issue a press release to announce the
execution of this Agreement, together with a corresponding Question & Answer
outline for use in responding to inquiries about the Agreement, Ciba, Chiron and
Focal may each thereafter disclose to third parties the information contained in
such press release and Question & Answer outline without the need for further
approval by the other.
17.12 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together, shall constitute one and the same instrument.
17.13 Headings. Headings used herein are for convenience only and shall
not in any way affect the construction of or be taken into consideration in
interpreting this Agreement.
17.14 Patent Marking. Focal and Ciba and Chiron agree to mark and have
their Affiliates and sublicensees mark all patented Products they sell or
distribute pursuant to this Agreement in accordance with the applicable patent
statutes or regulations in the country or countries of manufacture and sale
thereof.
17.15 Export Laws. Notwithstanding anything to the contrary contained
herein, all obligations of Focal and Ciba/Chiron are subject to prior compliance
with United States export regulations and such other United States laws and
regulations as may be applicable, and to obtaining all necessary approvals
required by the applicable agencies of the government of the United States.
Focal and Ciba/Chiron shall cooperate with each other and shall provide
assistance to the other as reasonably necessary to obtain any required
approvals.
17.16 No Implied Licenses. Except as expressly provided herein, no
party hereto grants to any other party hereto any rights or licenses under such
party's patent rights, trade secrets or other intellectual property rights.
17.17 Entire Agreement. This Agreement, including Exhibits attached
hereto, and the Joint Defense Agreement between the parties effective as of
January 15, 1996, constitute the entire agreement, both written or oral, with
respect to the subject matter hereof, and supersede all prior or
contemporaneous understandings or agreements, whether written or oral, among
the parties hereto with respect to such subject matter.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in duplicate originals as of the date first above
written.
FOCAL INC. CIBA-GEIGY CORPORATION
By: /s/ David M. Clapper By: /s/ James M. Callahan
-------------------------------- -------------------------------------
Name: David M. Clapper Name: James M. Callahan
------------------------------ -----------------------------------
Title: President & CEO Focal, Inc. Title: President, Ciba Pharmaceuticals
----------------------------- ----------------------------------
CHIRON CORPORATION
By: /s/ Lewis T. Williams
-------------------------------------
Name: Lewis T. Williams, M.D., Ph.D.
-----------------------------------
Title: President, Chiron Technologies
----------------------------------
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EXHIBIT A
INITIAL RESEARCH PLAN & BUDGET
CIBA/CHIRON + FOCAL RESEARCH
COLLABORATION
FOR
LOCAL THERAPY TO INHIBIT
POST ANGIOPLASTY RESTENOSIS
1996 RESEARCH PLAN & BUDGET
DRAFT OF APRIL 18, 1996
CONFIDENTIAL
<PAGE>
1. OBJECTIVE:
Develop and marekt a product that inhibits the incidence of restenosis
following angioplasty procedures, including balloon angioplasty, stenting and
mechanical atherectomy. [*]
* Confidential treatment has been requested for marked portion
-2-
<PAGE>
[*]
3. PLANS & BUDGETS
A) COLLABORATION MANAGEMENT:
A joint Steering Committee (Ciba-Chiron-Focal) will manage the research
for the Embolization & Fragmentation Study, the First Generation Product
Research, and the Radiopharmaceutical Product Research. The committee will
periodically review the project plans and resource requirements and make
revisions as necessary. Focal will define and manage it's internal resource
to meet the goals described in this plan:
A Steering committee composed of Ciba and Focal representative will
manage the research for the Second Generation Product research with the
first drug. The steering committee for the second drug program will be
defined once the compound has been identified.
B) PLAN ASSUMPTIONS
- Program start date in accordance with contract.
- the 1996 Research Plan describes the activities required in 1996 to
make progress towards the goal of the collaboration.
[*]
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[*]
- Focal will commence activities for an additional Second Generation
Product in accordance with the contract.
[*]
- Focal will use a currently available FocalGel Hydrogel Polymer(s) for
the Fragmentation & Embolization Study and First Generation Product
Research program. [*]
[*]
- The budget is based on an estimate for the number of Focal full-time
equivalent (FTE) resources required to complete their activities in
the 1996 Research Plan. [*]
C) 1996 RESEARCH PLAN:
The following is a tentative working plan based on initial discussions
between Ciba, Chiron and Focal. All working plans are intended to be a
living document that reflects the directions set by the Steering
Committees. A final working plan will be discussed and approved at the
first meeting of each Steering Committee following initiation of the
collaboration.
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[*]
I) SPECIFIC TASKS IN THE PRE-CLINICAL RESEARCH PLANS:
Descriptions for specific tasks in 1996 are presented on the following
pages. Primary responsibility for performance of each task is indicated.
FRAGMENTATION AND EMBOLIZATION STUDY
[*]
FIRST GENERATION PRODUCT RESEARCH
[*]
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RADIOPHARMACEUTICAL PRODUCT RESEARCH
[*]
D) RESEARCH PLAN BUDGET - FIRST GENERATION PRODUCTS
During the second and third quarters of 1996, Ciba and Chiron agree to
provide research funding for up to the maximum number of FTE's identified
below, to conduct (i) the fragmentation and embolization studies, which shall
be completed during such period, and (ii) such studies with respect to First
Generation Products, as the parties agree to complete during such period,
pursuant to the Research Plan.
[*]
Funding commitments for each Second Generation Product shall be separately
determined by the Developing Party of such Second Generation Product and
Focal.
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EXHIBIT B
First Ciba/Chiron Compound
[*]
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<PAGE>
EXHIBIT C
Focal Third Party Agreements
- - PATENT AND TECHNOLOGY LICENSE AGREEMENT dated June 11, 1992 between
Pegas Pharmaceuticals, Inc., and
Board of Regents the University of Texas System, and
University of Texas at Austin
- - PATENT OWNERSHIP AGREEMENT dated January 1, 1992 between
Focal, Inc., and
Arizona Board of Regents, and
Endoluminal Therapeutics, Inc., and
Marvin J. Slepian
- - LICENSE AGREEMENT between
Focal, Inc., and
Arizona Board of Regents
- - EXCLUSIVE LICENSE AGREEMENT dated August 7, 1992 between
Pegas Pharmaceuticals, Inc., and
Endoluminal Therapeutics, Inc., and
Marvin J. Slepian
Notwithstanding any provision set forth in this Agreement, Ciba and
Chiron each shall be bound by all applicable restrictions and limitations set
forth in any or all of the agreements set forth in this Exhibit C, and
further shall perform such acts as are reasonably necessary for Focal to
fully comply with Focal's obligations under such agreements.
<PAGE>
EXHIBIT D
I. Platelet Antagonists will exclude without limitation the following drugs
and drug classes:
[*]
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[*]
II. Platelet Antagonists will include, without limitation, the following
drugs and drug classes:
[*]
III. The determination of whether a compound not specifically listed in I or
II above is a Platelet Antagonist shall be based on Section 1.23.
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EXHIBIT E
FOCAL PATENTS - STATUS SUMMARY PRINTED 3/11/96 BY KIRKPATRICK
COMPANY CONFIDENTIAL - DO NOT DISCLOSE!
<TABLE>
<CAPTION>
FOCAL ID INVENTOR TITLE TYPE APP SERIAL # FILE DATE PATENT NUMBER
- ------- -------- ----- ---- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
[*]
001 101 Issued Slepian, Marvin Method and Apparatus for I 08/101,968 [*] 5,328,471
[*]
002 002 Issued Slepian, Marvin "Paving process" Biodegradable I 07/857,700 [*] 5,213,580
[*]
003 UT003 div 1 Iss Hubbell Biocompatible Microcapsules I 07/740,703 [*] 5,380,536
</TABLE>
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<PAGE>
FOCAL PATENTS - STATUS SUMMARY PRINTED 3/11/96 BY KIRKPATRICK
COMPANY CONFIDENTIAL - DO NOT DISCLOSE!
<TABLE>
<CAPTION>
FOCAL ID INVENTOR TITLE TYPE APP SERIAL # FILE DATE PATENT NUMBER
- ------- -------- ----- ---- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
003 UT003 div2 Iss Hubbell, J Biocompatible Microcapsules I 07/740,632 [*] 5,232,984
[*]
</TABLE>
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<PAGE>
FOCAL PATENTS - STATUS SUMMARY PRINTED 3/11/96 BY KIRKPATRICK
COMPANY CONFIDENTIAL - DO NOT DISCLOSE!
<TABLE>
<CAPTION>
FOCAL ID INVENTOR TITLE TYPE APP SERIAL # FILE DATE PATENT NUMBER
- ------- -------- ----- ---- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
[*]
010 496iss Hubbell, J "Photogel" Photopolymerizable I 08/022,687 [*] 5,410,016
[*]
</TABLE>
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<PAGE>
FOCAL PATENTS - STATUS SUMMARY PRINTED 3/11/96 BY KIRKPATRICK
COMPANY CONFIDENTIAL - DO NOT DISCLOSE!
<TABLE>
<CAPTION>
FOCAL ID INVENTOR TITLE TYPE APP SERIAL # FILE DATE PATENT NUMBER
- ------- -------- ----- ---- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
[*]
018 UT001- Iss Hubbell, JA Multifunctional Organic Polymers I 08/132,507 [*] 5,462,990
[*]
100 UT062- Issued Hubbell, J "Urokinase"; Local Delivery of I 08/165,392 [*] 5,468,505
[*]
</TABLE>
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<PAGE>
FOCAL PATENTS - STATUS SUMMARY PRINTED 3/11/96 BY KIRKPATRICK
COMPANY CONFIDENTIAL - DO NOT DISCLOSE!
<TABLE>
<CAPTION>
FOCAL ID INVENTOR TITLE TYPE APP SERIAL # FILE DATE PATENT NUMBER
- ------- -------- ----- ---- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
[*]
</TABLE>
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<PAGE>
Exhibit 10.13
DISTRIBUTION, LICENSE AND SUPPLY AGREEMENT
DISTRIBUTION, LICENSE AND SUPPLY AGREEMENT ("Agreement") dated as of
January 2, 1997, between ETHICON, INC, a company with its principal office at
Route 22, Somerville, New Jersey 08876-0151 ("'Ethicon"), and FOCAL, INC, a
company with its principal office at Four Maguire Road, Lexington, Massachusetts
02173 ("Focal").
WHEREAS, Focal and Ethicon desire to enter into this Agreement which will
set out the terms and conditions under which (i) Focal will undertake certain
development obligations with respect to its technology, (d) Focal will supply to
Ethicon the Products (as defined below) for use in the Field (as defined below)
in the Territory (as defined below), (iii) Ethicon will market and distribute
the Products and (iv) Focal will grant to Ethicon certain limited license rights
to manufacture or have manufactured, develop, market, distribute, sub-license
and sell Products in the Field;
NOW THEREFORE, in consideration of the mutual covenants and consideration
set forth herein, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
(a) "Advisory Board" shall have the meaning set forth in Section
4(a)(i).
(b) "Affected Territories" shall have the meaning set forth in Section
6(b)(ii)(A).
(c) "Affiliate" shall mean, in relation to either party hereto, (i) any
company or other entity in which the relevant party directly or
indirectly holds more than 50% of the voting securities, (ii) any
company or other entity ("Holding Company") which holds directly or
indirectly more than 50% of the voting securities of the relevant
party, (iii) any other company or other entity in which more than
50% of the voting securities is directly or indirectly held by any
Holding Company of the relevant party or (iv) any company or other
entity in which the relevant party directly or indirectly holds less
than 50% of the voting securities but has management control of such
company or entity in that it
<PAGE>
has the ability to appoint and remove the majority of the directors
of such company or entity.
(d) "Affiliated Distributor" shall have the meaning set forth in Section
1(mmm).
(e) "Alternate Cardiovascular Sealant Candidate" shall have the meaning
set forth in Section 4(b)(iii)(B).
(f) "Alternate Gastrointestinal Sealant Candidate" shall have the
meaning set forth in Section 4(b)(iv)(B).
(g) "Anti-Adhesion Product" shall have the meaning set forth in Section
4(b)(v)(A).
(h) "Anti-Adhesion Product Agreement" shall have the meaning set forth
in Section 4(b)(v)(A).
(i) "Applicable Forecast" shall have the meaning set forth in Section
7(d)(ii).
(j) "Audit Report" shall have the meaning set forth in Section 7(b)(ii).
(k) "Bankruptcy Event" shall mean the person or entity in question
becomes insolvent, or voluntary or involuntary proceedings by or
against such person or entity are instituted in bankruptcy or under
any insolvency law, or a receiver or custodian is appointed for such
person or entity, or proceedings are instituted by or against such
person or entity for corporate reorganization or the dissolution of
such person or entity, which proceedings, if involuntary, shall not
have been dismissed within sixty (60) days after the date of filing,
or such person or entity makes an assignment for the benefit of its
creditors, or substantially all of the assets of such person or
entity are seized or attached and not released within sixty (60)
days thereafter.
(l) "Cardiovascular Sealant Candidate" shall have the meaning set forth
in Section 4(b)(iii)(A).
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(m) "Cardiovascular "Studies" shall have the meaning set forth in
Section 4(b)(iii)(A).
(n) "Change in Control" shall mean (i) the liquidation or dissolution of
Focal or the sale or other transfer by Focal (excluding transfers to
subsidiaries) of all or substantially all of its assets; or (ii) the
occurrence of a tender offer, stock purchase, other stock
acquisition, merger, consolidation, recapitalization, sale or
transfer of assets, or other transaction as a result of which any
person, entity or group which is not a stockholder of Focal (or an
affiliate of any such stockholder) as of the date of this Agreement
(a "New Controlling Holder") (A) becomes the beneficial owner,
directly or indirectly, of securities of Focal representing more
than 50% of the ordinary shares of Focal or representing more than
50% of the combined voting power with respect to the election of
directors (or members of any other governing body) of Focal's then
outstanding securities, (B) obtains the ability to appoint a
majority of the Board of Directors (or other governing body) of
Focal, or (C) obtains the ability to direct the general operations
or management of Focal or any successor to Focal's business;
provided, however, that (x) a New Controlling Holder shall not
include, and a Change in Control shall not be deemed to exist on
account of the acquisition of Focal securities by, (1) Ethicon or
its Affiliates, or (2) any venture capital investor, financial
institution or any similar passive investor, and (y) in no event
shall a Change in Control be deemed to include the issuance by Focal
of equity to the public through a public offering or offerings.
(o) "Claims" shall have the meaning set forth in Section 7(g)(i).
(p) "Clinical Trials" shall mean that portion of the clinical
development program which generally provides for the introduction
into humans of a product or formulation with the purpose of
establishing the safety and/or efficacy for the desired claims and
indications.
(q) "Commercial Use" shall mean, with respect to any Product, the sale
by Ethicon, its Affiliates, licensees and/or assignees to
independent third parties or to an Affiliated Distributor.
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(r) [*]
(s) Conversion Right" shall have the meaning set forth in Section
3(d)(ii).
(t) "Delivery System" shall mean the devices, other than a Light System,
developed or obtained by Focal and/or Ethicon that are to be used in
the delivery of a Hydrogel Formulation (including but not limited to
syringes, syringe extensions, flow-through brushes and other
components).
(u) "Delivery System 1" shall mean the Delivery System that is specified
in Exhibit A.
(v) "Direct Costs" shall mean the cost of manufacture inclusive of
materials, direct labor, transport costs and an appropriate
allocation of production, warehousing, administration and technical
service overheads calculated in accordance with generally accepted
accounting practices.
(w) "Dural Sealant Formulation" shall mean the Hydrogel Formulation that
is specified in Exhibit B.
(x) "Dural Sealant Product" shall mean a product that consists of the
Dural Sealant Formulation and Delivery System 1.
(y) "EPC States" shall have the meaning set forth in Section 6(a)(i)(B).
(z) "Ethicon Delivery System" shall mean a Delivery System developed or
obtained by Ethicon that is to be used in the delivery of any
Hydrogel Formulation.
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(aa) "Ethicon Inventions" shall have the meaning set forth in Section
6(c)(ii).
(bb) "Ethicon Offer" shall have the meaning set forth in Section
3(e)(iii).
(cc) [*]
(dd) "Ethicon Standards" shall have the meaning set forth in Section
7(b)(ii)
(ee) "E.U." shall mean the European Union, as recognized as of the date
of this Agreement.
(ff) "Event of Default" shall have the meaning set forth in Section 8(f).
(gg) "Event of Force Majeure" shall have the meaning set forth in Section
9(h)(i).
(hh) "Existing Patents" shall mean Patents which exist or have been
applied for as of the date of this Agreement.
(ii) "FDA" shall mean the U.S. Food and Drug Administration, or any
successor agency thereto.
(jj) "Field" shall mean (i) all human intraoperative surgical sealing of
air and fluid leaks using any Hydrogel Polymer and (ii) [*]
provided, however, that the Field shall not include (A) the use of
any Hydrogel Polymer solely for purposes of drug delivery (it being
understood that drug delivery does not include medicated devices or
medical devices which are being promoted and sold as sealants), and
(B) the use of any Hydrogel Polymer for the prophylaxis, treatment
and/or inhibition of restenosis and/or stenosis.
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(kk) "First Commercial Sale" shall mean, with respect to a country, the
earlier of (i) the date on which Ethicon first sells a Product to a
third party in such country in the Territory pursuant to this
Agreement and (ii) the date that is six (6) months after the date on
which a Product receives Regulatory Approval in such country in the
Territory.
(ll) "Focal Counter Offer" shall have the meaning set forth in Section
3(e)(iv).
(mm) "Focal Delivery System" shall mean a Delivery System, other than
Delivery System 1 or the VATS Delivery System, developed or obtained
by Focal that is to be used in the delivery of any Hydrogel
Formulation.
(nn) "Focal Inventions" shall have the meaning set forth in Section
6(c)(i).
(oo) "Focal Patent Application" shall have the meaning set forth in
Section 6(a)(i).
(pp) "Force Majeure Notice" shall have the meaning set forth in Section
9(h)(i).
(qq) "Gastrointestinal Sealant Candidate" shall have the meaning set
forth in Section 4(b)(iv)(A).
(rr) "Gastrointestinal Studies" shall have the meaning set forth in
Section 4(b)(iv)(A).
(ss) "Holding Company" shall have the meaning set forth in Section 1(c).
(tt) "Hydrogel Formulation" shall mean the combination at specified
ratios and concentrations of a Hydrogel Polymer and, if applicable,
any solvents, initiators, stabilizers, excipients and any other
ingredients contained within a formulation.
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(uu) [*]
(vv) "Improved Formulation" shall mean a Hydrogel Formulation that (a) is
not the Lung Sealant Formulation or the Dural Sealant Formulation
but comprises the Hydrogel Polymer contained in the Lung Sealant
Formulation or the Dural Sealant Formulation, (b) does not contain a
biologically active ingredient (e.g.. a drug or medication), and (c)
is developed by Focal during the term of this Agreement to replace
the Lung Sealant Formulation or the Dural Sealant Formulation.
(ww) "Improved Product" shall mean any product that consists of (a) the
Lung Sealant Formulation or the Dural Sealant Formulation and a
Focal Delivery System or an Ethicon Delivery System, or (b) an
Improved Formulation and Delivery System 1, the VATS Delivery
System, a Focal Delivery System or an Ethicon Delivery System.
(xx) "Infringement Claim" shall have the meaning set forth in Section
6(b)(i).
(yy) "Infringement Notice" shall have the meaning set forth in Section
6(b)(ii)(A).
(zz) "Infringement Suit" shall have the meaning set forth in Section
6(b)(i)(C).
(aaa) "Initial Forecast" shall have the meaning set forth in Section 7(h).
(bbb) "Initial Product" shall mean (a) the Lung Sealant Product and/or (b)
the Dural Sealant Product.
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(ccc) "Joint Inventions" shall have the meaning set forth in Section
6(c)(iii).
(ddd) "Joint Invention Patent(s)" shall have the meaning set forth in
Section 6(c)(iii).
(eee) "Know-How" shall mean all know-how, including the Manufacturing
Technology, owned, controlled or acquired by Focal at any time prior
to or during the term of this Agreement, including without
limitation, processes, techniques, methods, products, software
(including the source code related thereto), components,
apparatuses, or chemical materials and other materials and
compositions, which (i) is related to any of the Products or (ii)
may be necessary to enable Ethicon to manufacture, develop, use or
sell the Products.
(fff) [*]
(ggg) "Lung Sealant Formulation" shall mean the Hydrogel Formulation that
is specified in Exhibit C.
(hhh) "Lung Sealant Product" shall mean a product that consists of the
Lung Sealant Formulation and Delivery System 1.
(iii) "Manufacturing Plan" shall have the meaning set forth in Section
7(b)(i).
(jjj) "Manufacturing Standards" shall have the meaning set forth in
Section 7(b)(ii).
(kkk) "Manufacturing Technology" shall mean, with respect to each Product,
the know-how, technical specifications, instructions, processes and
other intellectual property and information that (i) is owned,
controlled or acquired by Focal at any time prior to or during the
term of this Agreement, and (ii) is used or related to the
manufacture of
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such Product including, but not limited to, good manufacturing
procedures (such as FDA good manufacturing practices) and good
laboratory procedures, all such material to be in sufficient clarity
and detail to enable it to be followed by a skilled person.
(lll) "NAFTA" shall mean all of the United States, Canada and Mexico
(including any territories or possessions thereof), as the same
shall exist on the date of this Agreement.
(mmm) "Net Sales" shall mean, with respect to any Product, the amount
derived by Ethicon, its Affiliates, licensees and assignees from the
sale of such Product to independent third parties and/or to any
Affiliate of Ethicon acting as a distributor and/or wholesaler (an
"Affiliated Distributor"), in each case after (i) subtracting all
normal and customary discounts of any type or nature which are
provided solely in connection with such Product (such as cash
discounts, volume discounts, rebates, marketing subsidies and
credits), and (ii) taking into account all authorized returns of
such Product, provided, however, that in the case of sales or other
transfers to an Affiliated Distributor, such sales or transfers
shall, for the purpose of determining Net Sales, be deemed to be the
fair market value of such sales or transfers, where the fair market
value shall be determined from the sales of similar volumes of
similar Products to independent third parties. The parties
understand and agree that in calculating any royalties on Net Sales
payable by Ethicon under this Agreement, such calculations shall be
based upon either (A) sales or other transfers to independent third
parties, or (B) sales or other transfers to Affiliated Distributors,
but not both.
In the event that a Product is sold in the form of a combination
product, the amount invoiced for such Product shall be deemed to be
the invoiced price of such Product as if sold separately by Ethicon,
its Affiliates, licensees or assignees.
(nnn) "Net Selling Price" shall have the meaning set forth in Section
7(c)(ii)(E)(1).
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(ooo) "New Controlling Holder" shall have the meaning set forth in Section
1(n).
(ppp) "New Product" shall mean any product that (a) consists of a Hydrogel
Formulation with or without a Delivery System, (b) is not an Initial
Product or an Improved Product or a VATS Product, and (c) is
developed by Focal or jointly by the parties pursuant to this
Agreement for use in the Field in the Territory.
(qqq) "New Product Programs" shall have the meaning set forth in Section
4(b)(vii).
(rrr) "Notice Quarter" shall have the meaning set forth in Section
7(l)(ii)(B).
(sss) "Notification" shall have the meaning set forth in Section 3(e)(ii).
(ttt) "Patent(s)" shall mean (i) all the patents and applications for
patents, if any, that are identified in Exhibit D any applicable
foreign counterparts thereof, as well as all continuations,
continuations-in-part, divisions and renewals thereof, and any
amendments and modifications thereto, and all patents which may be
granted thereon, and all reissues, reexaminations, extensions,
patents of addition and patent of importation thereof, (ii) any
patent application which is owned or otherwise controlled by Focal
and is related to or based on any Know-How that is developed during
the term of this Agreement, and any division, continuation or
continuation-in-part of any such application and any patent which
shall issue based on such application, divisional, continuation or
continuation-in-part, and any patent which is a reissue or extension
thereof or a patent of addition to any such patent, and (iii) all
patent applications and patents which are owned or otherwise
controlled by Focal and which, but for the license granted herein,
the manufacture or sale of a Product would infringe a Valid Claim.
(uuu) "PCT" shall have the meaning set forth in Section 6(a)(i)(A).
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(vvv) "Prime Rate" shall mean the highest Prime Rate of interest as quoted
in U.S. edition of The Wall Street Journal from time to time.
(www) "Product" shall mean (a) the Initial Products, (b) Improved
Products, (c) VATS Products, or (d) New Products.
(xxx) "Purchase Price" shall mean the price paid by Ethicon to Focal for a
Product manufactured by or for Focal and supplied to Ethicon
pursuant to Section 7.
(yyy) "Regulatory Approval" shall mean, with respect to any country,
filing for and receipt of all regulatory agency registrations and
approvals (including, but not limited to, approvals of all final
Product labelling) required for the marketing and sale of a Product
for the indication for which it is being marketed in such country.
With respect to the E.U., Regulatory Approval shall mean CE- Mark
certification for sale of the Product within all the applicable E.U.
countries.
(zzz) "Regulatory Filings" shall mean all applications, filings,
materials, studies, data and documents of any nature whatsoever
(including any supporting information related thereto) filed with,
or prepared in connection with, any Regulatory Approval process in
any country or territory.
(aaaa) "Requirements for Full Royalty" shall have the meaning set forth in
Section 6(d)(i)(A).
(bbbb) "Sales Threshold" shall have the meaning set forth in Section
3(d)(ii).
(cccc) "Secondary Facilities" shall have the meaning set forth in Section
7(b)(i).
(dddd) "Specifications" shall have the meaning set forth in Section
7(a)(ii)
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(eeee) "Territory" shall mean the entire world, excluding only NAFTA.
(ffff) "Trigger Date" shall have the meaning set forth in Section 3(d)(ii).
(gggg) "Triggering Event shall have the meaning set forth in Section
7(1)(ii)(A).
(hhhh) "Unremedied Facilities Deficiency" shall have the meaning set forth
in Section 7(b)(ii).
(iiii) "UT Agreement" shall mean that certain patent and technology
agreement between Focal (formerly known as Pegas) and the Board of
Regents of the University of Texas System dated as of June 11, 1992
with respect to Hydrogel Polymers.
(jjjj) "Valid Claim" shall mean any claim in (a) any unexpired patent
which has not been held invalid by a non-appealed or unappealed
decision by a court or other appropriate body of competent
jurisdiction, or (b) any patent application that is filed in good
faith and is pending in any national or regional patent office.
(kkkk) [*]
(llll) [*]
(mmmm) [*]
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SECTION 2
DISCLOSURES
Focal expressly understands and acknowledges that Ethicon is currently and in
the future will evaluate and/or pursue other business opportunities and products
for the medical sealant, adhesive and adhesion prevention markets. Ethicon in
its sole discretion may participate in these markets alone or in other business
or research arrangements with third parties, both now and during the term of
this Agreement. Focal acknowledges that the consideration contemplated by this
Agreement, including but not limited to, the financial considerations and the
other obligations to be undertaken by Ethicon as specified in this Agreement, is
complete and adequate consideration for Focal entering this Agreement.
SECTION 3
DISTRIBUTION AND LIMITED LICENSE RIGHTS
(a) Grant of Rights.
(i) Subject to the terms and conditions of this Agreement, Focal
hereby grants to Ethicon (A) an exclusive right and license,
under Patents and Know-How, to use (including the undertaking
of development work and the seeking of Regulatory Approval,
all as contemplated herein), market, advertise, promote,
distribute and sell the Products in the Field throughout the
Territory and (B) a right and license, under Patents and
Know-How, to make and have made the Products in the Field,
solely in accordance with the provisions of Section 7(l).
(ii) Ethicon shall have the right to grant sublicenses to any
Affiliate or to any third party with respect to any rights
conferred upon Ethicon under this Agreement; provided,
however, that any sublicense shall be subject in all respects
to the same terms, conditions and provisions contained in this
Agreement; and provided further, however, that Ethicon shall
not be entitled to sub-license in its entirety Ethicon's
rights and obligations under this Agreement (other than where
Ethicon has exercised its rights to manufacture Products
pursuant to this Agreement or
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in connection with a permitted assignment of this Agreement), such
sub-licensing being restricted to those countries in the Territory
where it is commercially desirable or necessary to sell the Products
through a third party or parties.
(b) Exclusivity Provisions.
(i) During the term of this Agreement and except as specifically
permitted in this Agreement, Focal shall not:
(A) with respect to the Territory, grant or license to or
otherwise permit any third party to (a) use, make, have
made, lease, sell or otherwise commercialize the
Products in the Field or (b) use the Know-How to make,
have made, use, lease or sell or otherwise commercialize
any product that competes with the Products in the
Field; and
(B) with respect to the Territory, (a) use, make, have made
lease, sell or otherwise commercialize the Products in
the Field or (b) use the Know-How to make, have made,
use, lease or sell or otherwise commercialize any
product that competes with the Products in the Field.
As used in subsections (A) and (B) above, the phrase
"competes with the Products" shall not be deemed to
refer to the occasional and sporadic off-label use of
products in the Field.
(ii) Except as may be contemplated by this Agreement, Focal shall
cooperate with Ethicon and take all actions reasonable and
appropriate to prohibit and prevent third parties, including
any licensee of Focal, from making, using, leasing or selling
any, product which uses the Know-How which is obtained from or
through Focal in competition with any Product in the Field,
including, without limitation, the termination of licenses and
contract rights.
(iii) Except as may be contemplated by this Agreement, Focal shall
not, with respect to any products which use the Know-How,
place on such product or its packaging any CE mark obtained in
connection with or related to any Product, or allow any such
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CE mark to be placed thereon, either by Focal or by any third
party.
(c) UT Agreement and Rights.
(i) Focal shall, at its own expense, take all such actions and
proceedings as shall be necessary to ensure that the UT
Agreement remains in force and effect and that Focal's rights
under the UT Agreement to the Know-How (to the extent such
rights are granted under the UT Agreement) shall remain in
full force and effect. In the event that Focal fails to take
any such actions and proceedings, Ethicon shall have the right
to require that Focal take, and Focal agrees to take all such
actions as Ethicon shall reasonably deem necessary or
desirable in order to ensure that the UT Agreement remains in
force and effect and that Focal's rights under the UT
Agreement to the Know-How shall remain in full force and
effect, including, but not limited to, the execution and
filing of any court-related filings and documents, the pursuit
of injunctive proceedings, and any similar measures. If the
Board of Regents of the University of Texas System gives Focal
notice under Article 4.6 of the UT Agreement, Focal shall
decide in 90 days whether to undertake reasonable efforts to
sponsor research toward developing such PRODUCT ( as defined
in the UT Agreement). If Focal decides not to undertake such
development, Focal should inform Ethicon of such notification
and allow Ethicon to pursue its rights to proceed with said
development.
(ii) Focal shall, within five business days after notice thereof,
provide written notice to Ethicon of any challenges or claims
with respect to the UT Agreement, or alleged breaches under
the UT Agreement.
(iii) Focal shall not allow or agree to any amendment, waiver or
modification to the UT Agreement (which amendment, waiver or
modification restricts, modifies or limits in any way
Ethicon's rights under this Agreement) without the prior
written consent of Ethicon.
(d) Obligations of Ethicon.
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(i) Upon receipt of all necessary and appropriate Regulatory
Approvals, Ethicon shall, in a manner generally consistent
with the manner in which Ethicon markets and sells its own
products, market and sell either (A) one Product for at least
two (2) different indications, or (B) at least two (2)
different Products, in either case, as applicable, for use as
human surgical sealants in the Field pursuant to this
Agreement.
(ii) In the event that (A) after the date of the fifth anniversary
of the First Commercial Sale of the first Product in the E.U.
(the "Trigger Date"), Ethicon sells a Competing Product in
either the E.U. or Japan and (B) it can be reasonably
demonstrated that the aggregate Net Sales in the Territory for
all the Products decrease by the Sales Threshold as a direct
result of Ethicon's sale of such Competing Product, then Focal
shall have the right to convert (the "Conversion Right") the
rights and licenses granted to Ethicon pursuant to Section
3(a) into co-exclusive (as to Focal only, acting directly or
indirectly through a distributor) rights, provided that the
Conversion Right shall not be applicable to [*]. For purposes
of this paragraph, the term "Sales Threshold" shall mean the
decrease, in any calendar year which commences on or after the
Trigger Date, in the aggregate Net Sales of all three products
by an amount greater than [*] when compared to the Net Sales
for the immediately previous calendar year. Exercise of the
Conversion Right by Focal shall be made in writing upon no
less than thirty (30) days prior notice to Ethicon. Upon
exercise of the Conversion Right, (A) with respect to Products
that are not supplied by Focal pursuant to Section 7, any
royalty that Ethicon is obligated to pay Focal pursuant to
Section 6(d) on the sale in the Territory of Products other
than [*]) shall be reduced by [*] and (B) with respect
to Products that are supplied by Focal pursuant to
Section 7, the Purchase Price that Ethicon is obligated to
pay Focal pursuant to Section 7(c)(ii) for Products (other
than [*]) shall be reduced by an amount equal to [*], if any,
that Ethicon would be obligated to pay Focal per unit
of such Product pursuant to Section 6(d) (exclusive
of any reduction pursuant to this Section 3(d)(ii)),
but for the fact that Focal is supplying such
Product to Ethicon pursuant to Section 7.
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(e) Right of First Offer
(i) During the term of this Agreement, Ethicon shall have the
right of first offer with respect to the Know-How (and any
patents that cover the Know-How, owned or otherwise
controlled by Focal) in the Field for NAFTA (the "Ethicon
Right of First Offer"). The Ethicon Right of First Offer
shall be exercised in accordance with the provisions of this
Section 3(e).
(ii) If at any time during the term of this Agreement Focal shall
either (A) determine in good faith to actively pursue the
licensing, transfer, sale or other conveyance of interest in
the Know-How in the Field for NAFTA to a third party, or (B)
cease active pursuit of Regulatory Approval for the Initial
Products in the United States, then Focal shall so notify
Ethicon of such event in writing (a "Notification").
(iii) Ethicon shall have [*] days from receipt of a Notification
to provide to Focal a written, reasonably detailed set of
terms and conditions upon which Ethicon would enter into an
agreement with Focal with respect to rights to the Know-How
in the Field for NAFTA (an "Ethicon Offer").
(iv) Focal shall have [*] days from receipt of an Ethicon Offer
to either (A) accept such Ethicon Offer or (B) provide to
Ethicon a written, reasonably detailed set of terms and
conditions upon which Focal would enter into an agreement
with Ethicon with respect to rights to the Know-How in the
Field for NAFTA (a "Focal Counter Offer").
(v) [*]
(vi) [*]
(vii) [*] PROVIDED, HOWEVER, that (1) Focal agrees that the terms
and conditions of any arrangement with a third party with
respect to the use of the Know-How in the Field for NAFTA
shall not be, on the whole, more favorable to such third
party than the most favorable terms and conditions offered
to Ethicon, and (2) in the event that Focal does not enter
into an arrangement with a third party with respect to use
of the Know-How in the Field for NAFTA within [*] after the
date on which Focal shall have gained the right to enter
into such arrangement with a third party pursuant to this
Section 3(e)(vii), then the Ethicon Right of First Offer
shall apply to any further actions by Focal with respect to
the use of Know-How in the Field for NAFTA.
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[*]
SECTION 4
DEVELOPMENT AND REGULATORY PROCEDURES
(a) Advisory Board.
(i) Advisory Board Composition. The parties agree to form an
advisory board made up Of not more than four (4) individuals each
from Focal and Ethicon, which shall include Focal's President and a
Vice President of Ethicon (the "Advisory Board"). The Advisory Board
will meet from time to time to discuss the development and
regulatory programs for the Products. The location, time and length
of such meetings shall be agreed to by the parties. The Advisory
Board shall alternate the location of its meetings between the
facilities of each of the parties or by mutual agreement meet at
either facility or telephonically. Meetings of the Advisory Board
shall be held at least as frequently as once per calendar quarter.
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(ii) Advisory Board Responsibilities. The Advisory Board role shall
include (A) evaluating and determining which products to develop,
(B) reviewing the progress of the development of Products, (C)
reviewing the seeking of Regulatory Approval for the Products in the
Territory, (D) reviewing the expenditure of funding on all
development work by Focal under this Agreement, (E) discussing a
marketing strategy for NAFTA and the Territory with a goal to avoid
inconsistencies in the marketing of Products, and (F) reviewing the
initial marketing, selling and distribution plans for each Product
in the Territory.
(iii) Reports, Etc. Each party shall be responsible for submitting
appropriate reports to the Advisory Board with respect to the
progress of those aspects of the development of Products and/or the
Regulatory Approval progress of Products for which it has
responsibility. Such reports shall be submitted not less frequently
than quarterly outlining the progress of such party, and identifying
any significant issues which require the attention of the Advisory
Board.
(b) Development and Regulatory Approvals
(i) Lung Sealant Product.
(A) Focal shall, at its own expense and with the reasonable
cooperation of Ethicon, conduct those preclinical
studies and Clinical Trials, and undertake such product
development work, process development work and other
steps and actions, including preparation of
documentation and applications, as shall be reasonably
necessary to obtain, in as prompt a fashion as is
reasonably practicable, Regulatory Approval in the E.U.
of the Lung Sealant Product [*]. Although Focal shall
have the responsibility for conducting such work, it
shall give adequate and due consideration to Ethicon's
concerns and priorities in connection with such process.
As part of such work, Focal shall (1) develop a
preclinical prototype [*] and (2) evaluate a [*]
comprising such preclinical prototype [*] System in a
relevant animal model.
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(B) Copies of all Regulatory Filings made by Focal in
connection therewith shall be provided to Ethicon within
fourteen (14) days after each such submission, and
Ethicon shall be permitted to use and cross-reference
such Regulatory Filings, solely in connection with
Ethicon's rights under this Agreement.
(C) Ethicon shall have responsibility for filing at its own
expense and in its own name (or that of its Affiliates)
The Regulatory Filings for Regulatory Approval of the
Lung Sealant Product in countries in the Territory
outside of the E.U. Ethicon agrees to make Regulatory
Filings for Regulatory Approval of the Lung Sealant
Product in the following countries: Japan, Brazil,
Australia, South Africa and such other countries in the
Territory outside of the E.U. as Ethicon shall
determine. Such Regulatory Filings shall be conducted in
accordance with Ethicon's normal and customary
procedures for the submission of regulatory filings. Any
Clinical Studies required in connection with such
filings which are in addition to those Clinical Trials
which are required to be conducted for purposes of U.S.
Regulatory Approval or CE marking shall be done at the
expense of Ethicon. Copies of all such Regulatory
Filings by Ethicon shall be provided to Focal within
fourteen (14) days after each such submission. Focal
shall provide to Ethicon all such assistance and
information as shall be reasonably necessary for Ethicon
to make such Regulatory Filings.
(ii) Dural Sealant Product.
(A) Focal shall, at its own expense and with the reasonable
cooperation of Ethicon, conduct those preclinical
studies and Clinical Trials, and undertake such product
development work, process development work and other
steps and actions, including preparation of
documentation and applications, as shall be reasonably
necessary to obtain, in as prompt a fashion as is
reasonably practicable, Regulatory Approval in the E.U.
of the Dural Sealant Product [*]. Although Focal shall
have the responsibility for conducting such work, it
shall give adequate and due consideration to
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Ethicon's concerns and priorities in connection with
such process.
(B) Copies of all Regulatory Filings made by Focal in
connection therewith shall be provided to Ethicon within
fourteen (14) days after each such submission, and
Ethicon shall be permitted to use and cross-reference
such Regulatory Filings, solely in connection with
Ethicon's rights under this Agreement.
(C) Ethicon shall have responsibility for filing at its own
expense and in its own name (or that of its Affiliates)
the Regulatory Filings for Regulatory Approval of the
Dural Sealant Product in countries in the Territory
outside of the E.U. Ethicon agrees to make Regulatory
Filings for Regulatory Approval of the Dural Sealant
Product in the following countries: Japan, Brazil,
Australia, South Africa and such other countries in the
Territory outside of the E.U. as Ethicon shall
determine. Such Regulatory Filings shall be conducted in
accordance with Ethicon's normal and customary
procedures for the submission of regulatory filings. Any
Clinical Studies required in connection with such
filings which are in addition to those Clinical Trials
which are required to be conducted for purposes of U.S.
Regulatory Approval or CE marking shall be done at the
expense of Ethicon. Copies of all such Regulatory
Filings by Ethicon shall be provided to Focal within
fourteen (14) days after each such submission. Focal
shall provide to Ethicon all such assistance and
information as shall be reasonably necessary for Ethicon
to make such Regulatory Filings. Although Ethicon shall
have the responsibility for obtaining such Regulatory
Approvals, it shall give adequate and due consideration
to Focal's concerns in connection with such process.
(iii) Cardiovascular Sealant.
(A) Focal shall, at its own expense and with the cooperation
and reasonable assistance of Ethicon, conduct those
animal studies (the "Cardiovascular Studies") as shall
be necessary to evaluate the effectiveness [*]
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[*]
(B) Within sixty (60) days after the completion of the
Cardiovascular Studies, the Advisory Board shall review
such studies and determine whether further development
work in connection with the Cardiovascular Sealant
Candidate should be undertaken. In the event that the
members of the Advisory Board agree that further
development work in connection with the Cardiovascular
Sealant Candidate should be undertaken, the Advisory
Board shall determine (1) which additional studies
should be undertaken in order to obtain sufficient
information to initiate Clinical Trials in the E.U. and
in Japan, and (2) how to proceed with the seeking of
Regulatory Approval for the Cardiovascular Sealant
Candidate as a Product in the Territory. Ethicon, at its
own expense, shall have the responsibility for
conducting the requisite development work and for
obtaining Regulatory Approval for the Cardiovascular
Sealant Candidate in the Territory; provided, however,
that Ethicon may, upon agreement by Focal, utilize
Focal's services for the performance of selected
development work, such development work to be provided
at cost by Focal. In the event that the members of the
Advisory Board agree that further development in
connection with the Cardiovascular Sealant Candidate
should not be undertaken but that the parties should
consider a program to develop a New Product for use as
an intraoperative surgical sealant in cardiovascular
surgery (an "Alternate Cardiovascular Sealant
Candidate"), then the parties shall discuss in good
faith the initiation of such program in accordance with
the provisions set forth in Section 4(b)(vii). In the
event that the parties have not agreed to initiate a
development program with respect to the Cardiovascular
Sealant Candidate or an Alternate Cardiovascular Sealant
Candidate within [*] after completion of the
Cardiovascular Studies, then Ethicon shall be entitled,
in its sole and unfettered discretion and at its own
expense, to undertake its own preclinical development,
clinical development, Regulatory Approval and/or
commercialization program with respect to the
Cardiovascular Sealant Candidate in the Territory, and
Focal shall be under no obligation to participate in
such program. Ethicon shall (1) have all
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rights to use Patents and Know-How for the sole purpose
of undertaking any such Ethicon program(s) with respect
to a Cardiovascular Sealant Candidate in the Territory,
(2) provide the Advisory Board with such information as
shall be necessary to enable the Advisory Board to
fulfill its responsibilities with respect to such
Cardiovascular Sealant Candidate under Section 4(a)(ii),
and (3) be obligated to pay Focal (i) the Purchase Price
of such Cardiovascular Sealant Candidate pursuant to
Section 7, if such Product is being supplied by Focal,
or (ii) if Focal is not supplying such Product to
Ethicon, royalties on the sales of such Cardiovascular
Sealant Candidate in the Territory pursuant to Section
6(d).
(iv) Gastrointestinal Sealant.
(A) Focal shall, at its own expense and with the cooperation
and reasonable assistance of Ethicon, conduct those
animal studies (the "Gastrointestinal Studies") as shall
be necessary to evaluate the effectiveness of [*]
(B) Within sixty (60) days after the completion of the
Gastrointestinal Studies, the Advisory Board shall
review such studies and determine whether further
development work in connection with the Gastrointestinal
Sealant Candidate should be undertaken. In the event
that the members of the Advisory Board agree that
further development work in connection with the
Gastrointestinal Sealant Candidate should be undertaken,
the Advisory Board shall determine (1) which additional
studies should be undertaken in order to obtain
sufficient information to initiate Clinical Trials in
the E.U. and in Japan, and (2) how to proceed with the
seeking of Regulatory Approval for the Gastrointestinal
Sealant Candidate as a Product in the Territory.
Ethicon, at its own expense, shall have the
responsibility for conducting the requisite development
work and for obtaining Regulatory Approval for the
Gastrointestinal Sealant Candidate in the Territory;
provided, however, that Ethicon may, upon agreement by
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Focal, utilize Focal's services for the performance of
selected development work, such development work to be
provided at cost by Focal. In the event that the members of
the Advisory Board agree that further development in
connection with the Gastrointestinal Sealant Candidate should
not be undertaken but that the parties should consider a
program to develop a New Product for use as an intraoperative
surgical sealant in gastrointestinal surgery (an "Alternate
Gastrointestinal Sealant Candidate"), then the parties shall
discuss in good faith the initiation of such program in
accordance with the provisions set forth in Section 4(b)(vii).
In the event that the parties have not agreed to initiate a
development program with respect to the Gastrointestinal
Sealant Candidate or an Alternate Gastrointestinal Sealant
Candidate within [*] after completion of the Gastrointestinal
Studies, then Ethicon shall be entitled, in its sole and
unfettered discretion and at its own expense, to undertake its
own preclinical development, clinical development, Regulatory
Approval and/or commercialization program with respect to the
Gastrointestinal Sealant Candidate in the Territory, and Focal
shall be under no obligation to participate in such program.
Ethicon shall (1) have all rights to use Patents and Know-How
for the sole purpose of undertaking any Ethicon programs(s)
with respect to a Gastrointestinal Sealant Candidate in the
Territory, (2) provide the Advisory Board with such
information as shall be necessary to enable the Advisory Board
to fulfill its responsibilities with respect to such
Gastrointestinal Sealant Candidate under Section 4(a)(ii), and
(3) be obligated to pay Focal (i) the Purchase Price of such
Gastrointestinal Sealant Candidate pursuant to Section 7, if
such Product is being supplied by Focal, or, (ii) if Focal is
not supplying such Product to Ethicon, royalties on the sales
of such Gastrointestinal Sealant Candidate in the Territory
pursuant to Section 6(d).
(v) Anti-Adhesion Products.
(A) The Parties agree to use good faith efforts to reach
a definitive agreement (the "Anti-Adhesion Product
Agreement") on or before March 31, 1997, with respect to
the development and commercialization of a Product, based
upon the Patents and Know-How, that can reduce and/or prevent
post-surgical adhesions (an "Anti-Adhesion Product").
The Anti-Adhesion Product could be an Initial Product, an
Improved Product or a New Product.
(B) The Anti-Adhesion Product Agreement shall include
reasonably detailed plans and time lines for the full
joint development program, estimates of funding
requirements, allocations of responsibilities, and
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business terms. The first year plans are expected to
include: preclinical evaluation of Initial Products;
initiation of a pilot clinical study with the Lung
Sealant Formulation and initiation of backup
formulations work at Focal. Ethicon shall fully fund
the first year of the program, but, in the event that
the program continues by mutual agreement beyond the
first year, shall be entitled to recover one-third
(1/3) of its costs from Focal out of future royalties
or payments of the Purchase Price in a manner to be
determined by mutual agreement of the parties. Funding
responsibility for subsequent years shall be shared and
negotiated, PROVIDED, HOWEVER, that (i) the level of such
funding shall be specifically set forth in the Anti-Adhesion
Product Agreement, and (ii) the parties understand and
agree that continued funding by Ethicon shall be at
Ethicon's sole discretion. The business terms of the
Anti-Adhesion Product Agreement shall be substantially
equivalent to those for the Initial Products under this
Agreement, PROVIDED, HOWEVER, that the parties agree that
the Anti-Adhesion Product Agreement shall require,
INTER ALIA, that Ethicon pay Focal (1) the sum of [*], due
within fourteen (14) days after receipt by Ethicon of written
verification that the Anti-Adhesion Product has received CE
marking necessary to market, distribute and sell the Product
throughout the E.U., and (2) the sum of [*], due within
fourteen (14) days after receipt by Ethicon of written
verification that the Anti-Adhesion Product has received
Regulatory Approval in Japan.
(C) In the event that the parties have not executed the
Anti-Adhesion Product Agreement by March 31, 1997, then
Ethicon shall be entitled, in its sole and unfettered
discretion and at its own expense, to undertake its own
preclinical development, clinical development, Regulatory
Approval and commercialization program with respect to the
use of an Initial Productor an Improved Product, if any, as
an Anti-Adhesion Product in the Territory, and Focal shall
be under no obligation to participate in such program.
Ethicon shall (1) have all rights to use Patents and Know-How
for the sole purpose of undertaking any such Ethicon
program(s) with respect to an Anti-Adhesion Product in the
Territory, (2) provide the Advisory Board with such
information as shall be necessary to enable the Advisory
Board to fulfill its responsibilities with respect to such
Anti-Adhesion Product under Section 4(a)(ii) and (3) be
obligated to pay Focal (i) the Purchase Price of such
Anti-Adhesion Product pursuant to Section 7, if such Product
is being supplied by Focal, or (ii) if Focal is not supplying
such Product to Ethicon,
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royalties on the sales of such Anti-Adhesion Product in the
Territory pursuant to Section 6(d). In the event that
Ethicon (i) ceases active preclinical development, clinical
development and/or pursuit of Regulatory Approval with
respect to an Anti-Adhesion Product (other than as a result
of Focal's failure to meet its obligations under this
Agreement or the Anti-Adhesion Product Agreement, if any),
and/or (ii) ceases funding of such efforts as may be
required under the Anti-Adhesion Product Agreement, if any,
and (iii) does not attempt to initiate another program with
Focal for the development of Anti-Adhesion Products, then (A)
Focal shall have the right to use the Know-How to make, have
made, use, lease or sell or otherwise commercialize in the
Territory any product that is marketed for use in the
reduction and/or prevention of post-surgical adhesions (it
being understood that Focal's obligations under Section
3(b)(i) shall not apply to any product marketed for use in
the reduction and/or prevention of post-surgical adhesions,
but shall remain applicable in all other instances) and
(B) Ethicon shall provide Focal with all pre-clinical,
clinical and regulatory data and materials that Ethicon owns
or otherwise controls that relate to any Anti-Adhesion
Product developed by the parties under the Anti-Adhesion
Product Agreement (if any) and are useful in obtaining
Regulatory Approval for any such Anti-Adhesion Product and
shall grant Focal the right to utilize such pre-clinical,
clinical and regulatory data and materials to the extent
necessary to obtain such Regulatory Approval.
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(vi) Improved Products. Provided that Ethicon (A) has not abandoned
the development, marketing and/or sale in the Territory of the
Lung Sealant Product and the Dural Sealant Product, and (B)
has not caused an Event of Default, Ethicon shall have the
right to develop, market and sell the Improved Products, if
any, under substantially equivalent terms and conditions as
those that apply to the Initial Products; provided, that
Ethicon shall bear all of the expense of conducting any,
preclinical and clinical development, and of obtaining the
Regulatory Approvals, required to commercialize any such
Improved Products in the Field in the Territory.
(vii) New Products. The Advisory Board shall meet no less frequently
than once every six (6) months to discuss programs utilizing
the Know-How to develop New Products ("New Product Programs").
Either Ethicon or Focal may propose New Product Programs. The
Advisory Board shall be responsible for developing plans, time
lines and budgets for any New Product Program, and obtaining
the required approvals to initiate such program. Although each
New Product Program shall be discussed and agreed to on an
individual basis, each such program shall follow these general
guidelines:
(A) Development of Hydrogel Polymers and Hydrogel
Formulations. Focal shall at all times be exclusively
responsible for the technical development of Hydrogel
Polymers and Hydrogel Formulations.
(B) Development of Delivery Systems; Preclinical Studies;
Clinical Studies; Regulatory Approval. Focal and Ethicon
shall agree on the division of labor appropriate for the
development of Delivery Systems, the conduct of
preclinical and clinical studies, and the pursuit of
Regulatory Approval.
(C) Development Funding.
1. New Product Programs that are approved by the
Advisory Board shall be funded as follows:
(a) [*] for New Product Programs that are
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intended to develop Products that shall be
marketed and sold in the Territory and
NAFTA, or
(b) [*] for New Product Programs that are
intended to develop Products that shall be
marketed and sold only in the Territory.
2. For development work conducted by Focal and funded
by Ethicon, Ethicon shall pay to Focal an amount
to be agreed upon by the parties, intended to
cover the direct and indirect expenses incurred by
Focal in the conduct of a New Product Program.
(D) Commercial Terms. Excluding the development funding set
forth above, the general commercial terms for Initial
Products shall also apply to New Products. The parties
agree, however, to negotiate in good faith a Purchase
Price and royalty rate for New Products which (a)
reflect the cost of manufacture of such New Product
relative to the projected commercial selling price and
(b) reasonably approximate the relative margins
contemplated for the, Initial Products.
(viii) Japan Regulatory Approval. Ethicon shall, at its own expense
and with the cooperation and reasonable assistance of Focal,
prepare such documentation and applications, and undertake
such other steps and actions, as shall be reasonably necessary
to obtain Regulatory Approval in Japan of the Lung Sealant
Product and the Dural Sealant Product. Copies of all
Regulatory Filings made by Ethicon in connection therewith
shall be provided to Focal within fourteen (14) days after
each such submission. Ethicon shall use reasonable efforts to
file for such Regulatory Approval for (A) the Lung Sealant
Product within [*] after the date that Focal submits the
clinical portion required for Regulatory Approval for such
Product in the E.U. and (B) the Dural Sealant Product
within [*] after the date that Focal submits the clinical
portion required for Regulatory Approval for such Product in
the E.U.; provided, however, that the dates for filing in
Japan set forth in (A) and (B) above are subject to adjustment
by mutual agreement of the parties [*]
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[*] In the event that Ethicon does not file for Regulatory
Approval in Japan for (1) the Lung Sealant Product within the
time period set forth in (A) above, and/or (2) the Dural
Sealant Product within the time period set forth in (B) above,
then (a) Focal shall have the fight to terminate the rights
and licenses granted to Ethicon pursuant to Section 3(a) with
respect to the Lung Sealant Product and/or the Dural Sealant
Product, as the case may be, in Japan, and (b) Ethicon shall
provide Focal with all pre-clinical, clinical and regulatory
data and materials that Ethicon owns or otherwise controls
that relate to the applicable Product and are useful in
obtaining Regulatory Approval for such Product in Japan and
shall grant Focal the right to utilize such pre-clinical,
clinical and regulatory data and materials to the extent
necessary to obtain such Regulatory Approval.
(ix) Failure by Focal to Pursue E.U. Regulatory Approvals.
(A) Ethicon's Right to Pursue Regulatory Approval. If (1)
Focal ceases active pursuit of Regulatory Approval for
the Lung Sealant Product or does not receive CE marking
for such Product [*], or (2) Focal ceases active pursuit
of Regulatory Approval for the Dural Sealant Product or
does not receive CE marking for such Product in the [*]
then Ethicon shall be given notice of such event by
Focal and Ethicon shall be entitled to take such steps
and actions as shall be necessary to obtain such
Regulatory Approval; provided, however, that the dates,
set forth in (1) and (2) above are subject to adjustment
by mutual agreement of the parties [*] Ethicon's
exercise of its right to pursue Regulatory Approval for
a given Initial Product in no way relieves Focal of its
obligations to pursue Regulatory Approval for any other
Initial Product under this Agreement, nor does Ethicon's
exercise of such rights for a given Initial Product
cause the provisions of subsection (B) below to apply to
any other Initial Product.
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(B) Consequences. In the event that Ethicon exercises its
right to pursue Regulatory Approval in the E.U. for the
Lung Sealant Product and/or the Dural Sealant Product,
then
1. if Focal is supplying such Product(s) to Ethicon
pursuant to Section 7 and, but for the fact that
Focal is supplying such Product(s), Ethicon would
be obligated to pay a royalty to Focal on the sale
of such Product(s) in the E.U. pursuant to Section
6(d), then the Purchase Price for such Product(s)
shall be (a) for such Product(s) purchased prior
to the second anniversary of the First Commercial
Sale of such Product(s), the price set forth in
Section 7(c)(ii)(A)(1), except that such price
shall be based upon [*] of the Net Selling Price
of such Product(s) [*] and (b) for such Product(s)
purchased on or after such second anniversary, [*]
of the Net Selling Price of such Product(s), but
in no event less than [*] per unit of such
Product(s);
2. if Focal is supplying such Product(s) to Ethicon
pursuant to Section 7 but Ethicon would not be
obligated to pay a royalty to Focal on the sale of
such Product(s) in the E.U. pursuant to Section
6(d) if Focal was not supplying such Product(s),
then the Purchase Price for such Product(s) shall
be (a) for such Product(s) purchased prior to the
second anniversary of the First Commercial Sale of
such Product(s), the price set forth in Section
7(c)(ii)(A)(1), except that such price shall be
based upon [*] of the Net Selling Price of such
Product(s) [*] and (b) for such Product(s)
purchased on or after such second anniversary,
[*] of the Net Selling Price of such Products(s),
but in no event less than [*] per unit of such
Product(s); and
3. if Focal is not supplying such Product(s) to
Ethicon pursuant to Section 7 and Ethicon is
obligated to pay a royalty to Focal on the sale of
such Product(s) in the E.U. pursuant to Section
6(d), then the royalty payable
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to Focal shall equal [*] of the Net Selling Price
of such Product(s).
In the event that Ethicon exercises its right to pursue
Regulatory Approval in the E.U. for a Product pursuant
to this Section 4(ix), Ethicon shall be entitled to
deduct from the Purchase Price for units of such Product
or from the royalty payable to Focal on the sale of
units of such Product, as the case may be, any
reasonable costs that Ethicon incurs in obtaining such
Regulatory Approval.
(x) U.S. Regulatory Approval. Focal shall use diligent efforts,
acting either by itself, through a clinical research
organization or, subject to the [*] with one or more third
parties, to pursue and obtain Regulatory Approval for the
Initial Products in the US. in as prompt a fashion as
reasonably possible. If Focal ceases active pursuit of
Regulatory Approval for an Initial Product in the U.S., then
Focal shall immediately notify Ethicon of such cessation and,
if it can be reasonably demonstrated that a failure to obtain
such Regulatory Approval is likely to have a material adverse
effect on Ethicon's rights in the Territory with respect to
any Initial Product, Ethicon shall, upon such cessation, be
entitled to take such steps and actions as shall be necessary
to obtain such Regulatory Approval. Focal acknowledges that
Ethicon's right to pursue Regulatory Approval for such Initial
Product in the U.S. in no way relieves Focal of its
obligations to pursue Regulatory Approval in the Territory for
the Products in the manner required by this Agreement.
(xi) Product Labeling. The parties acknowledge that the Products
sold in the Territory shall bear labels which prominently
display the name of Ethicon or its designated Affiliate. Focal
agrees that it shall provide such reasonable cooperation and
assistance to Ethicon as shall be necessary for Ethicon to
obtain any CE marking in its own name for any of the Products
to the extent necessary either (A) to enable the Products to
include the labeling set forth in the preceding sentence, or
(B) to enable Ethicon to effectively market the Products in
the E.U. (as shall be mutually agreed upon by the parties).
(c) Training. Focal, if requested, shall be responsible for providing
training on the Products to Ethicon's sales personnel. In addition,
Focal shall provide technical
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support at all customer conventions. Such training and support shall
be at levels and times reasonably agreed between the parties from
time to time and shall be at Ethicon's cost. Focal shall not be
obligated to provide training and support at levels beyond that
which its available personnel reasonably permits.
SECTION 5
MILESTONE PAYMENTS AND DEVELOPMENT FUNDING
(a) Milestone Payments. In consideration of Focal entering into this
Agreement, and of Focal's reaching certain milestones relating to
the Products, Ethicon shall pay to Focal the following payments:
(i) the sum of [*] due within seven (7) days of the execution of
this Agreement, to reimburse Focal for past research
expenditures relating to Products; and
(ii) the sum of [*] due within fourteen (14) days after receipt by
Ethicon of written verification that the Lung Sealant Product
has received CE marking necessary to market, distribute and
sell the Lung Sealant Product throughout the E.U.; and
(iii) the sum of [*] due within fourteen (14) days after receipt by
Ethicon of written verification that the Dural Sealant Product
has received CE marking necessary to market, distribute and
sell the Dural Sealant Product throughout the E.U., [*]
(b) Development Funding and Scientific Benchmark Payments. In
consideration of Focal entering into this
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Agreement, and of Focal's undertaking development activities
relating to Products, Ethicon shall provide Focal with the following
development funding and scientific benchmark payments:
(i) the sum of [*] to be paid in quarterly installments of
[*] each on the first business day of each calendar
quarter during 1997; and
(ii) the sum of [*] to be paid in quarterly installments of
[*] each on the first business day of each calendar
quarter during 1998.
SECTION 6
PATENTS AND INVENTIONS; ROYALTIES
(a) Patents.
(i) Prosecution. Focal and Ethicon agree that, with respect to any
patent application, contained in Patents, that is solely owned
or otherwise controlled by Focal (a "Focal Patent
Application"), the obligations and expenses of patent
prosecution and issuance shall be apportioned as follows:
(A) Focal agrees to file and to faithfully prosecute, at its
Sole expense, initial United States Focal Patent
Applications and any additional United States Focal
Patent Applications, divisionals, continuations,
continuations-in-part, reissues, reexaminations, and the
like, including Patent Cooperation Treaty ("PCT")
applications, but only to the extent necessary to
protect the rights in the Territory granted to Ethicon
under this Agreement.
(B) Focal shall file Focal Patent Applications at its own
expense in at least Japan, Canada, the European Patent
Convention states (the "EPC States"), Australia, Brazil
and South Africa, unless the parties agree in writing
that any such filings should not be made. In addition,
Focal agrees
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to designate and file in such other countries as the
parties shall mutually agree.
(C) Focal shall, within twenty (20) days of mailing or
receipt, provide Ethicon with copies of all future filed
Focal Patent Applications and all correspondence from
and to patent offices worldwide relating to both the
future filed Focal Patent Applications and any issued
patents based thereon, reexaminations, reissues or the
like.
(D) If Focal does not prosecute a Focal Patent Application
or obtain an issued patent based thereon, Focal shall so
notify Ethicon and Ethicon shall, in its sole
discretion, have the right to assume the prosecution of
such Focal Patent Application in the Territory at its
expense on a country by country basis for such Focal
Patent Application. In the event Ethicon elects to pay
such costs related to the prosecution of such Focal
Patent Application and obtains an issued patent based
thereon, it shall have the right to offset [*] of
such costs and expenses against any royalties which
become due under Section 6(d) in the country where
such patent is obtained.
(ii) Maintenance. Ethicon shall, in jurisdictions in the Territory,
have the duty and responsibility to pay or reimburse Focal for
all taxes, maintenance fees and annuities on all patents
contained in the Patents that are solely owned or otherwise
controlled by Focal.
(iii) Patent Term Extensions. The parties agree to cooperate in
order to avoid loss of any rights which may otherwise be
available to the parties under the United States Drug Price
Competition and Patent Term Restoration Act of 1984, to the
extent necessary to protect the rights in the Territory
granted to Ethicon under this Agreement, the Supplementary
Certificate of Protection of the Member States of the European
Community and other similar measures in any other country in
the Territory. Without limiting the foregoing, Focal agrees to
notify Ethicon promptly upon receipt of Regulatory Approval to
market a Product in the United States and Focal agrees to
timely file an application for patent extension within the
sixty (60) day period following such Regulatory Approval. The
same shall apply with respect to the approval by the Health
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Authorities in a country of the E.U. or approval by the
appropriate authorities in any other country in the Territory.
(b) Infringement.
(i) Infringement of Third Party Rights. If, as a result of the
manufacture, use or sale of any Product in any country of the
Territory, a third party sues, threatens to sue, or brings
other action for patent infringement against Focal or Ethicon
and/or any of their respective Affiliates (an "Infringement
Claim"), or if either party shall become aware of third-party
patent rights, Focal and Ethicon shall discuss in good faith
an appropriate response to such claim and shall determine by
mutual agreement an appropriate course of action.
(A) If an Infringement Claim exists with respect to an
Initial Product or an Improved Product that comprises
the Lung Sealant Formulation or the Dural Sealant
Formulation, and it is jointly determined in good faith
that a third-party patent poses a substantial risk to
such Initial Product or Improved Product in any country
in the Territory, then (1) Focal shall be responsible
for obtaining such license from such third-party and
shall pay all costs and fees associated with such
license, and (2) Ethicon shall have the right to suspend
performance of its obligations (other than payment
obligations arising prior to such suspension) with
respect to such Initial Product or Improved Product in
the country or countries in which such Infringement
Claim poses a substantial risk, such suspension right to
remain in effect until Focal obtains a license from such
third party or the Infringement Claim is otherwise
resolved to Ethicon's satisfaction. As used above, the
term "substantial risk" means that the claims of such
third-party patent cover, the manufacture, use or sale
of an Initial Product or Improved Product that comprises
the Lung Sealant Formulation or the Dural Sealant
Formulation.
(B) If an Infringement Claim exists with respect to a New,
Product or an Improved Product that does not comprise
the Lung Sealant Formulation or the Dural Sealant
Formulation, and it is jointly determined to be
necessary to obtain a license from such third party,
Focal and Ethicon shall be jointly responsible for
negotiating such license, it
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being understood that each shall make every effort to
minimize the license fees and/or royalty payable to such
third party, and each shall bear [*] of the costs and
fees associated with such license. In the event that
Ethicon shall be obligated to pay a license fee and/or
royalty to any such third party in any country of the
Territory, then Ethicon shall have the right to deduct
an amount equal to [*] of such payments made by Ethicon
to such third party (1) from any royalties payable to
Focal on the sale of such Product in such country
pursuant to Section 6(d), and (2) if Ethicon is paying
a Purchase Price to Focal for such Product pursuant to
Section 7, from that portion of such Purchase Price
equal to the royalty that would be payable to Focal
pursuant to Section 6(d) if Focal were not supplying
such a Product; provided, however, that in no event
shall such royalty or such portion of the Purchase Price
be reduced in any quarter by more than [*]. Any portion
of a deduction that is not available for the quarter due
to the foregoing limitation may be carried forward and
deducted from payments otherwise due hereunder for
subsequent quarters.
(C) If a third party sues or brings other action for
patent infringement against Focal or Ethicon and/or
any of their respective Affiliates (an "Infringement
Suit") in any country in the Territory with respect to
any Product and it can be reasonably determined, as
evidenced by a written opinion of counsel, that (1) such
Infringement Suit is likely to be successful, and
(2) a reasonable commercial license can not be
negotiated (it being understood that Focal shall have
the primary responsibility for seeking to obtain any
such license with respect to the Initial Products and
Improved Products), then Ethicon shall have the right
to terminate this Agreement with respect to its
rights to such Product in such country.
(ii) Infringement by a Third Party.
(A) In the event that either party suspects or discovers
that there is infringement of a Patent in the Field in
the Territory involving a Product by a third party, the
party that suspects or discovers such infringement shall
notify
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the other in writing to that effect (an "Infringement
Notice"), including with said written notice evidence
establishing a case of infringement by such third party,
and an identification of the jurisdictions in the
Territory in which such infringement is alleged to have
occurred (the "Affected Territories").
(B) Ethicon shall have the right, but not the obligation, to
bring suit or other legal actions, in its own name and
on its own behalf to the extent permitted by the law of
the applicable jurisdiction, against any third party
infringers of the Patents in the Affected Territories.
If Ethicon undertakes such action against third party
infringers, Focal shall cooperate with Ethicon to the
extent necessary for the effective prosecution of such
action and shall, at Focal's election, either (A) join
as a party to such suit or other legal action, or (B)
take such other action as may be necessary to enable
Ethicon to bring such suit or other legal action. To the
extent that Focal is given the capacity under the UT
Agreement to take actions against third party
infringers, such capacity shall be made available to
Ethicon. The right of Ethicon to undertake action
against third party infringers shall terminate upon (A)
Ethicon notifying Focal that it is withdrawing from any
legal challenge or suit of such third party infringers,
(B) Ethicon notifying Focal that it has resolved such
alleged infringement or (C) Focal obtaining the right to
bring suit in its own name in accordance with Section
6(b)(ii)(C) below.
(C) Ethicon shall bear all the expenses of any infringement
suit either brought by it, or initiated by Focal or a
Focal licensee at Ethicon's behest, and shall, with
respect to any damages (i) be entitled to retain all
damages or other monies awarded or received in
settlement of such suit up to the amount required to
cover its reasonable out-of-pocket expenses in such suit
and (ii) with respect to any excess amounts, shall split
such remaining amount with Focal on the following basis
- [*] to Ethicon, [*] to Focal. Focal and/or its
Affiliates will cooperate with Ethicon in any such suit
and shall have the right to consult with Ethicon and be
represented by its counsel at its own expense. If,
within one hundred eighty (180) days, or a shorter
period if
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mandated by local law, from the date of delivery of the
Infringement Notice, Ethicon has not (A) notified Focal
that it is withdrawing from any legal challenge or suit
of such third party infringers, (B) notified Focal that
it has resolved such alleged infringement or a
discontinuance of such infringement, or (C) brought suit
against the third party infringer, then Focal shall have
the right, in its sole discretion, but not the
obligation, to bring such suit at its own expense and in
its own name, if possible. Focal shall bear all the
expenses of any suit brought by it and shall, with
respect to any damages, (i) be entitled to retain all
damages or other monies awarded or received in
settlement of such suit up to the amount required to
cover its reasonable out-of-pocket expenses in such suit
and (ii) with respect to any excess amounts, shall split
such remaining amount with Ethicon on the following
basis - [*] to Focal,[*] to Ethicon. Ethicon shall
cooperate with Focal in any such suit and shall have the
right to consult with Focal and be represented by its
counsel at its own expense.
(c) Inventions
(i) Title to any inventions or discoveries made by Focal employees
or its representatives (A) without inventive contribution of
Ethicon employees or agents, (B) without the use of Ethicon
information which, at the time of conception or reduction to
practice, constituted confidential information of Ethicon (as
defined in Section 9(a)(i)), and (C) based on any Know-How
related in any way to a Product and developed during Focal's
performance under this Agreement ("Focal Inventions") shall
belong to Focal.
(ii) Title to any inventions or discoveries made by Ethicon
employees or its representatives (A) without inventive
contribution by Focal employees or agents, (B) without the use
of Know-How which, at the time of conception or reduction to
practice, constituted confidential information of Focal (as
defined in Section 9(a)(i)), and (C) conceived and first
reduced to practice under this Agreement (hereinafter,
"Ethicon Inventions") shall belong to Ethicon. Ethicon may
file patent application(s) for Ethicon Inventions in its own
discretion and at its own expense.
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(iii) Any inventions or discoveries (A) conceived or reduced to
practice jointly by employees or agents of Focal and Ethicon
or (B) reduced to practice by employees or agents of Ethicon
and based on any Know-How which, at the time of such reduction
to practice, constituted confidential information of Focal (as
defined in Section 9(a)(i)) or (C) reduced to practice by
employees or agents of Focal and based on any information
which, at the time of such reduction to practice, constituted
confidential information of Ethicon (as defined in Section
9(a)(i)), shall belong to Focal and Ethicon jointly (the
"Joint Inventions"). Focal and Ethicon shall execute any
assignments necessary to effect the distribution of ownership
of joint Inventions specified in this Section 6(c)(iii). After
joint Inventions are reduced to practice, each party shall
have sole responsibility for filing, prosecuting and
maintaining applications or patents and local counterparts
thereof (the "Joint Invention Patent(s)") in its geographical
area (Territory or NAFTA, respectively) as defined under this
Agreement, but shall give full consideration to
recommendations of the other party, including selection of
attorney(s). Each party shall bear the expenses of filing,
prosecution and maintenance of joint Invention Patents in its
geographical area. If either party declines to file, prosecute
or maintain a joint Invention Patent in a jurisdiction in its
geographical area, it shall notify the other party in writing
before any applicable due date or other deadline and no later
than fifteen (15) days after such decision. The notified party
shall have the option to file, prosecute or maintain at its
expense on a country by country basis each such joint
Invention Patent. In that event, the party paying all the
costs and expenses shall cease to have any further obligation
under this Agreement to pay a royalty to the other party on
such joint Invention Patent in such country until the party
recovers half the total costs and expenses of such patent
filings, prosecution and maintenance.
(iv) Each party shall require its employees or agents responsible
for conducting research in performance of this Agreement to
keep contemporaneous records of their results and findings in
sufficient detail to document any inventions of discoveries
made by such employees and agents under this Agreement in
bound notebooks (which notebooks shall be reviewed and signed
by a witness on a regular basis).
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(v) Focal and Ethicon will cooperate in a timely manner to
prepare, review and execute patent applications and all such
further papers, as may be necessary to enable the parties to
protect joint Inventions by patent in any and all countries.
(vi) Ethicon hereby agrees that it shall not, except as permitted
under this Agreement, either alone or in collaboration with a
third party, market and/or sell any product in the Field in
NAFTA that embodies, and/or the manufacture of which utilizes,
a joint Invention. Focal hereby agrees that it shall not,
except as permitted under this Agreement, either alone or in
collaboration with a third-party, market and/or sell any
product in the Field in the Territory that embodies, and/or
the manufacture of which utilizes, a joint Invention. If (A)
Focal wishes to practice a patented Joint Invention in the
Field in NAFTA or (B) either party wishes to practice a
patented joint Invention outside the Field in NAFTA and/or the
Territory, the party practicing the patented Joint Invention
shall pay a royalty of [*] of the Net Sales of any product
covered by a joint Invention Patent (where Net Sales is
redefined for purposes of this paragraph to refer to the
amount invoiced on sales of any product covered by a joint
Invention Patent), unless said joint Invention is used solely
by a party in fulfilling its obligations under this Agreement;
provided, however, that if a party seeks to practice a
patented joint Invention for which it did not pay its share of
the cost and expenses, such party shall have to reimburse the
party that paid the costs and expenses [*] of the costs and
expenses incurred in the country or countries in which the
party seeking to practice the joint Invention will make, have
made, use, lease or sell any product covered by a joint
Invention Patent prior to practicing the patented Joint
Invention. A party practicing a joint Invention (1) shall only
be obligated to pay the [*] royalty with respect to sales in
those countries where the products being sold fall within a
Valid Claim under an issued patent included in joint Invention
Patents for such country and (2) shall not be obligated to pay
an amount greater than the [*] royalties irrespective of the
number of issued patents included in joint Invention Patents
that cover such product.
(d) Royalties on Products not Manufactured by or for Focal.
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(i) Initial Products. In the event that Ethicon assumes the
responsibility for the manufacture of an Initial Product
pursuant to Section 7(1), then Ethicon shall pay to Focal on a
country by country basis in the Territory the following
royalties:
(A) a royalty of [*] of Net Sales of an Initial Product in a
country, if the making, using or selling of such Initial
Product by Ethicon, its Affiliates or sublicensees, in
such country, (1) is covered by a Valid Claim of an
issued patent included in Patents, (2) is covered by a
Valid Claim of a patent application included in Patents;
provided, however, that if a patent based on such
application does not issue within [*] of the First
Commercial Sale of such Initial Product in such country,
then, commencing with the [*] Anniversary of such First
Commercial Sale, Ethicon shall pay to Focal the
royalties specified in Section 6(d)(i)(B) on the sale of
such Initial Product until such time, if ever, that a
patent based on such application issues, in which case
the royalty payable by Ethicon on the sale of such
Initial Product shall revert to the level specified in
this Section 6(d)(i)(A), or (3) would be covered by a
Valid Claim of an issued patent or patent application
included in Patents but for a joint decision by the
parties (other than where such decision was made on the
basis that the seeking of such a patent would not be
successful due to previously existing patents or prior
art) to not obtain or maintain a patent with respect to
such Initial Product in such country (collectively, the
"Requirements for Full Royalty").
(B) a royalty of [*] of Net Sales of an Initial Product in a
country, if the making, using or selling of such Initial
Product in such country does not meet any of the
Requirements for Full Royalty.
(ii) Improved Products. In the event that Ethicon assumes the
responsibility for the manufacture of an Improved Product
pursuant to Section 7(l), then Ethicon shall pay to Focal on a
country by country basis in the Territory royalties on the
sales of such Improved Product at rates that are substantially
equivalent to those set forth in Section 6(d)(i).
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(iii) New Products. In the event that Ethicon assumes the
responsibility for the manufacture of a New Product pursuant
to Section 7(l), then Ethicon shall pay to Focal on a country
by country basis in the Territory royalties on the sales of
such New Product at rates to be established in the New Product
Program.
(e) Duration of Royalty Payments.
(i) With respect to each Product manufactured by or on behalf of
Ethicon (other than by Focal), the royalties payable to Focal
under Section 6(d) shall be paid for (A) a period of
(1) ten (10) years after the First Commercial Sale of such
Product (irrespective of who manufactures such Product) in
the E.U. with respect to sales in the E.U., or
(2) twelve (12) years after the First Commercial Sale in
Japan with respect to sales in apart, or (3) in countries
outside of Japan or the E.U., twelve (12) years after the
First Commercial Sale in the E.U. or in Japan, whichever is
later, or (B) for as long as the manufacture, use or sale
of such Product in such country is covered by a Valid Claim
of an issued patent included in Patents and/or in Joint
Invention Patents whichever of (A) or (B) is longer. In no
event shall more than one royalty be paid to Focal for the
sales of any Product.
(ii) After payment of the royalties specified in Section 6(d) for
the periods of time specified in this Section 6(e) with
respect to a Product, the license rights of Ethicon granted
pursuant to Section 3(a) shall be fully paid up with respect
to such Product but not any other Product, subject, however,
to the provisions of Section 8(e).
(f) Royalty Payment Mechanics.
(i) All royalties payable pursuant to this Agreement shall be
subject to the provisions of this Section 6(f).
(ii) Royalties will be payable in United States Dollars calculated
at a rate of exchange of the currency of the country from
which the royalties are payable as shall be determined in
accordance with U.S. generally accepted accounting principles.
If the transfer or the conversion into United States Dollars
in any such instance is not lawful or possible, payment of the
royalties shall be made
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by the deposit to the account of the appropriate party or its
nominee in any commercial bank or trust company of its choice
located in that country, such deposit to be made in the
currency of the country where the sales were made on which the
royalty was based. Prompt notice of any such deposit shall be
given to the appropriate party.
(iii) If the applicable royalty rate exceeds the permissible rate
established in a given country for royalty payments in that
country or royalty remission from that country, as the case
may be, the rate of royalty payable by the party paying the
royalty shall not exceed the established permissible rate and
the party obligated to pay royalty under this Agreement shall
pay the difference between the royalty due and the royalty at
the established permissible rate, unless said payments made
outside the country are illegal.
(iv) Any tax required to be withheld by the party paying the
royalty or any Affiliate or sublicensee under the laws of any
foreign country for the account of the party owed the royalty
under this Agreement shall be promptly paid by the party
paying the royalty or said Affiliate or sublicensee for and on
behalf of the party owed the royalty to the appropriate
governmental authority, and the party paying the royalty or
its Affiliate or sublicensee shall furnish the party owed with
proof of payment of such tax together with official or other
appropriate evidence issued by the appropriate governmental
authority sufficient to enable the party owed the royalty to
document a claim for income tax credit in respect to any sum
so withheld. Any such tax required to be withheld shall be an
expense of and borne solely by the party owed the royalty.
(v) The party paying the royalty shall keep accurate books and
records of all payments due to the party owed the royalty.
Said books of account shall be kept at the party paying the
royalty's principal place of business or the principal place
of business of an appropriate Affiliate or sublicensee to
which this Agreement relates.
(vi) The party owed the royalty shall have the right to nominate an
independent accountant acceptable to and approved by the party
paying the royalty (which approval shall not be unreasonably
withheld) who shall have access to the records of
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the party paying the royalty during reasonable business hours
for the purpose of verifying, at the party owed the royalty's
expense (except as provided below), the royalty payable as
provided for in this Agreement for the two (2) preceding
years, but this right may not be exercised more than once in
any year. The party owed the royalty shall solicit or receive
only information relating to the accuracy of the royalty
report and the royalty payments made. The party paying the
royalty shall be entitled to withhold approval of an
accountant which the party owed the royalty nominates unless
the accountant agrees to sign a confidentiality agreement with
the party paying the royalty which shall obligate such
accountant to hold the information he receives from the party
paying the royalty in confidence, except for information
necessary for disclosure to the party owed the royalty
necessary to establish the accuracy of the royalty reports.
Any underpayment of royalty shall be paid within thirty (30)
days after the delivery of a detailed written accountants
report to the party paying the royalty. Any overpayment of
royalty shall be credited to the next royalty payment due from
the party paying the royalty. If no further royalty payments
will be due then a refund will be made within thirty (30) days
of the audit. In the event any such audit reveals a shortfall
in paid royalties by an amount of five percent (5%) or more,
then the costs of the accountant employed in order to perform
such audit shall be reimbursed by the party owing the royalty.
(vii) In the event that a party owes a royalty, such party shall
deliver to the party owed the royalty written reports of Net
Sales during the preceding calendar quarter, on or before the
ninetieth (90th) day following the end of each calendar
quarter. In the event that a party owes a royalty for sales
made by its Affiliate or its sublicensee, such party shall
deliver to the party owed the royalty written reports of Net
Sales for such Affiliate or sublicensee during the preceding
calendar quarter, on or before the ninetieth (90th) day
following the end of each calendar quarter. Such reports shall
include a calculation of the earned royalty due and shall be
accompanied by the monies due.
(viii) In the event that a party is late in making payment of any
royalty obligation, interest shall accrue at the Prime Rate
from the date such payment was due.
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SECTION 7
SUPPLY AGREEMENT
(a) Exclusive Supply of Products; Specifications.
(i) Focal shall have the right and shall manufacture the Products
exclusively on behalf of Ethicon for resale by Ethicon in the
Territory during the term of this Agreement, or until such time as
Ethicon shall take over all or part of the manufacturing pursuant to
this Agreement. Except as specifically provided by the provisions of
this Agreement, Ethicon shall exclusively acquire the Products from
Focal during the term of this Agreement.
(ii) The Initial Product preliminary specifications, from which the
detailed final specifications for each Product shall be derived, are
set out on Exhibit H. No less than [*] days prior to the placement
of the first order for each Initial Product, Ethicon and Focal shall
mutually agree upon the final specifications ("Specifications") for
such Initial Product. Such Specifications shall become a part of
this Agreement and be attached as Exhibit I hereof.
(iii) Specifications for each Product that is not an Initial Product shall
be mutually agreed upon by Ethicon and Focal no less than [*]
days prior to the placement of the first order for each such
Product. Such Specifications shall become part of this Agreement and
be attached as Exhibit I hereof.
(iv) All Products supplied to Ethicon hereunder shall be supplied in a
finished and sterile form, as may be specified. Products shall be
supplied in packaging which is suitable for delivery to the ultimate
end-user of the Products. The packaging and sterilization
requirements shall be specified in the Specifications.
(b) Production Facilities and Capabilities
(i) Within ninety (90) days after the execution and delivery of this
Agreement, Focal shall submit to Ethicon [*]
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manufacturing capability plan (the "Manufacturing Plan") for
completing implementation of procedures and facilities for producing
the Products which satisfy both the volume, specifications and other
supply requirements of this Section 7. The Manufacturing Plan shall
include commercially appropriate plans (including scheduled
availability thereof) which provide for alternative manufacturing
facilities (the "Secondary Facilities") in the event Focal's primary
manufacturing facility is incapable (either by reason of force
majeure or otherwise) of supplying the Products as anticipated under
this Agreement. Ethicon shall promptly review the Manufacturing Plan
and discuss with Focal changes, if any, required to meet the supply
obligations set forth in this Section 7.
(ii) Ethicon shall have the right, upon reasonable advance notice and
during regular business hours, to inspect and audit the facilities
(including the Secondary Facilities) to be used or being used by
Focal for the manufacture of the Products to assure compliance by
Focal with (A) the requirements of the Manufacturing Plan, (B) the
CE Mark procedures, (C) FDA Good Manufacturing Practices, (D) the
Ethicon manufacturing standards (the "Ethicon Standards") (as set
out in Exhibit F), (E) all federal, state, local and comparable
foreign rules and regulations directly applicable to the manufacture
of products and manufacturing facilities, and (F) the requirements
of this Section 7 and Section 8(a)(i) (collectively, the
"Manufacturing Standards"). With respect to each Initial Product,
such inspections and audits may be conducted by Ethicon once during
the six (6) month period immediately preceding the anticipated First
Commercial Sale of each such Initial Product and no more than once
quarterly after the First Commercial Sale of such Initial Product.
Such inspections and audits shall be conducted in a manner so as to
minimize disruption of Focal's business operations. If any of such
inspections and audits reveal that the manufacturing facilities are
not adequate to meet the requirements of the Manufacturing
Standards, then Ethicon shall promptly provide Focal with written
notice of such fact, which notice shall contain in reasonable detail
the deficiencies found in the manufacturing facilities and, if
practicable, those steps Focal should undertake in order to remedy
such deficiencies (an "Audit Report"). Focal shall use its best
efforts to remedy any such deficiencies within ninety (90) days of
its receipt of an Audit Report. In the event that, within such
ninety (90) day period, Focal fails to remedy any such
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deficiencies that could reasonably result in the failure by Focal to
supply a Product in accordance with the requirements of this Section
7 and Section 8(a)(i) (an "Unremedied Facilities Deficiency"), then
Ethicon shall have the right to assume the responsibility for the
manufacture of such Product pursuant to the provisions of Section
7(1)(ii)(A). Notwithstanding the foregoing, Ethicon's right to
assume the responsibility for the manufacture of a Product pursuant
to the provisions of Section 7(1)(ii)(A) shall not be triggered by
Focal's failure to comply with any requirements set forth in new
general Ethicon manufacturing standards that are not included in the
Ethicon Standards that are set forth in Exhibit F as of the
effective date of this Agreement for that period of time generally
permitted other third party manufacturers of Ethicon to comply
with such new requirements.
(c) Purchase Prices
(i) Products not Intended for Commercial Use.
(A) Initial Products. Focal shall provide to Ethicon reasonable
quantities of an Initial Product that is not intended for
Commercial Use at a cost equal to Focal's Direct Cost to
supply such Initial Product; provided, however, that Ethicon
shall not pay Focal less than [*] per unit or per unit or more
than [*] per unit for such Initial Product.
(B) Improved Products. Focal shall provide to Ethicon reasonable
quantities of an Improved Product that is not intended for
Commercial Use at a cost equal to Focal's Direct Cost to
supply such Product; provided, however, that Ethicon shall not
pay to Focal less than $P per unit or more than $Q per unit
for such Improved Product, where P and Q shall be determined
through a good faith negotiation between the parties.
(C) New Products. Focal shall provide to Ethicon reasonable
quantities of a New Product that is not intended for
Commercial Use at a cost to be established in the New Product
Program.
(ii) Products Intended for Commercial Use.
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(A) Initial Products.
1. The Purchase Price for Initial Products intended for
Commercial Use purchased prior to that date which is the
second anniversary of the First Commercial Sale of the first
Initial Product in any country in the E.U. shall equal [*] of
the Net Selling Price of such Initial Product; provided,
however, that if Focal's Direct Cost of supplying such Initial
Product to Ethicon is greater than [*] of the Net Selling
Price of such Initial Product, then the Purchase Price shall
equal [*]. Notwithstanding the foregoing, and any provision
in this Agreement pursuant to which the Purchase Price is
subject to a reduction, in no event shall the Purchase Price
be less than [*] per unit of such Initial Product.
2. The Purchase Price for Initial Products intended for
Commercial Use purchased on or after that date which is the
[*] of the First Commercial Sale of the first Initial Product
in any country in the E.U. shall be (a) the applicable
percentage of the Net Selling Price of such Initial Product
set forth in Exhibit G, part 1, if (1) but for the fact that
Focal is supplying such Initial Product, Ethicon would be
obligated to pay a royalty to Focal on the sale of such
Initial Product in the Territory pursuant to Section 6(d) and
(2) the making, using or selling of such Initial Product in a
country in the Territory meets any of the Requirements for
Full Royalty, or (b) the applicable percentage of the Net
Selling Price of such Initial Product set forth in Exhibit G,
part 2, if (1) but for the fact that Focal is supplying such
Initial Product, Ethicon would be obligated to pay a royalty
to Focal on the sale of such Initial Product in the Territory
pursuant to
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Section 6(d) and (2) the making, using or selling of such
Initial Product does not meet any of the Requirements for Full
Royalty or (c) [*] of the Net Selling Price of such Initial
Product, if Ethicon would not be obligated to pay a royalty to
Focal on the sale of such Initial Product in the Territory
pursuant to Section 6(d) if Focal was not supplying such
Initial Product. Notwithstanding the foregoing, and any
provision in this Agreement pursuant to which the Purchase
Price is subject to a reduction, in no event shall the
Purchase Price be less than [*] per unit of such Initial
Product.
(B) Improved Products. The Purchase Price for each Improved
Product intended for Commercial Use shall be calculated using
percentages of the Net Selling Price of such Improved Product
that are substantially equivalent to those set forth in
Exhibit G.
(C) New Products. The Purchase Price for each New Product intended
for Commercial Use shall be established in the New Product
Program.
(D) Delivery System. The parties acknowledge and agree that
Ethicon shall have the right to purchase Delivery Systems
directly from a third party manufacturer and/or to provide
such Delivery Systems itself, but only to the extent that the
manufacture, use or sale of such Delivery System is not
covered by a Valid Claim of a Patent. In the event Ethicon so
elects to obtain or provide a Delivery System, the parties
shall negotiate in good faith an equitable adjustment to the
Purchase Price to take into account any modification in the
costs incurred by Focal as a result thereof.
(E) Calculation of Purchase Price.
1. The net selling price ("the "Net Selling Price") for an
Initial Product shall be calculated by dividing the
aggregate Net Sales for such Initial Product (based upon
the Products shipped by Ethicon, its Affiliates or
licensees to customers during such previous
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calendar quarter), divided by the number of units of
such Initial Product so shipped by Ethicon, its
Affiliates or licensees, exclusive of units of such
Product that are not intended for Commercial Use.
2. Calculation of the Purchase Price shall be made based
upon the forecasts provided pursuant to Section 7(h).
Ethicon shall provide to Focal no later than the
ninetieth (90th) day after the end of each calendar
quarter Ethicon's calculation of the actual Net Selling
Price for each Product for such quarter. If such
calculation indicates that the aggregate Net Selling
Price of a Product exceeded the forecasted aggregate Net
Selling Price during such calendar quarter, then Ethicon
shall submit the underpaid amount to Focal when it
provides such calculation to Focal. If such calculation
indicates that the aggregate Net Selling Price of a
Product was less than the forecasted aggregate Net
Selling Price during such calendar quarter, then Focal
shall issue a check to Ethicon within ten (10) business
days of receipt of such calculation of the overpaid
amount or, at Focal's option, Focal may credit such
amount against purchases under this Agreement.
3. The Purchase Price for Products will be payable in
United States Dollars calculated at a rate of exchange
of the currency of the country in which the Products are
sold, as shall be determined in accordance with U.S.
generally accepted accounting principles. If the
transfer or the conversion into United States Dollars in
any such instance is not lawful or possible, payment of
the Purchase Price shall be made by deposit to the
account of the appropriate party or its nominee in any
commercial bank or trust company of its choice located
in that country, such deposit to be made in the currency
of the country where the sales were made on which the
Purchase Price was based. Prompt notice of any such
deposit shall be given to the appropriate party.
4. In the event that, as a result of significant currency
fluctuations, the financial return to either Ethicon or
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Focal is significantly different than had been
anticipated by the parties, either party may request
that the parties discuss in good faith revisions to the
financial terms of this Agreement intended to address
the situation, provided that neither party shall be
obligated to agree to any such revisions.
(d) Shipment and Purchase Orders.
(i) All shipments of Products shall be F.O.B. to a single Ethicon
designated facility located in NAFTA unless otherwise agreed by the
parties, and shall be accompanied by a packing slip which describes
the Products and states the purchase order number. To the extent of
any conflict or inconsistency between this Agreement and any
purchase order, purchase order release, confirmation, acceptance or
any similar document, the terms of this Agreement shall govern.
(ii) Ethicon shall, by the first business day of each calendar month,
provide purchase orders to Focal for Ethicon's Product requirements
for that calendar month which is two (2) months after the date such
purchase order is provided. Ethicon shall at all times be obliged to
purchase the quantity of the Products requested in such purchase
orders. Focal shall not be obligated to supply in any month a number
of units of a Product that is greater than [*] of the number of
units of such Product specified in the Applicable Forecast (as
defined below), and Ethicon shall be obligated to issue purchase
orders to Focal and to purchase at least [*] of the number of units
of such Product specified in the Applicable Forecast. As used
herein, the term "Applicable Forecast" means the forecast relating
to a specific month provided by Ethicon pursuant to Section 7(h)
four months prior to such month. For example, if the forecast
provided on January 1 specified [*] units of a particular Product
for shipment in the following May (which January forecast is the
Applicable Forecast in May), then Focal is not obligated to supply
more than [*] units of such Product in May, and Ethicon shall be
obligated to issue purchase orders and purchase at least [*] units
of such Product in May.
(iii) Ethicon will make payment upon any ordered Products within thirty
(30) days of receipt of the relevant shipment of such
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Products. Payments made past the due date shall accrue interest at
the Prime Rate from the date such payment was due.
(e) Minimum Purchases.
(i) Following the [*] of the First Commercial Sale in any country within
the E.U. of an Initial Product following receipt of E.U. Regulatory
Approval, Ethicon agrees to purchase from Focal the following
minimum unit quantities of Product per year for the term of this
Agreement:
(A) [*] of Product, if only one Initial Product has received
Regulatory Approval in the Territory and such Regulatory
Approval is for a single indication, or
(B) [*] of Product, if one Initial Product has received Regulatory
Approval in the Territory for more than one indication, or if
more than one Initial Product has received Regulatory Approval
in the Territory.
(ii) Ethicon shall not be considered as having failed to meet the
purchase minimums (A) in the event such failure is a result of
Focal's failure to supply a Product under this Agreement, (B) in the
event of a recall or government initiated action with respect to a
Product or (C) in the event that Ethicon fails to meet the purchase
minimum as set forth in this Section 7(e) for an Initial Product in
a given year but pays Focal during such year an amount equal to the
product of the Purchase Price for such Initial Product multiplied by
(M-A), where M is the minimum unit quantity of such Initial Product
that Ethicon is obligated to purchase from Focal during such year
and A is the number of units of such Initial Product that Ethicon
actually purchased from Focal during such year.
(iii) In the event that Ethicon does not meet the applicable annual
purchase minimums set forth in this Section in any calendar year
commencing after the second anniversary referred to in subsection
(i) above, then Focal's sole and exclusive remedy shall be its
option to terminate this Agreement, effective upon ninety
(90) days prior written notice of Focal's intention to do so
(it being specifically understood that such failure to meet the
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annual purchase minimums shall not be considered to be an Event of
Default under this Agreement).
(f) Packaging.
(i) Packaging and labelling requirements for the Products shall be part
of the Specifications for each particular Product. In addition, from
time to time, Ethicon may submit changes to such packaging and
labelling specifications should Ethicon determine such changes are
necessary or desirable; provided that Focal shall only be obligated
to incur the expenses necessary to provide a single version of the
packaging and/or labelling materials for a Product, unless otherwise
agreed by the parties, but shall be obligated to provide additional
versions of the packaging and/or labelling materials [*]. Any
packaging and labelling requirements must be commercially reasonable
in light of Ethicon's then-existing packaging practices.
(ii) Focal acknowledges that Ethicon is the exclusive owner of and has
all rights to the trademarks, copyrights, plans, ideas, names,
slogans, artwork and all other intellectual property that appear on
or are otherwise used by Ethicon in connection with the marketing of
Products. Ethicon acknowledges that such ownership rights do not
extend to Focal's proprietary formulae or other proprietary
information. All trademarks to be used by Ethicon and/or its
Affiliates in connection with the Products shall be chosen by
Ethicon and/or its Affiliates in their sole discretion.
(iii) Ethicon shall have the option, but not the obligation, to use the
names "FocalSeal" and/or "Focal" in connection with the marketing,
distribution, promotion, advertising and sale of any Product,
provided that if Ethicon uses "FocalSeal" and/or "Focal" as a
trademark on a Product not manufactured by Focal, then, as a
condition to such use, the parties shall agree upon customary
quality control provisions in accordance with applicable trademark
laws. Any such use shall be without charge or cost to Ethicon, and
shall be subject to such reasonable written guidelines as to such
usage as Focal may elect to provide.
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(g) Product Defects and Warranties.
(i) Unless otherwise agreed in writing in any specific instance,
delivery of any Products by Focal to Ethicon shall constitute a
certification by Focal that the Products conform to the
Specifications and were manufactured in accordance with the
Manufacturing Standards. After delivery of a shipment of any
Products to Ethicon, Ethicon shall have thirty (30) days to examine
the Products to determine if they conform to the Specifications and,
on the basis of such examination, to accept or reject such shipment.
Any claims for failure to so conform ("Claims") shall be made by
Ethicon in writing to Focal during such thirty (30) day period,
indicating the nonconforming characteristics of the Products.
(ii) If Focal agrees with such Claim, then within thirty (30) days after
the submission of a Claim by Ethicon, Focal shall, at Ethicon's
option, provide Ethicon (i) with a credit against future billings
equal to the full amount paid by Ethicon for such Products or (ii)
replacement Products, if available. Focal shall pay for all shipping
costs of returning or destroying Products that are the subject of
such accepted Claims. Focal shall bear the risk of loss for such
Products, beginning at such time as they are taken at Ethicon's
premises for return delivery.
(iii) If Focal does not agree with such Claim, then the parties agree to
submit the Products in question to an independent party which has
the capability of testing the Products to determine whether or not
they comply with the Specifications. In the event the parties cannot
agree upon such independent party, or in the event it is not
possible to acquire the services of such an independent party, then
such dispute shall be resolved pursuant to Section 9(m).
(h) Forecasts. During the term of this Agreement, Ethicon shall provide to
Focal no later than the first day of each month a non-binding good faith
estimate by month of Ethicon's requirements for the Products for the
twelve (12) month period which commences one calendar month after the date
on which each forecast is due. In addition, Ethicon shall provide an
initial guidance forecast ("Initial Forecast") no later than six (6)
months prior to the estimated date of First Commercial Sale of a Product.
Such forecast shall be
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updated no later than three (3) months prior to such estimated date.
(i) Short-Shipments. Ethicon shall notify Focal of any short-shipment claims
within thirty (30) days of receipt of a shipment of Products.
(j) Adverse Events; FDA Audits.
(i) The parties recognize that the holder of all regulatory filings and
registrations may be required to submit information and file reports
to various governmental agencies on Products under clinical
investigation, Products proposed for marketing, or marketed
Products. Consequently, each party agrees to provide to the other
notification as soon as practicable, but in any event within seven
(7) days of the initial receipt of a report of any adverse
experience with a Product that is serious. Serious adverse
experiences mean any experience that suggests a significant hazard,
contraindication, side effect or precaution, or any experience that
is fatal or life threatening, is permanently disabling or requires
or prolongs inpatient hospitalization.
(ii) Focal shall promptly provide to Ethicon copies of any FDA or
Regulatory Agency inspection reports related to Focal's facilities
or to the manufacture of Products that it receives from such
agencies.
(iii) Ethicon shall promptly provide to Focal copies of any medical device
reviews filed with nominated E.U. competent authorities.
(iv) Focal shall promptly notify Ethicon of any FDA inspections of its
facilities related to the manufacture of Products.
(k) Recalls.
(i) In the event any governmental agency having applicable jurisdiction
shall order any corrective action with respect to a Product supplied
hereunder (including any recall of any product containing a
Product), customer notice, restriction, change, market action or any
Product change, and the cause of such corrective action is due to a
breach by Focal of any of its
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warranties, representations, obligations or covenants contained
herein, then Focal shall be liable, and shall reimburse Ethicon for
the reasonable costs of such action, including the cost of any
Product affected by such action whether or not such particular
Product shall be established to be in breach of any warranty by
Focal hereunder; provided, however, that Ethicon shall be obligated
to use reasonable efforts that are consistent with Ethicon's normal
business practice to minimize the cost of any such action.
(ii) In the event that Ethicon determines to undertake any recall of any
Product supplied hereunder (including any recall of any product
containing a Product), customer notice, restriction, change,
corrective action or market action or any Product change, and the
cause of such corrective action is due to a breach by Focal of any
of its warranties, representations, obligations or covenants
contained herein, then Focal shall be liable, and shall reimburse
Ethicon for the reasonable costs of such action, including the cost
of any Product affected by such action whether or not such
particular Product shall be established to be in breach of any
warranty by Focal hereunder; provided, however, that Ethicon shall
be obligated to use reasonable efforts that are consistent with
Ethicon's normal business practice to minimize the cost of any such
action.
(l) Ethicon Manufacturing.
(i) Transfer of Manufacturing Rights. Upon the occurrence of a
Triggering Event, Ethicon shall have the right to assume the
responsibility for the manufacture of the applicable Product(s). In
the event that Ethicon exercises its right to manufacture such
Product(s) pursuant to this Section 7(1), (A) Ethicon shall have a
royalty-bearing (in accordance with the terms of Section 6(d))
license, under Patents, Know-How and Manufacturing Technology for
the sole purpose of making and having made such Product(s) in the
Field throughout the Territory, (B) Ethicon shall have the right to
use and cross-reference Focal's Regulatory Filings with respect to
such Product(s) and (C) Focal shall provide, at Ethicon's cost, such
reasonable assistance and other information as shall be necessary in
order for Ethicon to manufacture or have manufactured such
Product(s).
(ii) Triggering Events.
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(A) Failure by Focal to Supply. As used in this Agreement, the term
"Triggering Event" means (1) an Unremedied Facilities Deficiency or
(2) that an Event of Default caused by Focal (which Event of Default
has not been cured within thirty (30) days after receipt of notice
thereof, subject to the proviso below) results in the failure by
Focal to supply Product(s) to Ethicon in accordance with the supply
obligations set forth in Section 7 and Section 8(a)(i) (provided
that if such Event of Default occurs within the first twelve (12)
months following the First Commercial Sale of the first Product and
Focal's failure to supply Products does not exceed by more than [*]
the quantity of the Product Focal is obligated to supply, Focal
shall have an additional sixty (60) days in which to diligently
attempt to remedy such Event of Default). Upon the occurrence of a
Triggering Event, Ethicon shall have the right to assume
responsibility for the manufacture of the applicable Product(s)
during the term of this Agreement. In the event that Ethicon assumes
the responsibility for the manufacture of such Product(s) pursuant
to this Section 7(1)(ii)(A), then (1) the provisions of Section 7
shall no longer be applicable to such Product(s), (2) Ethicon shall
pay Focal a royalty on the sale of such Product(s) in accordance
with the terms of Section 6(d); provided, however, that the rate
used to calculate the royalty on the sale of any Initial Product
shall be reduced to [*] and (3) Ethicon shall be entitled to deduct
from royalties payable to Focal pursuant to Section 6(d) [*].
(B) [*]
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[*]
(C) Change in Control. Upon a Change in Control, Ethicon shall have the
right to assume responsibility for the manufacture of any and all
Products during the term of this Agreement. In the event that
Ethicon exercises its right to manufacture a Product(s) pursuant to
this Section 7(1)(ii)(C), then (1) the provisions of Section 7 shall
no longer be applicable to such Product(s), (2) Ethicon shall pay
Focal a royalty on the sale of such Product(s) at the applicable
rate set forth in Section 6(d) and (3) Ethicon shall not be entitled
to deduct from the royalties payable to Focal pursuant to Section
6(d) any costs which Ethicon incurs in assuming such manufacturing
responsibility.
(D) Force Majeure. In the event that an Event of Force Majeure results
in an interruption in the supply of Product(s) by Focal to Ethicon
that continues unabated for a period of sixty (60) days or longer,
then Ethicon shall have the right to assume responsibility for the
manufacture of such Product(s), but only for so long as such Event
of Force Majeure prevents Focal from supplying such Product(s) to
Ethicon in accordance with the terms of this Agreement and subject
always to the last sentence of this paragraph. In the event that
Ethicon assumes the responsibility for the interim manufacture of
such Product(s) pursuant to this Section 7(l)(ii)(D), then (1) the
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provisions of Section 7 shall not be applicable to such Product(s)
during the period of time when Ethicon is responsible for such
manufacture, (2) Ethicon shall pay Focal a royalty on the sale of
such Product(s) at the applicable rate set forth in section 6(d) and
(3) Ethicon shall be entitled to deduct [*] of the direct costs
which Ethicon incurs in assuming such manufacturing responsibility
(it being understood that direct costs are intended to include the
costs of acquisition of facilities or equipment necessary for such
manufacture but are not intended to include the acquisition of raw
materials or normal and customary labor costs involved in such
manufacturing) (a) from royalties payable to Focal pursuant to
Section 6(d), or (b) in the event that Focal has resumed the
manufacture of Product(s) under this Section 7(1)(ii)(D), from that
portion of the Purchase Price equal to the royalty that would be
payable to Focal pursuant to Section 6(d) if Focal were not
supplying such Product(s), provided, however, that in no event shall
such royalty or such portion of the Purchase Price be reduced in any
quarter by more than [*] provided further that any portion of a
deduction that is not available for the quarter due to the foregoing
limitation shall be carried forward and deducted from payments
otherwise due hereunder for subsequent quarters. Notwithstanding the
foregoing, Focal's right to resume the manufacture of Product(s)
under this Section 7(1)(ii)(D) shall always be subject to the terms
and conditions of any agreement between Ethicon and a third party
with respect to the interim manufacture of Product(s) entered into
during the period when Ethicon was responsible for such manufacture,
it being acknowledged that the terms and conditions which Ethicon
agrees to shall be determined in Ethicon's sole discretion, provided
that Ethicon, in negotiating such terms and conditions, shall
consider in good faith the expected length of the interruption in
Focal's ability to supply Product(s) as a result of the Event of
Force Majeure.
(E) Manufacture by Ethicon by Agreement Upon mutual agreement by the
parties, Ethicon shall have the right to assume responsibility for
the manufacture of any and all Products. In the event that Ethicon
exercises its right to manufacture Product(s) pursuant to this
Section 7(l)(ii)(E),
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then (1) the provisions of Section 7 shall no longer be applicable
to such Product(s), (2) Ethicon shall pay Focal a royalty on the
sale of such Product(s) at the applicable rate set forth in Section
6(d), and (3) Ethicon shall not be entitled to deduct from the
royalties payable to Focal pursuant to Section 6(d), any costs which
Ethicon incurs in assuming such manufacturing responsibility.
(iii) Manufacturing Technology Escrow. The parties shall enter into an
escrow agreement within sixty (60) days after the date of this
Agreement (to be attached to this Agreement as Exhibit J) with a
mutually acceptable escrow agent. Focal shall deposit the
Manufacturing Technology (such material to be updated no less than
annually and upon any material change therein) with respect to a
Product in an escrow account with such escrow agent within the
thirty (30) day period immediately preceding the anticipated
Regulatory Approval of such Product in the Territory. All fees of
the escrow agent associated with such escrow shall be shared equally
by the parties. Such Manufacturing Technology shall be released to
Ethicon only upon the occurrence of a Triggering Event. In the event
the escrow agreement is terminated, the parties shall enter into a
new escrow agreement with another mutually agreeable escrow agent.
(m) Light System. The parties acknowledge and agree that Ethicon shall have
the right to purchase light Systems directly from a third party
manufacturer. In the event that Ethicon elects to purchase Light Systems
from Focal, such purchases shall be on the following terms:
(i) Purchase Price. The purchase price for each Light System purchased
from Focal shall be equal to [*]. In the event that suppliers of a
Light System require advance deposits with purchase orders for such
Light System, Ethicon shall arrange for timely payment of such
deposits either directly or through Focal, at Ethicon's option.
(ii) Shipment and Purchase Orders. Given that the estimated time from the
date of Focal's purchase order for a Light System to
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receipt of such Light System at Focal is [*], Ethicon shall order
each Light System as far in advance as possible, but no earlier than
[*] days from the required delivery date. a addition, Ethicon shall
estimate the number of Light Systems it requires for use during the
initial twelve (12) months from first commercial sale of such Light
Systems in the Territory, and place orders for such quantities no
less than [*] days prior to the anticipated first commercial sale.
(iii) Warranties. Focal warrants that the Light System shall be free from
defects in workmanship or material for a period of one (1) year from
the date of receipt of such Light Systems by Focal. Focal's warranty
for light bulbs contained in the Light System shall be limited to
six (6) months from date received by Focal. If any Light System does
not conform to the above warranty, Focal shall be obligated to
repair or replace such Light System at its own expense, and ship
such repaired or replacement Light System back to either Ethicon or
the applicable customer at its own expense. All defective Light
Systems returned to Ethicon by customers which are covered by the
foregoing warranty shall be shipped to Focal at Focal's expense for
such repair or replacement.
(iv) Servicing. Focal shall provide directly or through a third party,
after-warranty servicing of the Light Systems. All service costs
provided by Focal or its designated service representative shall be
billed to the customer by Ethicon and Ethicon shall reimburse Focal
for all such service costs within thirty (30) days after the receipt
of payment by the customer for such servicing.
SECTION 8
GENERALLY APPLICABLE TERMS
(a) Representations and Warranties.
(i) Focal represents and warrants to Ethicon that:
* Confidential treatment has been requested for marked portion
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(A) each Product supplied by Focal pursuant to this Agreement
shall be (i) manufactured in accordance with the
Specifications, the Manufacturing Standards and applicable
Regulatory Approvals for such Product, and (ii) free from
defects in materials, design or workmanship;
(B) each Product sold to Ethicon by Focal pursuant to this
Agreement shall be free and clear of all liens, claims and
encumbrances of any nature;
(C) to Focal's knowledge, as of the effective date of this
Agreement, the manufacture, use or sale of the Initial
Products does not infringe any valid, issued patents or
copyrights, or involve misappropriation of any trade secrets
or proprietary rights of any person;
(D) to Focal's knowledge, as of the effective date of this
Agreement, with respect to the Products, there are no pending
or threatened suits, claims, or actions of any type whatsoever
asserted against Focal;
(E) as of the effective date of this Agreement, (i) the UT
Agreement is in full force and effect; (ii) to Focal's best
knowledge, the UT Agreement is not subject to any challenge,
claim, breach, default or other similar action or threat
thereof, (iii) Focal, and to Focal's best knowledge, UT, is in
compliance in all material respects with the UT Agreement, and
(iv) Focal has not received any communication related to the
UT Agreement which may materially impact Focal's rights
thereunder or Ethicon's rights under this Agreement;
(F) all presently filed Patents having claims covering or related
to the manufacture, sale or distribution of the Initial
Products are listed in Exhibit D;
(G) all necessary corporate and other authorizations, consents and
approvals which are necessary or required for the entering
into of this Agreement have been duly obtained; and
* Confidential treatment has been requested for marked portion
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<PAGE>
(H) the entering into of this Agreement by Focal will not (i)
violate any provision of U.S., state or local law, statute,
rule or regulation or any ruling, writ, injunction, order,
judgment or decree of any court, administrative agency or
other governmental body or (ii) conflict with or result in any
breach of any of the terms, conditions or provisions of, or
constitute a default (or give rise to any right of
termination, cancellation or acceleration) under, or result in
the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of Focal,
under its organizational documents, as amended to date, or any
material note, indenture, mortgage, lease, agreement
(including, but not limited to, the UT Agreement), contract,
purchase order or other instrument, document or agreement to
which Focal is a party or by which it or any of its properties
or assets is bound or affected.
(ii) Ethicon represents and warrants to Focal that:
(A) all necessary corporate and other authorizations, consents and
approvals which are necessary or required for the entering
into of this Agreement have been duly obtained; and
(B) the entering into of this Agreement by Ethicon will not (i)
violate any provision of U.S., state or local law, statute,
rule or regulation or any ruling, writ, injunction, order,
judgment or decree of any court, administrative agency or
other governmental body or (ii) conflict with or result in any
breach of any of the terms, conditions or provisions of, or
constitute a default (or give raise to any right of
termination, cancellation or acceleration) under, or result in
the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of Ethicon
under its organizational documents, as amended to date, or any
material note, indenture, mortgage, lease, agreement,
contract, purchase order or other instrument, document or
agreement in which Ethicon is a party or by which it or any of
its properties or assets is bound or affected.
(iii) Disclaimer. THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS
AGREEMENT ARE IN LIEU OF ALL
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<PAGE>
OTHER REPRESENTATIONS AND WARRANTIES. FOCAL AND ETHICON DISCLAIM ALL
OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, WITH RESPECT TO
PRODUCTS, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL EITHER FOCAL OR
ETHICON BE LIABLE FOR SPECIAL, INDIRECT, INCIDENTAL CONSEQUENTIAL OR
PUNITIVE DAMAGES ARISING OUT OF THIS AGREEMENT BASED ON CONTRACT,
TORT OR ANY OTHER LEGAL THEORY.
(b) Indemnification. In order to distribute among themselves the
responsibility for claims arising out of this Agreement, and except
as otherwise specifically provided for herein, the parties agree as
follows:
(i) Focal agrees to defend and indemnify and hold Ethicon harmless
against any and all claims, suits, proceedings, expenses,
recoveries and damages, including court costs and reasonable
attorneys fees and expenses, arising out of, based on, or
caused by, the breach by Focal of any representation or
warranty contained in this Agreement, in each case except to
the extent that such arise from or are aggravated by acts of
or failure to act by Ethicon. Ethicon will promptly notify
Focal of any such claim or demand which comes to its
attention.
(ii) Ethicon agrees to defend and indemnify and hold Focal harmless
against any and all claims, suits, proceedings, expenses,
recoveries, and damages including court costs and reasonable
attorneys fees and expenses, in connection with any of the
Products sold by Ethicon or its Affiliates arising out of,
based on, or caused by (A) statements, whether written or
oral, made or alleged to be made by Ethicon or its Affiliates
on the packaging or labelling of any of the Products, or in
the advertising, publicity, promotion, or sale of any of the
Products, (B) the manufacture, storage, sale, shipment,
promotion or distribution of the Products by Ethicon or its
Affiliates, or (C) the breach by Ethicon of any representation
or warranty contained in this Agreement, in each case except
to the extent that such arise from or are aggravated by acts
of or failure to act by Focal. Focal will promptly notify
Ethicon of any such claim or demand which comes to its
attention.
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(c) Other Responsibilities of Focal. During the term of this Agreement,
Focal shall:
(i) Refer to Ethicon all customers' inquiries and correspondence
which it receives relating to the sale of the Products in the
Territory, as well as all correspondence or communications it
receives with respect to any malfunction or failure of any
Product;
(ii) Make available to Ethicon such information and knowledge in
Focal's possession concerning the Products, their qualities
and uses, as will aid Ethicon in improving the sales of
Products;
(iii) Adhere to all law, rules and regulations applicable to the
manufacture and supply of the Products under this Agreement.
(d) Insurance. Focal agrees to procure and maintain in full force and
effect during the term of this Agreement valid and collectible
insurance Policies in connection with the supply of Products
pursuant to this Agreement, which policies shall provide for the
type of insurance and amount of coverage described in Exhibit K.
Upon Ethicon's request, Focal shall provide to Ethicon a certificate
of coverage or other written evidence reasonably satisfactory to
Ethicon of such insurance coverage.
(e) Term.
(i) This Agreement shall remain in effect for a period of ten
(10) years from the date of this Agreement and may be renewed
thereafter for successive additional periods of one (1) year
each by Ethicon upon at least ninety (90) days' notice prior
to the expiration of the applicable period; provided, however,
that, unless terminated earlier by Ethicon in accordance with
the terms of this Agreement, solely for purposes of that part
of the Territory covered by the E.U., the exclusivity of the
Patent and Know-How licenses granted pursuant to Section
3(a)(i) shall remain exclusive only for (A) ten (10) years
from the date of First Commercial Sale in the E.U. of any
Product manufactured by or on behalf of Ethicon with respect
to Know-How and (B) for the life of any Existing Patents
issued in the applicable E.U. country with respect to such
Existing Patent.
* Confidential treatment has been requested for marked portion
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<PAGE>
(ii) In addition to the foregoing, Ethicon may terminate this
Agreement upon written notice to Focal on or after the third
anniversary of this Agreement upon no less than 12 month's
prior written notice to Focal.
(iii) Focal expressly acknowledges that the termination provisions
contained in this Section 8(e) are reasonable, considering the
intended nature and scope of this Agreement, and considering
the investments and undertakings required on the part of
Ethicon in connection herewith.
(f) Events of Default. The occurrence of any one or more of the
following acts, events or occurrences shall constitute an ""Event of
Default" under this Agreement.
(i) either party becomes the subject of a Bankruptcy Event; or
(ii) either party breaches any material provision of this Agreement
and fails to remedy such default within thirty (30) days after
receipt of notice thereof; provided, however, and subject to
Section 7(1)(ii)(A)(2), that in the event of such a breach
which cannot be remedied within such thirty (30) day period,
so long as the breaching party is diligently attempting to
remedy such breach, an Event of Default shall not have
occurred until three (3) months after notice of such breach
(unless such breach is cured during such period).
(g) Certain Rights After an Event of Default. In addition to those
rights which may be available at law or equity, the following
additional rights shall be available upon the occurrence of an Event
of Default under this Agreement or in the event that Focal
terminates this Agreement pursuant to Section 7(e)(iii):
(i) If the Event of Default is caused by Ethicon, Focal may
terminate this Agreement upon written notice thereof to
Ethicon. Upon termination of this Agreement by Focal upon the
occurrence of an Event of Default or pursuant to Section
7(e)(iii), Ethicon shall have one hundred eighty (180) days in
which to sell out its stock of any Products it possesses or
has committed to purchase under this Agreement, unless Focal
has
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<PAGE>
informed Ethicon in such termination notice that it desires to
purchase such stock. In the event Focal provides such notice,
Focal shall repurchase such stock (except for stock which is
required by Ethicon in order to fill purchase orders received
prior to the termination of the Agreement) at Ethicon's landed
cost (the Purchase Price, plus all shipping, handling, customs
and other costs incurred by Ethicon to have such Product reach
Ethicon's facilities). In addition, upon any such termination
Focal shall have the right to cross-reference any Regulatory
Approval held in the name of Ethicon.
(ii) If the Event of Default is caused by Focal, Ethicon may, in
its discretion, either (i) terminate this Agreement in its
entirety or (ii) if the Event of Default arises out of a
breach by Focal of the supply obligations with respect to a
Product set forth in Section 7, assume the responsibility for
the manufacture of such Product pursuant to Section
7(1)(ii)(A).
SECTION 9
MISCELLANEOUS
(a) Confidentiality; Press Releases.
(i) Ethicon and Focal will be exchanging information relating to
the Products at the inception of and from time to time during
the term of this Agreement. Any such information which is
considered by the disclosing party to be confidential will be
identified in writing as confidential information or, if
disclosed orally or in another non-written manner, shall be
confirmed in writing as being confidential promptly after the
disclosure thereof. The party receiving such information will
maintain the information in confidence using the same standard
of care it uses to maintain its own information in confidence.
Such obligation of confidentiality shall not apply to
information which (i) is known to the receiving party prior to
the disclosure, (ii) is publicly known as of the date of the
disclosure, (iii) becomes publicly known after the date of
disclosure through no fault of the receiving party, (iv) is
received from a third party who has no obligation of
confidentiality to the disclosing party or (v) is developed
independently by the receiving party. Such
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<PAGE>
obligation of confidentiality shall continue for a period of
seven (7) years from the date of disclosure of the
confidential information.
(ii) Notwithstanding the foregoing Section 9(a)(i), Ethicon shall
be permitted to disclose to its wholesalers and other direct
customers such confidential information relating to the
Products as Ethicon shall reasonably determine to be necessary
in order to effectively market and distribute the Products,
provided that such entities undertake the same confidentiality
obligation as Ethicon has with respect to Focal's confidential
information.
(iii) Neither party will originate any publicity, news release, or
other public announcement, written or oral, whether to the
public press or otherwise, relating to any amendment hereto or
to performance hereunder or the existence of an arrangement
between the parties, without the prior written approval of the
other party, such approval not to be unreasonably withheld.
(iv) Neither party shall use the name of the other for advertising
or promotional claims without the prior written consent of the
other party.
(b) Survival. Those provisions of this Agreement dealing with rights and
obligations upon and/or after termination of this Agreement shall
survive termination of this Agreement to the extent necessary to
give effect to such provisions.
(c) Penalties. If either party terminates this Agreement in accordance
with the terms herein, the terminating party shall owe no penalty or
indemnity to the terminated party on account of such termination.
(d) Independent Contractor. Focal is an independent contractor and shall
have no authority to obligate Ethicon in any respect nor hold itself
out as having any such authority. All personnel of Focal shall be
solely employees of Focal and shall not represent themselves as
employees of Ethicon.
(e) Binding Effect; Benefits; Assignment.
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<PAGE>
(i) This Agreement shall enure to the benefit of and be binding
upon the parties hereto and their respective permitted
successors and assigns. Nothing contained herein shall give to
any other person any benefit or any legal or equitable right,
remedy or claim.
(ii) Anything contained herein to the contrary notwithstanding,
this Agreement shall not be assignable by Focal, without the
prior written consent of Ethicon, except that with respect to
the assignment of this Agreement to an Affiliate of Focal,
such consent will not be unreasonably withheld.
(iii) Ethicon shall be permitted to assign all or part of this
Agreement (i) to any Affiliate of Ethicon with an emphasis on
intraoperative wound closure upon written notice to Focal,
(ii) upon the sale of all or substantially all of the assets
or business of Ethicon, to the successor of such assets or
business upon written notice to Focal, and (iii) to such other
Affiliate of Ethicon or third party as Ethicon shall
determine, such assignment to be subject to Focal's consent,
such consent not to be unreasonably withheld. In the case of
all such assignments, such assignment shall be subject to the
assignee agreeing in writing to assume the benefits and
obligations of this Agreement.
(f) Entire Agreement, Amendments. This Agreement and the other writings
referred to herein or delivered pursuant hereto which form a part
hereof contain the entire understanding of the parties with respect
to its subject matter. This Agreement may be amended only by a
written instrument duly executed by the parties hereto. To the
extent of any conflict or inconsistency between this Agreement and
any purchase order, purchase order release, confirmation, acceptance
or any similar document, the terms of this Agreement shall govern.
(g) Remedies. Unless otherwise expressly provided, all remedies
hereunder (including, but not limited to, those remedies provided
for in Section 8(g) hereof), are cumulative, are in addition to any
other remedies provided for by law and may, to the extent permitted
by law, be exercised concurrently or separately, and the exercise of
any one remedy shall not be deemed to be an election of such
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<PAGE>
remedy or to preclude the exercise of any other remedy.
(h) Force Majeure.
(i) The obligations of Focal and Ethicon hereunder shall be
subject to any delays or non-performance caused by acts of
God, earthquakes, fires, floods, explosion, sabotage, riot,
accidents; orders of, or failure to issue all necessary
permits or licenses by, regulatory, governmental, or military
authorities; strikes, lockouts or labor trouble; perils of the
sea; or any other similar cause beyond the reasonable control
of either party (an "Event of Force Majeure"), and each party
shall be under no liability to the other for anything which
would constitute a breach of this Agreement arising by reason
of such matters. If either party is unable to perform one of
its obligations under this Agreement as a result of an Event
of Force Majeure, it shall so notify the other party in
writing as soon as reasonably practicable, but in no event
later than ten (10) days following the date by which such
obligation was to have been fulfilled (a "Force Majeure
Notice"). The party which is not performing its obligation
under this Agreement as a result of an Event of Force Majeure
shall use diligent efforts to resume compliance with this
Agreement as soon as possible. Should the Event of Force
Majeure continue unabated for a period of thirty (30) days or
more, the parties shall enter into good faith discussions with
a view to alleviating its affects or to agreeing upon such
alternative arrangements as may be fair and reasonable having
regard to the circumstances prevailing at that time.
(ii) In the event that such alternative arrangements cannot be
agreed upon with thirty (30) days after occurrence of the
Event of Force Majeure, and in the event such Event of Force
Majeure does not result in an interruption of supply to
Ethicon or its Affiliates of the Products in accordance with
the terms of this Agreement, then the non-performing party
shall continue to diligently attempt to alleviate such Event
of Force Majeure until it is removed or eliminated.
(i) Notices. All notices, claims, certificates, requests, demands and
other communications hereunder shall be in writing and shall be
delivered personally or sent by facsimile transmission, air courier,
or registered or certified
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<PAGE>
mail, return receipt requested, addressed as follows:
if to Focal to:
Focal, Inc.
Four Maguire Road
Lexington, Massachusetts 02173
Attention: President
Fax: 617-280-7802
with a copy to:
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Attention: Steven D. Singer, Esq.
Fax: 617-526-5000; and
if to Ethicon to:
Ethicon, Inc.
Route 22
Somerset, New Jersey 08876
Attention: Vice President, Growth Technologies
and New Business Development
Fax: 1-908-218-3492
with a copy to:
Office of General Counsel
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933 U.S.A.
Fax: 1-908-524-2788;
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<PAGE>
or to such other address as the party to whom notice is to be given
may have furnished to the other parties in writing in accordance
herewith. Any such communication shall be deemed to have been
delivered (i) when delivered, if delivered personally, (ii) when
sent (with confirmation received), if sent by facsimile transmission
on a business day, (iii) on the first business day after dispatch
(with confirmation received), if sent by facsimile transmission on a
day other than a business day, (iv) on the third business day after
dispatch, if sent by air courier, and (v) on the seventh business
day after mailing, if sent by mail.
(j) Waivers. It is further understood and agreed that no failure or
delay by either party hereto in exercising any right, power or
privilege under this Agreement shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or
further exercise of any right, power or privilege hereunder.
(k) Counterparts. This Agreement may be executed in any number of
counterparts, and execution by each of the parties of any one of
such counterparts will constitute due execution of this Agreement.
Each such counterpart hereof shall be deemed to be an original
instrument, and all such counterparts together shall constitute but
one agreement.
(l) Headings. The article and section headings contained in this
Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement.
(m) Governing Law; Dispute Resolution.
(i) Excepting only actions and claims relating to actions
commenced by a third party against Focal or Ethicon
(including, without limitation, actions for injuries caused by
a Product, or in respect to a patent infringement claim), any
controversy or claim arising out of or relating to this
Agreement, or the parties' decision to enter into this
Agreement, or the breach thereof, shall be settled by
arbitration in accordance with the arbitration rules of the
American Arbitration Association, and judgment upon the award
rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
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<PAGE>
(ii) The arbitration shall be held before a panel of three (3)
arbitrators, one each being selected by Focal and Ethicon, and
the third being selected by such two arbitrators. Arbitration
shall be in the Borough of Manhattan, New York City, New York,
and the arbitrators shall apply the substantive law of the
State of New Jersey.
(iii) It shall be the duty of the arbitrators to set dates for
preparation and hearing of any dispute and to expedite the
resolution of such dispute. The arbitrators shall permit and
facilitate discovery, taking into account the needs of the
parties and the desirability of making discovery expeditious
and cost-effective. The arbitrators will set a discovery
schedule with which the parties will comply and attend
depositions if requested by either party. The arbitrators will
entertain such presentation of sworn testimony or evidence,
written briefs and/or oral argument as the parties may wish to
present; however, no testimony or exhibits will be admissible
unless the adverse party was afforded an opportunity to
examine such witness and to inspect and copy such exhibits
during the pre-hearing discovery phase. The arbitrators shall
among his other powers and authorities, have the power and
authority to award interim or preliminary relief.
(iv) The arbitrators shall not award either party punitive damages
and the parties shall be deemed to have waived any right to
such damages. A qualified court reporter will record and
transcribe the proceedings. The decision of the arbitrators
will be in writing and judgment upon the award by the
arbitrators may be entered into any court having jurisdiction
thereof. Prompt handling and disposal of the issue is
important. Accordingly, the arbitrators are instructed to
assume adequate managerial initiative and control over
discovery and other aspects of the proceeding to schedule
discovery and other activities for substantially continuous
work, thereby expediting the arbitration as much as is deemed
reasonable to him, but in all events to effect a final award
within 365 days of the arbitrators' selection or appointment
and within 20 days of the close of evidence.
(v) The proceedings shall be confidential and the arbitrators
shall issue appropriate protective orders to safeguard both
parties'
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<PAGE>
confidential information. The fees of the arbitrators shall be
paid by the losing party which shall be designated by the
arbitrators. If the arbitrators are unable to designate a
losing party, they shall so state and the fees shall be split
equally between the parties.
(n) Severability. In the event that any provision of this Agreement
would be held in any jurisdiction to be invalid, prohibited or
unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more
narrowly drawn so as not to be invalid, prohibited or unenforceable
in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of
this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
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<PAGE>
IN WITNESS WHEREOF, duly authorized representatives of the parties hereto
have duly executed this Agreement as of the date first above written.
ETHICON, INC. FOCAL, INC.
By: /s/ Patrick J. O'Neill 1/3/97 By: /s/ David M. Clapper 1/2/97
---------------------- --------------------
Name: Patrick J. O'Neill Name: David M. Clapper
Title: Vice President, Title: President and CEO
Growth Technologies and
New Business Development
ORIGINAL
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EXHIBIT A
DELIVERY SYSTEM
Summary:
The Lung Sealant Product and or the Dural Sealant Product are applied to
tissue via a Delivery System consisting of separate applicators for the
primer and sealant solutions.
[*]
* Confidential treatment has been requested for marked portion
<PAGE>
EXHIBIT B -- DURAL SEALANT FORMULATION
Summary:
The Dural Sealant Formulation consists of a crosslinkable hydrogel that can
be crosslinked by IN SITU photo-polymerization. It is designed to be faster
absorbing and exhibit less swelling than the Lung Sealant Formulation,
making it particularly useful for application to tissue such as the dura. It
is anticipated that the dosage size will be adequate for a single procedure
[*] each for the separate primer and sealant formulations.
[*]
* Confidential treatment has been requested for marked portion
<PAGE>
EXHIBIT C--Lung Sealant Formulation
Summary:
The Lung Sealant Formulation consists of a crosslinkable hydrogel that can be
crosslinked by IN SITU photo-polymerization. The Lung Sealant Formulation is
applied as a laminate composed of a primer layer and a sealant layer. [*]
[*]
* Confidential treatment has been requested for marked portion
<PAGE>
EXHIBIT D
PATENTS
Four patent families are covered by this agreement.
1. PHOTOPOLYMERIZABLE BIODEGRADABLE HYDROGELS AS TISSUE CONTACTING
MATERIALS AND CONTROLLED RELEASE CARRIERS, by J. A. Hubbell, C. P. Pathak,
and A. S. Sawhney.
Licensed from the University of Texas (UTSB 496)
Focal Series 010
[*]
Two issued U.S. patents: 5,410,016, 5,567,435; [*]
2. GELS FOR ENCAPSULATION OF BIOLOGICAL MATERIAL, by J. A. Hubbell,
C. P. Pathak, A. S. Sawhney and N. P. Desai.
Licensed from the University of Texas (UTSB 493)
Focal Series 009
[*]
Two issued U.S. patents 5,529,914, 5,573,934; [*]
3. INITIATOR PRIMING FOR IMPROVED ADHERENCE OF GELS TO SUBSTRATES,
by D. A. Melanson, A. S. Sawhney and others.
Owned by Focal (note: some divisionals may also be assigned to U. Texas,
where priority to USTB 493 or 496 is appropriate).
Focal Series 110
[*]
4. APPARATUS & METHOD FOR LOCAL APPLICATION OF POLYMERIC MATERIAL TO TISSUE,
by Stephen C. Rowe, Jeffrey A. Hubbell, Stephen J. Herman, and Vae Sun
Owned by Focal
Focal Series 012
[*]
* Confidential treatment has been requested for marked portion
<PAGE>
EXHIBIT E
[Intentionally omitted]
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EXHIBIT F
ETHICON STANDARDS
ATTACHMENTS:
- Ethicon Company Policy for External Manufacturing
- Ethicon Company Procedure for External Manufacturers
- J&J Guideline - Submission of Contract Sterilizer Validation Data
<PAGE>
EXHIBIT G
Part I
PERCENT OF NET SELLING PRICE NET SALES FOR A PRODUCT
- ---------------------------- ------------------------
[*] $0 to [*] million
[*] greater than [*] million to [*] million
[*] greater than [*] million to [*] million
[*] greater than [*] million to [*] million
[*] greater than [*] million to [*] million
[*] greater than [*] million to [*] million
[*] greater than [*] million
Part II
PERCENT OF NET SELLING PRICE NET SALES FOR A PRODUCT
- ---------------------------- ------------------------
[*] $0 to [*] million
[*] greater than [*] million to [*] million
[*] greater than [*] million to [*] million
[*] greater than [*] million to [*] million
[*] greater than [*] million to [*] million
[*] greater than [*] million
* Confidential treatment has been requested for marked portion
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EXHIBIT H
INITIAL SPECIFICATIONS
(LUNG SEALANT PRODUCT)
FOCAL, INC.
PRODUCT DEVELOPMENT SPECIFICATION
PRODUCT: Ethicon Lung Sealant System, Commercial Product
SPEC. NO. DP001 REVISION NO. 000
PREPARED BY: Dean Pichon DATE OF ORIG. PREP. October 11, 1996
REVISION DATE: 13DEC96
1. PRODUCT DESCRIPTION:
The Lung Sealant Product is designed at seal air leaks created during open
pulmonary surgical procedures. The Lung Sealant Product is delivered as a
two component system consisting of a lower viscosity primer and a higher
viscosity sealant. The applied materials are polymerized using a custom
visible light source. The materials hydrolyze and are absorbed by the body.
The sealant system consists of 4 sub-systems:
- Primer and Sealant formulations
- Separate applicators for applying primer and sealant
- Light Wand to provide directed light energy to the application site
- Light source
2. SPECIFICATION:
See attachment
<PAGE>
APPLICATION SYSTEM
DESIGN SPECIFICATION
REVISION: gkDECEMBER 19, 1996
2.0 SYSTEM SPECIFICATIONS.
2.1 PRIMER AND SEALANT
[*]
2.2 APPLICATORS
Separate applicators are used to apply primer and sealant. The applicators'
attributes are listed below:
PRIMER APPLICATOR
[*]
[*]
* Confidential treatment has been requested for marked portion
<PAGE>
[*]
SEALANT APPLICATOR
[*]
2.3 PROCEDURE KIT PACKAGING
[*]
2.4 LIGHT WAND
[*]
* Confidential treatment has been requested for marked portion
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[*]
2.5 LIGHT SOURCE [*]
[*]
* Confidential treatment has been requested for marked portion
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EXHIBIT I
Final Specifications
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-84-
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EXHIBIT J
Escrow Agreement
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-85-
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EXHIBIT K
INSURANCE COVERAGE
Upon First Commercial Sale, Focal will obtain and maintain the following
insurance coverage:
- - Commercial General Liability coverage in the amount of [*] million U.S.
- - Product Liability Insurance coverage in the amount of [*] million U.S.
per occurrence, [*] million in aggregate.
- - As Focal's business continues to grow after First Commercial Sale, Focal
will consider in good faith securing additional insurance coverage as
appropriate, taking into consideration increases in aggregate amounts of
Commercial General Liability and Product Liability Coverage, up to [*]
million for each.
Such policies shall name Ethicon, Inc. as additional insured and shall
provide for 30 days written notice of cancellation. Focal shall annually
provide Ethicon with a Certificate of Insurance evidencing required
coverage.
* Confidential treatment has been requested for marked portion
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated February 7, 1997
(except as to the first paragraph of Note 10, as to which the date is December
8, 1997), in Amendment No. 5 to the Registration Statement (Form S-1 No.
333-38379) and related Prospectus of Focal, Inc.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
December 10, 1997
