<PAGE>
As filed with the Securities and Exchange Commission on February 9, 1999
Registration No. 333-66259
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
Phytera, Inc.
(Exact name of registrant as specified in its charter)
Delaware 8731 04-3159045
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
377 Plantation Street
Worcester, Massachusetts 01605
(508) 792-6800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
MALCOLM MORVILLE, Ph.D.
President and Chief Executive Officer
Phytera, Inc.
377 Plantation Street
Worcester, Massachusetts 01605
(508) 792-6800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
LYNNETTE C. FALLON, ESQ. ALAN L. JAKIMO, ESQ.
Palmer & Dodge LLP Brown & Wood LLP
One Beacon Street One World Trade Center
Boston, Massachusetts 02108 58th Floor
(617) 573-0100 New York, New York 10048
(212) 839-5300
----------------
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, 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,
check the following box. [_]
----------------
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
Section 8(a), may determine.
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<PAGE>
Explanatory Note
This Registration Statement contains two forms of prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "US
Prospectus") and (ii) the other to be used in connection with a concurrent
offering outside of the United States and Canada (the "European Prospectus").
The European Prospectus will be produced in English and Danish. The US
Prospectus and the European Prospectus are identical in all respects except for
the front cover page and back cover page of the European Prospectus, both of
which are included herein after the final page of the US Prospectus as pages X-
1 and X-2 and are labeled "Alternate Pages for European Prospectus." Final
forms of each of the Prospectuses will be filed with the Securities and
Exchange Commission under Rule 424 (b).
Additionally, an Application Form included as page X-3 will be delivered with
the Danish language version of the European Prospectus to Danish investors in
the European offering.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is declared effective. This prospectus is +
+not an offer to sell these securities and we are not soliciting an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 9, 1999
US PROSPECTUS
2,500,000 Shares
[Logo of Phytera, Inc. appears here]
Common Stock
This is an initial public offering of the shares of common stock of Phytera,
Inc. The shares of common stock will be offered to the public in Denmark.
Additionally, shares of common stock will be offered in private placements in
other European countries. The offering in the United States, Canada and Belgium
will be limited to institutional investors. There is currently no public market
for these shares. Phytera expects that the public offering price will be
between $12.00 and $14.00 per share.
In the United States and Canada, we are offering 750,000 shares of common
stock. In Europe, we are offering 1,750,000 shares of common stock.
We have applied for admission to trading and quotation of the common stock on
the European Association of Securities Dealers Automated Quotation system,
called EASDAQ, and for listing on the Copenhagen Stock Exchange, called the
CSE. We expect that these listings will become effective and that trading in
the shares of common stock will begin promptly after the initial public
offering price is determined through negotiations between Phytera and the
underwriters. Our trading symbol on EASDAQ and our short name on the CSE will
be PHYT.
Our business involves significant risks. These risks are described under the
caption "Risk Factors" beginning on page 8.
None of EASDAQ, the CSE, the US Securities and Exchange Commission nor any
state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
------------
<TABLE>
<CAPTION>
Per
Share Total
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discounts and commissions.............................. $ $
Proceeds, before expenses, to Phytera............................... $ $
</TABLE>
The underwriters for the offering in the United States and Canada may also
purchase up to an additional 112,500 shares of common stock and the managers
for the offering in Europe may also purchase up to an additional 262,500 shares
of common stock, an aggregate of 375,000 shares, at the public offering price,
less the underwriting discounts and commissions, within 30 days from the date
of this prospectus to cover over-allotments.
In the distribution of the offering as a firm commitment underwriting, the
underwriters will purchase the offered shares of common stock from Phytera and
resell the shares to investors.
------------
SG COWEN
CARNEGIE INC.
BANCBOSTON ROBERTSON STEPHENS
, 1999
<PAGE>
[Graphic: The graphic illustrates the various elements of Phytera's
Combinatorial Drug Discovery Program. Along the length of the page will be a
series of photographs, artist's renderings and other graphics, each
illustrating one of the elements of Phytera's Combinatorial Drug Discovery
Program.]
This diagram illustrates our Combinatorial Drug Discovery Program. We have
identified several lead structures and are developing one candidate drug. We
have not yet conducted any clinical trials, obtained any regulatory approvals,
or commercialized any drug product. Drug discovery and development involves
technological and commercial risks. Our Program and related product development
activities could fail because of these risks.
ExPAND(R) and (U)MARINE(R) are registered trademarks of Phytera. ENRICH(TM)
and PINACLE(TM) are trademarks of Phytera for which there are applications for
registration pending in the US Patent and Trademark Office. MANIFOLD(TM) is a
trademark of Phytera for which there is an application for registration pending
in the European Trademark Office. All other trademarks and registered
trademarks used in this prospectus are the property of their respective owners.
----------------
<PAGE>
Information About This Prospectus
Phytera was incorporated in Delaware in May 1992 and operates three wholly-
owned subsidiaries, Phytera Ltd. in the United Kingdom and Phytera A/S and
Phytera Symbion ApS in Denmark. Phytera's headquarters and executive offices
are located at 377 Plantation Street, Worcester, Massachusetts 01605, US and
its telephone number is (508) 792-6800.
On September 17, 1998, the Board of Directors of Phytera authorized this
offering.
Approval by the Belgian Banking and Finance Commission
The English language prospectus has been approved by the Belgian Banking and
Finance Commission, the Commission Bancaire et Financiere/Commissie voor het
Bank-en Financiewezen, called the CBF, on December 29, 1998 in accordance with
Article 29ter, (S)1, par. 1 of Royal Decree n(degrees) 185 of July 9, 1935 and
Article 18 of the Royal Decree of September 18, 1990 on the prospectus to be
published for the admission of securities to listing on the first market of a
stock exchange, which transposes into Belgian law the provisions of Directive
80/390/EEC. The approval of this prospectus by the CBF does not extend to the
Danish Tax Considerations section of this prospectus or to the summary of
certain differences between US GAAP and Danish GAAP nor does it imply any
judgment as to the appropriateness or the quality of this offering, the common
stock nor of the situation of Phytera. The notice prescribed by Article 29,
(S) 1 of the Royal Decree n(degrees) 185 of July 9, 1935 will appear in the
financial press prior to the first day of trading on EASDAQ. Based on the
approval by the CBF, this prospectus is recognized by the CSE in compliance
with Directive 80/390/EEC.
No Public Offer in the United Kingdom
Phytera has not authorized any offer of shares of common stock to the public
in the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995. The shares of common stock may not lawfully be offered or
sold to persons in the United Kingdom except in circumstances which do not
result in an offer to the public in the United Kingdom within the meaning of
these regulations or otherwise in compliance with all applicable provisions of
the regulations.
Responsibility for the Prospectus and
Declaration of Conformity
Phytera, here represented by the Board of Directors, confirms that, to the
best of its knowledge, the information given in this prospectus is in
accordance with the facts in all material respects and contains no omissions
likely to affect the import of the prospectus in any material respect. Under US
federal securities laws, Phytera's Chief Executive Officer, Chief Financial
Officer and members of the Board of Directors are generally liable, subject to
certain defenses, for untrue statements of material fact in this prospectus and
omissions of material fact which are required to be stated in this prospectus
or necessary to make the statements in this prospectus not misleading.
In the case of any doubt about the contents or the meaning of the information
of this document, an authorized or professional person who specializes in
advising on the acquisition of financial instruments should be consulted.
Preparation of the Prospectus
This prospectus has been prepared in accordance with the rules and
regulations of the US Securities and Exchange Commission and EASDAQ and in
compliance with the Royal Decree of September 18, 1990 on the prospectus to be
published for the admission of securities to listing on the first market of a
stock exchange, which transposes into Belgian law the provisions of Directive
80/390/EEC. This prospectus has been produced in English and Danish for use in
connection with this offering. The Danish language version of this prospectus
will not be circulated in the US. In the event of any inconsistency between the
Danish language version and the English language version, the English language
version shall prevail.
3
<PAGE>
Experts
Phytera's audited Consolidated Financial Statements as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997
have been audited by Arthur Andersen LLP, independent public accountants, as
stated in their report with respect to the Consolidated Financial Statements
and included in this prospectus upon the authority of Arthur Andersen LLP as
experts in auditing and accounting. Arthur Andersen LLP's mailing address is
225 Franklin Street, Boston, MA 02110-2812, US.
Where To Find More Information About Phytera
Phytera has filed with the US Securities and Exchange Commission a
registration statement under the Securities Act of 1933. This prospectus does
not contain all of the information contained in the registration statement and
its exhibits and schedules. For further information with respect to Phytera and
the common stock being offered, please refer to the registration statement and
its accompanying exhibits and schedules. Statements in this prospectus as to
the contents of any contract or other document are not necessarily complete.
Refer to the exhibits to the registration statement for a complete copy of
these contracts and other documents. The registration statement, including its
exhibits, may be inspected and copied without charge at the SEC's principal
office located at 450 Fifth Street, Judiciary Plaza, NW, Washington, DC 20549,
US. Copies may also be obtained by mail upon request and payment of prescribed
fees to the Public Reference Section at the SEC's principal office. The SEC
also maintains a web site at http://www.sec.gov that contains reports, proxy
and information statements, as well as other information regarding registrants
that file electronically with the SEC.
Phytera intends to furnish its stockholders with the following documents as
they become available:
. annual reports containing audited financial statements, and
. quarterly reports for the first three quarters of each fiscal year
containing interim unaudited financial information.
You may obtain copies of all documents that Phytera files with the SEC upon
request to Phytera at its executive offices at 377 Plantation Street,
Worcester, MA 01605, US.
Companies approved for trading on EASDAQ and CSE are required to publish
relevant financial and other information regularly and to keep the public
informed of all events likely to affect the market price of their securities.
Price sensitive information will be made available to investors in Europe
through EASDAQ-Reuters Regulatory Company Reporting System, the CSE's internal
information system and other international information vendors. Phytera also
will provide a summary of its quarterly and annual financial statements to its
stockholders in Europe across the EASDAQ Company Reporting System. Investors
who do not have direct access to these information systems should ask their
financial intermediary how this information will be provided to them.
Copies of both the English language and Danish language prospectuses will be
made available, at no cost, upon prior written request to:
. SG Cowen International L.P., One Angel Court, London EC2R 7HJ, United
Kingdom, telephone +44 (171) 696-0034
. Carnegie Bank A/S, Overgaden neden Vandet 9b, DK-1414 Copenhagen K,
Denmark, telephone +45 32 88 02 00
. BancBoston Robertson Stephens International Ltd., 105 Piccadilly, London
W1V 9FN, United Kingdom, telephone +44 (171) 518-7000
Copies of the English language and Danish language prospectuses and Phytera's
Restated Certificate of Incorporation and By-laws will be available for
inspection at the offices of EASDAQ, 56 Rue des Colonies, Box 15, B-1000
Brussels, Belgium.
4
<PAGE>
PROSPECTUS SUMMARY
The following is just a summary. Potential investors should carefully read
the more detailed information contained in this prospectus, including the
Consolidated Financial Statements and the notes to the Consolidated Financial
Statements. The shares of common stock being offered involve a high degree of
risk. Investors should carefully consider the information set forth under the
heading "Risk Factors." We urge potential investors to read this prospectus in
its entirety.
The Company
Phytera, Inc. is an international biopharmaceutical company with operations
in the United States, Denmark and the United Kingdom. We apply a range of
proprietary technologies to create novel chemical libraries from plant cells
and marine microbes that we grow and manipulate in cell culture. These chemical
libraries contain a large number of chemical compounds that we and our partners
are evaluating as potential new drugs.
We evaluate our chemical libraries for therapeutic utility in laboratory
tests for activity in different diseases. These diseases include bacterial,
fungal and viral infections, cancer, inflammation, allergy, asthma, depression,
memory and attention deficit disorders, diabetes, stroke and heart attack. We
conduct some of these testing programs in collaboration with our corporate
partners, including Eli Lilly and Company, Chiron Corporation, Tsumura & Co.,
NeuroSearch A/S, Galileo Laboratories, Inc. and Nycomed Amersham plc. Our
internal laboratory testing programs focus on the discovery and development of
drugs to treat resistant bacterial, fungal and viral infections. We apply
modern genetic engineering techniques to develop proprietary laboratory tests
that we believe offer significant advantages in the discovery of novel drugs.
Our laboratory testing programs are aimed at identifying novel chemical lead
structures from our chemical libraries. A chemical lead structure is a chemical
compound of defined structure that exhibits activity in a laboratory test.
Chemical lead structures are used as starting points for a chemical synthesis
optimization program, which seeks to identify a candidate drug that possesses
all the necessary attributes for commercial development. We use proprietary
chemical synthesis techniques to optimize natural lead structures isolated from
our chemical libraries into candidate drugs for commercial development. To date
we have identified one candidate drug and several lead structures. Marinovir,
our novel candidate drug for the treatment of herpes infections, was isolated
from a marine microbe and is scheduled to enter clinical trials in 1999.
Nature is a proven source of new medicines, but a number of factors has
limited its systematic exploration as a source of novel chemicals, chemical
lead structures and candidate drugs. Our proprietary technologies provide
solutions to many of these limitations and facilitate access to increased
numbers of diverse chemicals from plant cells and marine microorganisms in cell
culture. We employ several types of cell culture manipulations, alone and in
combination, including genetic, hormonal, infection-related, environmental
and/or chemical treatments. These manipulations substantially expand the
variety and novelty of chemical compounds produced by the cell culture beyond
that found in the natural sourced material or in the initial cell culture.
Using these technologies, we have produced proprietary chemical libraries of
60,000 plant and marine cell culture extracts. Additionally, we are further
refining the process to deliver a library of individual chemical compounds
isolated from these extracts, with resultant advantages in laboratory tests for
activity in different diseases.
Our objective is to be the leader in the application of these technologies to
the search for new medicines derived from nature. To achieve this objective, we
intend to:
. take advantage of our corporate partnerships;
. advance our drug-resistant infectious diseases program; and
. enhance and add to our technologies through internal innovation and
acquisitions of additional technologies and products.
5
<PAGE>
Except in the sections headed Summary Consolidated Financial Data,
Capitalization, Dilution and Selected Consolidated Financial Data or as
otherwise noted, all information in this Prospectus assumes:
. the conversion of all outstanding shares of Phytera's Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series
C Convertible Preferred Stock, Series D Convertible Preferred Stock and
Series E Convertible Preferred Stock into an aggregate of 4,949,443shares
of common stock immediately prior to the closing of this offering
(assuming the Series E Convertible Preferred Stock converts into an
aggregate of 722,746 shares of common stock and the closing of this
offering on February 8, 1999 at an offering price of $13.00 per share
(the mid-point of the expected range)) under the terms of a binding
agreement executed by the holders of over 80% of Phytera's outstanding
preferred stock that is binding upon all preferred stockholders;
. the exercise of outstanding warrants to purchase an aggregate of 68,995
shares of common stock at $0.02 per share prior to the closing of this
offering;
. that the underwriters' over-allotment options are not exercised;
. all financial data is stated in US dollars; and
. the effectiveness, for all periods presented, of a 0.654 for one reverse
stock split effected on February 8, 1999.
The Offering
<TABLE>
<S> <C>
Common stock offered in the US
offering............................ 750,000 shares
Common stock offered in the European
offering............................ 1,750,000 shares
Aggregate amount common stock offered
in the offering .................... 2,500,00 shares
Common stock to be outstanding after
the offering........................ 8,233,750 shares (1)
Underwriters' over-allotment
options............................. 375,000 shares
Use of proceeds...................... To fund research and product development
programs, to repay indebtedness and for
general corporate purposes. See "Use of
Proceeds."
Proposed EASDAQ and CSE symbol....... PHYT
</TABLE>
- -------
(1) Based on the number of shares outstanding at November 30, 1998 and assuming
the exercise of outstanding warrants to purchase 68,995 shares of common
stock at $0.02 per share prior to the closing of this offering. Excludes an
aggregate of 953,057 shares of common stock issuable upon exercise of stock
options and warrants outstanding as of November 30, 1998 with a weighted
average exercise price of $1.91 per share. See "Capitalization" and
"Description of Capital Stock--Stock Purchase Warrants."
We expect that delivery of the common stock will be made in New York, New
York, US on or about February 8, 1999.
In this prospectus, references to "USD', "$', or "dollars' are to United
States dollars, "DKK' or "kroner' are to Danish kroner, "(Pounds)' or "pounds'
are to British pounds, "BEF' is to Belgian francs and "ECUs' is to European
Currency Units.
6
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months May 27, 1992
Ended (Inception)
Year Ended December 31, September 30, through
------------------------------------------- ---------------- September 30,
1993 1994 1995 1996 1997 1997 1998 1998
------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Collaborative revenue.. $ 68 $ 34 $ 50 $ 247 $ 1,053 $ 730 $ 1,100 $ 2,552
Loss from operations... (1,764) (4,266) (5,339) (8,158) (9,972) (7,880) (6,447) (37,694)
Interest income
(expense), net........ (125) 115 (106) (30) 228 231 14 101
Net loss............... $(1,876) $(4,227) $(5,439) $(8,289) $(9,754) $(7,662) $(6,585) $(37,689)
======= ======= ======= ======= ======= ======= ======= ========
Historical basic and
diluted net loss per
share (1)............. $(10.78) $(16.32) $(15.43) $(19.99) $(19.53) $(15.59) $(12.47)
Pro forma basic and di-
luted net loss per
share (1)............. $ (2.17) $ (1.45)
Shares used in comput-
ing historical basic
and diluted net loss
per share (1)......... 175 260 353 435 521 512 594
Shares used in comput-
ing pro forma basic
and diluted net loss
per share (1)......... 4,693 5,122
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------------
Pro Forma
Actual Pro Forma (2) As Adjusted (3)
-------- ------------- ---------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities........................... $ 6,988 $ 6,988 $36,348
Working capital....................... 5,051 5,051 34,411
Total assets.......................... 9,315 9,315 38,675
Current portion of long-term debt..... 289 289 289
Long-term debt less current portion... 2,189 2,189 2,189
Redeemable convertible preferred
stock................................ 41,139 -- --
Deficit accumulated during development
stage................................ (39,648) (39,648) (39,648)
Total stockholders' equity (deficit).. (36,245) 4,894 34,254
</TABLE>
- -------
(1) Computed as described in note 3(n) of notes to Consolidated Financial
Statements.
(2) Presented on a pro forma basis to give effect to the automatic conversion,
upon the closing of this offering, of all outstanding shares of existing
Preferred Stock into shares of common stock.
(3) As adjusted to reflect the sale of 2,500,000 shares of common stock offered
by Phytera at an assumed initial public offering price of $13.00 per share
(the mid-point of the expected range) and the application of the estimated
net proceeds therefrom, after deducting the Underwriting discounts and
commissions and estimated offering expenses payable by Phytera. Includes
the exercise of outstanding warrants to purchase shares of common stock at
$0.02 per share prior to the closing of this offering. See "Use of
Proceeds," "Capitalization" and "Description of Capital Stock."
Please Note: The currency exchange rate between ECUs and dollars at September
30, 1998 was 1.1790 ECUs to $1.00.
7
<PAGE>
RISK FACTORS
An investment in the shares of common stock will be subject to a high degree
of financial risk. In deciding whether to invest, prospective investors should
consider carefully the following risk factors as well as the other information
in this document. The list of risks set out below may not be exhaustive.
It is especially important to keep these risk factors in mind when reading
forward-looking statements. These are statements that relate to future periods
and include statements about our lead structure and candidate drug discovery
efforts, product development and receipt of regulatory approvals. Generally,
the words "anticipates," "expects," "intends," "seeks," "plans" and similar
expressions identify such forward-looking statements. Forward-looking
statements involve risks and uncertainties, and our actual results could differ
significantly from the results discussed in the forward-looking statements.
WE MAY NEVER BECOME PROFITABLE
We are not able to predict when, or if, we will become profitable, nor are we
able to predict whether any profitability will be sustained if it is achieved.
We have never made a profit in any fiscal period and, as of September 30, 1998,
have an accumulated deficit of approximately $39.6 million. We had a net loss
in 1996 of $8.3 million, a net loss in 1997 of $9.8 million, and a net loss for
the nine months ended September 30, 1998 of $6.6 million. In addition, we
expect to incur operating losses over the next several years. To date, our only
sources of revenue have been up-front payments and research and development
funding from our corporate partners. For the foreseeable future, we expect that
our level of revenues and operating results will depend upon our ability to
enter into new partnerships while maintaining existing partnerships. We have
not received any revenues from the discovery, development or sale of a
commercial product and we may not realize any revenues in the future. See
"Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
WE WILL NOT RECEIVE ANY REVENUE FROM PRODUCT SALES OR SIGNIFICANT PAYMENTS FROM
PARTNERS IF WE FAIL TO DISCOVER DRUGS OR DEVELOP PRODUCTS
We may fail to discover lead structures or develop products. To date, we have
identified several lead structures and are developing one candidate drug, but
we have not entered into or completed clinical trials, or obtained regulatory
approval for or marketed any product. See "Business--Phytera's Combinatorial
Drug Discovery Program."
We may fail to discover lead structures from natural product sources for many
reasons, including our inability to:
. source the natural species;
. gain access to their chemistry;
. effectively screen and isolate and identify active chemical compounds.
After discovery, our product development efforts may fail for many reasons,
including:
. we fail to develop lead structures into candidate drugs;
. the candidate drug or potential product fails in preclinical studies;
. a potential product is not shown to be safe and effective in clinical
studies;
. required regulatory approvals are not obtained;
. a potential product cannot be produced in commercial quantities at an
acceptable cost; or
. a product does not gain market acceptance.
WE MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM PARTNERS DUE TO A FAILURE TO ENTER
INTO PARTNERSHIPS OR UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS
Our revenue stream and our strategy for identifying and developing lead
structures and candidate drugs are dependent on our entering into partnerships
with third parties. We may not be able to establish any corporate partnerships,
and we cannot guarantee that these partnerships will be established on
commercially acceptable terms. Our current or future corporate partnerships may
not ultimately be successful. Each of our existing partnership agreements has
an initial term of three years or less. Our partners could terminate these
agreements or these agreements could expire before any related lead structures
are identified or any related candidate drugs are developed. The termination or
expiration of any or all of these agreements could have a material adverse
effect on our business.
8
<PAGE>
Much of the revenue that we may receive under these partnerships depends upon
our partners' successful development and commercial introduction of new
products derived from our chemical diversity libraries or pharmaceutical
screens. Our partners may develop alternative technologies or products outside
of their partnerships with us, and these technologies or products may be used
to develop treatments for the diseases targeted by our partnerships. This could
have a material adverse effect on our business. See "--We May Be Unable to
Discover Drugs or Develop Products" and "Business--Corporate Partnerships."
We Face Uncertainty in Raising Additional Funds Necessary to Fund Our
Operations
We may be required to repeatedly raise additional capital to fund our
operations. Capital may be raised through public or private equity financings,
partnerships, debt financings, bank borrowings, or other sources. Additional
funding may not be available on favorable terms or at all. Our capital
requirements will depend upon numerous factors, including the following:
. the establishment of additional partnerships;
. the development of competing technologies or products;
. changing market conditions;
. the cost of protecting our intellectual property rights;
. the purchase of capital equipment;
. the progress of our drug discovery and development programs;
. the progress of our partnerships and receipt of any option/license,
milestone and royalty payments resulting from those partnerships; and
. in-licensing and acquisition opportunities.
If adequate funds are not otherwise available, we may be required to curtail
operations significantly. To obtain additional funding, we may need to enter
into arrangements that require us to relinquish rights to certain technologies,
candidate drugs, products and/or potential markets. To the extent that
additional capital is raised through the sale of equity, or securities
convertible into equity, you may experience dilution of your proportionate
ownership in Phytera. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Our Business May Fail Due to Intense Competition in Our Industry
Our business may fail because we face intense competition from major
pharmaceutical companies and specialized biotechnology companies providing
chemical diversity libraries, pharmaceutical screening systems, combinatorial
chemistry technologies and other expertise. In addition, in pursuing our
internal drug discovery program, we compete against pharmaceutical and
biotechnology companies developing drugs against infectious diseases, and our
partners face similar competition in the respective markets for which they are
developing drugs. Many of these competitors have greater financial and human
resources and more experience in research and development than we have.
Competitors that identify lead structures, develop candidate drugs, complete
clinical trials, obtain regulatory approvals, and begin commercial sales of
their products before us will enjoy a significant competitive advantage. We
anticipate that we will face increased competition in the future as new
companies enter the market and alternative technologies become available. See
"Business--Competition."
If We Fail to Obtain a License for Marinovir, We Will Be Unable to Continue its
Development
We must negotiate an exclusive license to certain patent rights in order to
commercialize marinovir. Pursuant to an exclusive option, we are currently
negotiating with an academic institution to determine the terms of this
license. The proposed license would cover an issued US composition of matter
patent on marinovir and a use patent covering its anti-inflammatory properties
and any counterparts issued outside the US. While we believe that we will
obtain a license on terms consistent with pharmaceutical industry standards, we
cannot guarantee that we will obtain the license on commercially acceptable
terms or at all. See "Business--Products Under Development" and "Business--
Patents and Proprietary Rights."
9
<PAGE>
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS THAT MAY FAIL TO PROTECT OUR
BUSINESS
Our success will depend, in large part, on our ability to obtain and maintain
patent or other proprietary protection for our technologies, products, and
processes, and our ability to operate without infringing the proprietary rights
of other parties. We may not be able to obtain patent protection for the
composition of matter of discovered compounds, processes developed by our
employees, or uses of compounds discovered through our technology. Legal
standards relating to the validity of patents covering pharmaceutical and
biotechnological inventions and the scope of claims made under these patents
are still developing. There is no consistent policy regarding the breadth of
claims allowed in biotechnology patents. The patent position of a biotechnology
firm is highly uncertain and involves complex legal and factual questions.
We have been issued three patents and currently have eight patent
applications pending in the US and/or Denmark, with counterparts in several
other countries. We may not receive any issued patents based on currently
pending or any future applications. Any issued patents may not contain claims
sufficiently broad to protect against competitors with similar technology. In
addition, our patents, our partners' patents, and those patents for which we
have license rights may be challenged, narrowed, invalidated or circumvented.
Furthermore, rights granted under patents may not provide us with any
competitive advantage.
We may have to initiate litigation to enforce our patent and license rights.
If our competitors file patent applications that claim technology also claimed
by us, we may have to participate in interference or opposition proceedings to
determine the priority of invention. An adverse outcome could subject us to
significant liabilities to third parties and require us to cease using the
technology or to license the disputed rights from third parties. We may not be
able to obtain any required licenses on commercially acceptable terms or at
all.
The cost to us of any litigation or proceeding relating to patent rights,
even if resolved in our favor, could be substantial. Some of our competitors
may be able to sustain the costs of complex patent litigation more effectively
than we can because of their substantially greater resources. Uncertainties
resulting from the initiation and continuation of any pending patent or related
litigation could have a material adverse effect on our ability to compete in
the marketplace.
We also rely on certain proprietary trade secrets and know-how that are not
patentable. We have taken measures to protect our unpatented trade secrets and
know-how, including the use of confidentiality agreements with our employees,
consultants, and certain contractors. It is possible that the agreements may be
breached, that we would have inadequate remedies for any breach, or that our
trade secrets will otherwise become known or be independently developed or
discovered by competitors. See "Business--Patents and Proprietary Rights."
OUR LIBRARIES ARE VULNERABLE TO LOSS WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS
Our chemical diversity libraries, cell cultures, cell culture extracts and
chemical compound libraries are critical assets. If the libraries are damaged
or destroyed by any event or series of events, such as a major fire,
earthquake, contamination or other casualty, it could have a material adverse
effect on our business, financial condition and results of operations. Due to
the nature of this risk, we have not been able to obtain adequate casualty
insurance against a loss of this type on commercially reasonable terms. We
believe appropriate loss control measures can provide protection against a
casualty, but to date we have not been able to fully implement these measures.
We intend to implement these loss control measures as quickly as feasible, but
our chemical diversity libraries, cell cultures, cell culture extracts and
chemical compound libraries will always be subject to some degree of
vulnerability. See "Business--Phytera's Combinatorial Drug Discovery Program."
WE WILL NOT MAXIMIZE OUR BUSINESS POTENTIAL IF WE ARE NOT ABLE TO OBTAIN OR
MAINTAIN ACCESS TO CHEMICALS FOUND IN NATURE
To develop proprietary drugs, we need to find novel chemicals that have not
previously been identified as being potential drugs. To maximize the potential
for discovery of novel chemicals having activity in laboratory tests, we need
to access the broadest possible range of plant and marine micro-organisms. We
access samples of plant and marine micro-organisms through contractual
arrangements or understandings with third parties, including botanical gardens,
countries rich in biodiversity, plant and marine research institutions, and
commercial seed companies. If our existing contracts or understandings
terminate before we have fully accessed the resources available from such third
parties, or if we are unable to enter into contracts with new sources of
natural samples, our potential to discover novel chemicals with activity in
laboratory tests will be limited to the chemicals based on natural sources that
we already have accessed.
The 1992 Convention on Biological Diversity provides that each nation has a
sovereign right over its genetic resources. The Convention has been ratified by
a number of countries with significant biodiversity. Our
10
<PAGE>
policy is to comply with the terms of the Convention in sourcing plant
materials or marine microorganisms, even where the source country is not a
Convention signatory. While we believe that the Convention successfully
addresses many of the issues that arise in obtaining access to diverse
biological samples, many of the Convention's signatories have not yet adopted
mechanisms to implement its provisions. This has added to the complexity of
negotiating access to natural samples. We may not be able to negotiate these
contractual arrangements or understandings on commercially reasonable terms or
at all. If we fail to successfully negotiate these contractual arrangements or
understandings, it could have a material adverse effect on our business
strategy and on our ability to achieve our business objectives. See "Business--
Biodiversity Sourcing Agreements."
UNCERTAIN PHARMACEUTICAL PRICING ENVIRONMENT MAY IMPACT OUR BUSINESS
Our ultimate ability to commercialize any products that we or our partners
develop depends on the extent to which reimbursements to patients for the cost
of such products and related treatments will be available from government
health administration authorities, private health insurance providers, and
other organizations. It is uncertain whether third party payers will reimburse
patients for newly approved health care products or will do so at a level that
will enable us to obtain a satisfactory price for our products. Healthcare
reform is an area of increasing attention and is a priority of many government
officials. Any such reform measures, if adopted, could adversely affect the
pricing of therapeutic or diagnostic products in the US, the European Union,
known as the EU, or elsewhere and the amount of reimbursement available from
governmental agencies or third party insurers. We cannot predict the effect of
these measures upon our business.
QUALIFIED MANAGERIAL AND SCIENTIFIC PERSONNEL ARE SCARCE IN OUR INDUSTRY
We are highly dependent on the principal members of our scientific and
management staff. Our success will depend in part on our ability to identify,
attract and retain qualified managerial and scientific personnel. There is
intense competition for qualified personnel. We may not be able to continue to
attract and retain personnel with the advanced technical qualifications or
managerial expertise necessary for the development of our business. If we fail
to attract and retain key personnel, it could have a material adverse effect on
our business, financial condition and results of operations. See "Business--
Organization."
CONCENTRATION OF CONTROL OF OUR STOCK COULD LEAD TO FAILURE TO MAXIMIZE STOCK
PRICE
Upon completion of this offering (based on shares outstanding on January 31,
1999), our significant stockholders, executive officers, Directors, and
affiliated entities together will beneficially own approximately 35.30% of the
outstanding shares of common stock (33.81% if the underwriters' over-allotment
option is exercised in full). This assumes the conversion of the Series E
Convertible Preferred Stock into an aggregate of 722,746 shares of common stock
(assuming the closing of this offering on February 8, 1999 at a public offering
price of $13.00 per share (the mid-point of the expected range)), the exercise
of warrants to purchase 2,170 shares of common stock at $0.02 per share and the
exercise of an aggregate of 237,645 additional then exercisable options or
warrants held by our significant stockholders, executive officers, Directors
and affiliated entities. As a result, these stockholders, acting together, will
be able to influence significantly and possibly control most matters requiring
stockholder approval. This concentration of ownership may have the effect of
delaying or preventing a change in control of Phytera, including transactions
in which stockholders might otherwise receive a premium for their shares over
then current market prices. See "Principal Stockholders" and "Description of
Capital Stock."
SERIES E CONVERTIBLE PREFERRED STOCK CONVERSION RATE PROVISION COULD HAVE A
DILUTIVE EFFECT
For the purposes of this prospectus, we have assumed that all outstanding
existing Preferred Stock other than Series E Convertible Preferred Stock will
convert to common stock at the rate of 0.654 for one. The outstanding shares of
Series E Convertible Preferred Stock have a special conversion rate adjustment
that is triggered by the timing and pricing of our initial public offering. The
Series E Convertible Preferred Stock would convert to common stock immediately
prior to the closing of this offering at the rate of 0.654 for one only if this
offering is closed on or before June 25, 1999, and the price per share in this
offering is not less than the "Minimum Price" which, as of November 30, 1998,
was $16.94. The Minimum Price increases, up to a maximum of $19.11, over the
period ending June 25, 1999. If this offering is closed after June 25, 1999, or
if the price per share in this offering is less than the Minimum Price, more
than one share of common stock will be issued upon conversion of each share of
Series E Convertible Preferred Stock. The information presented in this
prospectus assumes that this offering will close on or prior to February 8,
1999 at a per share price of $13.00 (the mid-point of the expected range). This
price is below the Minimum Price for that date and would result in an
additional 191,315 shares of common stock becoming issuable upon conversion of
the Series E Convertible Preferred Stock. The closing of this offering on a
date later than February 8, 1999 or at a per share
11
<PAGE>
price below $13.00 would result in a greater number of shares outstanding at
the time of the closing of this offering. See "--Shares Eligible for Future
Sale Could Have an Adverse Effect on Market Price," "Capitalization,"
"Description of Capital Stock" and "Dilution."
Shares Eligible for Future Sale Could Have an Adverse Effect on Market Price
Future sales of common stock in the public market could adversely affect the
stock's market price. Upon completion of this offering there will be 8,233,750
shares of common stock outstanding, assuming no currently outstanding options
or warrants are exercised (other than warrants to purchase 68,995 shares of
common stock with an exercise price of $0.02 per share that otherwise expire
upon the closing of this offering) and that the Series E Convertible Preferred
Stock converts at the rate stated in the above paragraph. The 2,500,000 shares
sold in this offering (plus any additional shares sold upon exercise of the
underwriters' over-allotment options) will be freely transferable.
The 5,733,750 shares of common stock expected to be outstanding prior to this
offering will, subject to certain agreements described below, be eligible for
immediate resale in Denmark and other member states of the EU. In the US, these
resales will also be subject to Rule 144 under the Securities Act. Certain of
our stockholders, Directors and employees, holding (on an as-converted basis)
in the aggregate approximately 4,948,819 shares of common stock (plus
approximately 223,878 shares issuable upon exercise of warrants exercisable at
$0.02 and vested options), have agreed, subject to certain limited exceptions,
not to sell or otherwise dispose of any of their shares for a period of 180
days after the date of this Prospectus. The holders of an additional 763,349
shares of common stock are subject to agreements not to sell or otherwise
dispose of any of their shares for a period of 90 days after the effectiveness
of the offering. See "Shares Eligible for Future Sale" and "Underwriting."
Our Common Stock May Have a Volatile Public Trading Price and Low Trading
Volume
Prior to this offering, there has been no public market for the common stock.
An active public market for the common stock may not develop or be sustained
after the offering. We and the underwriters will, through negotiations,
determine the initial public offering price. The initial public offering price
is not necessarily indicative of the market price at which the common stock
will trade after this offering. The market prices for securities of companies
comparable to us have been highly volatile and the market has experienced
significant price and volume fluctuations that are unrelated to the operating
performance of the individual companies. Many factors may have a significant
adverse effect on the market price of the common stock, including:
. announcements of technological innovations or new commercial products by
us or our competitors;
. developments concerning proprietary rights, including patent and
litigation matters;
. publicity regarding actual or potential results with respect to products
or compounds under development by us or our partners;
. unexpected terminations of partnerships;
. regulatory developments in the US, the EU and its member states, and
other countries;
. general market conditions; and
. quarterly fluctuations in our revenues and other financial results.
Anti-Takeover Provisions in Our Charter and By-laws and Delaware Law May Limit
Stock Price
Our Certificate of Incorporation, certain provisions of our By-laws and
certain provisions of Delaware law could delay or make more difficult a merger,
tender offer or proxy contest involving us. These provisions may have the
effect of delaying or preventing a change of control without action by the
stockholders and, therefore, could adversely affect the price of the common
stock. See "Management," "Description of Capital Stock--Preferred Stock" and
"Description of Capital Stock--Anti-Takeover Measures."
Investors Will Pay More Than Net Book Value Per Share
Investors in this offering will experience immediate and substantial dilution
in the value of their investment. This dilution will equal the difference
between the initial public offering price and the per share net book value of
Phytera immediately after this offering. Investors will experience additional
dilution upon the exercise of outstanding options and warrants. Furthermore,
owners of common stock do not have preferred subscription rights and we do not
anticipate that they will be accorded such rights in the future. See "Dilution"
and "Shares Eligible for Future Sale."
12
<PAGE>
Year 2000 Issues Could Cause Interruption or Failure of Our Computer Systems
We use a significant number of computer systems and software programs in our
operations, including applications used in support of research and development
activities, accounting, and various administrative functions. Although we
believe that our internal systems and software applications contain source code
that is able to interpret appropriately the dates following December 31, 1999,
our failure to make or obtain necessary modifications to our systems and
software could result in systems interruptions or failures that could have a
material adverse effect on our business. We do not anticipate that we will
incur material expenses to make our systems Year 2000 compliant. Unanticipated
costs necessary to avoid potential systems interruptions could exceed our
present expectations and consequently have a material adverse effect on our
business. In addition, if our key supply and service providers fail to make
their respective computer software programs and operating systems Year 2000
compliant, it could have a material adverse effect on our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Phytera from the sale of the common stock
being offered are estimated to be $29,360,000, ($33,893,750 if the
underwriters' over-allotment options is exercised in full), based on an assumed
initial public offering price of $13.00 per share (the mid-point of the
expected range) and after deducting underwriting discounts and commissions and
estimated offering expenses payable by Phytera.
Phytera intends to use the net proceeds of this offering as follows:
$20,000,000 for the continued development and expansion of its Combinatorial
Drug Discovery Program, $6,000,000 for clinical development, $816,000 for
repayment of debt due upon the closing of this offering and the remainder for
general corporate purposes. Such general corporate purposes may include
acquisitions of other businesses, technologies or product rights. The amount
and timing of Phytera's actual expenditures will depend upon a number of
factors, including Phytera's ability to enter into additional partnership or
licensing arrangements, as well as the timing of and terms governing such
arrangements. In addition, Phytera's research and development expenditures will
vary with the progress of programs and as a result of variability in funding
from its partners. Phytera's management will have broad discretion to allocate
proceeds of this offering to uses that it believes are appropriate.
Phytera currently believes the net proceeds of the offering, together with
its existing cash, cash equivalents, short-term investments and cash generated
from operations and research funding from corporate partners, will enable it to
maintain its current and planned operations until December 31, 2000. See "Risk
Factors--We Will Need to Raise Additional Funds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Pending such uses, Phytera intends to invest the net proceeds of this
offering primarily in interest-bearing investment-grade securities.
DIVIDEND POLICY
Phytera has never declared or paid any cash dividends on its common stock and
does not anticipate doing so in the foreseeable future. Phytera currently
intends to retain future earnings, if any, for the development of its
technologies and future products.
14
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1998, (1) the actual
capitalization of Phytera, (2) the pro forma capitalization of Phytera after
giving effect to (a) the increase in the number of authorized shares of common
stock to 25,000,000 and the authorization of 1,000,000 shares of undesignated
Preferred Stock and (b) the conversion of all issued and outstanding existing
Preferred Stock into 4,949,056 shares of common stock and (3) the pro forma
capitalization 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
$13.00 per share (the mid-point of the expected range) after deducting
underwriting discounts and commissions and estimated offering expenses and the
application of the estimated net proceeds therefrom of Phytera as set forth in
"Use of Proceeds" and the exercise of outstanding warrants to purchase 69,382
shares of common stock at $0.02 per share prior to the closing of this
offering. The data in this table excludes an aggregate of 958,092 shares of
common stock issuable upon exercise of stock options and warrants outstanding
as of September 30, 1998. This table should be read in conjunction with the
Consolidated Financial Statements of Phytera, notes to the Consolidated
Financial Statements and other financial information included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------
Pro Forma As
Actual Pro Forma Adjusted
-------- ---------- ------------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term debt............ $ 289 $ 289 $ 289
======== ======== =======
Long-term debt, less current portion......... $ 2,189 $ 2,189 $ 1,373
-------- -------- -------
Redeemable convertible preferred stock, par
value $0.01 per share, 14,446,382 shares
authorized and 7,274,833 issued and
outstanding, actual; no shares authorized,
issued or outstanding, pro forma and pro
forma as adjusted........................... 41,139 -- --
-------- -------- -------
Stockholders' equity (deficit):
Preferred Stock, par value $0.01 per share,
no shares authorized, issued or
outstanding, actual; 1,000,000 shares
authorized and none issued and
outstanding, pro forma and pro forma as
adjusted.................................. -- -- --
Common stock, par value $0.01 per share,
13,000,000 shares authorized and 709,949
issued and outstanding actual; 25,000,000
shares authorized and 5,659,005 shares
issued and outstanding pro forma;
8,228,387 shares issued and outstanding
pro forma as adjusted..................... 11 57 82
Additional paid-in capital................. 5,203 46,296 75,631
Deficit accumulated during development
stage..................................... (39,648) (39,648) (39,648)
Deferred compensation (1).................. (1,811) (1,811) (1,811)
-------- -------- -------
Total stockholders' equity (deficit)..... (36,245) 4,894 34,254
-------- -------- -------
Total capitalization..................... $ 7,083 $ 7,083 $35,627
======== ======== =======
</TABLE>
- --------
(1) Deferred compensation is the aggregate difference between the deemed value
of certain stock options and the exercise price of such stock options.
These stock options were not exercisable by the holders on September 30,
1998. A compensation expense will be recorded as the right to exercise
these stock options vests with the holder in future periods.
15
<PAGE>
DILUTION
The pro forma net tangible book value of Phytera as of September 30, 1998 was
$4,894,000 or approximately $0.86 per share of common stock. Pro forma net
tangible book value per share represents the total tangible assets of Phytera,
less total liabilities, divided by 5,659,005 shares of common stock to be
outstanding after giving effect to the conversion of all outstanding shares of
existing Preferred Stock into 4,949,056 shares of common stock upon the closing
of this offering. Assuming the receipt by Phytera of the net proceeds from the
sale of the 2,500,000 shares of common stock offered hereby at an assumed
public offering price of $13.00 per share (the mid-point of the expected range)
and the exercise of outstanding warrants to purchase 69,382 shares of common
stock at $0.02 per share prior to the closing of this offering, the pro forma
net tangible book value of Phytera as of September 30, 1998 would have been
$34,254,000 or $4.16 per share. This represents an immediate increase in the
pro forma net tangible book value of $3.30 per share to existing stockholders
of Phytera and an immediate dilution of $8.84 per share to new investors
purchasing common stock in this offering. The following table illustrates the
per share dilution to be incurred by new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $13.00
Pro forma net tangible book value per share before this
offering.................................................... $0.86
Increase per share attributable to new investors............. 3.30
-----
Pro forma net tangible book value per share after this
offering...................................................... 4.16
------
Dilution per share to new investors............................ $ 8.84
======
</TABLE>
The following table sets forth, as of September 30, 1998 (after giving effect
to the conversion of all outstanding shares of existing Preferred Stock into
4,949,056 shares of common stock and the exercise of outstanding warrants to
purchase 69,382 shares of common stock at $0.02 per share prior to the closing
of this offering and assuming the Series E Stock is convertible into an
aggregate of 722,746 shares of common stock (assuming the closing of this
offering on February 8, 1999 at a public offering price of $13.00 per share
(the mid-point of the expected range)), the differences between the existing
stockholders and the new investors with respect to the number of shares of
common stock acquired from Phytera, the total consideration paid and the
average price per share (assuming a public offering price of $13.00 per share):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------- ------------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 5,728,387 70% $43,944,000 57% $ 7.67
New investors............... 2,500,000 30% 32,500,000 43% $13.00
--------- --- ----------- ---
Total..................... 8,228,387 100% $76,444,000 100%
========= === =========== ===
</TABLE>
Total Consideration is the aggregate purchase price paid by existing
stockholders for previously issued shares and is calculated by totaling the
gross proceeds from previous sales of Phytera's stock. The above information
excludes, as of September 30, 1998, an aggregate of 958,092 shares of common
stock issuable upon exercise of stock options and warrants outstanding as of
September 30, 1998 with a weighted average exercise price of $1.90 per share.
To the extent that such options and warrants are exercised, there will be
further dilution to new investors. See "Description of Capital Stock."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data set forth below, as of December
31, 1995, 1996 and 1997, and the consolidated statements of operations data for
each of the three years in the period ended December 31, 1997, are derived from
Phytera's Consolidated Financial Statements which have been audited by Arthur
Andersen LLP, independent public accountants, and which are included elsewhere
in this prospectus. The selected consolidated financial data as of December 31,
1993 and 1994 and for the years then ended are derived from Phytera's
Consolidated Financial Statements not included in this prospectus, all of which
have been audited by Arthur Andersen LLP, independent public accountants. The
selected financial data as of September 30, 1998 and for the nine months ended
September 30, 1997 and 1998 and for the period from inception (May 27, 1992) to
September 30, 1998 are derived from Phytera's unaudited Consolidated Financial
Statements which are included elsewhere in this prospectus and which include,
in the opinion of Phytera, all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of its financial
position and the results of its operations for those periods. Operating results
for the nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31, 1998.
The selected consolidated financial data should be read in conjunction with,
and are qualified by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Phytera's Consolidated
Financial Statements and accompanying notes and the Report of Independent
Public Accountants included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine Months May 27, 1992
Ended (inception)
Year Ended December 31, September 30, through
------------------------------------------- ---------------- September 30,
1993 1994 1995 1996 1997 1997 1998 1998
------- ------- ------- ------- ------- ------- ------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Collaborative revenue.. $ 68 $ 34 $ 50 $ 247 $ 1,053 $ 730 $ 1,100 $ 2,552
Operating expenses:
Research and
development........... 1,230 3,270 3,964 5,232 7,673 5,711 5,638 27,191
General and
administrative........ 602 1,030 1,425 1,675 1,740 1,287 1,909 8,633
Charge for acquired
research and
development........... -- -- -- 1,498 1,612 1,612 -- 4,422
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses............. 1,832 4,300 5,389 8,405 11,025 8,610 7,547 40,246
------- ------- ------- ------- ------- ------- ------- --------
Loss from operations... (1,764) (4,266) (5,339) (8,158) (9,972) (7,880) (6,447) (37,694)
Interest income
(expense), net........ (125) 115 (106) (30) 228 231 14 101
Foreign currency
translation gain
(loss)................ 13 (76) 6 (101) (10) (13) (152) (96)
------- ------- ------- ------- ------- ------- ------- --------
Net loss............... $(1,876) $(4,227) $(5,439) $(8,289) $(9,754) $(7,662) $(6,585) $(37,689)
======= ======= ======= ======= ======= ======= ======= ========
Historical basic and
diluted net loss per
share (1)............. $(10.78) $(16.32) $(15.43) $(19.99) $(19.53) $(15.59) $(12.47)
Pro forma basic and
diluted net loss per
share (1)............. $(2.17) $ (1.45)
Shares used in
computing historical
basic and diluted net
loss per share (1).... 175 260 353 435 521 512 594
Shares used in
computing pro forma
basic and diluted net
loss per share (1).... 4,693 5,122
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30, 1998
---------------------------------------------- -----------------------
1993 1994 1995 1996 1997 Actual Pro Forma (2)
------- ------- -------- -------- -------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and marketable
securities............ $ 8,107 $ 4,383 $ 470 $ 10,117 $ 3,792 $ 6,988 $ 6,988
Working capital........ 8,933 2,789 (797) 8,976 2,586 5,051 5,051
Total assets........... 9,439 6,924 2,704 12,396 6,289 9,315 9,315
Current portion of
long-term debt........ 19 1,092 825 301 300 289 289
Long-term debt, less
current portion....... 710 752 745 1,274 1,550 2,189 2,189
Redeemable convertible
preferred stock....... 11,863 11,879 11,894 30,945 34,186 41,139 --
Deficit accumulated
during development
stage................. (3,417) (7,659) (13,113) (22,055) (32,233) (39,648) (39,648)
Deferred compensation.. -- -- -- -- -- (1,811) (1,811)
Stockholders' equity
(deficit)............. (3,410) (7,648) (13,101) (21,210) (30,886) (36,245) 4,894
</TABLE>
- --------
(1) Computed as described in note 3(n) of notes to Consolidated Financial
Statements.
(2) Presented on a pro forma basis to give effect to the automatic conversion,
upon the closing of this offering, of all outstanding shares of the
existing Preferred Stock into an aggregate of 4,949,056 shares of common
stock.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Phytera, Inc. was incorporated as a Delaware corporation on May 27, 1992.
Phytera is a development stage biopharmaceutical company focused on applying
its proprietary Combinatorial Drug Discovery Program to the identification and
optimization of new lead structures and candidate drugs for pharmaceutical
application. Phytera's operations have been funded primarily through the sale
of equity securities and revenues generated from research partnerships with
pharmaceutical and biotechnology companies. As of September 30, 1998, Phytera
has signed partnership agreements with Eli Lilly and Company, Chiron
Corporation, Tsumura & Co., NeuroSearch A/S, Galileo Laboratories, Inc. and
Nycomed Amersham plc. See "Business--Corporate Partnerships."
Phytera has not been profitable since its inception and has an accumulated
deficit of approximately $39,648,000 as of September 30, 1998. Losses have
resulted primarily from expenses related to research and development programs
focused on expanding Phytera's Combinatorial Drug Discovery Program, which
includes combinatorial biology, pharmaceutical screening, combinatorial
chemistry and preclinical development of a novel candidate drug. Phytera has
also incurred costs related to the administrative activities required to
support these research and development efforts. Phytera's ability to fund its
operations and achieve profitability is dependent on its near-term ability to
market its broad technology base to and enter into research partnerships with
pharmaceutical and biotechnology companies, and on the longer-term development
and commercialization of products derived from these partnerships and Phytera's
internal drug discovery programs.
Phytera has built and expanded its technology base via the acquisition of
three companies. Plant Science Limited, a UK-based plant cell culture company,
was acquired in September 1992 and is now a wholly-owned subsidiary, Phytera
Ltd. Neptune Pharmaceuticals, Inc., a US-based marine microbiology company, was
acquired in July 1996 and has been integrated into the operations of Phytera,
Inc. Auda Pharmaceuticals ApS, a Danish combinatorial chemistry company, was
acquired in March 1997 and is now a wholly-owned subsidiary, Phytera Symbion
ApS. Each of these transactions was accounted for as a purchase with
approximately $1,312,000, $1,498,000 and $1,612,000, respectively of the
purchase price charged to operations as the cost of acquired research and
development. The results of operations of each of the acquired companies are
included in the Consolidated Statements of Operations since the date of
acquisition.
In addition to the above acquisitions, Phytera established Phytera A/S, a
wholly-owned Danish subsidiary, in February 1996 with an equity investment of
approximately $89,500 in order to expand Phytera's plant cell culture
capabilities. The results of operations of Phytera A/S are included in the
Consolidated Statements of Operations since its date of incorporation.
The Consolidated Financial Statements include the accounts of Phytera, Inc.
and its wholly-owned subsidiaries, Phytera Ltd., Phytera Symbion ApS and
Phytera A/S. For the remainder of this discussion Phytera, Inc. and its
subsidiaries together will be referred to as "Phytera."
Results of Operations
Nine Months Ended September 30, 1998 and 1997
Revenues from research and development partnership agreements were $1,100,000
and $730,000 for the nine months ended September 30, 1998 and 1997,
respectively. For the nine months ended September 30, 1998, all of the revenue
recognized by Phytera was derived from its partnerships with Tsumura & Co.,
Chiron Corporation and Eli Lilly and Company. For the nine months ended
September 30, 1997, revenues were derived entirely from Phytera's partnership
with Tsumura & Co., as payment for access to Phytera's extract libraries and in
support of Phytera's research activities under the partnership. The results of
operations for the nine months ended September 30, 1998 do not reflect the full
impact of Phytera's partnerships with Lilly and Chiron, which are expected to
have a more substantial effect on revenues and expenses in future periods. See
"Business--Corporate Partnerships."
Research and development expenses decreased by 1% to $5,638,000 for the nine
months ended September 30, 1998 from $5,711,000 for the nine months ended
September 30, 1997, due to reduced outside research support for preclinical
development and decreased laboratory supplies expense in the US. These
decreases were partially offset by an increase in research and development
expenses by Phytera's Danish subsidiaries,
18
<PAGE>
reflecting a full nine months of operations in 1998 for Phytera Symbion ApS,
which was acquired in March 1997, and increased plant sourcing costs in support
of Phytera A/S' plant cell culture activity.
General and administrative expenses increased by 48.3% to $1,909,000 for the
nine months ended September 30, 1998 from $1,287,000 for the nine months ended
September 30, 1997. This increase resulted from compensation expense
attributable to stock options granted, and executive incentive compensation
programs, and a full nine months of expenses related to Phytera Symbion ApS.
General and administrative expenses at Phytera Symbion ApS during this period
included salary related costs, travel and other costs associated with the
Managing Director of Phytera A/S and Phytera Symbion ApS who joined Phytera at
the time of the Auda acquisition.
Net interest income was $14,000 for the nine months ended September 30, 1998,
compared to $231,000 for the same period in 1997. Interest income in 1998
decreased as a result of a decreasing cash balance resulting from the use of
cash for operations, while interest expense for the nine months ended September
30, 1998 increased due to interest accrued for additional debt funding received
from VdkstFonden of Copenhagen, Denmark.
Years Ended December 31, 1997, 1996 and 1995
Phytera's collaborative revenues for the years ended December 31, 1997, 1996
and 1995 were $1,053,000, $247,000 and $50,000, respectively and were derived
from research and development partnership and marketing agreements. In 1997 and
1996, such revenues were derived entirely from the partnership with Tsumura &
Co., while revenue in 1995 was derived from the Nycomed Amersham plc research
partnership in the area of plant culture-derived enzymes. See "Business--
Corporate Partnerships."
Research and development expenses increased to $7,673,000 in 1997 from
$5,232,000 in 1996 and $3,964,000 in 1995, primarily as a result of the
expansion of Phytera's plant cell culture, marine microbiology, combinatorial
chemistry and general drug discovery capabilities. Subsequent to the
acquisition of Neptune Pharmaceuticals, Inc. in 1996, Phytera established a
research program focused on the sourcing, culturing and extraction of marine
microbes. Also in 1996, Phytera established Phytera A/S as a wholly-owned
subsidiary to conduct plant cell culture activities. Phytera acquired Auda
Pharmaceuticals ApS in March 1997 and research and development expenses in 1997
include costs associated with this operation through the end of the year. In
addition, research and development staff at Phytera's Worcester facility
increased by four people in 1996 compared to 1995 and by seven people in 1997
compared to 1996.
General and administrative expenses were $1,740,000, $1,675,000, and
$1,425,000 for 1997, 1996 and 1995, respectively. The increase in 1997 compared
to 1996 was approximately 3.8% and was primarily due to normal cost increases.
The increase in 1996 compared to 1995 was approximately 17.6% and related
principally to general and administrative expenses incurred as a result of the
establishment of Phytera A/S, and to increased costs at Phytera, Inc. related
to increased staff.
Net interest income was $228,000 in 1997, compared to net interest expense of
$30,000 and $106,000 in 1996 and 1995, respectively. This increase in 1997
resulted from a larger cash balance available for investment during the year as
a result of the sale of Series D Convertible Preferred Stock that occurred in
late 1996.
Liquidity and Capital Resources
Phytera has experienced net losses and negative cash flow from operations
each year since its inception and, as of September 30, 1998, had an accumulated
deficit of $39,648,000. Phytera has financed its operations primarily through
private equity financings. As of September 30, 1998, net proceeds from equity
financings were $39,044,000. Phytera received total research payments from its
corporate partnerships of $3,161,000 through September 30, 1998, of which
$2,552,000 has been recognized as collaborative revenue. $609,000 of the
research payments that have been received by Phytera has not been recognized as
revenue as of September 30, 1998. Phytera has entered into several loan
agreements to fund leasehold improvements, the acquisition of equipment, for
working capital purposes and the acquisition of Phytera Ltd.
In 1992, Phytera issued a promissory note in the principal amount of
(Pounds)480,000 (approximately $816,000 at the September 30, 1998 exchange
rate) note payable to the University of Sheffield, bearing interest at 10% per
annum, in connection with the acquisition of Phytera Ltd. The note will be
payable on the closing of this offering. Interest on the unpaid principal
balance is due each October 1.
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<PAGE>
In July 1994, Phytera entered into a $1,100,000 equipment line of credit with
a United States bank. Phytera borrowed the maximum amount through December 31,
1994, at which time the amount outstanding under the equipment line of credit
was converted into a promissory note. The note is payable in 48 equal monthly
installments, beginning in January 1995 and is scheduled to end in December
1998, bearing interest at the bank's prime rate (8.5% at September 30, 1998)
plus 2%. Borrowings under the note are secured by substantially all of
Phytera's assets. The note contains certain covenants, including minimum levels
of liquidity and net worth. Phytera was in compliance with all covenants at
September 30, 1998. As of September 30, 1998, $68,750 was outstanding under
this note.
In 1996, Phytera entered into an agreement with VdkstFonden to obtain funding
for Phytera's Danish subsidiaries. This agreement was originally focused on
providing partial funding for the development of Phytera A/S, but was recently
expanded to include Phytera Symbion ApS. Under the agreement, VdkstFonden
provides a research and development loan of approximately DKK 13.2 million
(approximately $2,087,000 at the September 30, 1998 exchange rate) over a three
year period to finance approximately 45% of the operations of both Phytera A/S
and Phytera Symbion ApS. The loan accrues interest at an annual interest rate
of 7.98% and will be repaid over a five year period beginning in April 1999.
The loan was granted subject to certain conditions, each of which has been met
by Phytera. The loan is secured by a guarantee from Phytera, Inc. and by way of
a pledge of certain rights in the projects funded by the loan. As of September
30, 1998, approximately DKK 8,546,000 (approximately $1,347,000 at the
September 30, 1998 exchange rate) has been received from VdkstFonden.
During the nine months ended September 30, 1998 and the years ended December
31, 1997, 1996 and 1995, Phytera made purchases of equipment and leasehold
improvements in the amounts of approximately $297,000, $913,000, $627,000 and
$150,000, respectively. In addition to the VdkstFonden loan, Phytera entered
into several loans and operating leases that provided aggregate financing of
DKK 2,800,000 (approximately $442,000 at the September 30, 1998 exchange rate)
to Phytera's Danish subsidiaries during 1996 and 1997 and the nine months ended
September 30, 1998.
In September 1998, Phytera entered into a $1,000,000 equipment line of credit
with a US finance company. This agreement provides for the funding of equipment
purchases made by Phytera through July 15, 1999. Separate loans are created
each time funding is provided, and each loan is to be repaid over 48 months
from the date of the funding with a final payment of 12.5% of the initial
principal amount. The repayment amount is based on a percentage of the
outstanding principal of the loan. The percentage rate can vary prior to each
funding, but is then fixed for the term of the specific loan created by the
specific funding event. There was no outstanding balance under this line of
credit at September 30, 1998.
Management estimates that the proceeds from this offering, along with
existing cash balances, amounts to be received under existing partnership
agreements and funds available under existing borrowing arrangements, will be
sufficient to fund operations until December 31, 2000. Phytera's cash
requirements may vary materially from those now planned, depending upon the
results of its research and development strategies, the ability of Phytera to
enter into any corporate partnerships, the results of research and development,
competitive and technological advances, in-licenses and acquisitions and other
factors. If Phytera experiences increased losses, it may have to seek
additional financing from public or private sale of its securities, including
equity securities.
There have been no material events or significant changes in the financial or
other conditions of Phytera since September 30, 1998.
Tax Matters
At December 31, 1997, Phytera had available net operating loss carryforwards
of approximately $25,200,000 for US federal income tax purposes, which expire
at various dates beginning in 2009. Phytera also has available US federal tax
credits of approximately $330,000 expiring through the year 2010. Phytera's
non-US subsidiaries have approximately $690,000 of available net operating loss
carryforwards for non-US income tax reporting purposes as of December 31, 1997.
Phytera has recorded a full valuation allowance against its deferred tax asset
due to uncertainties surrounding the realization of these assets.
The US Internal Revenue Code of 1986, as amended, referred to in this
prospectus as the Code, contains provisions that may limit the US net operating
loss and tax credit carryforwards available to be used in any given year upon
the occurrence of certain events, including changes in the ownership interests
of significant
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<PAGE>
stockholders. In the event of a cumulative change in ownership in excess of 50%
over a three year period, the amount of the US net operating loss carryforwards
that Phytera can utilize in any one year may be limited. In the event of a
change in ownership, as defined, the annual limitation on the use of the
existing net operating loss carryforwards is equal to an amount determined by
multiplying the value of Phytera at the time of the ownership change by the US
federal applicable rate of interest as determined by the US Internal Revenue
Service.
Year 2000
Many currently installed computer systems and software applications are coded
to accept only two digit entries in the year entry of the date code field.
Beginning in the year 2000, these codes will need to accept four digit year
entries to distinguish 21st century dates from 20th century dates. Phytera has
completed a review of all of its microprocessor-based computer systems to
assess what steps, if any, are required to achieve full Year 2000 compliance.
Phytera relies upon microprocessor-based personal computers and commercially
available applications software. These technologies have been put into service
recently, and our review has confirmed that virtually all of Phytera's systems
are currently Year 2000 compliant. The small number of systems that are not yet
Year 2000 compliant are systems that are integral components of certain
laboratory instrumentation used by Phytera. Phytera is in the process of
replacing these systems. It does not anticipate that it will incur material
expenses or meaningful delays in making these systems Year 2000 compliant.
Phytera is not able to assess the Year 2000 readiness of its research
partners, or the potential impact, if any, on its research programs if a
research partner is not Year 2000 compliant. Phytera is currently discussing
Year 2000 readiness with its material supply and service vendors. To date,
those vendors that have been contacted have indicated that their hardware or
software are or will be Year 2000 compliant on a timely basis. However, Phytera
intends to continue to assess its exposure to Year 2000 noncompliance on the
part of any of its material vendors and there can be no assurance that their
systems will be Year 2000 compliant.
Phytera believes that Year 2000 issues will not pose significant operational
problems for its business. Therefore, Phytera does not have, and does not
intend to create, a contingency plan in the event Year 2000 compliance cannot
be achieved in a timely manner. See "Risk Factors--Year 2000 Issues Could Cause
Interruption or Failure of Our Computer Systems."
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<PAGE>
BUSINESS
Overview
Phytera is an international biopharmaceutical company engaged in identifying
and optimizing novel chemical lead structures through its Combinatorial Drug
Discovery Program. Phytera conducts operations in the United States, Denmark,
and the United Kingdom. Phytera's Combinatorial Drug Discovery Program enhances
the pharmaceutical industry's ability to use nature as a source of chemical
diversity by applying proprietary combinatorial biology, pharmaceutical
screening and combinatorial chemistry techniques. Phytera uses combinatorial
biology to create novel chemical diversity libraries from two relatively
untapped natural resources, plant cells and marine microbes, that it grows and
manipulates in cell culture. The combinatorial manipulations substantially
increase the variety and novelty of chemical compounds produced in cell culture
beyond that found in the native specimen. Phytera has entered into partnerships
with Eli Lilly and Company, Chiron Corporation, Tsumura & Co., NeuroSearch A/S,
Gallileo Laboratories, Inc. and Nycomed Amersham plc. Together with these
partners, Phytera tests its chemical diversity libraries for therapeutic
utility in pharmaceutical screens for diseases such as fungal infections,
cancer, inflammation, allergy, asthma, depression, memory and attention deficit
disorders, diabetes, stroke and myocardial infarction. Phytera's internal drug
discovery efforts are focused on drug-resistant bacterial, fungal and viral
infections. In particular, Phytera has developed bacterial and fungal screens
in which Multiple Drug Resistance pumps ("MDR pumps") have been inactivated.
Phytera believes that these "MDR knockout-based" screens offer significant
advantages in discovering novel antibacterial and antifungal drugs. Phytera
uses proprietary combinatorial chemistry techniques to optimize lead structures
identified through screening into candidate drugs for further development.
Nature is a source of a substantial portion of new medicines, but a number of
factors has limited the systematic exploration of nature as a source of
chemical diversity. These factors include access to sufficient quantity of
novel source material, difficulty in reaccessing source material, limited and
fixed chemical diversity, chemistry which is not easily reproducible or
scalable, difficulties associated with screening complex extract mixtures and
limited ability to optimize natural product lead structures. Phytera's
Combinatorial Drug Discovery Program encompasses a number of technologies to
provide an integrated solution to these limitations.
Phytera's combinatorial biology program produces chemical diversity libraries
from plant cell cultures using its ExPAND(R) technology and from marine microbe
cultures using its (u)MARINE(R) technology. Phytera has established an extensive
network of species sourcing collaborations in order to access plants and marine
microorganisms for its combinatorial biology program. Its combinatorial biology
technologies facilitate access and reaccess to novel plant and marine microbial
source material. The chemical diversity of cell cultures is increased by
applying proprietary manipulations, such as genetic, hormonal, infection-
related, environmental or chemical treatments. The resulting chemical
expression states are highly reproducible, ensuring that increased quantities
of interesting chemical compounds can be produced to facilitate drug discovery
and development. To date, Phytera has produced over 60,000 high quality cell
culture extracts through its ENRICH(TM) extraction technology and a pilot
library of individual natural chemical compounds by applying its PINACLE(TM)
chemical isolation methodology.
Phytera is applying its proprietary MANIFOLD(TM) combinatorial chemistry
technologies to optimize lead structures and select additional candidate drugs
for preclinical and clinical development. MANIFOLD is particularly suited for
optimizing natural product lead structures, many of which are not amenable to
conventional combinatorial chemistry techniques. Phytera has produced one
candidate drug and several lead structures. Marinovir, Phytera's candidate drug
from a marine microbe, is aimed at treating herpes infections and is currently
scheduled to enter clinical studies in 1999.
Corporate Strategy
Phytera's objective is to be the leader in the application of combinatorial
drug discovery technology to the search for new medicines derived from nature.
To achieve this objective, Phytera will leverage its broad range of proprietary
technologies in the following ways:
. Capitalize on Revenue-Generating Partnerships. Phytera has established
several revenue-generating partnerships, such as its antifungal alliance
with Eli Lilly and Company, and is continuing to pursue additional such
relationships. These revenue-generating partnerships provide Phytera with
both
22
<PAGE>
tear-term and potential longer-term revenues through up-front payments,
option/license fees, research funding, milestone payments and royalties
and provide its partners with access to Phytera's novel chemical diversity
libraries, proprietary screens and other proprietary technologies and
resources. See "--Corporate Partnerships."
. Capitalize on Joint Research and Development Partnerships with Retained
Product Rights. Phytera retains substantial product rights under a number
of joint research and development partnerships, such as its alliance with
NeuroSearch A/S, and is continuing to pursue additional relationships of
this type with other partners. These retained product rights partnerships
combine Phytera's novel chemical diversity libraries and other
proprietary resources with pharmaceutical screens developed by its
partners. Lead structures and candidate drugs identified by the screening
of Phytera's libraries are expected to be the focus of joint development
and commercialization efforts. See "--Corporate Partnerships."
. Advance Phytera's Drug-Resistant Infectious Diseases Program. Phytera
intends to continue its internal drug discovery efforts, with particular
focus on the use of its proprietary screen portfolio for drug-resistant
infectious diseases. Included in this portfolio are antibacterial screens
based on Phytera's MDR knockout technology (a joint discovery between
Phytera and an academic institution to which Phytera holds exclusive
commercial rights) which offer advantages in screening for new drugs to
treat resistant infections. Phytera is currently seeking to advance one
preclinical candidate drug, marinovir, to the clinic and is currently
optimizing several lead structures identified within the program. See "--
Phytera's Resistant Infectious Diseases Screening Program" and "--Patents
and Proprietary Rights."
. Broaden and Leverage Phytera's Technology Platform. Phytera believes its
intellectual property position represents a substantial barrier to entry
by competitors. Phytera intends to broaden and leverage this position
through further internal innovation and in-licensing and acquisitions of
new technologies and novel products. It is also pursuing application of
its current technologies to other business areas, such as agriculture.
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<PAGE>
Nature as a Source of Chemical Diversity
Historically, natural products have represented a major source of medicines
used to treat human disease and, together with medicinal synthetic chemistry,
continue to generate a substantial number of pharmaceuticals. Drugs can be
derived from natural sources either directly or, more commonly, indirectly.
Direct derivation occurs when the natural chemical compound is used as a
pharmaceutical, as in the case of Taxol(R), a cancer drug from the Pacific yew
tree. Indirect derivation occurs when a lead structure from a natural source is
used as a chemical basis or conceptual starting point for a drug analog and
optimization program that results in a commercial product. An example of this
is Zocor(R), a cholesterol-lowering drug derived from a fungal lead structure.
A recent study from the US National Institutes of Health reported that
natural product-derived drugs accounted for 39% of all approvals by the US FDA
from 1983 to 1994 across all therapeutic categories. In the case of infectious
diseases, 56% of all FDA-approved drugs were derived from natural products.
Many of today's most commercially important drugs were derived from a natural
product starting point, as illustrated below.
Derivation of Certain Commercially Significant Drugs
<TABLE>
<CAPTION>
1997 Worldwide Therapeutic
Brand Name Sales Rank Indication Natural Product Derivation
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Zocor(R) 1 High cholesterol Fungal lead structure
Vasotec(R) 4 Hypertension Snake venom lead structure
Zantac(R) 5 Ulcers Based on histamine-derived
structure
Augmentin(R) 9 Bacterial infection Bacterial lead structure
and fungal product
combination
Pravachol(R) 13 High cholesterol Fungal lead structure
Mevalotin(R) 14 High cholesterol Fungal lead structure
Biaxin(R) 15 Bacterial infection Bacterial lead structure
Sandimmune(R) 16 Transplant rejection Fungal product
Taxol(R) 30 Cancer Plant product
</TABLE>
As the table above illustrates, two natural product sources, terrestrial
fungi and bacteria, have played prominent roles in the development of new drugs
in the recent past. These successes have been driven by decades of extensive
evaluation of these sources by the pharmaceutical industry. However, continued
study of terrestrial microbes is increasingly resulting in the rediscovery of
the same natural chemistry. Thus, Phytera believes that terrestrial microbes
have diminished value as potential sources of new chemical diversity.
Plants and marine microorganisms represent two relatively untapped natural
sources of novel chemicals that may be useful in the discovery of new drugs.
According to scientific and other literature, only a small percentage of the
estimated 250,000 species of plants has been evaluated as a source of new
pharmaceuticals. Phytera believes that the pharmaceutical industry's evaluation
of plants for drug discovery has been limited by the use of traditional
sourcing approaches. These approaches require large amounts of plant material
so that species that are available only in small quantities or are subject to
conservation efforts cannot be readily sampled. An additional problem is the
difficulty of reaccessing the source material to obtain greater quantities for
further discovery and development once the plant extract is found to contain a
pharmaceutically active chemical compound. Reaccessing the source material can
be logistically difficult and time consuming, and it is often not possible to
successfully reaccess the species, or its pharmaceutically important chemistry.
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<PAGE>
Marine microorganisms are a genetically and chemically distinct class of
organisms that are only just beginning to be examined as a source of lead
structures or candidate drugs. Marine microorganisms have never been
systematically sourced by the pharmaceutical industry. In the cases where
marine microorganisms have been sourced, both their isolation and subsequent
culture have been constrained by the failure to recognize their dependence on
specific marine nutrients for growth.
The most significant limitation in traditional natural product drug discovery
is the inability to access much of the potential chemical diversity of a
sourced species. Traditional natural product drug discovery technologies sample
a species from a single environment and therefore access only a minor portion
of the chemical potential of that species. Changing environmental conditions
cause a plant or marine microbe to express different chemical compounds. In
order to fully access the chemical potential of a sourced species, living
tissue or cells from the sample must be exposed to a wide array of
environmental and other conditions. Phytera believes this is best accomplished
under the controlled laboratory conditions of cell culture by applying certain
technologies collectively termed "combinatorial biology".
In addition, pharmaceutical screening of complex extract mixtures
traditionally derived from natural products requires difficult chemical
isolation and identification steps after screening. The presence of nuisance
and dilutive chemical compounds in such mixtures creates problems for the
screening process and can also hinder the isolation and identification process.
Finally, active compounds discovered by screening of natural product extracts
are often not suitable drug candidates themselves. Rather, they are of value as
lead structures which can then be chemically modified to improve potency,
selectivity or physical and chemical characteristics. Such optimization of
natural product-derived lead structures has relied on traditional and
relatively slow medicinal chemistry approaches as many of the methods used in
conventional combinatorial chemistry are not easily applicable to such
situations.
Combinatorial Biology
Historically, the term combinatorial biology has referred to the manipulation
of cells using recombinant DNA techniques, which involve the insertion of
genetic material from one type of organism into the genome of a second
organism. Such gene manipulation can enable the latter organism to produce
different chemistry than was possible in its original state. A more expansive
definition of combinatorial biology also encompasses the manipulation of the
genetic and enzymatic machinery of an organism. Such manipulation may include
chemical and environmental stresses, infection-related or hormonal
perturbations, the introduction of substances that chemically change the
organism's DNA, and various combinations of the foregoing. Applied in this way,
combinatorial biology allows cells to produce an extremely wide variety of
chemical compounds, many of which may not be produced by the organism in its
natural state. As such, combinatorial biology is an attractive method for
gaining access to a far greater portion of a species' chemical diversity than
is currently possible using traditional approaches.
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<PAGE>
Phytera's Combinatorial Drug Discovery Program
The worldwide pharmaceutical industry depends upon the continuing discovery
of new lead structures and candidate drugs to maintain its drug development
pipeline. This requires, among other things:
. multiple sources of novel chemicals;
. innovative means of screening those chemicals for pharmaceutical
activity; and
. efficient methods of optimizing the chemical structures of
pharmaceutically active compounds (lead structures) for preclinical and
clinical development.
Phytera's Combinatorial Drug Discovery Program integrates these three
elements by combining combinatorial biology, pharmaceutical screening and
combinatorial chemistry to exploit the diversity of chemistry from plants and
marine microorganisms more effectively than traditional approaches. Phytera
believes that this program addresses many of the significant problems and
limitations of traditional natural product drug discovery programs.
Phytera's Solutions to Natural Product Drug Discovery Problems
<TABLE>
<CAPTION>
Phytera Solution
Problem Approach Technology
- -----------------------------------------------------------------------------------
<S> <C> <C>
Access to "novel" source Cell culture technology requires ExPAND
material only a seed or leaf/stem clipping,
permitting access to those plant
species that are available in
limited quantity
Isolation and cell culture (u)MARINE
technology permits access to marine
microorganisms not previously
isolated
Difficulty in Cell culture storage technology ExPAND and (u)MARINE
reaccessing source eliminates need to reaccess source
material material
Limited and fixed Combinatorial biology expands ExPAND and (u)MARINE
chemical diversity chemical diversity in cell culture
Chemistry not easily Cell culture results in reproducible ExPAND and (u)MARINE
reproducible or scalable and scalable chemistry
Difficulties associated Extraction technology creates ENRICH
with screening of refined cell culture extracts for
complex extract mixtures screening
Individual chemical compounds are PINACLE
isolated prior to screening
Limited optimization of Proprietary combinatorial chemistry MANIFOLD
natural product lead techniques are used to optimize
structures natural product lead structures
</TABLE>
Phytera's technological acronyms are:
ExPAND Expanded Phytochemistry Aimed at Novel Discovery
(u)MARINE Broad access to the chemical diversity of MARINE micro(u)organisms
ENRICH ENRICHed chemical extraction of natural species
PINACLE Pre-isolated Individual NAtural Chemical Library Elements
MANIFOLD Multiple Analoging of Natural Isolates For Optimal Lead
Development
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<PAGE>
The following diagram illustrates the various elements of Phytera's
Combinatorial Drug Discovery Program:
PHYTERA'S COMBINATORIAL DRUG DISCOVERY PROGRAM
----------------------------------------------
WORLDWIDE SOURCING OF DIVERSE
PLANT AND MARINE SPECIMENS
. Botanical gardens . Commercial seed suppliers
. Biodiversity-rich countries . Marine sourcing expeditions
----------------------------------------------
|
\|/
----------------------------------------------
GENERATE CHEMICAL DIVERSITY LIBRARIES
. Establish and manipulate cell cultures using combinatorial biology
. EXPAND (plant) and (mu)MARINE (marine microorganisms)
. Produce extracts using ENRICH
. Isolate individual chemical compounds using PINACLE
----------------------------------------------
|
\|/
----------------------------------------------
PHARMACEUTICAL SCREENING
. Phytera's resistant infectious diseases screening program
- bacterial, fungal, viral and MDR-based screens
. Partnership programs
- screens for cancer, inflammation, allergy, asthma, stroke,
myocardial infarction, diabetes, memory and attention deficit
disorders and depression
----------------------------------------------
|
\|/
----------------------------------------------
CANDIDATE DRUG IDENTIFICATION
. Isolate and identify lead structures
. Optimize lead structures using combinatorial chemistry (MANIFOLD)
----------------------------------------------
|
\|/
----------------------------------------------
PHARMACEUTICAL DEVELOPMENT
. Preclinical and future clinical development of candidate drugs
----------------------------------------------
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<PAGE>
Sourcing of Plants and Marine Microorganisms
Phytera has established worldwide sourcing programs for plant and marine
specimens. Phytera believes that its sourcing arrangements, combined with its
proprietary technology for establishing plant and marine microbial cell
cultures, represent an important strategic asset and a substantial barrier to
entry for potential competitors. Further, Phytera believes that its reputation
and proprietary technologies provide it with important advantages in forming
additional sourcing collaborations. See "--Biodiversity Sourcing Agreements."
Combinatorial Biology Program
Phytera uses combinatorial biology to generate unique access to the chemistry
inherent in plant and marine samples obtained under its extensive sourcing
arrangements. Phytera's combinatorial biology program involves the manipulation
of the genetic and enzymatic machinery of an organism by exposing it to
chemical and environmental stresses, infection-related or hormonal
perturbations or the introduction of substances that chemically change the
organism's DNA and, various combinations of the foregoing. This program is
comprised of two novel and proprietary cell culture-based technologies, ExPAND
(for plants) and (u)MARINE (for marine microorganisms).
Phytera's culture libraries currently contain over 3,000 plant species and
over 8,000 marine microbial isolates and, to Phytera's knowledge, are unequaled
in the number and diversity of species.
EXPAND and (u)MARINE technologies enable:
. Initial establishment of cell cultures from sourced species. This
overcomes difficulties in culturing plant cells and creating novel marine
microbial cell cultures.
. Combinatorial manipulation of genes, enzymes and metabolic pathways. This
broadens access to the chemical diversity and novelty in each species
beyond what is expressed in the native sample.
. Maintenance and long-term storage of cell cultures. This facilitates
reaccess to the plant cell or marine microorganism.
. Reproducible and scalable reaccess to interesting chemical
compounds. This enables access to pharmaceutically active chemical
compounds at all stages of the discovery and early development process.
ExPAND Technology
Phytera's ExPAND technology program establishes plant cell cultures from
sourced plant species. This is a multi-stage process that establishes a cell
culture made up of finely dispersed plant cells in liquid medium. Successful
production of cell cultures from plants requires optimal culture conditions for
each species.
Once established in cell culture, plant cells are subjected to multiple,
proprietary manipulations in the form of genetic, hormonal, infection-related,
environmental or chemical treatments, applied singly and in combination. The
combinatorial matrix of manipulations substantially increases the variety and
novelty of chemical compounds in the cell culture by modulating the expression
of genes, enzymes and metabolic pathways. Interactions of the products of
manipulated genes and pathways also generate chemical compounds not otherwise
produced by the plant species. Phytera routinely applies various combinations
from a panel of as many as 15 manipulations to each plant cell culture and has
created libraries of very large numbers of reproducible cell culture extracts.
Sunillin, the structurally novel prototype for a series of antifungal
compounds, is a product identified by Phytera's ExPAND technology. Sunillin is
only produced by certain combinatorial manipulations of a plant cell culture.
Sunillin was not detected in numerous samples of the native plant species used
to generate the cell cultures. See figure below. See "--Products Under
Development--Sunillin Antifungal Series."
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Sunillin Is Produced by Combinatorial Manipulations
[CHART DEPICTING SUNILLIN PRODUCTION APPEARS HERE]
*As a % of maximum level produced by combinatorial manipulations
In addition to enabling broader access to novel chemical diversity, Phytera's
ExPAND technology addresses other significant problems associated with
traditional natural product drug discovery, including access and reaccess to
species source material and reproducibility and scalability of species
chemistry.
Small quantities of plant material, such as a seed or leaf or stem clipping,
are required to establish a cell culture. This enables access to plant species
available from botanical gardens and commercial seed vendors. It also provides
access to species in limited supply due to conservation concerns, sourcing
logistics or other issues. Phytera believes that these advantages will
facilitate access to the majority of the world's plant species.
Reaccess to source material can be a major problem with traditional
approaches and often requires new sourcing expeditions to harvest larger
quantities of the original plant material. This can present significant
logistical hurdles, require a great deal of time and often results in a failure
to reaccess the source or its pharmaceutically important chemistry. By
contrast, Phytera's ability to preserve and store its plant cell cultures,
primarily by cryopreservation or freezing, obviates the need for reaccess to
the source. Further, the ExPAND process is reproducible and scalable, providing
the increased quantities of chemical compounds required for further
pharmaceutical evaluation and preclinical development.
Phytera has developed its expertise and know-how in the area of plant cell
culture over more than 15 years and has successfully cultured thousands of
diverse plant species. Phytera believes that this expertise and the resultant
cell culture libraries represent significant barriers to entry for competitors.
Phytera is seeking to broaden its chemical diversity libraries through the
sourcing of additional species and development of additional manipulation
techniques.
(u)MARINE Technology
Marine microorganisms represent a promising and largely unexplored source of
lead structures and candidate drugs. The isolation and culture of marine
microorganisms has historically been limited by an incomplete understanding of
the environmental niches they occupy in the oceans. Traditional marine
microorganism isolation media are only minor modifications of those used for
terrestrial microorganisms and fail to reproduce the natural marine
environment. As a result, such media typically enable the isolation of only a
small percentage of the microorganisms present in a given marine sample.
Phytera's (u)MARINE technology significantly increases isolation success rates
by utilizing microbial isolation conditions which more closely replicate the
growth conditions of marine microbes in their natural environment. Phytera
believes that its (u)MARINE technology may provide access to many species of
marine microorganisms that have never before been isolated.
The (u)MARINE program is driven by broad sourcing of microbe-containing marine
specimens such as sediment, plant and animal macroorganisms and seawater.
Phytera's (u)MARINE culture library emphasizes the
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most chemically prolific classes of marine microbes, fungi and actinomycetes,
rather than more commonly sampled and less chemically diverse organisms such as
eubacteria. Each microbial cell culture is fermented under a variety of
proprietary, marine nutrient-based conditions to induce multiple genetic and
enzymatic changes which modify its chemistry. As in the case of plant cell
cultures, combinatorial manipulations of marine microbial cell culture
conditions result in diverse chemical expression states, providing access to
novel chemical compounds. Marine microorganism cell cultures can be
successfully stored by cryopreservation (freezing) and reaccessed for future
use. Phytera's antiviral candidate, marinovir, is a marine microbial product
that is not produced by the originating cell culture under non-(u)MARINE
conditions. See "--Products Under Development--Marinovir--Preclinical Candidate
for Herpes Infections."
Generation of Chemical Diversity Libraries
ENRICH Extraction Technology
One limiting factor in natural product-based drug discovery has been the use
of overly crude extracts which have not been processed to remove nuisance and
dilutive compounds prior to screening. To overcome this limitation, Phytera has
developed its ENRICH technology which refines extracts to generate high-quality
pharmaceutical screening samples. Studies have confirmed that ENRICH extraction
selectively increases the abundance of potentially important chemicals in
pharmaceutical screening samples and removes a substantial number of nuisance
and dilutive compounds.
To date, Phytera has generated over 60,000 ENRICH cell culture extracts,
22,000 from its ExPAND program and 38,000 from its (u)MARINE program, and
expects to increase its extract libraries further in the future. Numerous
samples of these extracts are stored in a format that is compatible with the
high-throughput screening methods used by Phytera and other pharmaceutical and
biotechnology companies. Each stored sample is capable of supporting hundreds
of pharmaceutical screenings, enabling long term access to Phytera's novel
chemical diversity libraries. In the event that these extract libraries become
depleted, Phytera can replenish each sample by regrowth, re-manipulation and
re-extraction of the respective plant or marine microbial culture from its
storage bank.
PINACLE Technology
While Phytera believes that its novel extract-based technologies overcome
many of the key limitations to successful natural product-based drug discovery,
the approach involves screening mixtures of natural chemical compounds.
Phytera's PINACLE technology is designed to solve many of the problems
associated with the screening of complex mixtures. The objective of Phytera's
PINACLE technology is to combine the high degree of chemical diversity
available from its combinatorial biology technology with the benefits of a one-
chemical-compound-per-screening-sample format. Phytera has established a pilot
library of PINACLE compounds, and is further developing this program in order
to produce a larger-scale library to be made available to commercial partners
in 2000.
The PINACLE process begins by subjecting plant cell and marine microbial
cultures to up to 15 manipulations using ExPAND and (u)MARINE technologies. The
precise series of subsequent steps is the subject of an ongoing technology
development effort. In the initial phase of PINACLE operation, manipulated
cultures grown at intermediate scale are being subjected to a series of
proprietary extraction and separation methods to isolate individual chemical
compounds. Isolated compounds then undergo multiparameter analysis using
techniques such as liquid chromatography, ultraviolet absorption, mass
spectrometry and nuclear magnetic resonance spectroscopy. These compounds are
then catalogued in a proprietary database and placed in 96-well microtiter
plates for later screening in a one-chemical-compound-per-screening-sample
format. As the PINACLE compound library grows, it will be increasingly
desirable to ensure that each culture subjected to this process has a high
probability of contributing new chemicals to the library which have not been
seen in previous cultures. Thus, a second phase of PINACLE technology
development is underway which will miniaturize and automate some parts of the
process. The goal will be to subject each plant species to up to
30 manipulations, to further diversify chemical expression. These manipulations
will be performed on smaller scale cultures, which will be rapidly extracted
and subjected to a protocol of multiparameter analysis to generate a unique
chemical profile for each extract. These profiles will be continuously compared
to identify those cell culture extracts containing the largest amounts of the
most novel and diverse chemistry. Only these selected cultures will then be
regrown on a larger scale and subjected to the separation, isolation and
analytical steps currently in use generating, if successful, large numbers of
additional compounds for entry into the PINACLE library database and
distribution into 96-well microtiter plates.
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Pharmaceutical Screening
For a novel chemical compound to be identified as a lead structure or
candidate drug, it must first exhibit activity in a pharmaceutical screen that
acts as a surrogate for the human disease state. In order to leverage its novel
chemical diversity libraries, Phytera has built an extensive pharmaceutical
screen portfolio that combines an internal program of screens for resistant
infectious diseases with partnership screens that span a wide variety of
disease areas. Phytera's screen portfolio is evolving over time as new
pharmaceutical screens are incorporated to replace certain existing screens and
to expand the portfolio to address new therapeutic targets.
Phytera's Resistant Infectious Diseases Screening Program
Escalating drug resistance is now considered by many the single most
important issue in the management of human infectious diseases. Phytera
believes that the area of resistant infectious diseases is particularly suited
to screening Phytera's plant and marine microbial combinatorial biology-derived
libraries. Both plants and microbes are attacked by bacterial, fungal and viral
pathogens that have much in common with human pathogens. Plants and microbes
have, therefore, evolved chemical defense mechanisms that combat pathogen
invasion and reproduction. Further, they have developed approaches that deal
with the problem of resistance development in the invading pathogen. Phytera's
plant- and marine microbe-derived chemical diversity libraries thus offer a
potentially rich source of novel antimicrobial agents that may not be
susceptible to the current resistance problems encountered in the human
therapeutic area.
Phytera believes that this area represents a particularly attractive focus
for its internal drug discovery program due to:
. Critical and growing medical need not addressed by existing therapies:
particularly important in this regard is the continued emergence of new
drug resistant pathogens;
. Large commercial markets for effective new agents;
. Reduced development risk since activity of a candidate drug in a
laboratory model of infectious disease is often highly predicative of
clinical efficacy in man; and
. Relatively rapid and cost-effective clinical studies since many human
infectious diseases involve acute, short treatment periods with easily
measured symptoms and outcomes.
Phytera's resistant infectious diseases screening program consists of over 20
molecular targets and whole cell screens which act as surrogates for human
diseases. Molecular target-based screens enable the testing of samples against
the increasing number and variety of important enzymes, receptors or ion
channels being identified via genomic studies as relevant to key diseases. By
contrast, whole cell screens offer the opportunity to discover drugs which act
by entirely new mechanisms, independent of existing knowledge of molecular
targets. This is particularly important in view of the novel chemistry that is
contained in Phytera's chemical diversity libraries because it increases the
odds of discovering agents which act by novel mechanisms. Finally, information
generated from screening efforts is tracked, analyzed and integrated with
upstream sourcing and culturing activities and downstream natural product
chemistry through a computerized database and bioinformatics system.
MDR Knockout-Based Screens
Among the most innovative of Phytera's screens are those based on its
proprietary MDR pump technology. One way pathogens effectively defend
themselves against antimicrobial drugs is through the operation of MDR pumps,
which remove the drug from the cell. These pumps, discovered in the 1980s, are
responsible for a significant percentage of drug resistance in both bacteria
and fungi. For example specific MDR pumps have been identified that expel the
leading antifungal drug, fluconazole (active ingredient in Diflucan(R)), from
the fungal cell.
Phytera believes that the presence of MDR pumps in strains of pathogens used
as screening tools over the last several decades may have resulted in a failure
to detect whole classes of potential antimicrobial chemical compounds. Phytera
has established an MDR pump-based genomics program which combines its internal
resources with those of a number of leading academic centers in the US and
Europe. In this program, Phytera uses genetic engineering techniques to
generate a proprietary library of fungal and bacterial mutants that have one or
more of their MDR pumps selectively inactivated (or "knocked out"). Knowledge
of the MDR pump gene sequence(s) for certain microbial pathogens enables
identification of related sequences in a broader range of pathogens and
facilitates the construction of further MDR knockout strains. This approach has
generated numerous MDR knockout strains of microbial pathogens or related
organisms, each of which displays hypersensitivity to a wide range of
antimicrobial agents.
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Based on these MDR knockouts, Phytera has developed high-sensitivity, high-
throughput pharmaceutical screens. Within its internal drug discovery program,
Phytera is using bacterial MDR knockouts; in one revenue generating
partnership, Phytera is using fungal MDR knockouts. Phytera's library of MDR
knockouts includes, among others, several major bacterial pathogens such as
Staphylococcus aureus and Escherichia coli (E. coli) and important fungal
pathogens such as Candida albicans.
Phytera's efforts to date clearly demonstrate that MDR knockout strains are
capable of detecting the antimicrobial activity of chemical compounds that is
undetected in screens using the corresponding wild-type strain of the pathogen
with normal MDR pump(s). Traditional antimicrobial screens used by the
pharmaceutical industry employ these wild-type strains. Thus, MDR knockout
pathogen strains offer the opportunity to discover chemically and
mechanistically novel classes of antibacterials and antifungals.
A candidate drug identified by this approach can be used to treat pathogens
with active MDR pumps in three ways:
. the concentration of the drug could be increased to overcome the effect of
the active MDR pump in the pathogen. Marketed drugs that achieve this
effect include antibacterials, such as erythromycin, and antifungals, such
as Diflucan(R) (fluconazole);
. the original lead structure identified by the screen could be synthetically
modified to reduce the impact of the action of the MDR pump in the
pathogen; and
. the drug could be combined with a compound that inhibits the action of the
MDR pump in the pathogen.
MDR Knockout-Based Screens Can Detect Novel Antimicrobial Drugs
[Graphic representation of a "Wild-type Microbe" that has functioning MDR pumps
with the following adjacent text:
. Drug largely removed from microbe by MDR pump
. Microbial screen does not detect the activity of novel antimicrobial drugs
Graphic representation of an "MDR Knockout Microbe" in which there are no
functioning MDR pumps with the following adjacent text:
. Drug not removed from microbe
. Microbial screen detects the activity of novel antimicrobial drugs]
Partnership Screens
Phytera is leveraging its chemical diversity libraries through a number of
corporate partnerships that expose this chemistry to a wide array of innovative
screening targets across numerous important therapeutic areas. Phytera's
partnership screens currently span 12 therapeutic areas. See "--Corporate
Partnerships."
Combinatorial Chemistry Program
Lead structures identified by pharmaceutical screening rarely possess all the
properties required to be selected as a candidate drug. Usually, a lead
structure needs to be optimized to improve efficacy, safety, drug delivery
characteristics, pharmacokinetics or manufacturing procedures, prior to its
advancement as a candidate drug.
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Recently, combinatorial chemistry has emerged as an important and powerful
ancillary technology in the optimization of lead structures into candidate
drugs. Combinatorial chemistry is a chemical synthesis technology that, in many
ways, is analogous to the methods that living cells use to produce chemical
diversity. The basic concept involves the chemical reaction of a family of
closely related chemical structures (for example, family A/1/, A/2/ and A/3/)
with a different family of closely related structures (for example, family
B/1/, B/2/, and B/3/) to produce a number of combinatorial chemical analogs
(A/1/B/1/, A/1/B/2/, A/1/B/3/, A/2/B/1/, . . ., A/3/B/3/). If each chemical
family is large, then the resultant chemical library will be exponentially
larger. Two families of 100 chemicals will yield 10,000 new chemical compounds
when optimally combinatorialized. Thus, once a lead structure is identified,
combinatorial chemistry can be applied to produce large numbers of structural
analogs, which can be examined for the improved properties required in a
candidate drug. Together with medicinal synthetic chemistry and computer
assisted design, combinatorial chemistry now plays an important role in the
process of optimization of a lead structure.
Phytera's combinatorial chemistry program, MANIFOLD, integrates solid phase
combinatorial chemistry techniques with other proprietary methods for analoging
natural product structures. These technologies greatly facilitate the
optimization of lead structures derived from Phytera's combinatorial biology-
based screening program. Certain of these natural product lead structures may
not be easily approachable by conventional combinatorial chemistry. Phytera
further applies its proprietary MANIFOLD technologies in the generation of
combinatorial libraries based on novel natural product structures isolated
within the PINACLE program and other interesting lead structures identified
from the literature or by Phytera's academic collaborators.
Among the structures to which Phytera has applied MANIFOLD are Actinomycin D,
balanol and a number of others that have been identified through its
combinatorial biology program. Actinomycin D is a potent but non-selective
natural inhibitor of DNA repair that is currently used for cancer therapy,
analogs of which could have wider indications in cancer and infectious
diseases. Balanol is a potent but non-selective inhibitor of the enzyme protein
kinase C, isoforms of which have been implicated in a wide variety of diseases.
Among structures identified within Phytera's combinatorial biology program are
PHY400 and PHY1100, both discovered from screening of Phytera's ExPAND plant
cell culture-derived chemical library. PHY400 is the prototype of a novel
series of antibacterial compounds which inhibit a specific molecular target
found in important pathogenic bacteria such as Staphylococcus spp. Inhibition
of the molecular target is correlated with in vitro activity against bacterial
pathogens. The objective of the associated MANIFOLD combinatorial chemistry
effort is to identify an analog of PHY400 which displays potent antibacterial
activity in vivo. Enhancement of in vivo activity is also the goal of a
MANIFOLD analog program around PHY1100, a potent, structurally novel inhibitor
of human angiogenesis in in vitro models, which was identified in partnership
with Tsumura & Co. Other lead structures identified in internal screening
programs or from external publications will enter the MANIFOLD analog program
in 1999.
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Corporate Partnerships
Phytera is actively seeking to develop revenue-generating and retained
product rights partnerships with pharmaceutical and biotechnology companies.
The table below summarizes the focus of each of Phytera's current corporate
partnerships:
Phytera's Corporate Partnerships
<TABLE>
<CAPTION>
Type of Partnership
Corporate Partner Partnership Focus Revenue-Generating Retained Product Rights
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Eli Lilly and Company Fungal diseases X
Chiron Corporation Cancer and other areas X
Tsumura & Co. Inflammation and allergy X X
NeuroSearch A/S Asthma, depression, diabetes, X
memory and attention deficit
disorders
Galileo Laboratories, Stroke and myocardial X
Inc. infarction
Nycomed Amersham plc. Plant-derived enzymes for X X
research laboratory use or
clinical diagnostics
</TABLE>
Revenue-generating partnerships are intended to provide Phytera with a source
of near-term and potential longer-term revenues through up-front payments,
license fees, research funding, milestone payments and royalties. Retained
product rights partnerships provide Phytera marketing rights to products
developed through joint research with partners. Phytera has no obligation under
any of the partnerships to make cash payments to any partner. However, Phytera
will be responsible for bearing the expenses associated with performing its
obligations under the various partnerships. In certain cases, those expenses
are offset by research funding provided by the partner. For payments received
by Phytera pursuant to corporate partnerships through September 30, 1998, see
note 9 of notes to Consolidated Financial Statements.
Eli Lilly and Company
In July 1998, Phytera entered into a revenue-generating partnership with Eli
Lilly and Company, a US pharmaceutical company, to discover novel agents for
the diagnosis, treatment and prevention of infectious fungal diseases in humans
and animals. The partnership involves several of Phytera's proprietary
technologies, including chemical diversity libraries, MDR knockout-based
antifungal screens and the isolation and identification of active chemical
compounds. Lilly will also provide chemical compounds for screening and will be
responsible for lead structure optimization and candidate drug development and
commercialization. The initial term of the agreement is two years, and Lilly
has the right to extend the program for three additional years, in one year
increments. Lilly will hold all product rights to any product discovered during
the collaboration. Each of Lilly and Phytera are responsible for bearing the
expenses associated with performing their respective obligations under the
agreement. Lilly is obligated to make certain payments to Phytera to support
ongoing research and to make milestone payments at certain points in the
development process. Under this agreement, Phytera retains rights to certain
pre-existing anti-fungal programs, subject to a right of first negotiation
granted to Lilly in the event that Phytera seeks a research, development or
commercialization collaboration with a third pary. The value of milestone
payments which may be received by Phytera in the future, if any, depends upon
the success of the partnership in discovering novel agents, the number of such
agents Lilly chooses to develop, and the level of success of the development
effort. Therefore, the value of future milestone payments, if any, cannot be
accurately estimated, and Phytera may not receive any such payments. If the
collaboration is successful, Phytera could receive more than $41,000,000 from
Lilly under this agreement (exclusive of royalties), but actual receipts from
the partnership may be substantially less than that amount. Royalty payments
are due on the sales of any products derived from this partnership. Lilly has
made an initial equity investment of $500,000 in connection with this agreement
and will make a further equity payment if a specific research milestone is
triggered. See note 9(c) of notes to Consolidated Financial Statements.
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<PAGE>
Chiron Corporation
In May 1998, Phytera entered into a revenue-generating partnership with
Chiron Corporation, a US biotechnology company, to discover novel agents for
the treatment of various forms of cancer and other diseases. Phytera has
provided chemical diversity libraries to Chiron for screening in certain of
Chiron's proprietary high throughput screening systems and will carry out the
isolation and identification of active chemical compounds. Under the terms of
this agreement, Phytera has received an up-front payment, will receive funding
for research activities, and may receive option and license fees based on
Chiron's selection of certain chemical compounds for further development.
Phytera is also entitled to future milestone payments at certain specified
points in the development process. The value of option fees, license fees, and
milestone payments which may be received by Phytera in the future, if any,
depends upon the success of the partnership in discovering novel agents, the
number of such agents Chiron chooses to develop, and the level of success of
the development effort. Therefore, the value of future option fees, license
fees and milestone payments, if any, cannot be accurately estimated, and
Phytera may not receive any such payments. If the collaboration is successful,
Phytera could receive more than $18,000,000 from Chiron under this agreement
(exclusive of royalties), but actual receipts from the partnership may be
substantially less than that amount. Royalty payments are due on sales of
marketed products derived from the partnership; provided that, a milestone
payment is creditable against royalties. The Chiron partnership terminates upon
the completion of screening and the isolation and identification of any active
chemical compounds. The agreement with Chiron contemplates an initial
collaboration term of up to 15 months, during which time Chiron will screen
Phytera's chemical diversity libraries. After the 15 month collaboration,
Chiron may, at its option, enter into an exclusive license to commercialize one
or more lead structures upon payment of an additional fee to Phytera, or
terminate this agreement upon 30 days' notice.
Tsumura & Co.
In June 1996, Phytera entered into a revenue-bearing and retained product
rights partnership with Tsumura & Co., a Japanese pharmaceutical company, to
discover novel agents for the treatment of inflammation and allergies. Under
the terms of the agreement, Phytera provides access to its chemical diversity
libraries for screening against selected allergy and inflammation targets.
Phytera and Tsumura share responsibilities for the discovery and development of
chemical compounds from this partnership. Tsumura is responsible for primary
screening and lead structure optimization, while Phytera is responsible for the
isolation and identification of active chemical compounds. Phytera and Tsumura
will jointly own any patents resulting from the partnership. Phytera has
retained North American development and marketing rights to any discoveries
emanating from the partnership and Tsumura has been granted development and
marketing rights outside North America. The parties have agreed to work
together to facilitate the optimal development of candidate drugs in their
respective territories. The agreement was originally entered into for a three-
year period and has been extended for an additional year, now remaining in
effect until June 2000. Under the agreement, Tsumura makes annual extract
library access payments and provides other research funding to Phytera and will
make milestone payments at certain specified points in the drug development
process. The value of milestone payments which may be received by Phytera in
the future, if any, depends upon the successful entry of lead structures into
clinical development and the level of success of the development effort.
Therefore, the value of future milestone payments, if any, cannot be accurately
estimated, and Phytera may not receive any such payments. If the collaboration
is successful, Phytera could receive approximately $7,000,000 in additional
payments from Tsumura under this agreement (exclusive of royalties), but actual
receipts from the partnership may be substantially less than that amount.
Royalty payments are due on marketed products derived from the partnership.
NeuroSearch A/S
In May 1998, Phytera entered into a retained product rights partnership with
NeuroSearch A/S, a Danish neuropharmaceutical company, to discover novel agents
that interact with potassium ion channels. These agents may prove useful in the
treatment or prevention of a wide array of diseases, such as memory and
attention deficit disorders, depression, asthma, and diabetes. Phytera is
providing extracts from its chemical diversity libraries for screening in
NeuroSearch's proprietary potassium ion channel assay systems. Phytera will
also conduct the isolation and identification of active chemical compounds. The
parties share equally both the rights to and the costs of the discovery and
development of chemical compounds identified from this partnership and will
collaborate on lead structure optimization activities. The parties will
negotiate in good faith with respect to a development strategy once lead
structures have been identified. In the event the parties are not able to reach
agreement with respect to a development strategy, Phytera will retain exclusive
commercial rights in North America, NeuroSearch will retain exclusive
commercial rights in Europe, and the parties will share commercial
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<PAGE>
rights in the rest of the world equally. The agreement remains in effect for a
three year term, subject to extension by mutual agreement.
Galileo Laboratories, Inc.
In April 1998, Phytera entered into a retained product rights partnership
with Galileo Laboratories, Inc., a US biotechnology company. Under the terms of
this agreement, Phytera will provide chemical diversity libraries to Galileo
for screening in Galileo's proprietary assay systems for the purpose of
discovering chemical compounds that are useful for the prevention or treatment
of diseases such as stroke and myocardial infarction. The parties share equally
both the rights to and the costs of the discovery and development of chemical
compounds identified from this partnership. Phytera is responsible for
providing cell culture extracts for screening and for the isolation and
identification of active chemical compounds. Galileo is responsible for
conducting the primary and secondary pharmaceutical screening of the extracts.
The parties have agreed to collaborate on lead structure optimization
activities and will negotiate in good faith with respect to a development
strategy once lead structures have been identified. In the event the parties
are not able to reach agreement with respect to a development strategy, either
or both Phytera or Galileo may independently develop such lead compounds at
their own expense. In the event both partners choose to undertake development,
Phytera will retain exclusive commercial rights in Europe, Galileo will retain
exclusive commercial rights in North America, and the parties will share
commercial rights in the rest of the world equally. In the event only one party
chooses to develop the compound, such party shall be obligated to pay royalties
to the other party. The agreement terminates upon the execution of a final
agreement regarding the development of one or more candidate drugs identified
pursuant to this partnership.
Nycomed Amersham plc
In July 1993, Phytera established a revenue-bearing and retained product
rights partnership with Nycomed Amersham plc, a UK company. Under this
partnership, Phytera and Amersham pursued a research and development program in
the area of plant cell culture-derived enzymes for application within
Amersham's Life Science Group. Amersham provided research support to Phytera
and agreed to make royalty payments based on Amersham's net sales of products
derived from the partnership. The parties will equally share any royalties or
other payments derived from licensing any inventions made by the partnership
for clinical diagnostic applications. In addition, Phytera retained rights to
any inventions made by the partnership for applications other than laboratory
testing, forensics testing and clinical diagnostics.
Phytera successfully completed this research program in 1995 with the
identification and bulk supply to Amersham of several novel enzymes meeting the
project specification. The agreement was amended in October 1998 to provide
that Phytera would assume responsibility and pay costs for pursuing out-
licenses to the intellectual property that was developed under the research
program in the clinical diagnostics area.
Products Under Development
Marinovir--Preclinical Candidate for Herpes Infections
Marinovir (formerly known as cyclomarin-A) is a novel chemical compound
isolated from a marine microbial cell culture utilizing Phytera's (u)MARINE
technology. Marinovir's dual antiviral/anti-inflammatory activity addresses two
important components of herpes pathology. As such, it has the potential of
providing a superior overall therapeutic effect in herpes virus infections.
Phytera is currently carrying out preclinical studies with the objective of
commencing clinical studies in 1999. See "Risk Factors--We May Be Unable to
Discover Drugs or Develop Products."
Preclinical tests have indicated that marinovir inhibits proliferation of
HSV-1 and HSV-2 in vitro with potencies similar to that of acyclovir, the
leading marketed product for the treatment of herpes infections. Marinovir
displays in vivo topical activity in two animal models of human herpes
infection and has also demonstrated anti-inflammatory action in the same animal
species. In a mouse model of vaginal herpes infection, topical application of
marinovir had a significant impact across all endpoints under study, including
herpes-related mortality, vaginal herpes levels, inflammatory indices and
neural deficits resulting in excessive urination. Phytera believes marinovir
may work through a novel mechanism of action because it is structurally
distinct from all other antiviral and anti-inflammatory agents known to Phytera
and is effective against acyclovir-resistant strains of HSV-2.
Marinovir was initially identified by academic collaborators as a novel anti-
inflammatory chemical compound using technology ultimately incorporated into
Phytera's (u)MARINE program. Subsequently, Phytera
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<PAGE>
demonstrated that marinovir had activity against the herpes virus. Phytera
holds a use patent on the application of marinovir as a treatment of viral
infections and has exclusive rights to license composition of matter and anti-
inflammatory use patents on marinovir from the originating academic
institution. See "--Patents and Proprietary Rights."
Sunillin Antifungal Series
Sunillin, the lead structure for a series of over 8,000 analogs generated by
Phytera's MANIFOLD technology, was isolated from manipulated plant cell
cultures using Phytera's ExPAND technology. Sunillin and its analogs are
structurally distinct from all other antifungal agents known to Phytera.
Phytera's extensive preclinical development work with sunillin demonstrated
that it is not suitable for commercial development, as is the case with most
lead structures. Phytera believes that within the large number of analogs
synthesized on the basis of the sunillin chemical structure, compounds may be
identified that retain antifungal activity and possess more acceptable
properties commensurate with commercial development. Phytera is currently in
the process of selecting a candidate drug for preclinical development from this
series.
The sunillin series has demonstrated a broader in vitro spectrum of
antifungal activity than fluconazole, the active ingredient in the leading
systemic antifungal drug, Diflucan(R). Sunillin and certain of its analogs
suppress growth of strains of fungal pathogens resistant to fluconazole and
have demonstrated the ability to protect mice in vivo from a lethal challenge
with Candida albicans or Aspergillus fumigatus, two human fungal pathogens.
Such compounds have also demonstrated the ability to inhibit an identified
molecular target within the fungal cell which appears to play a role in fungal
pathology. Other known antifungal drugs do not inhibit this target, indicating
that members of the sunillin series produce at least some of their antifungal
effects through a distinct mechanism of action. The fact that members of the
series have produced synergistic antifungal effects in conjunction with known
antifungal drugs has reinforced the concept of a distinct mechanism of action
for sunillin and its analogs.
Biodiversity Sourcing Agreements
Phytera's proprietary plant and marine microorganism cell culture
technologies enable broad sourcing of biological material. Phytera believes
these technologies represent an important strategic asset and competitive
advantage. In the case of plants, the small amount of material required to
initiate the cell cultures (for example, a seed, leaf or stem clipping) enables
access to species that would not be available by traditional sourcing methods.
Phytera's marine microorganism culture technology allows access to species
that, to the best of its knowledge, have never previously been grown
successfully under laboratory conditions. Further, application of Phytera's
proprietary combinatorial biology technology generates expression of a greater
range of chemical compounds than is found using traditional natural product
approaches. In addition, the ability to store plant and marine microorganism
cultures provides reproducible and scalable access to such compounds.
The combination of these advantages provides a strategic asset that
facilitates the negotiation of sourcing agreements and has led to a number of
these agreements with botanical gardens and certain countries or their
appointed designees. This combination also serves as a barrier to entry by
competitors because it relies substantially on proprietary technologies which
Phytera believes cannot easily be replicated by others.
Phytera's policy is to conduct all of its sourcing activities in compliance
with the requirements of the 1992 Convention on Biological Diversity. The most
important precept of this Convention is that each country has a sovereign right
over the genetic resources that are within its borders and therefore has the
right to control access to these resources. Parties wishing to access these
resources must do so only by agreement with the respective country, its
government or its appointed representative. A further concept embodied in the
Convention is that access should be linked with a sharing of benefits derived
from such access with the country of origin. While various forms of payment for
access to genetic resources are desirable, benefits sharing may also include
elements such as associated conservation efforts, education, technology
transfer, product rights and/or milestone and royalty payments on products
discovered and developed from these resources.
INBio Agreement
In July 1998, Phytera entered into a two-year collaborative research
agreement with Instituto Nacional de Biodiversidad, called INBio, in Costa
Rica. INBio is a private, non-profit organization empowered by the government
of Costa Rica to develop and implement viable approaches to manage the
country's biodiversity
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<PAGE>
resources. Under this joint research effort, access to a portion of indigenous
plant species that could not otherwise be investigated is made possible through
the unique combination of Phytera's ExPAND technology and INBio's inventory and
bioprospecting approach. Phytera will provide research funding to INBio during
the term of the agreement and INBio will be entitled to royalties on the sales
of products derived from the cultures provided to Phytera. Ten percent of
research funding and fifty percent of royalties received by INBio shall be
donated to the Ministry of Environment and Energy in Costa Rica for
biodiversity conservation.
Other Plant Sourcing
In addition to commercial seed sources, Phytera has established plant
sourcing agreements with a number of botanical gardens that provide Phytera
with access to a quantity and diversity of plant species sufficient to support
continued production of ExPAND extracts and PINACLE libraries. Although
specimens in the collections of such gardens that pre-date the Convention are
not governed by its terms, Phytera nonetheless structures its agreements with
the gardens to honor the tenets of the Convention whenever possible. As part of
those agreements, Phytera will make milestone and royalty payments to the
country of origin related to products developed from specimens originally
sourced by the botanical garden from such country, if it can be identified. If
a country of origin cannot be determined, Phytera will make such payments to a
non-profit trust established by Phytera for the purpose of promoting research
and conservation of biodiversity resources.
Marine Sourcing
Phytera also maintains an active program to acquire samples of marine
microorganisms from US territorial waters. Phytera acquires samples through a
variety of approaches, including charters, contract diving companies and
collaborations with academic groups conducting marine biology research
expeditions. It expects that marine sourcing expeditions outside of US
territorial waters may be conducted in the future.
Patents and Proprietary Rights
Phytera seeks to protect its core enabling technologies and drug discoveries
through patents or trade secrets, depending on the nature of the technology or
discovery, and in consultation with its external intellectual property
advisors. Phytera holds three patents, an issued US patent on the use of
marinovir to treat viral infections and two issued US use patents on the
production of novel enzymes in plant cell culture. It is pursuing counterpart
patents in other jurisdictions. Novel chemical compounds isolated from natural
sources are potentially patentable as composition of matter patents, even if a
crude natural product (for example, an extract or blend of extracts) containing
the chemical compound claimed has previously been used or marketed by others.
In addition, Phytera has eight patent applications pending in the US or Denmark
with counterpart filings in other countries. One of these applications covers
the identification and use of MDR knockouts. This invention was a joint
discovery by Phytera and the University of Maryland. Phytera has licensed the
University's rights so that it now holds exclusive rights to this invention
within the field of human and animal veterinary therapeutics and agrochemicals
and subject to the University's right to use the technology for research and
development purposes and to certain rights of the United States government. In
connection with this license, Phytera is obligated to pay a portion of research
and development revenue deriving from the patented technology to the
University. Phytera is also obligated to pay certain milestone and royalty
payments to the University as products are identified, developed and
commercialized.
Phytera has an option from an academic institution to an exclusive license
with respect to an issued US composition of matter patent on marinovir and an
issued US use patent on its anti-inflammatory use and all associated foreign
patent applications. It is currently negotiating the terms of its exclusive
license with the academic institution. Phytera believes that a license will be
obtained under terms that are consistent with pharmaceutical industry
standards, in part because Phytera holds an issued patent on the use of
marinovir in the treatment of viral infections. However, there can be no
guarantee that Phytera will obtain the license on commercially acceptable terms
or at all.
Patent law, as it relates to inventions in the pharmaceutical and
biotechnology fields, is still evolving and involves complex legal and factual
questions for which legal principles are not firmly established. Moreover,
because (1) patent applications in the United States are maintained in secrecy
until patents issue, (2) patent applications in certain other countries
generally are not published until more than 18 months after they are filed, (3)
publication of technological developments in the scientific or patent
literature often lags behind the date of such developments and (4) searches of
prior art may not reveal all relevant prior inventions, Phytera
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<PAGE>
cannot be certain that it was the first to invent the subject matter covered by
its patent applications or that it was the first to file patent applications
for such inventions. Accordingly, there can be no assurance that patents will
be granted with respect to any of Phytera's pending patent applications or with
respect to any patent applications filed by it in the future.
There can be no assurance that patent applications filed by Phytera will
result in patents being issued, that the claims of such patents will offer
significant protection for Phytera's technology, or that any patents issued to
or licensed by Phytera will not be challenged, narrowed, invalidated or
circumvented. Phytera may also be subject to proceedings that result in the
revocation of patent rights previously owned by or licensed to Phytera, as a
result of which it may be required to obtain licenses from others to continue
to develop, test or commercialize its products. There can be no assurance that
Phytera will be able to obtain such licenses on acceptable terms or at all. In
addition, there may be pending or issued patents held by parties not affiliated
with Phytera that relate to the technology utilized by Phytera. As a result,
Phytera may need to acquire licenses, to assert infringement of, or contest the
validity of, such patents or other similar patents which may be issued. Phytera
could incur substantial costs in defending itself against patent infringement
claims, interference proceedings, opposition proceedings or other challenges to
its patent rights made by third parties, or in bringing such proceedings or
enforcing any patent rights of its own.
Phytera also relies upon trade secrets, know-how and continuing technological
advances to develop and maintain its competitive position. Such information may
become available to Phytera's competitors. In an effort to maintain the
confidentiality and ownership of trade secrets and proprietary information,
Phytera requires employees, consultants and certain collaborators to execute
confidentiality and invention assignment agreements upon commencement of a
relationship with Phytera. These agreements are intended to enable Phytera to
protect its proprietary information by controlling the disclosure and use of
technology to which it has rights and provide for ownership by Phytera of
proprietary technology developed at Phytera or with its resources. There can be
no assurance, however, that these agreements will provide meaningful protection
for Phytera's trade secrets or other confidential information in the event of
unauthorized use or disclosure of such information or that adequate remedies
would exist in the event of such unauthorized use or disclosure. The loss or
exposure of trade secrets possessed by Phytera could adversely affect its
business.
Phytera relies upon common law trademark protection for its trademarks as
well as registration of trademarks with the US Patent and Trademark Office,
called the US PTO, and the European Trademark Office. Trademark registrations
have been issued by the US PTO for the ExPAND and (u)MARINE marks. Applications
have been filed with the US PTO for the PINACLE and ENRICH marks and with the
European Trademark Office for the MANIFOLD mark, but registrations have not yet
issued. There can be no assurance that any registered or unregistered
trademarks or trade name of Phytera may not infringe upon a third party's
rights. The requirement to change the trademark or trade name of Phytera could
entail significant expenses and could have a material adverse effect on
Phytera's business, financial condition and results of operations. See "Risk
Factors--We Depend on Patents and Proprietary Rights that May Fail to Protect
Our Business."
Regulation
Phytera's preclinical studies and future clinical trials, as well as the
manufacturing and marketing of its potential products, are subject to extensive
regulation by numerous governmental authorities, including the US Food and Drug
Administration, called the FDA, and the European Medicines Evaluation Agency,
called the EMEA. Phytera will be subject to similar regulation by agencies in
other countries where Phytera and its collaborators may test and market
products.
These regulatory authorities require certain steps including preclinical
studies in animal models to assess a candidate drug's efficacy and to identify
potential health problems resulting from use of a drug. Preclinical safety
tests must be conducted by laboratories that comply with applicable regulations
regarding Good Laboratory Practices. The results of these studies are submitted
to the appropriate regulatory authorities as part of an Investigational New
Drug Application which is filed to comply with FDA and EMEA regulations, prior
to beginning clinical testing.
Clinical trials are typically conducted in three sequential phases, which
sometimes overlap. In Phase I, clinical trials are conducted with a small
number of subjects to determine the early safety profile and the pattern of
drug distribution and metabolism. In Phase II, clinical trials are conducted
with groups of patients afflicted with a specified disease in order to
determine efficacy, optimal dosages and provide additional safety
39
<PAGE>
data. In Phase III, large scale, multicenter comparative clinical trials are
conducted with patients afflicted with a target disease, in order to provide
enough data for the statistical proof of efficacy and safety required by the
regulatory authorities. The human trials must be adequate and well controlled
to establish the safety and efficacy of the drug for its intended use.
The results of the preclinical testing and clinical trials are then submitted
to the FDA for a pharmaceutical product in the form of a New Drug Application,
for approval to commence commercial sales. In responding to a New Drug
Application, the FDA may grant marketing approval, request additional
information, or deny the application if it determines that the application does
not satisfy its regulatory approval criteria. Preparing a New Drug Application
involves considerable data collection, verification, analysis and expense.
At the European level, the EMEA assists in the operation of two new
procedures for obtaining marketing authorization in Europe--a centralized
community procedure and a decentralized country-based procedure--the latter
being based on the principle of mutual recognition pursuant to which approval
by the relevant regulatory authority of one member state is recognized by those
of others. As such, Phytera can choose to file for full authorization of
pharmaceutical products in the European community as a whole, or authorization
in single European countries can be sought by filing authorization applications
with the respective countries' regulatory authorities.
If the centralized EU procedure is chosen, pharmaceutical legislation
requires that a Marketing Authorization Application, called a MAA, for a drug
produced through the use of biotechnology be submitted for review by the EMEA.
Similar to the requirements of the FDA, the pharmaceutical legislation of the
European Union requires that the safety and efficacy of a drug be demonstrated
in clinical trials prior to approval of an MAA for that drug. If approved by
the EMEA, an MAA is recommended for acceptance by the European Union.
In addition to obtaining FDA and EMEA approval for each type of product, each
manufacturing establishment for new drugs must receive approval by the FDA and
EMEA, regardless of whether the centralized community procedure or the
decentralized procedure is utilized for EMEA approval. Manufacturing
facilities, both within and outside the US, are subject to inspections by, or
under the authority of, the FDA and EMEA and by other federal, state or local
agencies. Manufacturing facilities also must comply with the FDA's current Good
Manufacturing Practice regulations and parallel manufacturing regulations of
the EMEA.
Approval of a product by regulatory authorities outside the US and Europe
must be obtained prior to the commencement of commercial sales of the product
in such countries. The requirements governing the conduct of clinical trials
and product approvals vary widely from country to country, and the time
required for approval may be longer or shorter than that required for FDA or
EMEA approval. Although there are some procedures for unified regulatory
filings for certain countries, in general, each country at this time has its
own procedures and requirements.
Phytera's research and development processes involve the controlled use of
hazardous materials. Phytera is subject to national, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and certain waste products. Phytera currently incur costs
to comply with environmental laws and regulations. Phytera cannot eliminate
completely the risk of accidental contamination or injury from hazardous
materials. If an accident of this type occurs, Phytera could be liable for
damages that result and such liability could exceed our resources. If Phytera
fails to control these risks, it could result in loss of permits that allow
Phytera to use hazardous materials, which could result in a material adverse
effect on Phytera's business, financial condition and results of operations.
Competition
The biotechnology and pharmaceutical industries are characterized by rapidly
evolving technology and intense competition. Phytera competes against major
pharmaceutical companies and specialized biotechnology companies providing
chemical diversity libraries, pharmaceutical screening systems, combinatorial
chemistry technologies and other expertise. In addition, in pursuing its
internal drug discovery program, Phytera competes against pharmaceutical and
biotechnology companies developing drugs against infectious diseases. Many of
these competitors have greater financial and human resources and more
experience in research and development than Phytera. Competitors that identify
lead structures, develop candidate drugs, complete clinical trials, obtain
regulatory approvals, and begin commercial sales of their products before
Phytera will have a significant
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<PAGE>
competitive advantage. Companies that are able to achieve superior patent
positions, develop lower cost alternatives, or develop drugs with superior
efficacy, lower side effects or improved delivery characteristics will also
have a significant competitive advantage. Products currently exist for the
treatment of many of the disease conditions that Phytera is targeting with its
internal discovery programs and partnerships, and additional products are under
development for these conditions. The existence of these products may adversely
affect the commercialization or marketability of products which Phytera and its
partners may develop. Companies also compete with Phytera in recruiting and
retaining highly qualified scientific and management personnel.
Phytera anticipates that it will face increased competition in the future as
new companies enter the market and advanced technologies become available.
Phytera's processes may be rendered obsolete or uneconomical by technological
advances or entirely different approaches developed by one or more of its
competitors. The existing approaches of Phytera's competitors or new approaches
or technology developed by its competitors may be more effective than those
developed by Phytera. See "Risk Factors--Our Business May Fail Due to Intense
Competition in Our Industry."
Facilities
Phytera has approximately 26,000 square feet of laboratory and office space
in Worcester, Massachusetts, US pursuant to a lease that expires in March 2004.
Phytera's subsidiaries also lease approximately 10,000 square feet in
Sheffield, UK, approximately 4,600 square feet in Taastrup, Denmark and
approximately 4,100 square feet in Copenhagen, Denmark. Phytera believes its
current facilities are adequate for its current operations and that suitable
additional space will be available, when needed, on commercially reasonable
terms.
Litigation; Legal Proceedings
Phytera is not a party to any litigation or material legal proceedings.
Organization
As of November 30, 1998, Phytera employed 75 people. Of these, 64 were
engaged in research and development and 11 were engaged in general
administration. As of each of December 31, 1997 and December 31, 1996, Phytera
employed 74 and 53 people, respectively. None of Phytera's employees are
covered by collective bargaining agreements. Phytera believes its employee
relations are good.
Phytera conducts operations in Denmark, the United Kingdom and the United
States. The activities comprising Phytera's Combinatorial Drug Discovery
Program and preclinical development program conducted at each of these
locations are illustrated in the following chart.
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MANAGEMENT
Executive Officers, Key Employees and Directors
The following table sets forth certain information regarding the executive
officers, key employees and Directors of Phytera as of November 30, 1998:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert G. Foster (1)............. 60 Chairman of the Board of Directors
Malcolm Morville, Ph.D. ......... 53 Director, President and Chief Executive
Officer
Christopher J. Pazoles, Ph.D. ... 48 Vice President of Research
Stephen J. DiPalma .............. 39 Chief Financial Officer and Vice
President
Neil Goldsmith................... 35 Managing Director of Phytera Symbion ApS
and Phytera A/S
Uffe Bundgaard-Jorgensen, Ph.D. 53 Director
(2)..............................
Gustav A. Christensen............ 51 Director
Graham K. Crooke, MB. BS. (1).... 39 Director
Steven J. Roth (1)(2)............ 50 Director
Poul Schluter.................... 69 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
The current members of Phytera's Board of Directors have been elected
pursuant to voting agreements set forth in an Amended and Restated Stockholders
Agreement among Phytera and certain of its stockholders dated as of May 25,
1998. Such agreement specifies that the Chief Executive Officer will be a Board
member and gives certain stockholders and groups of stockholders the right to
designate other Board members. All provisions of this agreement will terminate
upon the closing of this offering. The current members of the Board will then
be subject to re-election at the next annual meeting of stockholders pursuant
to the classified board procedures discussed below.
Robert G. Foster is a founder of Phytera and has served as Chairman of the
Board since August 1995. Mr. Foster is a founder of Commonwealth BioVentures,
Inc., referred to in this prospectus as CBI, and has served as Chairman,
President and Chief Executive Officer of CBI since November 1987. Through CBI,
he was a founding investor in Alpha-Beta Technology, Inc., EcoScience Corp.,
and TSI Corp., among others. Prior to founding CBI, Mr. Foster served as
Chairman, President and Chief Executive Officer of Ventrex Laboratories, Inc.
from 1976 to 1987. Mr. Foster is also a director of Meridian Medical
Technologies, Inc. and the Wyman-Gordon Company.
Malcolm Morville, Ph.D. has served as President, CEO and Director since he
joined Phytera in 1993. From 1988 to 1993, Dr. Morville held senior management
positions at ImmuLogic Pharmaceutical Corp., most recently as Division Vice
President, Allergic Diseases Strategic Business Unit. From 1970 to 1988, Dr.
Morville held scientific and management positions at Pfizer, Inc., both in the
US and UK. Dr. Morville is also a member of the Boards of Directors of
Interneuron Pharmaceuticals, Inc. and the Massachusetts Biotechnology Council.
He received his Ph.D. in Biochemistry from the University of Manchester, UK.
Christopher J. Pazoles, Ph.D. has served as Vice President of Research since
he joined Phytera in 1994. From 1981 to 1994, Dr. Pazoles served at Pfizer,
Inc., most recently as Director of Early Development Planning and Assistant
Director, Department of Immunology and Infectious Diseases. Dr. Pazoles
received his Ph.D. in microbiology from the University of Notre Dame and
conducted post-doctoral studies at the National Institutes of Health.
Stephen J. DiPalma has served as Chief Financial Officer and Vice President
since he joined Phytera in 1997. Mr. DiPalma previously served as Chief
Financial Officer of Aquila Biopharmaceuticals, Inc. (formerly Cambridge
Biotech Corporation) from 1996 to 1997. Prior to joining Aquila
Biopharmaceuticals, Mr. DiPalma served as Chief Operating Officer at The Picker
Institute from 1995 to 1996 and Chief Financial Officer of Genica
Pharmaceuticals Corporation (currently Athena Diagnostics, Inc.) from 1988 to
1995. He holds an MBA from Babson College.
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<PAGE>
Neil Goldsmith has served since 1997 as Managing Director of Phytera Symbion
ApS and Phytera A/S. He also provides senior management support to Phytera Ltd.
under a consulting agreement with Prospero Biotech Ltd. From 1996 to 1997, Mr.
Goldsmith served as Managing Director of Auda Pharmaceuticals ApS ("Auda") and
joined Phytera when it acquired Auda. Prior to his service at Auda, Mr.
Goldsmith served as Managing Director at GX BioSystems A/S from 1995 to 1996
and PNA Diagnostics A/S in 1994. Mr. Goldsmith was Vice President, Business
Development at Pharmacia Biosensor AB from 1992 to 1993.
Uffe Bundgaard-Jorgensen, Ph.D. has served as a Director of Phytera since
1996 and as Managing Director of Danish Venture Finance A/S since 1988. Dr.
Bundgaard-Jorgensen worked for Hoff & Overgaard Consultants as a Planning
Consultant from 1970 to 1979 and Komgas (Energy) as Managing Director (Denmark)
from 1979 to 1988. Dr. Bundgaard-Jorgensen is Chairman of SAXoTech A/S and HTC
A/S and a director of Data Flight Europe A/S and PPU Maconomy A/S. Dr.
Bundgaard-Jorgensen received his Ph.D. from the University of Copenhagen.
Gustav A. Christensen is a founder of Phytera and has served as a Director of
Phytera since 1992. He is also a part-time consultant to Phytera, Inc. Mr.
Christensen has served as Chairman of Alpha-Beta Technology, Inc. since 1991.
From 1988 to 1990, Mr. Christensen served as President and Chief Executive
Officer of ImmuLogic Pharmaceutical Corp. From 1983 to 1988, he served as
Senior Vice President, Commercial Affairs at Genetics Institute. Prior to
joining Genetics Institute, Mr. Christensen held a variety of management
positions at Baxter International Inc. Mr. Christensen is also a director of
several privately held biotechnology companies and Diatide, Inc., a publicly
held biotechnology company. Mr. Christensen holds an MBA from Harvard Business
School and a M.Sc. in economics from the University of Aarhus.
Graham K. Crooke, MB. BS. has served as a Director of Phytera since 1995 and
is a partner at Ticonderoga Capital, Inc. (formerly Dillon, Read Venture
Capital). Prior to joining Dillon, Read Venture Capital in 1992, Dr. Crooke
worked as a consultant for Booz, Allen & Hamilton, Inc. from 1990 to 1991. He
served as Product Manager at Molecular Devices Corporation from 1988 to 1990.
Dr. Crooke is a Director of Centaur Pharmaceuticals, InsMed Pharmaceuticals,
Epic Therapeutics and ProScript. Dr. Crooke earned his medical degree from the
University of Western Australia in 1983 and his MBA from Stanford Business
School in 1988.
Steven J. Roth has served as a Director of Phytera since 1995. Mr. Roth has
been a private equity investor since 1984 and a Partner and Principal of CR
Management Associates, Inc. since 1990. Prior to 1990, Mr. Roth held senior
positions with Bartex Publishing Group, Heublein, Inc., Corning, Inc. and
Touche Ross & Co., Inc. He holds an MBA with distinction from Harvard Business
School.
Poul Schluter has served as a Director of Phytera since 1997. Mr. Schluter
was a member of the Danish parliament from 1964 through 1994, and served as
Prime Minister of Denmark from 1982 to 1993. Since 1994, Mr. Schluter has
served as a member of the European Parliament, holding the office of Vice
President from 1994 to 1996. Mr. Schluter also serves as a director for several
organizations, including Bayer A/S, and Henke-Ecolab. In addition, he is an
advisor to the Republic National Bank of New York and Waste Management
International.
Classification of the Board of Directors
Phytera's Restated Certificate, to be filed concurrently with the closing of
this offering, provides for a staggered Board of Directors consisting of three
classes, with each class being as nearly equal in number as possible. At each
annual meeting of Phytera's stockholders, the term of one class expires and
their successors are elected for a term of three years. Phytera has designated
two Class I Directors (Dr. Crooke and Mr. Schluter), two Class II Directors
(Messrs. Foster and Roth) and three Class III Directors (Dr. Morville, Mr.
Christensen and Dr. Bundgaard-Jorgensen). These Class I, Class II and Class III
Directors will serve until the annual meetings of stockholders to be held in
1999, 2000 and 2001, respectively, and until their respective successors are
duly elected and qualified, or until their earlier resignation or removal. The
Restated Certificate provides that Directors may be removed only for cause by a
majority of stockholders. There are no family relationships among any of the
Directors or executive officers. See "Description of Capital Stock--Anti-
Takeover Measures."
Board Committees
Phytera has standing Audit and Compensation Committees of the Board of
Directors. The Audit Committee, consisting of Dr. Bundgaard-Jorgensen and Mr.
Roth, held two meetings in 1997. The primary
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<PAGE>
function of the Audit Committee is to assist the Board of Directors in the
discharge of its duties and responsibilities by providing the Board with an
independent review of the financial health of Phytera and of the reliability of
Phytera's financial controls and financial reporting systems. The Audit
Committee reviews the general scope of Phytera's annual audit, the fee charged
by its independent accountants and other matters relating to internal control
systems.
The Compensation Committee of the Board of Directors determines the
compensation to be paid to all executive officers of Phytera, including the
Chief Executive Officer. The Compensation Committee also administers Phytera's
1998 Equity Incentive Plan (which amended and restated its 1992 Stock Option
Plan), including the grant of stock options and other awards under such plans.
The Compensation Committee held four meetings during 1997. The Compensation
Committee is currently composed of Messrs. Foster and Roth and Dr. Crooke.
Scientific Advisors
Phytera's scientific advisors are individuals with demonstrated expertise in
various fields who advise Phytera on long-term scientific planning, research
and development. Members also evaluate Phytera's research program, recommend
personnel to Phytera and advise it on technology matters. While the scientific
advisors have not met as an entire group, individual advisors and small groups
have been available to advise Phytera on specific scientific and technical
issues. The scientific advisors are compensated on a time and expenses basis
and, in some cases, have received shares of common stock, stock options or
warrants of Phytera. Phytera has entered into consulting agreements with a
number of scientific advisors. Aggregate amounts paid to scientific advisors
during 1996, 1997 and 1998 do not constitute a material component of amounts
spent by Phytera on research and development, when taken as a whole.
No scientific advisor is employed by Phytera and individual members may have
other commitments to or consulting or advisory contracts with their employers
or other entities that may conflict or compete with their obligations to
Phytera. Accordingly, such persons are expected to devote only a small portion
of their time to Phytera. Phytera's scientific advisors are:
<TABLE>
<CAPTION>
Scientific Advisors Academic Institution/Affiliation
------------------- --------------------------------
<C> <S>
Marine Science
Arnold L. Demain, Ph.D. .......... Massachusetts Institute of Technology,
Massachusetts, US
William Fenical, Ph.D. ........... Scripps Institution of Oceanography,
California, US
Molecular Biology
Kim Lewis, Ph.D. ................ Tufts University, Massachusetts, US
Dominique Sanglard, Ph.D. ....... Centre Hospitalier Universitaire Vaudois,
Lausanne, Switzerland
Pharmaceutical Development
Ze'ev Shaked, Ph.D. ............. ZS & Associates, Massachusetts, US
Cornelius Wortel, M.D., Ph.D. .... Clinquest Inc., Massachusetts, US
Plant Science
Charles Arntzen, Ph.D. ........... Boyce Thompson Institute for Plant Research,
Cornell University, New York, US
Michael W. Fowler, Ph.D. ......... High Value Horticulture Ltd., Oxford, UK
Robert Verpoorte, Ph.D. .......... Leiden/Amsterdam Center for Drug Research,
Leiden,
Netherlands
Chemistry
Robert Langer, Ph.D. ............. Massachusetts Institute of Technology,
Massachusetts, US
Lester Mitscher, Ph.D. ........... University of Kansas, Kansas, US
John Nielsen, Ph.D. .............. The Technical University of Denmark,
Copenhagen, Denmark
Infectious Diseases
Gary Doern, Ph.D. ................ University of Massachusetts Medical Center,
Massachusetts, US
Robert C. Moellering, Jr., M.D. .. Deaconess Hospital & Harvard Medical School,
Massachusetts, US
Alan H. Sugar, M.D. .............. Boston University School of Medicine,
Massachusetts, US
</TABLE>
Phytera's Directors and consultants are eligible to participate in the 1998
Equity Incentive Plan. See "--1998 Equity Incentive Plan."
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<PAGE>
Executive Compensation
The following tables summarizes the compensation paid to or earned during the
fiscal year ended December 31, 1997 by Phytera's Chief Executive Officer and
all of the other executive officers of Phytera whose salary and bonus exceeded
$100,000. These officers are collectively referred to in this prospectus as the
Named Executive Officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------- ---------------------------------------------
Securities
Other Annual Underlying Restricted Stock All Other
Name and 1997 Principal Position Salary ($) Bonus ($) Compensation ($) Options (#) Award(s) ($) Compensation ($)
- -------------------------------- ---------- --------- ---------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Malcolm Morville,
Ph.D................... 250,000 30,000 -- -- -- --
President and Chief
Executive Officer,
Director
Stephen J. DiPalma (1).. 9,231 -- -- 49,050 18,750 --
Vice President, Finance
Christopher J. Pazoles,
Ph.D................... 181,715 -- -- -- -- --
Vice President of
Research
John S. McBride (2)..... 63,144 -- -- -- -- --
</TABLE>
- --------
(1) Mr. DiPalma commenced employment with Phytera on December 8, 1997.
Restricted stock was awarded in December 1997, but was not purchased until
March 1998. The restricted stock is subject to a repurchase right for those
shares unvested should Mr. DiPalma cease to be employed with Phytera.
(2) Mr. McBride served as Vice President, Business Development to Phytera until
May 1997.
1997 Option Grants
The following table contains certain information regarding stock option
grants during the twelve months ended December 31, 1997 by Phytera to the Named
Executive Officers:
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Annual Rates of Stock
Securities Percent of Total Price Appreciation
Underlying Options Granted Exercise or for Option Term (1)
Options to Employees Base Price Expiration ----------------------
Name Granted (#) in Fiscal Year ($/Share) Date 5% ($) 10% ($)
---- ----------- ---------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Malcolm Morville,
Ph.D. ................. -- -- -- -- -- --
Stephen J. DiPalma (2).. 49,050 27% 1.15 12/09/07 35,375 89,648
Christopher J. Pazoles,
Ph.D. ................. -- -- -- -- -- --
John S. McBride......... -- -- -- -- -- --
</TABLE>
- --------
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the SEC and, therefore, are not intended to
forecast possible future appreciation, if any, in the price of the
underlying common stock. No gain to the optionees is possible without an
increase in price of the common stock, which will benefit all stockholders
proportionately. In order to realize the potential values set forth in the
5% and 10% columns of this table, the per share price of the common stock
would have to be $1.87 and $2.98, or approximately 63% and 160% above the
respective exercise or base price shown.
(2) Represents an option grant on December 9, 1997 covering 49,050 shares,
exercisable with respect to 16,350 of the underlying shares on December 8
in each of the years 1999, 2000 and 2001.
45
<PAGE>
Option Exercises and Year-End Option Values
The following table provides information about the number of shares issued
upon option exercises by the Named Executive Officers during the year ended
December 31, 1997, and the value realized by the Named Executive Officers. The
table also provides information about the number and value of options held by
the Named Executive Officers at December 31, 1997.
Aggregated Option Exercises In Last Fiscal Year And
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal At Fiscal Year End ($)
Year-End (#) (1)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Malcolm Morville, Ph.D.
(2).................... -- -- 88,454 89,762 1,068,508 1,083,412
Stephen J. DiPalma...... -- -- 0 49,050 0 581,400
Christopher J. Pazoles,
Ph.D. (2).............. 13,489 164,013 16,105 37,442 194,418 453,652
John S. McBride (3)..... 8,502 108,476 -- -- -- --
</TABLE>
- --------
(1) Based on the difference between the option exercise price and an assumed
initial public offering price of $13.00 per share of the underlying common
stock.
(2) Certain unvested options are subject to acceleration of vesting upon the
occurrence of milestone events related to Phytera's performance.
(3) All unvested options held by Mr. McBride were terminated upon his departure
from Phytera on May 19, 1997. Vested options not exercised have lapsed.
Loans to Insiders
Phytera has not made any loans to its Directors or executive officers.
1998 Equity Incentive Plan
Phytera's 1998 Equity Incentive Plan, which amends and restates its 1992
Stock Option Plan, authorizes the grant of certain tax-advantaged stock
options, non tax-advantaged stock options, stock grants and other stock-based
awards for the purchase of an aggregate of up to 1,569,600 shares (subject to
adjustment for stock splits and similar capital changes) of common stock to
employees, consultants and Directors of Phytera or any Affiliate (as defined in
the 1998 Equity Incentive Plan) capable of contributing to Phytera's
performance. These grants are collectively referred to as Awards. As of
November 30, 1998, options to purchase 792,802 shares of common stock were
outstanding. Grants of Awards under the 1998 Equity Incentive Plan and all
questions of interpretations with respect to the 1998 Equity Incentive Plan are
determined by Phytera's Board of Directors. The Board of Directors has
appointed the Compensation Committee to administer the 1998 Equity Incentive
Plan. In the event of a consolidation or merger of Phytera or the sale of
substantially all of its assets, the Board of Directors may terminate
outstanding options after a 20 day notice to the option holders. If the Board
does not take such action, the holders of outstanding options will be entitled
to an option for securities of the successor corporation.
Employee Stock Purchase Plan
Phytera has also adopted an employee stock purchase plan, referred to as the
Purchase Plan, under which employees may purchase shares of common stock at a
discount from fair market value. There are 163,500 shares of common stock
reserved for issuance under the Purchase Plan. The shares of common stock to be
issued under the Purchase Plan will not be purchased in the open market and are
authorized, unissued shares of Phytera's common stock. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the the Code. Rights to purchase common stock under the Purchase
Plan are granted at the discretion of the Compensation Committee, which
determines the frequency and duration of individual offerings under the Plan
and the dates when stock may be purchased. Eligible employees participate
voluntarily and may withdraw from any offering at any time before stock is
purchased. Participation terminates automatically upon termination of
employment. The purchase price per share of common stock in an offering is 85%
of the lesser of its fair market value at the beginning of the offering period
or on the applicable exercise date and may be paid through payroll deductions,
periodic lump sum payments or a combination of both. The Purchase Plan
terminates on September 17, 2008.
46
<PAGE>
Compensation of Directors
Phytera currently reimburses its Directors for out-of-pocket expenses
incurred in connection with their rendering of services as Directors.
Phytera's Directors generally receive no cash remuneration for their services,
with the exception of Mr. Schluter who receives $1,000 per board meeting. Mr.
Christensen receives a stipend for consulting services provided to Phytera.
For the 12 months ended December 31, 1997, Mr. Christensen was paid $160,000
for his consulting services. For the 11 months ended November 30, 1998, Mr.
Christensen was paid $133,333 for his consulting services.
Directors who are not currently receiving compensation as officers or
employees of Phytera are eligible to receive options under the 1998 Equity
Incentive Plan in consideration for their service as Directors. The
Compensation Committee of the Board of Directors determines the number of
options awarded to non-employee directors based on comparative analysis of
similarly situated companies. During the twelve months ended December 31,
1997, Phytera granted options to purchase 9,810 shares of common stock to each
of Mr. Foster and Dr. Crooke and warrants to purchase 9,810 shares of common
stock to each of Mr. Schluter and Danish Venture Finance A/S (for Dr.
Bundgaard-Jorgensen's service as a member of the Board of Directors). See
"Principal Stockholders." During the eleven months ended November 30, 1998,
Phytera granted options to purchase 3,270 shares of common stock to members of
the Board.
Executive Employment Agreements
Under an Employment Agreement dated June 5, 1996, Phytera agreed to employ
Dr. Morville as President and Chief Executive Officer of Phytera for a period
of three years at a minimum annual salary of $250,000, plus incentive bonuses
as determined by the Compensation Committee. If Dr. Morville is terminated
without cause (including a failure to renew the agreement) or if Dr. Morville
terminates his employment for good reason (as defined in the agreement), he
will be entitled to receive a lump sum payment equal to six months base
salary, plus any benefits to which he is entitled for a period of up to six
months and a portion of the options granted to, and restricted stock held by,
Dr. Morville which would have otherwise vested on the next vesting date
following termination. Such portion is calculated by multiplying the number of
shares which would otherwise be exercisable on the next applicable vesting
date by a fraction, the numerator of which is the number of calendar days
elapsed from the last vesting date until termination and the denominator of
which is the total number of days from the last vesting date until the next
vesting date.
Compensation Committee Interlocks And Insider Participation
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for Directors, executive officers
and other employees of Phytera. The Compensation Committee also administers
various incentive compensation and benefit plans. The Compensation Committee
currently consists of Messrs. Foster and Roth and Dr. Crooke. Commonwealth
BioVentures, Inc., of which Mr. Foster is President, is a general partner of
both Commonwealth BioVentures IV Limited Partnership and Commonwealth
BioVentures V Limited Partnership, each of which is a venture capital fund and
a principal stockholder of Phytera. Dr. Crooke is a partner of Ticonderoga
Capital, Inc., a venture capital firm and the general partner of Venture
Associates II, L.P., which is the general partner of Concord Partners II,
L.P., a principal stockholder of Phytera. CR Management Associates, of which
Mr. Roth is a partner and principal, is a general partner of CR Management
Capital Partners I, L.P., a stockholder of Phytera. See "Principal
Stockholders" and "Certain Transactions."
47
<PAGE>
CERTAIN TRANSACTIONS
In September and December 1995 each of BancBoston Ventures, Inc.,
Commonwealth BioVentures V Limited Partnership, called CBI V, Concord Partners
II, L.P. and CR Management Capital Partners I, L.P. purchased a Convertible
Term Note in the principal amount of $250,000, except in the case of CBI V,
which purchased a Convertible Term Note of $900,000. These investors are called
the Bridge Investors, and this financing is referred to as the 1995 Bridge
Financing. In connection with the 1995 Bridge Financing, Phytera issued to each
of the Bridge Investors other than CBI V warrants to purchase 14,683 shares of
common stock at an exercise price of $8.41 per share; CBI V received warrants
to purchase 35,673 shares of common stock at an exercise price of $8.41 per
share. In January 1996, the Bridge Investors and Danish Development Finance
Corporation (now known as Danish Venture Finance A/S) purchased shares of
Series C Convertible Preferred Stock $0.01 par value per share, referred to
generally in this prospectus as the Series C Stock, at a price of $8.41 per
underlying common stock share and warrants to purchase common stock at a price
of $0.02 per share as set forth below:
<TABLE>
<CAPTION>
Common Stock Underlying
------------------------------------
Investor Series C Shares(#) Warrant Shares(#)
-------- ------------------ -----------------
<S> <C> <C>
Danish Venture Finance A/S............... 188,352 25,993
BancBoston Ventures, Inc................. 26,837 3,704
Commonwealth BioVentures V Limited
Partnership............................. 95,758 13,215
Concord Partners II, L.P. ............... 84,389 11,656
CR Management Capital Partners I, L.P.... 84,389 11,656
</TABLE>
In separate closings as of each October 30 and November 29, 1996, Phytera
issued shares of its Series D Convertible Preferred Stock, $0.01 par value per
share, referred to generally in this prospectus as the Series D Stock, to a
large number of institutional and individual investors, all of whom were
considered non-US persons. Shares of Series D Stock were purchased for $6.50
($9.94 on an as-converted basis) per share. Codan Forsikring A/S, a principal
stockholder of Phytera, purchased 524,000 shares of Series D Stock convertible
into 342,696 shares of common stock.
On March 11, 1997, Phytera completed the acquisition of Auda Pharmaceuticals
ApS (later renamed Phytera Symbion ApS), a Danish biotechnology company
headquartered in Copenhagen. Danish Venture Finance A/S, a principal
stockholder of Phytera, of which Dr. Bundgaard-Jorgensen is a Director, owned
approximately 92.4% of the outstanding share capital of Auda prior to its
acquisition. As consideration for its interest in Auda, Danish Venture Finance
A/S received 402,000 shares of Phytera's Series D Stock, convertible into
262,908 shares of common stock, valued at $11.47 per underlying common stock
share, for total compensation valued at $3,015,000.
In separate closings as of each of May 26 and June 25, 1998, Phytera issued
shares of its Series E Convertible Preferred Stock, $0.01 par value per share,
referred to generally in this prospectus as the Series E Stock, convertible
into 678,274 shares of common stock to certain qualified institutions and high
net worth individuals. Shares of Series E Stock were purchased for $11.24 per
underlying common stock share. Danish Venture Finance A/S, Concord Partners II,
L.P., and Codan Forsikring A/S, each a principal stockholder of Phytera,
purchased shares of Series E Stock convertible into 17,269, 21,364 and 150,000
shares of common stock, respectively. In addition, Mr. Steven J. Roth, a member
of the Board of Directors, purchased shares of Series E Stock convertible into
8,894 shares of common stock for his own account.
Each of the Series C Stock, Series D Stock, and Series E Stock currently
converts into common stock at the rate of 0.654 for one. The rate of conversion
of the Series E Stock may adjust depending on the timing and price of the
offering. See "Description of Capital Stock."
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the shares of Phytera's common stock as of January 31, 1999, by
(1) each person known by Phytera to own beneficially more than 5% of the common
stock, (2) each Director of Phytera, (3) each Named Executive Officer and (4)
all Directors and Named Executive Officers of Phytera as a group. The table
reflects the conversion of the existing Preferred Stock of Phytera into an
aggregate of 5,016,268 shares of common stock upon the closing of this
offering. The number of shares of common stock deemed outstanding after this
offering includes an additional 2,500,000 shares of common stock of Phytera
which are being offered for sale by Phytera in this offering. The ownership
numbers and percentages have been calculated in accordance with the rules of
the SEC. These rules require the inclusion of shares that may be obtained upon
the exercise of any presently exercisable option or warrant or any option or
warrant that becomes exercisable within 60 days of January 31, 1999, with
respect to the holder of any such option of warrant. Since the number of
options or warrants, if any, may vary among the stockholders listed, the
denominator used to calculate the percentages may vary among the stockholders
listed. Unless otherwise indicated, the address of each stockholder is Phytera,
Inc., 377 Plantation Street, Worcester, MA 01605, US. Except as indicated by
footnote, each of the parties listed above has sole voting and investment power
with respect to all shares shown as beneficially owned by such party.
<TABLE>
<CAPTION>
Percentage of Total
Shares ----------------------
Beneficially Before After
Beneficial Owner Owned Offering Offering
----------------- ------------ --------- ---------
<S> <C> <C> <C>
5% Stockholders
Commonwealth BioVentures IV Limited
Partnership............................ 849,158 14.73% 10.28%
Commonwealth BioVentures V Limited Part-
nership (1)
4 Milk Street
Portland, ME 04101, US
Concord Partners II, L.P. (2)........... 476,480 8.27% 5.77%
535 Madison Avenue
New York, NY 10022, US
A/S Forsikringsselskabet Codan Pension.. 476,112 8.27% 5.77%
A/S Forsikringsselskabet Codan Liv
Codan Forsikring A/S
c/o Codanhus
Gammel Kongevuej 60
DK-1790 Copenhagen V, Denmark
Danish Development Finance Corporation
Denmark................................ 435,007 7.55% 5.27%
(now known as Danish Venture Finance
A/S)
Gladsaxevej 376
DK-2860 Soborg, Denmark
Directors
Robert G. Foster (3).................... 877,580 15.19% 10.60%
c/o Commonwealth BioVentures, Inc.
4 Milk Street
Portland, ME 04301, US
Graham K. Crooke, M.D. (4).............. 484,328 8.40% 5.86%
c/o Ticonderoga Capital, Inc.
555 California Street, Suite 4360
San Francisco, CA 94104, US
Uffe Bundgaard-Jorgensen, Ph.D. (5)..... 435,007 7.55% 5.27%
c/o Danish Venture Finance A/S
Gladsaxevej 376
DK-2860 Soborg, Denmark
Steven J. Roth (6)...................... 198,825 3.45% 2.40%
192 E. Emerson Road
Lexington, MA 02173, US
Gustav A. Christensen (7)............... 132,386 2.28% 1.59%
Poul Schluter (8)....................... 5,886 * *
Frederiksberg Alle 66
DK-1820 Frederiksberg C, Denmark
Named Executive Officers
Malcolm Morville, Ph.D. (9)............. 312,891 5.32% 3.73%
Christopher J. Pazoles, Ph.D. (10)...... 39,158 * *
John S. McBride......................... 21,582 * *
5 Olde Connecticut Path
Westborough, MA 01581
Stephen J. DiPalma...................... 16,350 * *
All Directors and Named Executive
Officers as a group
(10 persons) .......................... 2,523,993 42.10% 29.71%
</TABLE>
49
<PAGE>
- --------
*Indicates less than 1%
(1) Includes (a) 480,229 shares held by Commonwealth BioVentures IV Limited
Partnership, called CBI IV, and (b) 368,929 shares held by CBI V, 4,774
shares of which are issuable on exercise of warrants, all of which will
terminate upon the closing of this offering if not exercised.
(2) Includes 2,386 shares issuable on exercise of warrants, all of which will
terminate upon the closing of this offering if not exercised.
(3) Includes (a) 480,229 shares held by CBI IV and (b) 368,929 shares, 4,774
of which are issuable on exercise of warrants which will terminate upon
the closing of this offering if not exercised, held by CBI V. Mr. Foster,
President and Chief Executive Officer of CBI IV and CBI V, disclaims
beneficial ownership of the shares and warrants held by CBI IV and CBI V,
except to the extent of his proportional pecuniary interests therein. Also
includes stock options to purchase 13,080 shares exercisable as of January
31, 1999 or within 60 days thereafter.
(4) Includes 476,480 shares, 2,386 of which are issuable on exercise of
warrants which will terminate upon the closing of this offering if not
exercised, held by Concord Partners II, LP. Dr. Crooke is a partner of
Ticonderoga Capital, Inc., an affiliate of Concord Partners II, LP. He
disclaims beneficial ownership of the shares held by Concord Partners II,
LP, except to the extent of his proportional pecuniary interests therein.
Also includes stock options to purchase 1,962 shares exercisable as of
January 31, 1999 or within 60 days thereafter.
(5) Consists of 435,007 shares held by Danish Venture Finance A/S of which Dr.
Bundgaard-Jorgensen is the Managing Director. Dr. Bundgaard-Jorgensen
disclaims beneficial ownership of the shares held by Danish Venture
Finance A/S, except to the extent of his proportional pecuniary interest
therein.
(6) Includes 184,044 shares, 4,774 of which are issuable on exercise of
warrants which will terminate upon the closing of this offering if not
exercised, held by CR Management Capital Partners I, L.P., of which Mr.
Roth is a general partner. Mr. Roth disclaims beneficial ownership of the
shares and warrants held by CR Management Capital Partners I, L.P., except
to the extent of his proportional pecuniary interest therein. Also
includes stock options to purchase 5,886 shares exercisable as of January
31, 1999 or within 60 days thereafter.
(7) Includes (a) 3,807 shares held in trust for the benefit of Mr. Christensen
and (b) 29,430 shares held in trust for the benefit of his children. Also
includes 50,276 shares subject to stock options exercisable as of January
31, 1999 or within 60 days thereafter. Also includes 13,080 shares of
common stock subject to a repurchase right held by Phytera.
(8) Represents shares issuable upon exercise of warrants exercisable as of
January 31, 1999 or within 60 days thereafter.
(9) Includes 39,240 shares held by Dr. Morville's wife and 19,620 shares held
by Dr. Morville's children, as to which Dr. Morville disclaims beneficial
ownership, and 18,312 shares held in trust for his benefit by Delaware
Charter Guarantee & Trust Co. Also includes stock options to purchase
122,952 shares exercisable as of January 31, 1999 or within 60 days
thereafter.
(10) Includes stock options to purchase 25,670 shares exercisable as of January
31, 1999 or within 60 days thereafter.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of Phytera
will consist of 25,000,000 shares of common stock, $0.01 par value per share,
and 1,000,000 shares of Preferred Stock, $0.01 par value per share, after
giving effect to the amendment and restatement of Phytera's Restated
Certificate. At November 30, 1998, there was outstanding an aggregate of (1)
715,312 shares of common stock and (2) 7,275,425 shares of Existing Preferred
Stock which will automatically convert into 4,949,443 shares of common stock
upon the closing of this offering, assuming that in connection with conversion
of the Series E Stock the closing of this offering occurs on February 8, 1999
at a price per share of $13.00 (the mid-point of the expected range). As of the
date of this prospectus, Phytera had 246 shareholders. Assuming the closing of
this offering occurs on February 8, 1999 at a per share price of $13.00 (the
mid-point of the expected range) and the exercise of warrants to purchase
68,995 shares of common stock, upon the closing of this offering, Phytera will
have 8,233,750 shares of common stock outstanding.
The following summary of certain provisions of the common stock and Preferred
Stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of Phytera's Restated Certificate, the form of
which is included as an exhibit to the Registration Statement, and by the
provisions of applicable law.
Since 1992 there has been a stock option plan for Phytera's employees and
officers, consultants and Board of Directors. The following table sets forth
the total number of options which are outstanding at November 30, 1998, their
exercise prices and their expiration.
<TABLE>
<CAPTION>
Year Granted Total Numbers Range of Exercise Prices Expiration
------------ ------------- ------------------------ ----------
<S> <C> <C> <C>
1993 16,791 $0.02 2003
1994 34,269 $0.84 2004
1995 19,146 $0.84 2005
1996 312,972 $0.84-$0.99 2006
1997 105,187 $0.99-$1.15 2007
1998 304,437 $1.15-$7.65 2008
-------
792,802
=======
</TABLE>
Phytera has issued warrants which give rights to purchase its capital stock.
The following table sets forth the total number of warrants which are
outstanding at November 30, 1998, their exercise prices and their expiration.
<TABLE>
<CAPTION>
Type of Stock Year Granted Total Numbers Range of Exercise Prices Expiration
------------- ------------ ------------- ------------------------ ----------
<S> <C> <C> <C> <C>
Common 1995 85,637 $8.41 1999 or IPO*
Common 1997 62,683 $0.99-$1.15 2003
-------
148,320
=======
Series C
Preferred 1996 68,995 $0.02 2001 or IPO*
Series C
Preferred 1996 11,934 $8.41 2001 or IPO*
-------
80,929
=======
229,249
=======
</TABLE>
- --------
* the earlier to occur
Common Stock
Holders of common stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights or
preemptive rights. Upon the liquidation, dissolution or winding up of Phytera,
holders of common stock share ratably in the assets of Phytera available for
distribution to its stockholders, subject to the preferential rights of any
then outstanding shares of Preferred Stock. There will be no shares of
Preferred Stock outstanding immediately following the effective date of the
Registration Statement. The common stock outstanding upon the effective date of
the Registration Statement, and the shares offered by Phytera hereby, upon
issuance and sale, will be fully paid and nonassessable. Phytera does not have
an established procedure pursuant to which it purchases back shares of common
stock from its stockholders.
51
<PAGE>
Holders of common stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor.
Phytera has not paid any dividends since its incorporation. Phytera does not
anticipate paying any dividends in the foreseeable future. If Phytera were to
pay any dividends, they would be distributed first to satisfy any preferential
payments to holders of any Preferred Stock then outstanding, if any, and then
distributed ratably to the holders of common stock. Any dividends declared and
paid by Phytera will be delivered by it or its agent to each stockholder at the
stockholder's last known address. Generally, any dividend which is delivered by
Phytera or its agent and not claimed by the holder of the shares in respect of
which the dividend has been paid within a certain period of time will become
the property of the governing body of the jurisdiction of the stockholders's
last known address. The time period referred to in the previous sentence varies
depending on the jurisdiction. In the United States, this time period is
determined by each state, and in Europe, this time period is determined by each
country.
As described more fully in the section headed "Settlement and Clearance", the
shares of common stock issued pursuant to this offering will be in the form of
either one global share certificate or one book entry (such form to be
determined in the discretion of the underwriters just prior to closing), which
will be deposited with The Depository Trust Company, referred to in this
prospectus as DTC, a US clearing agency. Common Stock held by existing
stockholders will continue to be represented by physical share certificates
issued in the name of each holder until appropriate arrangement has been made
by Phytera and the holder to convert to book entry. Additional shares of common
stock, up to the authorized but as yet unissued total stated in Phytera's
Restated Certificate, may be issued in such number and at such price as may be
determined in the discretion of Phytera's Board of Directors. Any increase in
the authorized number of shares of common stock requires the consent and
approval of Phytera's stockholders.
Contingent Series E Conversion Adjustment
The Series E Stock would convert to common stock on a 0.654 for one basis if
this offering (1) is closed on or before June 25, 1999 (the "Series E
Anniversary") and (2) the price per share in the offering is not less than
$15.29 plus $3.82 multiplied by a fraction, the numerator of which is the
number of days elapsed from June 25, 1998 up to and including the closing date
of this offering and the denominator of which is 365 (the "Minimum Price"). In
the event that either the offering is closed after the Series E Anniversary or
the price per share in the offering is less than the Minimum Price, the number
of shares of common stock outstanding after the offering will increase as a
result of a greater number of shares being issued upon conversion of the
currently outstanding shares of Series E Stock. If the offering is closed at a
per share price less than the Minimum Price, the number of shares of common
stock issuable upon conversion of the Series E Stock will increase to a number
that is equal in value (determined with reference to the actual offering price)
to the Minimum Price. If the offering is closed after the Series E Anniversary,
the number of shares of common stock issuable upon conversion shall increase by
a specified percentage on each of the Series E Anniversary and the dates five
months and ten months after the Series E Anniversary. Assuming this offering is
closed on February 8, 1999 at a per share price of $13.00 (the mid-point of the
expected price range), an additional 191,315 shares of common stock will be
issued upon the conversion of the Series E Stock.
Preferred Stock
Phytera's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock in one or more series and to fix the relative rights,
preferences, privileges, qualifications, limitations and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The Board of Directors could,
without the approval of the stockholders, issue Preferred Stock having voting
or conversion rights that could adversely affect the voting power of the
holders of common stock and the issuance of Preferred Stock could be used,
under certain circumstances, to render more difficult or discourage a hostile
takeover of Phytera. Phytera has no present plans to issue any shares of
Preferred Stock.
Stock Purchase Warrants
From September through December 1995, Phytera, in connection with the
issuance of certain Convertible Term Notes, issued warrants to purchase an
aggregate of 85,637 shares of common stock. These warrants are referred to as
the Bridge Warrants. The Bridge Warrants are exercisable at $8.41 per share and
expire on the earlier of (1) January 31, 1999 or (2) the closing of this
offering. As of November 30, 1998, all of the Bridge
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Warrants remained outstanding. For the purpose of this prospectus, we have not
assumed these warrants will be exercised prior to this offering.
In January and July of 1996, Phytera, in connection with the issuance of
certain Series C Stock, issued warrants to purchase an aggregate of 148,041
shares of Series C Stock, convertible into 96,819 shares of common stock, at an
exercise price of $0.01 ($0.02 on an as converted basis) per share of Series C
Stock and warrants to purchase an aggregate of 18,247 shares of Series C Stock,
convertible into 11,934 shares of common stock, at an exercise price of $5.50
($8.41 on an as converted basis) per share of Series C Stock. These warrants
are collectively referred to as the Series C Warrants. The Series C Warrants
expire on the earlier of (1) five years from the respective date of the
issuance of the Series C Warrant or (2) the closing of this offering. As of
November 30, 1998, 123,744 Series C Warrants were outstanding and 42,544 had
been exercised, convertible into 80,929 and 27,824 shares of common stock,
respectively. Of the outstanding Series C Warrants, 105,497 are exercisable at
the price of $0.01 ($0.02 on an as converted basis) per share which are
convertible into 68,995 shares of common stock. For the purposes of this
prospectus, we have assumed the Series C Warrants with a $0.01 exercise price
($0.02 on an as converted basis) will be exercised prior to the closing of this
offering and that the remaining Series C Warrants will not be exercised prior
to this offering.
In December 1997, Phytera issued warrants to purchase an aggregate of 39,793
shares of common stock to selected employees and Directors in Denmark. These
warrants have an exercise price of $1.15 per share, vest over a three to five
year period beginning on January 1, 1999 and expire on December 9, 2003.
Phytera also issued warrants to DACC ApS to purchase an aggregate of 22,890
shares of common stock at an exercise price of $0.99. These warrants vest over
a two year period beginning on January 1, 1999, and expire on December 9, 2003.
Stockholders' Meetings
Phytera is required to hold an annual meeting of stockholders that is held on
a date selected by its Board of Directors. Matters generally put to a
stockholders' vote include the election of Directors, the approval of certain
changes in the capital stock of Phytera, the adoption and/or amendment of
certain employee benefit plans, the approval of certain amendments to the
Certificate of Incorporation and By-laws of Phytera, and other extraordinary
matters. The presence in person or by proxy of stockholders owning a majority
of all votes entitled to be cast at a meeting constitutes a quorum. A plurality
of the votes cast is required for the election of Directors, which means that
those Directors receiving the most votes are elected to office although they
may not necessarily have received a majority of votes. Most other matters
require the affirmative vote of a majority of the votes cast by those
stockholders present at the meeting, although certain extraordinary matters
require a greater vote.
All stockholders (including those residing in Denmark and Belgium) will be
sent notice of an annual or special meeting not less than ten days nor more
than 60 days before it is scheduled to be held. In addition, Delaware law and
the rules of the SEC require greater advance notice for certain transactions.
Shares cannot be voted at a meeting unless the holder of record is present in
person or by proxy, a means by which a stockholder may authorize the voting of
his or her shares at a meeting. At a meeting, the shares represented by each
properly executed proxy card will be voted in accordance with the stockholder's
directions, thereby providing an alternative to a stockholder appearing in
person at a meeting in order to cast his or her vote. Any stockholder executing
a proxy card has the right to revoke it by providing written or oral notice of
revocation to the secretary of Phytera, or by delivering a subsequently
executed proxy card, at any time before the proxy is voted.
Anti-Takeover Measures
In addition to the Board of Directors' ability to issue shares of Preferred
Stock, the Restated Certificate and the By-laws of Phytera contain several
other provisions that are commonly considered to discourage unsolicited
takeover bids. Under the Restated Certificate and By-laws, the Board of
Directors may enlarge the size of the Board and fill any vacancies on the
Board. The By-laws also provide that special meetings of Phytera's stockholders
may be called only by the President, the Chairman of the Board, the Board of
Directors, any officer, stockholders holding a majority of the outstanding
voting capital stock, or any stockholder or stockholders holding at least 10%
of any series of Preferred Stock, and require advance notice of business to be
brought by a stockholder before such special meeting.
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Phytera may be subject to a Delaware law regulating corporate takeovers,
referred to as the Anti-Takeover Law. In certain circumstances, the Anti-
Takeover Law prevents certain public Delaware corporations, from engaging in a
"business combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with an "interested stockholder" (a stockholder who owns
15% or more of the corporation's outstanding voting stock) for three years
following the date on which such stockholder became an "interested stockholder"
subject to certain exceptions, unless the transaction is approved by the Board
of Directors and the holders of at least 66 2/3% of the outstanding voting
stock of the corporation (excluding shares held by the interested stockholder).
The statutory ban does not apply if, upon consummation of the transaction in
which any person becomes an interested stockholder, the interested stockholder
owns at least 85% of the outstanding voting stock of the corporation (excluding
shares held by persons who are both directors and officers or by certain
employee stock plans). A Delaware corporation subject to the Anti-Takeover Law
may "opt out" of the Anti-Takeover Law with an express provision either in its
certificate of incorporation or by-laws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares;
such an amendment is effective following expiration of twelve months from
adoption. The Anti-Takeover Law applies to Delaware corporations with a class
of stock listed on a national securities exchange or Nasdaq. It is not clear
whether the Anti-Takeover Law would apply to Phytera if the stock is not listed
on Nasdaq or another US exchange but is listed on foreign exchanges. Phytera
has not "opted out" of the Anti-Takeover Law.
The foregoing provisions of Delaware law and the Restated Certificate and By-
laws could have the effect of discouraging others from attempting a hostile
takeover of Phytera and, as a consequence, they may also inhibit temporary
fluctuations in the market price of the common stock that might result from
actual or rumored hostile takeover attempts. Such provisions may also have the
effect of preventing changes in the management of Phytera. It is possible that
such provisions could make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.
Equity
The table below shows the changes to equity capital in Phytera since its
formation. The data are for the three years ended December 31, 1995, 1996 and
1997 and the nine months ended September 30, 1998. The net proceeds from
capital issues were derived from the sale of the Existing Preferred Stock, the
sale of common stock and the exercise of options and warrants to purchase
common stock.
Equity Capital
<TABLE>
<CAPTION>
Accumulated
As of Paid in Capital Total Value of Shares Net Loss Stockholders Equity
----- --------------- --------------------- ------------- -------------------
<S> <C> <C> <C> <C>
December 31, 1995....... $ 834 $ 11,854,317 $ (13,061,259) $ (1,206,942)
December 31, 1996....... 19,231,008 31,085,325 (21,350,139) 9,735,186
December 31, 1997....... 3,319,440 34,404,765 (31,104,151) 3,300,614
September 30, 1998...... 8,177,865 42,582,630 (37,688,864) 4,893,766
</TABLE>
Transfer Agent
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
Recent Sales of Unregistered Securities
Since September 1995, Phytera has issued and sold the following securities,
in each case in reliance on an exemption from required registration pursuant to
the Securities Act.
1995 Bridge Financing
From September through December 1995, Phytera issued certain Convertible Term
Notes, called the Bridge Notes, for an aggregate principal amount of $1,762,236
bearing interest on unpaid principal at a rate of 7% per annum and convertible
into Series C Stock at the conversion price of $6.25 ($9.56 on an as converted
basis) per share of Series C Stock, and the Bridge Warrants, exercisable at the
price of $8.41 per share, to certain current stockholders of Phytera. The
Bridge Notes and the Bridge Warrants are together referred to as the 1995
Bridge Financing.
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Series C Private Placement
In January and July 1996, Phytera sold an aggregate of 1,113,055 shares of
Series C Stock convertible into 727,938 shares of common stock, at a price of
$6.25 ($9.56 on an as converted basis) per share of Series C Stock, and issued
the Series C Warrants. This Series C Stock and the Series C Warrants are
together referred to as the Series C Private Placement.
Both the 1995 Bridge Financing and the Series C Private Placement were exempt
from the registration requirements of the Securities Act pursuant to the
private offering exemption under Section 4(2) thereof. In determining the
availability of this exemption, Phytera relied on representations made by the
purchasers in the stock purchase agreement pursuant to which the Series C Stock
was purchased.
Neptune Acquisition
On July 31, 1996, as consideration for the acquisition by Phytera of Neptune
Pharmaceuticals, Inc., a US pharmaceutical company, Phytera issued 246,050
shares of Series B Stock, to the stockholders of Neptune convertible into
160,917 shares of common stock. Shares of Series B Stock were valued at $5.50
($8.41 on an as converted basis) per share.
The shares issued in connection with the Neptune acquisition were exempt from
the registration requirements of the Securities Act pursuant to the private
offering exemption under Section 4(2) thereof. In determining the availability
of this exemption, Phytera relied on representations made by the stockholders
of Neptune in the acquisition agreement.
Series D Private Placement
In separate closings as of each of October 30 and November 29, 1996, Phytera
issued an aggregate of 1,900,000 shares of its Series D Stock, convertible into
1,242,600 shares of common stock, to a large number of institutional and
individual investors. All purchasers of Series D Stock were "Non-US Persons" as
defined by Rule 902 under Regulation S under the Securities Act, primarily
resident in Scandinavia. In determining the availability of this exemption,
Phytera relied on representations made by investors in subscription agreements
pursuant to which the Series D Stock was purchased, as well as certain
representations from the placement agent in the placement agreement. Shares of
Series D Stock were purchased for $6.50 ($9.94 on an as converted basis) per
share, which represents the initial conversion price at which shares of Series
D Stock convert into common stock. Carnegie Bank A/S, acted as placement agent
for the sale of the Series D Stock and, pursuant to the terms of a placement
agreement between Carnegie and Phytera dated as of October 5, 1996, received a
placement fee equal to 7% of the aggregate proceeds raised, plus accountable
expenses.
Auda Acquisition
On March 11, 1997, as consideration for the acquisition by Phytera of Auda,
Phytera issued additional shares of Series D Stock to the selling stockholders
of Auda. Phytera issued 402,000 shares (convertible into 262,908 shares of
common stock) to Danish Venture Finance A/S (previously known as Danish
Development Finance Corporation) and 33,000 shares (convertible into 21,582
shares of common stock) to GJK Holding ApS, a Danish corporation. Shares of
Series D Stock were valued at $7.50 ($11.47 on an as converted basis) per
share.
The private placement of the Series D Stock and the shares issued in
connection with the Auda acquisition were exempt from the registration
requirements of the Securities Act pursuant to Regulation S. In determining the
availability of this exemption, Phytera relied on representations made by
Danish Development Finance Corporation and GJK Holding ApS in the Auda
acquisition agreement.
Series E Private Placement
In separate closings as of each of May 26 and June 25, 1998, Phytera issued
an aggregate of 762,586 shares of the Series E Stock which are convertible into
an aggregate of 678,274 shares of common stock (assuming the closing of this
offering on February 8, 1999 at a public offering price of $13.00 per share
(the mid-point of the expected range)) to certain qualified institutions and
high net worth individuals. Shares of Series E Stock were purchased for $10.00
($11.24 on an as converted basis) per share. Carnegie acted as placement agent
for the sale of the Series E Stock and, pursuant to the terms of a placement
agreement between Carnegie and Phytera dated March 23, 1998, received a
placement fee equal to 7% of the gross proceeds from the subscription of Series
E Stock by new investors and 2% of the gross proceeds from the subscription of
Series E Stock by existing investors of Phytera.
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An additional 50,000 shares of Series E Stock which are convertible into an
aggregate of 44,472 shares of common stock (based on the same assumptions as
the immediately preceding paragraph) were purchased by Lilly on September 18,
1998 at a price of $10.00 ($11.24 on an as converted basis) per share. The
issuance to Lilly did not involve any compensation to Carnegie.
The sale of the Series E Stock and the sale to Lilly were exempt from the
Securities Act pursuant to Regulation D. In determining the availability of
this exemption, Phytera relied on representations made by Series E investors in
subscription agreements for the Series E Stock, as well as on selling
restrictions contained in the agreement with the placement agent.
Employee, Director and Consultant Issuances
The following securities have been sold in reliance on an exemption from
registration pursuant to Section 4(2) of the Securities Act:
Since inception, Phytera has granted employees and consultants options under
its 1998 Equity Incentive Plan, which amends and restates its 1992 Stock Option
Plan, which have a ten-year term and are exercisable at a price equal to the
fair market value of the common stock at the date of grant, as determined in
good faith by the Compensation Committee of the Board of Directors. As of
November 30, 1998, options for 792,802 shares of Phytera's common stock were
outstanding. As of such date, options for 187,775 shares of common stock had
been exercised at an average price of $0.55 per share.
In December 1997, Phytera issued warrants to purchase an aggregate of 39,793
shares of its common stock to its Danish employees and certain members of the
Board of Directors based in Denmark which vest over a three to five year period
beginning on January 1, 1999 and are exercisable at $1.15 per share, being a
price equal to the fair market value of the common stock at the date of grant,
as determined in good faith by the Compensation Committee of the Board of
Directors. Phytera also issued warrants to DACC ApS to purchase an aggregate of
22,890 shares of common stock at an exercise price of $0.99 per share. Such
warrants vest over a two-year period beginning on January 1, 1999.
In addition, from inception through November 30, 1998, Phytera made grants of
an aggregate of 434,372 shares of common stock to certain employees, Directors
and consultants to Phytera. Such shares were sold at fair market value and are
subject to repurchase rights held by Phytera.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of common stock in the public market could adversely affect the
stock's market price. Upon completion of this offering there will be 8,233,750
shares of common stock outstanding, assuming no currently outstanding options
or warrants (other than the warrants for 68,995 shares with a price of $0.02
per share which expire on the closing of this offering) are exercised and that
the Series E Stock converts at the rate of one-to-one. The 2,500,000 shares
sold in this offering (plus any additional shares sold upon exercise of the
underwriters' over-allotment options) will be freely transferable. The
5,733,750 shares of common stock expected to be outstanding prior to this
offering will, subject to certain agreements described below, be eligible for
immediate resale in Denmark and other member states of the EU. In the US, such
resales will also be subject to Rule 144 under the Securities Act, as described
below.
Certain Phytera stockholders, Directors and employees holding in the
aggregate approximately 4,948,819 shares of common stock (plus approximately
223,878 shares issuable upon exercise of vested options and warrants
exercisable at $0.02 per share), have agreed, subject to certain limited
exceptions, not to sell or otherwise dispose of any of their shares for a
period of 180 days after the date of this prospectus without the prior written
consent of SG Cowen Securities Corporation. The holders of an additional
763,349 shares of common stock are subject to agreements not to sell or
otherwise dispose of any of their shares for a period of 90 days after the
effectiveness of the offering.
For US securities law purposes, the 5,733,750 outstanding shares of common
stock owned by existing stockholders are deemed "Restricted Shares" pursuant to
Rule 144 under the Securities Act. These shares may not be resold in the US,
except pursuant to an effective registration statement or an applicable
exemption from registration. If Phytera establishes a public market for its
common stock in the US, the holders of the Restricted
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Shares may sell such shares into the US public market relying on the exemptions
from registration under Rule 144 and Rule 701 under the Securities Act. Upon
expiration of the 180 day lock-up agreements described above, 4,834,965 shares
will be eligible for immediate sale in the US under Rules 144 and 701. The
remaining 113,854 locked-up Restricted Shares will become eligible for resale
under Rule 144 from time to time thereafter upon the expiration of the minimum
one year holding period prescribed by Rule 144.
Of the 784,931 Restricted Shares not subject to the 180 day lock-up
agreements, 13,208 Restricted Shares may be sold in the US pursuant to Rule
144(k) immediately upon the effectiveness of this offering, and the remaining
771,723 shares not subject to the 180 day lock-up agreement (which amount
includes 763,349 Restricted Shares subject to a 90 day lock-up agreement) may
be sold under Rule 144 and Rule 701 under the Securities Act upon the
expiration of 90 days after the effectiveness of this offering.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned Restricted Shares for at least one year from the later of the date such
Restricted Shares were acquired from Phytera and (if applicable) the date they
were acquired from an affiliate, is entitled to sell in the US, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the then outstanding shares of common stock (57,337 shares based on the
number of shares to be outstanding after this offering) or the average weekly
trading volume in the public market (combined volume on all markets) during the
four calendar weeks preceding such sale. Sales in the US under Rule 144 are
also subject to certain requirements as to the manner and notice of sale and
the availability of public information concerning Phytera. Affiliates may sell
shares not constituting Restricted Shares in accordance with the foregoing
volume limitations and other restrictions, but without regard to the one-year
holding period. All sales of Restricted Shares held by affiliates of Phytera
must be sold under Rule 144, subject to the foregoing volume limitations and
other restrictions. Further, under Rule 144(k), if a period of at least two
years has elapsed between the later of the date Restricted Shares were acquired
from Phytera or an affiliate of Phytera, a holder of such Restricted Shares who
is not an affiliate of Phytera at the time of the sale and has not been an
affiliate of Phytera for at least three months prior to the sale would be
entitled to sell the shares immediately without regard to the volume
limitations or other conditions described above.
Rule 701 under the Securities Act provides an exemption from the registration
requirements of the Securities Act for offers and sales of securities issued
pursuant to certain compensatory benefit plans or written contracts of a
company not subject to the reporting requirements of Sections 13 or 15(d) of
the Securities Exchange Act of 1934, as amended, referred to in this prospectus
as the Exchange Act. Any employee, officer or director of or consultant to
Phytera who acquired shares of common stock from Phytera prior to this offering
or on exercise of a stock option granted prior to this offering is entitled to
rely on the resale provisions of Rule 701, which permit non-affiliates to sell
such shares without having to comply with the public information, holding
period, volume limitation, or notice requirements of Rule 144 and permit
affiliates to sell their Rule 701 shares without having to comply with the
holding period requirements of Rule 144 commencing, in each case, 90 days after
the date of this prospectus.
No prediction can be made as to the effect, if any, that market sales of
additional shares or the availability of such additional shares for sale will
have on the market price of the common stock. Nevertheless, sales of
substantial amounts of common stock in the public market may have an adverse
impact on the market price for the common stock. See "Risk Factors--Investors
Will Face Immediate and Substantial Dilution."
Registration Rights
Pursuant to the terms of an Amended and Restated Investors' Rights Agreement
dated as of May 26, 1998, the holders of the 4,949,443 shares of common stock
to be issued on conversion of the Existing Preferred Stock and the holders of
68,995 shares expected to be issued on exercise of warrants expiring in
connection with the offering are entitled to certain rights with respect to
registration under the Securities Act. If Phytera proposes to register any of
its securities under the Securities Act, either for its own account or for the
account of other security holders, it is obligated to use its best efforts to
include these shares in such registration. These shares will not form a part of
the shares of common stock registered in this offering. In addition, these
stockholders have certain demand registration rights with respect to such
shares.
Reporting Requirements
Phytera is required to register the shares of common stock offered hereby
under Section 12(g) of the Exchange Act, subjecting it and its shareholders to
Exchange Act reporting requirements. Under Section 13 of
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the Exchange Act, any person who is the beneficial owner of more than 5% of
Phytera's common stock must file with the SEC to report acquisitions or
holdings of the common stock. Under Section 16 of the Exchange Act, any person
who is a beneficial holder of more than 10% of any of Phytera's common stock,
and all Directors and executive officers of Phytera, are required to file with
the SEC to report all changes in such person's beneficial ownership of the
common stock.
Under EASDAQ rules, any person who is a 5% Holder must report to Phytera all
acquisitions and dispositions of Phytera's common stock. Phytera is required to
notify EASDAQ, and to disclose to the public through the EASDAQ Publication
Mean, the identity and number of shares of common stock held by all 5% Holders.
Under Danish law, any person who possesses any of Phytera's common stock
which in the aggregate represents either (1) 5% or more of Phytera's common
stock, or (2) 5% or more of the total voting power attributable to Phytera's
common stock, is required immediately to report the extent of such holdings and
such shareholders' identity to Phytera and the CSE. Subsequent changes in
percentage of common stock held or voting power acquired must be reported
immediately at each respective 5% interval (e.g. 10%, 15% and 20%) and at 33
1/3% and 66 2/3%. Reductions in common stock and voting power must also be
reported at such intervals accordingly.
SETTLEMENT AND CLEARANCE
The following summarizes Phytera's understanding of the operation of the
clearing system which will be in place after this offering. Persons proposing
to trade the common stock on EASDAQ or on the CSE should inform themselves
about the costs of such trading.
The common stock sold in this offering will be represented by one global
share certificate that will be deposited with DTC in the United States.
Transactions in the common stock executed in the United States will be settled
by book-entry through financial institutions that are participants in DTC.
DTC is a limited-purpose trust company that was created to hold securities
for its participating organizations, collectively called DTC Participants, and
to facilitate the clearance and settlement of transactions in such securities
between DTC Participants through electronic book-entry changes in accounts of
DTC Participants. DTC Participants include securities brokers and dealers,
banks and trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies, collectively called DTC
Indirect Participants that clear through or maintain a custodial relationship
with a DTC Participant, either directly or indirectly. Persons who are DTC
Participants may beneficially own securities held by or on behalf of DTC only
through DTC Participants or DTC Indirect Participants.
Phytera's common stock will be quoted on EASDAQ in USD. Transactions in the
common stock on EASDAQ will be settled in USD or any other Euroclear eligible
currency through the Euroclear System. Investors in the common stock on EASDAQ
must have a securities account with a financial institution which directly or
indirectly has access to Euroclear. Euroclear is a DTC Indirect Participant.
Euroclear holds securities and book-entry interests in securities for its
direct participants, which include banks, securities brokers and dealers, other
professional intermediaries and foreign depositories and facilitates the
clearance and settlement of securities transactions between Euroclear
participants, and between Euroclear participants and participants of certain
other securities intermediaries, including DTC, through electronic book-entry
changes in accounts of such participants or other securities intermediaries.
Euroclear provides Euroclear participants, among other things, with
safekeeping, administration, clearance and settlement, securities lending and
borrowing, and related services. Euroclear participants are investment banks,
securities brokers and dealers, banks, Central banks, supranationals,
custodians, investment managers, corporations, trust companies and certain
other organizations and include certain of the Underwriters.
Phytera's common stock will be quoted in DKK on the CSE. Transactions in the
common stock on the CSE will be settled in DKK or any other eligible currency
through account-holding institutions at the Danish Securities Center
(Vaerdipapircentralen), where the common stock will be registered. Such
account-holding institutions include banks, stock broking companies and
mortgage associations. The Danish Securities Center will have a relationship
with a direct participant in Euroclear. For real time settlement on a gross
basis, delivery against payment is carried out in real time on a final and
irrevocable basis. Cash settlement is effected through account-holding
institutions with the Danish Central Bank.
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TAX CONSIDERATIONS
The following is a general discussion of the tax consequences of an
investment in the common stock under US Federal, Danish and Belgian
regulations. This discussion is based on provisions of the law and the
regulations, administrative rulings and judicial discussions thereunder now in
effect, all of which are subject to change (possibly with retroactive effect)
or different interpretations. This discussion does not purport to be a
comprehensive description of all of the tax considerations that may be relevant
to a decision to acquire, hold, or dispose of the common stock. This discussion
is provided for general information purposes only, and does not constitute, and
should not be considered as, legal or tax advice to any prospective holder of
the common stock. Each prospective purchaser of the common stock is urged to
consult its own tax advisor with respect to the tax consequences of acquiring,
holding and disposing of common stock, the laws of any national, state or local
taxing jurisdiction.
United States Tax Considerations
The following is a general discussion of the material US federal income
consequences of the ownership and disposition of common stock by a person that
for United States federal income tax purposes is: (1) a non-resident alien
individual, (2) a foreign corporation, (3) a foreign partnership, or (4) an
estate or trust which is not subject to US federal income tax without regard to
the source of its income (a "non-US holder"). This discussion does not address
the US federal income tax consequences that may be relevant to particular non-
US holders subject to special treatment under the federal income tax law as a
result of their personal circumstances, and does not address the treatment of
non-US holders of common stock under the laws of any state, local or foreign
taxing jurisdiction.
Dividends
Distributions paid to a non-US holder of common stock which constitute
dividends for US federal income tax purposes generally will be subject to
withholding of US federal income tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty (such as that between the US and
Belgium), unless the dividends are effectively connected with the conduct of a
trade or business carried by the non-US holder within the US (and are
attributable to a US permanent establishment or fixed base of such holder, if
an applicable income tax treaty so requires as a condition for the non-US
holder to be subject to US income tax on a net income basis with respect to
such dividends). Such "effectively connected" dividends are generally subject
to tax at rates applicable to US citizens, resident aliens and domestic US
corporations, and are not generally subject to withholding (provided that the
non-US holder provides certain appropriate certification). Any such effectively
connected dividends received by a non-US corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as may be specified by an applicable income tax treaty.
Under the "Convention Between the United States of America and the Kingdom of
Belgium For the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion With Respect to Taxes on Income" (the "Belgium Treaty"), a non-US
holder that qualifies as a "resident of Belgium" may, as long as the shares of
common stock held by such person are not attributable to the conduct of a trade
or business or the rendering of independent personal services in the US through
a permanent establishment or fixed base situated therein, be entitled to a
reduced withholding tax rate on dividends paid by Phytera equal to 15%, rather
than 30% as discussed above. For this purpose, the term "resident of Belgium"
generally means (1) a Belgian corporation and (2) any person other than a
corporation (including an individual, a partnership, an estate, a trust, or any
body of persons) who is a resident of Belgium for purposes of its tax status.
In addition, the Belgium Treaty provides that if a non-US holder entitled to a
reduced rate of withholding under the above test is a Belgian company that owns
at least ten percent of the voting stock of Phytera, the withholding tax rate
is further reduced to five percent. Furthermore, under the Notice 87-56, the
additional 30% branch profits tax described above may be eliminated for
"qualified residents" of Belgium (the term qualified resident having the
meaning set forth in Section 884(e)(4) of the Code).
Under currently effective US Treasury Regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussion above and, under the current interpretation of US
Treasury Regulations, for purposes of determining the applicability of a tax
treaty rate. Under recently finalized US Treasury Regulations that will
generally be effective for distributions after December 31, 1998 (extended,
under certain transition
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rules, until December 31, 1999) (the "Final Withholding Regulations"), however,
a non-US holder of common stock who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification
requirements. In addition, under the Final Withholding Regulations, in the case
of common stock held by a foreign partnership among other things, (1) the
certification requirement would generally be applied to the partners of the
partnership and (2) the partnership would be required to provide certain
information, including a US taxpayer identification number or be subject to
withholding at the full 30% rate. The final Withholding Regulations also
provide look-through rules for tiered partnerships.
A non-US holder of common stock that is eligible for a reduced rate of US
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by the timely filing of an appropriate claim for
refund with the US Internal Revenue Service.
Gain on Disposition of Common Stock
A non-US holder generally will not be subject to US federal income tax in
respect of gain recognized on a disposition of common stock except in the
following circumstances: (1) where the gain is effectively connected with the
conduct of a trade or business in the US by such non-US holder (and is
attributable to a permanent establishment or fixed base maintained in the US by
such non-US holder if an applicable income tax treaty so requires as a
condition for such non-US holder to be subject to United States taxation on a
net income basis with respect to such gain), (2) in the case of a non-US holder
who is an individual and holds the common stock as a capital asset, such holder
is present in the United States for 183 or more days in the taxable year of the
sale and certain other conditions exist, (3) in some cases where Phytera is or
has been a "US real property holding corporation" for US federal income tax
purposes (which Phytera believes it is not currently and will not become) or
(4) the non-US holder is subject to tax pursuant to certain provisions of the
Code applicable to US expatriates. Effectively connected gains realized by a
corporate non-US holder may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Information Reporting and Backup Withholding
Under current law, US information reporting requirements (other than
reporting of dividend payments for purposes of the withholding tax noted above)
and backup withholding tax generally will not apply to dividends paid to non-US
holders that are either subject to the 30% withholding tax discussed above or
that are not so subject because an applicable tax treaty (such as the Belgium
Treaty) reduces such withholding. Otherwise, backup withholding of US federal
income tax at a rate of 31% may apply to dividends paid with respect to common
stock to non-US holders that are not "exempt recipients" and that fail to
provide certain information (including the holder's US taxpayer identification
number). Generally, unless the payor of dividends has definite knowledge that
the payee is a United States person (as such term is defined in the Code and
attendant regulations), the payor may treat dividend payments to a payee with a
foreign address as exempt from information reporting and backup withholding.
However, under the Final Withholding Regulations, dividend payments generally
will be subject to information reporting and backup withholding unless
applicable certification requirements are satisfied. See the discussion above
with respect to the rules applicable to foreign partnerships under the Final
Withholding Regulations.
In general, US information reporting and backup withholding requirements also
will not apply to a payment made outside the US of the proceeds of a sale of
common stock through an office outside the United States of a non-United States
broker. However, US information reporting (but not backup withholding)
requirements will apply to a payment made outside the US of the proceeds of a
sale of common stock through an office outside the US of a broker (1) that is a
United States person, (2) that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the US, (3) that is
a "controlled foreign corporation" as to the US or (4) (effective beginning
January 1, 1999) that is a foreign partnership with certain connections to the
US, unless the broker has documentary evidence in its records that the holder
or beneficial owner is a non-US person or the holder or beneficial owner
otherwise establishes an exemption. Payment of the proceeds of the sale of
common stock to or through a US office of a broker is currently subject to both
US backup withholding and information reporting unless the holder certifies its
non-US status under penalties of perjury or otherwise establishes an exemption.
Non-US holders should consult their tax advisors regarding the application of
information reporting and backup withholding in their particular situations,
the availability of an exemption therefrom, and the procedure
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for obtaining such an exemption, if available. Any amounts withheld from a
payment to a non-US holder under the backup withholding rules will be allowed
as a credit against such holder's US federal income tax liability provided the
required information is furnished to the US Internal Revenue Service. A non-US
holder generally may obtain a refund of any excess amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
US Internal Revenue Service.
Danish Tax Considerations
The following discussion summarizes certain Danish tax consequences relating
to an investment in common stock by a Danish resident investor. This summary
deals only with common stock held by portfolio investors with less than 25% of
the share capital of Phytera. Danish tax authorities distinguish between
"listed" and "unlisted" shares when assessing tax consequences for individual
investors who are Danish residents. The Danish tax authorities have not
confirmed that all of the shares sold in this offering will be deemed to be
"listed" shares for Danish tax purposes. The analysis set forth below assumes
that all shares sold in this offering will be treated as "listed".
Dividends
For Danish resident shareholders, the US withholding tax on dividend
payments by Phytera is in principle reduced from 30% to 15% pursuant to the
US-Danish income tax treaty. Special rules apply to the calculation of the
relief available under this treaty in different circumstances.
Residents
The gross amount of distributions by Phytera will be treated as taxable
income for resident shareholders. The dividend is deemed acquired as of the
date of the shareholders' meeting where the decision regarding distribution is
taken. For Danish resident individuals, dividends on common stock are taxed as
share income. For the 1999 tax year, the first DKK 36,000 (DKK 72,000 if
married) of share income is taxed at a rate of 25%, any dividend income over
that amount is taxed at a rate of 40%. These share income levels are subject
to change in subsequent tax years. The US-Danish income tax treaty provides
that any US withholding tax can be set-off against the Danish tax. Dividend
income is not subject to local income taxes. For information regarding
individual pension accounts, see below.
For Danish resident companies holding less than 25% of a company's share
capital, 66% of the total dividend is taxed as ordinary income; 34% of the
dividend is tax-exempt. Given that the Danish corporation tax rate is
currently 32%, the effective tax rate on dividends is approximately 21%. In
addition, Danish resident companies are entitled to a reduction in share
income for the US tax withheld. Dividend income is not subject to local income
taxes.
Dividends received by Danish banks and other entities in the business of
share investment are taxed as ordinary business income at a rate of 32%. No
part of the dividend is tax-exempt.
Pension funds are tax exempt, but must pay a real interest rate duty on
dividend income. Pension funds, life insurance companies, and other entities
subject to the Danish real interest duty are subject to a five percent duty on
dividends. The US withholding tax can be set-off against the five percent duty
on the dividend. The real interest rate rules apply to all pension capital
arising from tax deductible pension schemes, including pension accounts of
individuals held by banks.
Non-residents
If a non-resident holds common stock other than through a business that is a
permanent establishment in Denmark, no Danish tax is levied on dividends.
Capital Gains Tax
Residents
Shares of Phytera common stock disposed of by Danish residents will be
subject to the same capital gains tax as shares of Danish listed companies.
Gains and losses on shares are calculated as the difference between the market
value in DKK at the time of purchase and the market value in DKK at the time
of disposal. Accordingly, the capital gains tax is affected by changes in the
exchange rate between US dollars and Danish kroner.
Capital gains received on the disposal of common stock by an individual are
taxed as investment income (approximately 40%-59%) or share income (25%-40%).
If the shares were held for less than three years, capital gains on the
disposal of shares are taxed as investment income (approximately 40%-59%).
Such gains and losses are computed according to the so-called "share-for-share
method." Under this method, gains and losses are
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calculated as the difference between the purchase price and the corresponding
disposal price for each separate share. Any losses on shares held for less
than three years may be offset against similar gains or, if no such gains are
available, may be carried forward for five years.
Gains on shares held for three years or longer are tax-exempt if the market
value of the individual's total portfolio of listed shares, listed investment
fund certificates, and the like, within the last three years, has not exceeded
a certain level, which is DKK 113,300 for the 1999 tax year. For married
couples the aggregate value of both spouses' portfolios cannot exceed this
level. The market value of an individual's or married couples' portfolio is
generally measured immediately after each purchase and immediately prior to
each disposal of a listed share, and again at the end of each calendar year.
Gains on the disposal of listed shares are tax-exempt only if the market value
of the portfolio does not exceed the limit at any of the measurement dates.
If the shares are held for at least three years, and the portfolio exceeds
DKK 113,300, capital gains are taxed as share income (25%-40%). Gains and
losses on shares held for three years or longer are calculated in accordance
with the "average method." Under this method, the gain or loss is calculated
as the difference between the purchase price of the shares, which is
calculated as a fraction of the total purchase price for all of the shares in
the same company held for at least three years, and the disposal price of the
shares. Any losses on listed shares held for three years or more may be offset
against similar gains (assuming the portfolio exceeds the DKK 113,300 limit),
or may be carried forward for five years.
For information regarding individual pension accounts, see below.
The taxation of capital gains upon the disposal of shares of common stock by
a resident individual is outlined as follows:
<TABLE>
<CAPTION>
Ownership for three years or longer
-------------------------------------------------
Value less than or Value greater than
Disposal of Shares Ownership for less than three years equal to DKK 113,300 DKK 113,300
- ------------------ ----------------------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Capital gains Investment income Tax exempt Share income
Capital losses . Offset against taxable Capital losses cannot be . Offset against taxable
gains on the sale of set off gains on listed shares
shares held for less held for three years
than three years or more (incl.
(incl. spouses' spouses' shares)
shares).
. Carried forward for . Carried forward for
five years. five years
Calculation method Share-for-share method Average method
</TABLE>
Capital gains on common stock held by a company for less than three years
are taxed as ordinary income at a rate of 32%. Gains and losses are calculated
in accordance with the average method, as discussed above. Losses realized on
the sale of shares held by a company for less than three years can be deducted
from taxable gains on the sale of other shares owned for less than three
years, or can be carried forward for five years. Losses are reduced by the
amount of tax exempt dividends received in connection with such shares.
Gains on common stock held for more than three years are tax exempt and
losses are not deductible.
The taxation of capital gains upon the disposal of shares of common stock by
a resident company is outlined as follows:
<TABLE>
<CAPTION>
Disposal of Shares Ownership for less than three years Ownership for three years or longer
- ------------------ ----------------------------------- -----------------------------------
<S> <C> <C>
Capital gains Ordinary income (32%) Tax exempt
Capital losses . Offset against taxable gains on disposal of .No set-off
other shares held for less than three years.
. Tax-exempt dividends are deducted from the .No tax deduction
loss.
. Carried forward for five years.
</TABLE>
For Danish banks and other entities in the business of share investment,
capital gains received on the disposal of common stock are taxed as ordinary
business income at a rate of 32% irrespective of the period of ownership. Any
corresponding losses are deductible.
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Pension funds are tax exempt, but must pay a real interest rate duty of five
percent on any capital gains on listed shares. The capital gain is calculated
annually using the "mark-to market" method. Capital losses on listed shares are
calculated using the same method and are deductible against capital gains. The
real interest rate rules apply to all pension capital arising from tax
deductible pension schemes, including pension accounts of individuals held by
banks.
The proceeds from the sale of shares to the issuing company are taxed as a
deemed dividend distribution whether the sale is made by an individual or a
company. In certain circumstances and upon application to the tax authorities,
permission can be obtained to subject the sale to normal capital gains tax
rules.
Non-residents
If a non-resident holds common stock other than through a business that is a
permanent establishment in Denmark, no Danish tax is levied on capital gains.
Transfer Duty
On the disposal of common stock by a Danish resident, a duty of 0.5% is
assessed based upon the market value of the transferred shares. Non-residents
are not subject to the share transfer tax. Beginning on October 1, 1999, no
such duty shall be payable.
Insurance Companies
Life insurance companies are subject to both a corporate tax and a real
interest rate duty on capital gains and dividends. In order to avoid double
taxation, the real interest rate duty is reduced by a percentage of the taxable
income. For all insurance companies, the deduction of provisions, insurance
payments and the like may be reduced to the extent the company has tax exempt
dividends or capital gains on shares (realized or unrealized). Thus, the
benefits of the exempt 34% of the total dividends received (100%-66%) and the
tax exempt gains on the shares of common stock may indirectly trigger corporate
taxation.
Belgian Tax Considerations
The following is a summary of the material Belgian income and stamp tax
consequences of the acquisition, ownership and disposition of common stock. The
summary uses the term, "Belgian Holders," to refer to beneficial owners of
common stock of Phytera whose ownership of such common stock is not
attributable to a permanent establishment or a fixed base in another country
and who are considered residents of Belgium for the purposes of Belgian law.
Dividends
Belgian Withholding Tax
Dividends distributed on common stock are subject to a withholding tax at the
rate of 25%, when paid or attributed through a professional intermediary in
Belgium. However, no dividend withholding tax is due if no Belgian professional
intermediary is used to pay or attribute the dividend. Phytera has no intention
to use a Belgian professional intermediary to pay or attribute dividends to
non-Belgian Holders. No withholding tax is due on dividends paid on the common
stock to a company with its fiscal residence in Belgium.
In a case where dividends are paid outside Belgium without any intervention
of a paying agent in Belgium, no dividend withholding tax is, in principle,
due. However, where the Belgian Holder is a Belgian resident or entity subject
to the tax on legal entities (for example, a pension fund), the Belgian Holder
itself must pay the dividend withholding tax at the rate of 25%.
Income Tax
In the hands of a Belgian Holder who is an individual holding common stock as
a private investment, the Belgian dividend withholding tax is a final tax and
the dividends need not be reported in the individual's annual income tax
return. If no withholding tax has been levied (i.e., in case of payment or
attribution outside of Belgium), the individual must report the dividends in
his or her tax return. Thus, in the case of Phytera, such Belgian Holder will
be taxed at the separate rate of 15%, to be increased with a municipal
surcharge (varying, as a rule, from six percent to nine percent).
In the hands of an individual Belgian Holder whose holding of common stock is
effectively connected with a business, the dividends are taxable at the
ordinary rates for business income (i.e., varying from 25% to 55%, to be
increased by a crisis contribution of three percent of the tax due and the
appropriate municipal surcharge). Any Belgian withholding tax is creditable
against the final income tax due by the Belgian Holder,
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provided that the Belgian Holder has the full legal ownership of the common
stock at the time of payment or attribution of any dividends, and provided
further that the dividend distribution does not entail a reduction in value of
or a capital loss on the common stock.
Dividends received by Belgian Holders which are resident companies are, in
principle, subject to corporate income tax at the rate of 40.17% (i.e., the
standard rate of 39% increased by the crisis contribution of three percent of
the corporate income tax due). Lower rates may be applicable to Belgian
resident companies which, among other conditions, are not 50% or more owned by
another company and which derive taxable income below certain thresholds fixed
by law.
However, provided that the dividends benefit from the so-called "dividend-
received deduction," only five percent of the dividends received will be
taxable. In order to benefit from this deduction, Phytera must not fall within
one of the categories in which the distributed dividends are expressly excluded
from the "dividend-received deduction" (for example, dividends which are
distributed by tax-haven countries or are paid out of income has benefited from
a special tax regime) and the beneficiary should hold, at the time of payment
of the dividends, a participation of at least five percent in Phytera or a
participation which has an acquisition value of at least BEF 50 million.
For Belgian resident entities subject to the Belgian Tax on Juridical
Entities (for example, pension funds), the Belgian dividend withholding tax is
a final tax.
Capital Gains
Individual Belgian Holders holding the common stock as a private investment
and entities subject to Belgian tax on legal entities are not subject to
Belgian capital gains tax on the disposal of the common stock. Individual
Belgian Holders may, however, be subject to a 33% tax (to be increased by the
three percent crisis, contribution and the appropriate municipal surcharge) if
the capital gain is deemed to be "speculative" in nature, as defined by Belgian
case law.
Individual Belgian Holders whose holding of common stock may be considered as
effectively connected with a business will be taxable at ordinary (progressive)
rates on any capital gains realized upon a disposal of common stock if they
have held it for five years or less, but will be taxed at 16.5% (to be
increased by the three percent crisis contribution and the appropriate
municipal surcharge) on such gains if they have held the common stock for more
than five years before disposing of same.
Belgian resident companies are not subject to capital gains taxation,
provided that the dividends received on the shares which such companies have
disposed of would qualify for the "dividend-received deduction" (except for the
minimum holding requirement). As noted above, it is Phytera's view that any
dividends it may distribute might qualify.
Indirect Taxes
In principle, a stamp tax is levied upon the subscription of new common stock
and the purchase and sale in Belgium of common stock, if effected by means of a
professional intermediary. The rate applicable to subscriptions of new common
stock is 0.35%, but there is a limit of 10,000 BEF per transaction. The rate
applicable for secondary sales and purchases in Belgium of common stock through
a professional intermediary is 0.17%, but there is a limit of 10,000 BEF per
transaction.
An exemption is available to professional intermediaries (e.g., credit
institutions), insurance companies, pension funds, and collective investment
vehicles which are acting for their own account. A non-resident holder of
common stock who is acting for his or her own account will also be entitled to
an exemption from this stamp tax, provided that he or she delivers to the
issuer or the professional intermediary in Belgium, as the case may be, an
affidavit confirming his or her non-resident status vis-a-vis Belgium.
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UNDERWRITING
Phytera has entered into a European underwriting agreement with the European
managers named below. SG Cowen Securities International L.P., Carnegie Bank A/S
and BancBoston Robertson Stephens International Ltd are acting as European lead
managers for the European managers. Under the terms of the European
underwriting agreement, Phytera has agreed to sell to each European manager and
each European manager has agreed to purchase from Phytera, the number of shares
of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
Number
European Manager of Shares
---------------- ---------
<S> <C>
SG Cowen International L.P. .......................................
Carnegie Bank A/S..................................................
BancBoston Robertson Stephens International Ltd....................
---------
Total............................................................ 1,750,000
=========
</TABLE>
Phytera has entered into a US underwriting agreement with the US underwriters
named below. SG Cowen Securities Corporation, Carnegie Inc. and BancBoston
Robertson Stephens Inc. are acting as US representatives for the US
underwriters. Under the terms of the US underwriting agreement, Phytera has
agreed to sell to each US underwriter and each US underwriter has agreed to
purchase from Phytera, the number of shares of common stock set forth opposite
its name below:
<TABLE>
<CAPTION>
Number
US Underwriter of Shares
-------------- ---------
<S> <C>
SG Cowen Securities Corporation....................................
Carnegie Inc.......................................................
BancBoston Robertson Stephens Inc. ................................
-------
Total............................................................ 750,000
=======
</TABLE>
The offering price and aggregate underwriting discounts and commissions per
share for the European offering and the US offering are identical. The
completion of each offering is contingent upon the completion of the other.
The US and European underwriting agreements provide that the underwriters
will not be obligated to purchase the shares of common stock from Phytera if,
among other things, there is any material adverse change in Phytera's business
or they do not receive the closing documents required under the terms of the
underwriting agreements. If the underwriters purchase any of the shares of
common stock offered and covered by the underwriting agreements they have
agreed to purchase all the shares being offered, other than those covered by
the over-allotment options described below.
The underwriters propose to offer shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at that price less a concession not in excess
of $ per share. The underwriters may allow, and those dealers may re-allow,
a concession not in excess of $ per share to certain other brokers and
dealers. After the shares of common stock are released for sale to the public,
the offering price and other selling terms may from time to time be varied by
the US representatives and European lead managers acting together. Once the
underwriters have signed the underwriting agreements, they will bear the risk
that investors from whom they have obtained indications of interest will not
purchase the shares of common stock. We expect that delivery of the common
stock will be made in New York, New York, US on or about February 8, 1999.
In an agreement among the US underwriters and European managers, the US
underwriters have represented and agreed that, with certain exceptions:
. they are not purchasing any shares of common stock for the account of
anyone other than a United States or Canadian person and
. they have not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares outside the United States or Canada or to anyone other than a
United States or Canadian person.
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In that agreement, the European managers have represented and agreed that,
with certain exceptions:
. they are not purchasing any shares for the account of any United States
person or Canadian person and
. they have not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares in the United States or Canada or to any United States or Canadian
person.
The representations and agreements of any underwriter that is both a US
underwriter and a European manager made by it in its capacity as a US
underwriter apply to it only in its capacity as a US underwriter and the
representations and agreements made by it in its capacity as a European manager
apply to it only in its capacity as a European manager. These limitations do
not apply to stabilization transactions or to certain other transactions
specified in the agreement among the US underwriters and the European managers.
A United States or Canadian person includes:
.any national or resident of the United States or Canada,
. any corporation, profit sharing trust or other trust or other entity
organized under the laws of the United States or Canada or of any
political subdivision of the United States or Canada, except a branch of
any United States or Canadian person located outside of the United States
or Canada, and
. any United States or Canadian branch of a person that is otherwise not a
United States or Canadian person.
Under the agreement between the US underwriters and the European managers,
the US underwriters may agree to sell shares of common stock to the European
managers and the European managers may agree to sell shares of common stock to
the US underwriters. The price of any shares sold under this agreement shall be
the public offering price, less an amount not greater than the selling
concession.
Phytera has granted to the US underwriters and the European managers options,
exercisable for up to 30 days after the date of this prospectus, to purchase up
to an aggregate of 375,000 additional shares of common stock to cover over-
allotments, if any. If the underwriters exercise the over-allotment options,
each underwriter has agreed to purchase approximately the same percentage of
the total number of these additional shares that the number of shares of common
stock to be purchased by each of them as shown in the tables above bears to the
total number of shares of common stock in the offering. The underwriters may
exercise these options only to cover over-allotments made in connection with
the sale of shares of common stock in the offering.
Phytera, its officers, all Directors who own shares of common stock and
certain other stockholders, warrantholders and optionholders of Phytera have
agreed that for a period of 180 days following the date of this prospectus,
without the prior consent of SG Cowen Securities Corporation, they will not,
directly or indirectly, offer, sell, assign, transfer, encumber, pledge,
contract to sell, grant an option to purchase or otherwise dispose of, other
than by operation of law, any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock.
These securities include options, warrants and the like, whether the owners
hold the securities directly in their own names or indirectly through others
and whether the securities were acquired by them before or after the date of
this prospectus. SG Cowen Securities Corporation has advised Phytera that it
has no present intention of releasing any of Phytera's stockholders or
optionholders from the lock-up agreements they have signed until the expiration
of the 180-day period.
Phytera has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act and to contribute to payments
the underwriters may be required to make related to these liabilities.
The US representatives and European lead managers have advised Phytera that
the underwriters do not intend to confirm sales in excess of five percent of
the number of shares of common stock in the offering to any account over which
they exercise discretionary authority.
Until the distribution of common stock is completed, rules of the SEC and
EASDAQ may limit the ability of the underwriters and certain selling group
members to bid for and purchase the common stock. As an exception to these
rules, the underwriters, through a stabilizing manager to be designated by
them, are permitted to engage in certain transactions on EASDAQ that stabilize
the price of the common stock. These transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the common
stock. Under EASDAQ rules, the maximum price at which any such stabilizing
transactions may be made may not exceed the initial public offering price.
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If the underwriters create a short position in the common stock in connection
with this offering, i.e., if they sell a greater number of shares of common
stock than are being sold in the offering, they may reduce that short position
by purchasing common stock in the open market. The underwriters may also elect
to reduce any short position by exercising all or part of the over-allotment
options described above.
The underwriters may impose a penalty bid on underwriters and selling group
members. This means that if the underwriters purchase common stock in the open
market to reduce the underwriters' short positions or to stabilize the price of
the common stock, they may reclaim the amount of the selling concession from
the underwriters who sold those shares of common stock as part of this
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of a security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
could discourage resales of the security.
Phytera and the underwriters do not make any representation or prediction
relating to whether the transactions described above will have any effect on
the price of the common stock or, if so, the magnitude of the effect. In
addition, Phytera and the underwriters do not make any representation that the
underwriters will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
Prior to this offering, there has been no public market for the common stock.
Consequently, the initial public offering price was determined by negotiations
between Phytera and the US representatives and European lead managers. Among
the factors considered in these negotiations were:
. prevailing market conditions,
. Phytera's results of operations in recent periods,
. the market capitalizations and stages of development of companies
believed to be comparable to Phytera,
. the present state of Phytera's development and
. other factors that Phytera, the US representatives and the European
managers believe are relevant.
Although the shares of common stock offered for sale by the underwriters will
be registered under the Securities Act, Phytera does not intend to apply for
listing of its common stock on any securities exchange in the United States or
for quotation through the National Association of Securities Dealers Automated
Quotation System. The US underwriters have advised Phytera that they intend to
offer or sell shares of common stock only to United States or Canadian persons
that they reasonably believe to be institutional investors. Therefore, US
purchasers of shares of common stock may be required to seek liquidity for
their shares outside of the United States on EASDAQ or on the CSE.
Carnegie Bank A/S, one of the European lead managers and an affiliate of
Carnegie Inc., one of the US representatives, acted as placement agent for the
sale of Phytera's Series E Stock and received a placement fee in connection
with that sale.
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SUBSCRIPTION AND SALE
The offerings of the common stock will commence on the date that the
underwriters and Phytera determine the initial public offering price for the
common stock. Pricing for the offerings will occur simultaneously. The closing
of the issuance and sale of the common stock by Phytera in respect of the
offerings will occur simultaneously and are expected to occur on the fourth
business day following the determination of the initial public offering price.
In the event that the offerings are oversubscribed, the available shares will
be apportioned by the underwriters among the subscriptions received.
Denmark
In Denmark, the offering of the shares of common stock will be subject to the
following subscription procedures:
The subscription period is expected to commence on February 1, 1999 and
terminate at 5:00 P.M. Central European time on the date that the initial
public offering price is determined, unless terminated earlier. The CSE
will be notified of the termination of the subscription period. The initial
public offering price will be announced in Denmark through the CSE.
Certain selling agents in Denmark may request that investors use a
subscription application form which is included with the Danish version of
this prospectus. This form, if requested, must be received by the selling
agent from whom it was obtained prior to the termination of the
subscription period and is subject to the written instructions included
therein.
Names and addresses of investors must be disclosed to the European
managers who are entitled to pass on such information to Phytera.
Belgium
The shares of common stock will not be offered publicly, directly or
indirectly, in Belgium at the time of this offering. Nevertheless, the
admission to trading on EASDAQ of the shares of common stock constitutes a
public offer in Belgium necessitating the approval of this prospectus by the
CBF as described on page 3 of this prospectus.
Austria
The shares of common stock have not been offered and will not be offered to
the general public in Austria but will be offered to a defined group of certain
institutional investors on the basis of a private placing or otherwise only in
circumstances where an exemption from the duty to publish a securities sale
prospectus under the Austrian Capital Market Act is applicable. Therefore, this
prospectus is not intended for subscription and sale to the general public and
it is addressed to institutional investors only.
France
The offering does not and is not intended to constitute an offer to the
public ("appel public a l'epargne") under French law. The prospectus is issued
in France only to persons who are qualified investors as defined under French
law, in particular Article 6 of the Ordinance No. 67-833 dated 28 September
1967 (as amended) in conjunction with Article 1 of the Decree No. 98-880 dated
1 October 1998. The prospectus has not been submitted for approval to the
French Commission des Operations de Bourse (COB), nor have any procedures
required under French law for the public offering of shares in France been
followed. This prospectus may not be used in connection with any offer or sale
of securities issued by Phytera to the public in France.
Germany
The shares of common stock have not been offered and will not be offered to
persons in Germany except to persons who acquire or dispose of securities or
dispose of securities as part of their profession or as a business either for
their own account or for the account of third parties (Section 2, No. 1
Securities Sales Prospectus Act "Wertpapierverkaufspropekt-Gesetz") or
otherwise only in circumstances where an exemption from the duty to publish a
securities sales prospectus under the German Securities Sales Prospectus Act is
applicable.
68
<PAGE>
Italy
The European managers have represented and agreed that no action has been or
will be taken which would allow the offering of the shares of common stock to
the public in the Republic of Italy and that individual sales of shares of
common stock to any person in the Republic of Italy have only been or will only
be made in accordance with Italian securities, tax and other applicable laws
and regulations. Accordingly, the shares of common stock may not be offered,
sold or delivered and neither this prospectus nor any other offering material
relating to the shares of common stock may be distributed or made available in
the Republic of Italy unless (1) such activities are carried out by a
securities intermediary appropriately authorized to conduct such activities in
the Republic of Italy and in accordance with applicable Italian securities laws
and any other applicable law or regulatory requirements and (2) the applicable
requirements, if any, for notices to the Consob under Article 4 of Consob
Regulation 6430 and to the Bank of Italy under Article 129 of Legislative
Decree No. 385 of 1st September, 1993, as amended, and the Bank of Italy's
instructions issued thereunder, are fully complied with.
Sweden
The shares of common stock will be offered to a limited number of potential
investors only. The offered shares of common stock will not be offered to the
public in Sweden and are therefore not within the scope of the prospectus
regulations in the Swedish Financial Instruments Trading Act. This prospectus
has not been submitted for approval by or registration with the Swedish
Financial Supervisory Authority.
United Kingdom
The European managers have represented and agreed with Phytera that:
They have not offered or sold and prior to the expiration of the period of
six months from the date of the issue of the shares of common stock, will not
offer or sell any shares of common stock to persons in the United Kingdom,
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes
of their business or otherwise in circumstances which have not resulted and
will not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 or the Financial
Services Act of 1986.
They have complied and will comply with all applicable provisions of the
Financial Services Act of 1986 with respect to anything done by it in relation
to the shares of common stock in, from or otherwise involving the United
Kingdom.
They have only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue of the
shares of common stock to a person who is of a kind described in Article 11(3)
of the Financial Services Act of 1986 (Investment Advertisements) (Exceptions)
Order 1996 (as amended) or is a person to whom such document may otherwise
lawfully be issued or passed on.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for Phytera by Palmer & Dodge LLP, Boston, Massachusetts. Lynnette C. Fallon, a
partner of Palmer & Dodge LLP, is the Secretary of Phytera. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Brown & Wood LLP, New York, New York. Certain legal matters in
connection with Phytera's patents will be passed upon for it by Clark & Elbing,
LLP, Boston, Massachusetts. Certain matters of Danish law, including, among
other things, the statements of Danish law included in this prospectus under
the caption "Income Tax Considerations--Danish Tax Considerations" will be
passed upon by Dragsted & Helmer Nielsen, Copenhagen, Denmark, and Bech-Bruun &
Trolle, Copenhagen, Denmark, for Phytera and the underwriters, respectively.
Certain matters of English law will be passed upon by Denton Hall, London,
England, for Phytera. Palmer & Dodge LLP and Brown & Wood LLP will rely upon
Dragsted & Helmer Nielsen and Bech-Bruun & Trolle with respect to certain
matters governed by Danish law and upon Denton Hall with respect to certain
matters governed by English law.
69
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Financial Statements
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1995, 1996, 1997 and
September 30, 1998 (unaudited) and Pro Forma September 30, 1998
(unaudited)............................................................. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997, for the Nine Months Ended September 30, 1997 and
1998 (unaudited) and for the Period from Inception (May 27, 1992) to
September 30, 1998 (unaudited).......................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the Period from Inception (May 27, 1992) to December 31, 1997, and for
the Nine Months Ended September 30, 1998 (unaudited) and Pro Forma
September 30, 1998 (unaudited).......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997, for the Nine Months Ended September 30, 1997 and
1998 (unaudited) and for the Period from Inception (May 27, 1992) to
September 30, 1998 (unaudited).......................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Phytera, Inc.:
We have audited the accompanying consolidated balance sheets of Phytera, Inc.
(a Delaware corporation in the development stage) and subsidiaries as of
December 31, 1995, 1996 and 1997, the related consolidated statements of
operations and cash flows for each of the three years in the period ended
December 31, 1997, and the related statement of stockholders' equity (deficit)
for the period from inception (May 27, 1992) through December 31, 1997. These
financial statements are the responsibility of Phytera'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 Phytera, Inc. and subsidiaries
as of December 31, 1995, 1996 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with United States generally accepted accounting
principles.
Boston, Massachusetts
February 20, 1998 (except with respect
to the matters discussed in Note 6(a),
as to which the date is February 8, 1999)
/s/ Arthur Andersen LLP
F-2
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, Pro Forma
--------------------------------------- September 30, September 30,
1995 1996 1997 1998 1998
----------- ------------ ------------ ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents.......... $ 470,010 $ 4,011,527 $ 3,342,130 $ 5,887,649 $ 5,887,649
Marketable
securities........... -- 6,105,391 450,000 1,100,000 1,100,000
Prepaid expenses and
other current
assets............... 136,273 246,327 232,788 295,288 295,288
----------- ------------ ------------ ------------ ------------
Total current
assets............. 606,283 10,363,245 4,024,918 7,282,937 7,282,937
----------- ------------ ------------ ------------ ------------
Equipment and
Improvements, at cost:
Laboratory equipment.. 1,989,571 2,331,802 2,985,962 2,974,963 2,974,963
Leasehold
improvements......... 455,506 603,518 751,899 905,019 905,019
Office equipment...... 307,592 465,792 584,930 739,703 739,703
----------- ------------ ------------ ------------ ------------
2,752,669 3,401,112 4,322,791 4,619,685 4,619,685
Less--Accumulated
depreciation and
amortization......... 894,662 1,448,540 2,153,328 2,717,617 2,717,617
----------- ------------ ------------ ------------ ------------
1,858,007 1,952,572 2,169,463 1,902,068 1,902,068
----------- ------------ ------------ ------------ ------------
Other Assets............ 239,561 79,695 94,633 129,649 129,649
----------- ------------ ------------ ------------ ------------
Total Assets........ $ 2,703,851 $ 12,395,512 $ 6,289,014 $ 9,314,654 $ 9,314,654
=========== ============ ============ ============ ============
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED
STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Current portion of
long-term debt (note
4)................... $ 825,000 $ 300,993 $ 299,536 $ 289,278 $ 289,278
Accounts payable...... 297,098 199,868 243,790 431,368 431,368
Accrued expenses...... 281,019 339,860 363,340 862,633 862,633
Deferred revenue...... -- 546,079 531,898 648,529 648,529
----------- ------------ ------------ ------------ ------------
Total current
liabilities........ 1,403,117 1,386,800 1,438,564 2,231,808 2,231,808
----------- ------------ ------------ ------------ ------------
Long-Term Debt, less
current portion (note
4)..................... 745,440 1,273,526 1,549,836 2,189,080 2,189,080
----------- ------------ ------------ ------------ ------------
Convertible Debt........ 1,762,236 -- -- -- --
----------- ------------ ------------ ------------ ------------
Commitments (note 8)
Redeemable Convertible
Preferred Stock, $0.01
par value--Authorized--
14,446,382 shares; no
shares pro forma Issued
and outstanding--
2,766,486 shares,
6,025,591 shares,
6,460,591 shares,
7,274,833 shares and no
shares as of December
31, 1995, 1996 and
1997, September 30,
1998 and pro forma
September 30, 1998,
respectively........... 11,893,915 30,945,219 34,186,184 41,138,563 --
----------- ------------ ------------ ------------ ------------
Stockholders' Equity
(Deficit) (note 6):
Preferred stock, $0.01
par value--
Authorized--1,000,000
shares pro forma
Issued and
outstanding--no
shares -- -- -- -- --
Common stock, $0.01
par value--
Authorized--13,000,000
shares actual;
25,000,000 shares pro
forma
Issued and
outstanding--499,035
shares, 529,758
shares, 607,783
shares, 709,949
shares and 5,659,005
shares as of December
31, 1995, 1996 and
1997, September 30,
1998 and pro forma
September 30, 1998,
respectively......... 4,990 5,298 6,078 7,099 56,590
Additional paid-in
capital.............. 7,501 839,919 1,341,534 5,206,617 46,295,689
Deficit accumulated
during the
development stage.... (13,113,348) (22,055,250) (32,233,182) (39,647,629) (39,647,629)
Deferred
compensation......... -- -- -- (1,810,884) (1,810,884)
----------- ------------ ------------ ------------ ------------
Total stockholders'
equity (deficit)... (13,100,857) (21,210,033) (30,885,570) (36,244,797) 4,893,766
----------- ------------ ------------ ------------ ------------
Total liabilities,
redeemable
preferred stock and
stockholders'
equity (deficit)... $ 2,703,851 $ 12,395,512 $ 6,289,014 $ 9,314,654 $ 9,314,654
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Inception
Nine Months Ended (May 27,
Years Ended December 31, September 30, 1992) to
------------------------------------- ------------------------ September 30,
1995 1996 1997 1997 1998 1998
----------- ----------- ----------- ----------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Collaborative Revenue... $ 49,632 $ 247,000 $ 1,052,657 $ 730,311 $ 1,100,257 $ 2,551,963
----------- ----------- ----------- ----------- ----------- ------------
Operating Expenses:
Research and
development.......... 3,964,007 5,231,383 7,672,748 5,711,002 5,638,715 27,191,166
General and
administrative....... 1,424,539 1,675,317 1,739,806 1,287,038 1,908,900 8,632,962
Charge for acquired
research and develop-
ment................. -- 1,498,339 1,611,728 1,611,728 -- 4,421,517
----------- ----------- ----------- ----------- ----------- ------------
5,388,546 8,405,039 11,024,282 8,609,768 7,547,615 40,245,645
----------- ----------- ----------- ----------- ----------- ------------
Loss from
operations......... (5,338,914) (8,158,039) (9,971,625) (7,879,457) (6,447,358) (37,693,682)
Other:
Interest income....... 100,801 142,413 383,591 319,702 167,610 1,035,765
Interest expense...... (207,135) (172,505) (155,793) (89,115) (152,833) (935,285)
Foreign currency
translation gain
(loss)............... 6,720 (100,749) (10,185) (13,496) (152,132) (95,662)
----------- ----------- ----------- ----------- ----------- ------------
Net loss............ $(5,438,528) $(8,288,880) $(9,754,012) $(7,662,366) $(6,584,713) $(37,688,864)
=========== =========== =========== =========== =========== ============
Net Loss per Share:
Basic and Diluted..... $ (15.43) $ (19.99) $ (19.53) $ (15.59) $ (12.47)
Pro Forma Basic and
Diluted.............. $ (2.17) $ (1.45)
Weighted Average Common
Shares Outstanding:
Basic and Diluted..... 353,444 434,801 521,178 512,008 593,552
Pro Forma Basic and
Diluted.............. 4,692,624 5,121,511
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
-------------------- Additional During the Total
Number of $0.01 Par Paid in Development Deferred Stockholders'
Shares Value Capital Stage Compensation Equity (Deficit)
--------- --------- ----------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Initial Sale of Common
Stock.................. 196,200 $ 1,962 $ 1,038 $ -- $ -- $ 3,000
Exercise of stock
options............... 13,080 131 69 -- -- 200
Accretion of preferred
stock................. -- -- -- (6,093) -- (6,093)
Net loss............... -- -- -- (1,519,500) -- (1,519,500)
--------- ------- ----------- ------------ ----------- -----------
Balance, December 31,
1992................... 209,280 2,093 1,107 (1,525,593) -- (1,522,393)
Sale of common stock... 256,695 2,567 1,358 -- -- 3,925
Exercise of stock
options............... 13,080 131 69 -- -- 200
Accretion of preferred
stock................. -- -- -- (15,332) -- (15,332)
Net loss............... -- -- -- (1,876,218) -- (1,876,218)
--------- ------- ----------- ------------ ----------- -----------
Balance, December 31,
1993................... 479,055 4,791 2,534 (3,417,143) -- (3,409,818)
Sale of common stock... 4,905 49 4,076 -- -- 4,125
Exercise of stock
options............... 13,521 135 72 -- -- 207
Accretion of preferred
stock................. -- -- -- (15,332) -- (15,332)
Net loss............... -- -- -- (4,227,013) -- (4,227,013)
--------- ------- ----------- ------------ ----------- -----------
Balance, December 31,
1994................... 497,481 4,975 6,682 (7,659,488) -- (7,647,831)
Exercise of stock
options............... 1,553 15 819 -- -- 834
Accretion of preferred
stock................. -- -- -- (15,332) -- (15,332)
Net loss............... -- -- -- (5,438,528) -- (5,438,528)
--------- ------- ----------- ------------ ----------- -----------
Balance, December 31,
1995................... 499,035 4,990 7,501 (13,113,348) -- (13,100,857)
Exercise of stock
options............... 23,904 239 343 -- -- 582
Exercise of Series C
Warrants (note 6(f)).. -- -- -- (251,447) -- (251,447)
Issuance of stock
options to
consultants........... -- -- 4,890 -- -- 4,890
Repurchase of
restricted stock...... (10,628) (106) (57) -- -- (163)
Issuance of restricted
stock for consulting
services.............. 17,447 175 14,497 -- -- 14,672
Accretion of preferred
stock................. -- -- -- (401,575) -- (401,575)
Warrants issued in
connection with
issuance of Series C
preferred stock (note
6(c))................. -- -- 812,745 -- -- 812,745
Net loss............... -- -- -- (8,288,880) -- (8,288,880)
--------- ------- ----------- ------------ ----------- -----------
Balance, December 31,
1996................... 529,758 5,298 839,919 (22,055,250) -- (21,210,033)
Exercise of stock
options............... 36,362 364 24,752 -- -- 25,116
ESOP purchases......... 5,693 56 6,473 -- -- 6,529
Sale of common stock... 35,970 360 35,390 -- -- 35,750
Issuance of Series D
redeemable convertible
preferred stock in
connection with Auda
Pharmaceuticals ApS
acquisition........... -- -- 435,000 -- -- 435,000
Accretion of preferred
stock................. -- -- -- (423,920) -- (423,920)
Net Loss............... -- -- -- (9,754,012) -- (9,754,012)
--------- ------- ----------- ------------ ----------- -----------
Balance, December 31,
1997................... 607,783 6,078 1,341,534 (32,233,182) -- (30,885,570)
Deferred compensation
related to grants or
common stock options.. -- -- 2,115,350 -- (2,115,350) --
Amortization of
deferred
compensation.......... -- -- -- -- 304,466 304,466
Issuance of common
stock options......... -- -- 35,600 -- -- 35,600
Exercise of stock
options............... 85,816 858 70,374 -- -- 71,232
Exercise of Series C
redeemable convertible
preferred stock
warrants (note 6(f)).. -- -- -- (10,333) -- (10,333)
Sale of restricted
common stock.......... 16,350 163 18,587 -- -- 18,750
Value of discount
ascribed to the
guaranteed rate of
return on Series E
redeemable convertible
preferred stock....... -- -- 1,625,172 -- -- 1,625,172
Accretion of preferred
stock................. -- -- -- (413,108) -- (413,108)
Accretion of discount
ascribed to the
guaranteed rate of
return on Series E
redeemable convertible
preferred stock....... -- -- -- (406,293) -- (406,293)
Net Loss............... -- -- -- (6,584,713) -- (6,584,713)
--------- ------- ----------- ------------ ----------- -----------
Balance, September 30,
1998 (unaudited)....... 709,949 7,099 5,206,617 (39,647,629) (1,810,884) (36,244,797)
Conversion of
redeemable convertible
preferred stock into
common stock
(unaudited)........... 4,949,056 49,491 41,089,072 -- -- 41,138,563
--------- ------- ----------- ------------ ----------- -----------
Pro Forma Balance,
September 30, 1998
(unaudited)........... 5,659,005 $56,590 $46,295,689 $(39,647,629) $(1,810,884) $ 4,893,766
========= ======= =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended Inception
Years Ended December 31, September 30, (May 27, 1992) to
------------------------------------- ------------------------ September 30,
1995 1996 1997 1997 1998 1998
----------- ----------- ----------- ----------- ----------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net loss............... $(5,438,528) $(8,288,880) $(9,754,012) $(7,662,366) $(6,584,713) $(37,688,864)
Adjustments to
reconcile net loss to
net cash used in
operating activities--
Charge for acquired
research and
development, net of
cash paid............ -- 1,459,651 1,611,728 1,611,728 -- 4,103,038
Stock issuance in
exchange for
interest on bridge
financing loan....... -- 10,622 -- -- -- 70,074
Stock issuance in
exchange for rent.... -- -- -- -- -- 93,500
Stock issuance in
exchange for
consulting
services............. -- 14,406 -- -- -- 14,406
Compensation related
to issuance of
common stock
options.............. -- 4,890 -- -- 340,293 345,183
Depreciation and
amortization......... 485,286 553,878 704,788 493,562 564,289 2,850,531
Changes in assets and
liabilities--
Accounts receivable,
prepaid expenses and
other current
assets.............. 210,404 (110,054) 26,041 (188,400) (62,500) (273,724)
Accounts payable..... (270,888) (225,625) 4,702 264,848 187,576 244,329
Accrued expenses..... (812) 76,499 18,133 97,298 499,293 855,439
Deferred revenue..... -- 528,421 (14,181) 288,743 116,630 648,528
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in
operating
activities......... (5,014,538) (5,976,192) (7,402,801) (5,094,587) (4,939,132) (28,737,560)
----------- ----------- ----------- ----------- ----------- ------------
Cash Flows from
Investing Activities:
Purchases of equipment
and improvements...... (149,604) (626,723) (913,422) (892,106) (296,894) (4,689,058)
Decrease (increase) in
marketable
securities............ 1,547,640 (6,105,391) 5,655,391 3,455,638 (650,000) (1,100,000)
(Increase) decrease in
restricted cash....... (220,000) 220,000 -- -- -- --
Increase in other
assets................ (19,561) (60,134) (13,803) (17,933) (35,016) (128,514)
Net cash acquired in
acquisition of Auda
Pharmaceuticals ApS,
net of acquisition
costs................. -- -- 1,662,990 1,662,990 -- 1,662,990
----------- ----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) investing
activities......... 1,158,475 (6,572,248) 6,391,156 4,208,589 (981,910) (4,254,582)
----------- ----------- ----------- ----------- ----------- ------------
Cash Flows from
Financing Activities:
Net (payments of)
proceeds from notes
payable............... (266,606) (139,554) (295,420) (228,972) (227,911) 162,115
Proceeds from long-term
debt.................. -- 67,073 627,244 429,140 769,342 1,386,835
Proceeds from
convertible debt...... 1,762,236 -- -- -- -- 1,762,236
Net proceeds from sale
(repurchase) of
preferred stock....... -- 16,058,311 -- -- 7,747,576 35,494,761
Proceeds from sale of
common stock.......... -- (163) 35,750 35,750 18,750 64,387
Proceeds from the
exercise of stock
options and warrants.. 834 985 25,116 20,489 71,249 98,791
Proceeds from ESOP
purchases............. -- -- 6,529 -- -- 6,529
Proceeds from the
issuance of stock in
exchange for
consulting services... -- 266 -- -- -- 266
Net effect of foreign
currency translation
adjustments........... (6,096) 103,039 (56,971) (68,756) 87,555 (96,129)
----------- ----------- ----------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 1,490,368 16,089,957 342,248 187,651 8,466,561 38,879,791
----------- ----------- ----------- ----------- ----------- ------------
Net (decrease) increase
in cash and cash
equivalents............ (2,365,695) 3,541,517 (669,397) (698,347) 2,545,519 5,887,649
Cash and Cash
Equivalents, beginning
of period.............. 2,835,705 470,010 4,011,527 4,011,527 3,342,130 --
----------- ----------- ----------- ----------- ----------- ------------
Cash and Cash
Equivalents, end of
period................. $ 470,010 $ 4,011,527 $ 3,342,130 $ 3,313,180 $ 5,887,649 $ 5,887,649
=========== =========== =========== =========== =========== ============
Supplemental Disclosure
of Noncash
Transactions:
Acquisition of Phytera
Ltd.--
Assumed liabilities.... $ -- $ -- $ -- $ -- $ -- $ (1,073,327)
Fair value of assets
acquired.............. -- -- -- -- -- 42,668
Issuance of stock in
connection with
Phytera Ltd.
acquisition........... -- -- -- -- -- 1,000
Acquisition of Neptune
Pharmaceuticals,
Inc.--
Assumed liabilities.... $ -- $ (128,394) $ -- $ -- $ -- $ (128,394)
Fair value of assets
acquired.............. -- 22,018 -- -- -- 22,018
Issuance of stock in
connection with
Neptune
Pharmaceuticals,
Inc................... -- 1,353,275 -- -- -- 1,353,275
Acquisition of Auda
Pharmaceuticals ApS--
Assumed liabilities.... $ -- $ -- $ (44,569) $ (44,569) $ -- $ (44,569)
Fair value of assets
acquired.............. -- -- 1,739,370 1,739,370 -- 1,739,370
Issuance of stock in
connection with Auda
Pharmaceuticals ApS... -- -- 3,262,500 3,262,500 -- 3,262,500
Conversion of
convertible debt and
interest into
preferred stock....... $ -- $ 1,799,038 $ -- $ -- $ -- $ 1,799,038
Supplemental Disclosure
of Cash Flow
Information:
Cash paid for
interest.............. $ 181,079 $ 187,474 $ 134,355 $ 32,113 $ 21,285 $ 692,973
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
(Including Data Applicable to Unaudited Periods)
(1) Operations
Phytera, Inc. and subsidiaries (Phytera) was incorporated on May 27, 1992.
Phytera is an international biopharmaceutical company engaged in identifying
and optimizing novel chemical lead structures through its Combinatorial Drug
Discovery Program.
Phytera is in the development stage. Under United States generally accepted
accounting principles ("US GAAP"), a development stage enterprise is defined as
an enterprise which is devoting substantially all of its efforts toward
developing products, raising capital and marketing products under development.
Under US GAAP, development stage enterprises are required to provide certain
additional disclosure in their financial statements. Phytera is subject to a
number of risks similar to those of other development stage companies,
including dependence on key individuals, competition from substitute products
and larger companies, the development of commercially usable products and the
need to obtain adequate additional financing necessary to fund the development
of its products.
(2) Acquisitions
On July 31, 1996, Phytera issued 246,050 shares of its Series B redeemable
convertible preferred stock for 100% of the outstanding capital stock of
Neptune Pharmaceuticals, Inc. ("Neptune"). These shares were valued at $5.50
per share which represented the fair market value based upon comparable sales
of Series B redeemable convertible preferred stock. The acquisition was
accounted for as a purchase in accordance with Accounting Principles Board
Opinion ("APB") No. 16. The assets acquired from Neptune consisted primarily of
intellectual property which, at the date of acquisition, had not established
technological feasibility and has no alternative future uses. The intellectual
property consisted of know-how and methodologies related to marine culture
extracts and an option to license certain technology from an academic
institution. In order for the intellectual property acquired from Neptune to be
commercialized and generate cash flows, Phytera needs to expend a substantial
amount on additional research and development, preclinical testing and clinical
trials, regulatory clearances, and manufacturing, distribution and marketing
arrangements the outcome of which is uncertain. The cost and time required to
complete the development of the intellectual property is significant and
difficult to estimate given the uncertainties of research and development and
the regulatory process. Accordingly, the net realizable value of the acquired
intellectual property is uncertain. The portion of the purchase price allocated
to intellectual property, totaling $1,498,339, was charged to operations in the
year ended December 31, 1996 as in-process research and development. The
results of operations of Neptune have been included in the accompanying
Consolidated Financial Statements since the date of acquisition.
On March 11, 1997, Phytera issued 435,000 shares of its Series D redeemable
convertible preferred stock for 100% of the outstanding capital stock of Auda
Pharmaceuticals ApS ("Auda"). These shares were valued at $7.50 per share which
represented the fair market value based upon comparable sales of Series D
redeemable convertible preferred stock. The acquisition was accounted for as a
purchase in accordance with APB No. 16. The assets of Auda consisted primarily
of $1,662,990 of cash and intellectual property which, at the date of
acquisition, had not established technological feasibility and has no
alternative future uses. The intellectual property consisted of rights to three
patents licensed from the University of Copenhagen which may have use in
Phytera's combinational chemistry programs. In order for the intellectual
property acquired from Auda to be commercialized and generate cash flows
Phytera needs to expend a substantial amount on additional research and
development, preclinical testing and clinical trials, regulatory clearances,
and manufacturing, distribution and marketing arrangements the outcome of which
is uncertain. The cost and time required to complete the development of the
intellectual property is significant and difficult to estimate given the
uncertainties of research and development and the regulatory process.
Accordingly, the net realizable value of the intellectual property is
uncertain. The portion of the purchase price allocated to intellectual
property, totaling $1,611,728, was charged to operations in the year ended
December 31, 1997 as in-process research and development. The results of Auda's
operations have been included in the accompanying Consolidated Financial
Statements since the date of acquisition.
The following unaudited pro forma summary information presents the combined
results of operations of Phytera, Neptune and Auda as if the acquisitions had
occurred at the beginning of 1996 and 1997, respectively. This unaudited pro
forma financial information is presented for informational purposes only and
F-7
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
may not be indicative of the results of operations as they would have been if
Phytera, Neptune and Auda had been a single entity, nor is it necessarily
indicative of the results of operations that may occur in the future.
<TABLE>
<CAPTION>
Years Ended December Nine Months
31, Ended
------------------------ September 30,
1996 1997 1997
----------- ----------- -------------
<S> <C> <C> <C>
Collaborative revenues........... $ 267,200 $ 1,052,657 $ 730,311
Net loss......................... (8,758,011) (9,854,791) (7,763,146)
Basic and diluted net loss per
share........................... (21.07) (19.72) (15.78)
</TABLE>
(3) Significant Accounting Policies
The accompanying Consolidated Financial Statements reflect the application of
certain significant accounting policies as described in this note and elsewhere
in the notes to Consolidated Financial Statements.
(a) Summary of Certain Differences Between US GAAP, Danish generally accepted
accounting principles ("Danish GAAP") and International Accounting
Standards ("IAS")
In preparing its Consolidated Financial Statements for each of the years
ended December 31, 1995, 1996 and 1997 and nine-month periods ended
September 30, 1997 and 1998, Phytera has applied accounting principles
which are in accordance with US GAAP. These accounting principles differ in
some respects from Danish GAAP and IAS. The more significant differences
have been summarized below. The following sections list only the material
differences in accounting principles and related presentation and
disclosure items which apply to Phytera.
IAS and Danish GAAP differ in certain respects from US GAAP in such
regards as the classification and presentation of items in the balance
sheet and income statement as well as disclosure in the notes. The
explanatory notes to the income statement do differ both in terms of extent
and content. US GAAP require specific disclosures to be made related to the
consolidated statements of operations, consolidated balance sheets, and
accompanying notes. However, IAS tend to be less specific regarding the
form of presentation and structure of such disclosure.
In the balance sheet, US GAAP requires assets and liabilities to be
classified in ascending order, starting with current assets and current
liabilities, whereas the Danish GAAP requires a mandatory line by line
presentation, based on the European Union fourth directive. This structure
lists fixed assets and equity first and current assets and current
liabilities last (in descending order). Further differences relate to the
classification of assets on a line by line basis. US GAAP statements
usually display fixed assets at historical cost and total accumulated
depreciation as a separate line in the balance sheet. Danish GAAP
statements show fixed assets at net book value in the balance sheet with an
accompanying note explaining the "difference" between historical cost and
accumulated depreciation. Furthermore, Danish GAAP classifies current
assets differently on a line by line basis on the balance sheet. US GAAP
classifies leasehold improvements as tangible fixed assets, whereas these
are included in intangible fixed assets according to Danish GAAP. Similarly
the grouping and classification of debt and payables can vary under US GAAP
and Danish GAAP presentation rules.
US GAAP requires research and development costs to be charged to the
profit and loss account as incurred. IAS recognize development costs as an
asset provided that certain conditions are met. Phytera has not recognized
any such assets under IAS, and the development costs are expensed as
incurred in the same way as research costs.
Under US GAAP, a company such as Phytera and subsidiaries is deemed to be
a "development stage company", which requires very strict reporting forms,
including certain aggregate amounts from its inception until the most
recent reporting period to be reported in the consolidated statements of
operations and consolidated statements of cash flows and consolidated
statement of stockholders' equity (deficit). Accounting policy footnotes
require special disclosure explaining accounting for development stage
companies. IAS is less specific regarding the form of presentation and
structure of such disclosure.
F-8
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) Consolidation
The accompanying Consolidated Financial Statements include the accounts
of Phytera and its wholly owned subsidiaries, Phytera Ltd., Phytera A/S and
Phytera Symbion ApS. All material intercompany accounts and transactions
have been eliminated in consolidation.
(d) Unaudited Pro Forma Presentation
The unaudited Pro Forma Consolidated Balance Sheet as of September 30,
1998 reflects the automatic conversion of all outstanding shares of
redeemable convertible preferred stock into 4,949,056 shares of common
stock which will occur upon the closing of Phytera's proposed initial
public offering (assuming the Series E Convertible Preferred Stock converts
into an aggregate of 722,746 shares of common stock and the closing of the
proposed initial public offering on or before February 8, 1999 at an
offering price of $13.00 per share (the mid-point of the expected range)).
(e) Interim Financial Statements
The accompanying Consolidated Financial Statements as of September 30,
1998 and for the nine-month periods ended September 30, 1997 and 1998 are
unaudited, but in the opinion of management, include all adjustments
consisting of normal recurring adjustments necessary for a fair
presentation of results for the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted,
although Phytera believes that the disclosures included are adequate to
make the information presented not misleading. Results for the nine months
ended September 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
(f) Revenue Recognition
Substantially all of Phytera's revenues have been derived from research
and development partnerships (see note 9). Research funding, which is not
subject to achieving development milestones, is recognized as revenue over
the life of the research agreement as the required services are provided
and costs are incurred. Revenues derived from providing extracts are
recognized upon shipment of the extracts. Milestone payments will be
recognized as revenue upon achievement of the milestone and receipt of
payment. License fees will be recognized as revenue upon receipt and
fulfillment of all performance obligations. Deferred revenue represents
amounts received prior to recognition as revenue.
(g) Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market.
Phytera considers highly liquid investments with maturities of 90 days or
less at the time of acquisition to be cash equivalents. Cash and cash
equivalents include money market accounts that are readily convertible to
cash and commercial paper purchased with a maturity of 90 days or less.
(h) Marketable Securities
Phytera accounts for marketable securities under Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Phytera has classified its marketable
securities as held-to-maturity and they are recorded at amortized cost,
which approximates fair market value.
At December 31, 1996, 1997 and September 30, 1998, Phytera's marketable
securities consist of corporate bonds that mature within one year of the
balance sheet date.
F-9
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
(i) Depreciation and Amortization
Phytera provides for depreciation and amortization by charges to
operations in amounts estimated to allocate the cost of equipment and
improvements over their estimated useful lives on a straight-line basis as
follows:
<TABLE>
<CAPTION>
Asset Classification Estimated Useful Life
-------------------- ---------------------
<S> <C>
Laboratory equipment... 5 years
Leasehold
improvements.......... Life of lease
Office equipment....... 3-7 years
</TABLE>
(j) Research and Development Expenses
Phytera charges research and development expenses to operations as
incurred.
(k) Foreign Currency Translation
The financial statements of Phytera's non US subsidiaries are translated
in accordance with SFAS No. 52, Foreign Currency Translation. The
functional currency of Phytera's foreign subsidiaries is the US dollar,
accordingly, all assets and liabilities of the foreign subsidiaries are
translated using the exchange rate at the balance sheet date, except for
prepaid expenses, equipment and improvements and stockholders' equity
(deficit), which are translated at historical rates. Revenues and expenses
are translated at average rates during the period, except for depreciation
and amortization, which are translated at historical rates. Translation
gains and losses arising from the translations are included in the
consolidated statements of operations, since the functional currency is the
US dollar for all operations.
(l) Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash equivalents, marketable securities, accounts
payable and debt. The estimated fair value of these financial instruments
approximates their carrying value.
(m) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk, requires disclosure of any significant off-balance-sheet and
credit risk concentration. Phytera has no significant off-balance-sheet
concentration of credit risk such as foreign exchange contracts or other
hedging arrangements. Financial instruments that subject Phytera to credit
risk consist of cash and cash equivalents and marketable securities.
Phytera's collaborative revenue for the years ended December 31, 1996 and
1997 and for the nine months ended September 30, 1997 was derived entirely
from Tsumura & Co. Approximately 55%, 31% and 14% of Phytera's
collaborative revenue for the nine months ended September 30, 1998 was
derived from Tsumura & Co., Chiron Corporation and Eli Lilly and Company,
respectively. See note 9.
(n) Net Loss per Share
Basic and diluted net loss per common share was determined by dividing
net loss attributable to common shareholders, which reflects the accretion
of preferred stock to redemption value, by the weighted average vested
common shares outstanding during the period. The computation of basic and
diluted net loss per share reflects adjustments to net loss of $15,332,
$401,575, $423,920, $317,940 and $819,401 for the accretion of preferred
stock to its redemption value for the years ended December 31, 1995, 1996,
1997 and the nine months ended September 30, 1997 and 1998, respectively.
Basic and diluted net loss per share are the same, as outstanding common
stock options and warrants and convertible preferred stock are considered
antidilutive as Phytera has recorded a net loss for all periods presented.
Options and warrants to purchase a total of 258,081, 645,576, 747,753,
723,098, and 1,029,437 common shares have been excluded from the
computation of diluted weighted average shares outstanding for the years
ended December 31, 1995, 1996, 1997, and for the nine months ended
September 30, 1997 and 1998, respectively. Shares of common stock issuable
upon the conversion of outstanding redeemable convertible preferred stock
have also been excluded for all periods presented.
F-10
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes To Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
The calculation of pro forma net loss per common share assumes that all
series of redeemable convertible preferred stock had been converted to
common stock as of the original issuance dates. The calculation also
assumes that the Series E redeemable convertible preferred stock converts
into an aggregate of 722,746 shares of common stock which is based upon a
closing of Phytera's proposed initial public offering on or before February
8, 1999 at a public offering price of $13.00 per share (the mid-point of
the expected range).
(o) New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires
disclosure of all components of comprehensive income on an annual and
interim basis. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstance from non-operating sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Phytera has adopted this
statement, however as of September 30, 1998, Phytera does not have any
material components of comprehensive income.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Phytera will
adopt this statement in their 1998 year end financial statements.
(4) Long-Term Debt
Long-term debt obligations consist of the following as of December 31, 1996
and 1997 and September 30, 1998:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Note payable to University of
Sheffield........................... $ 822,000 $ 792,384 $ 816,000
Note payable to a Danish
organization........................ 67,073 685,257 1,510,656
Note payable to a United States
bank................................ 550,000 275,000 68,750
Note payable to an unrelated third
party............................... 100,691 73,990 64,656
Note payable to a Danish bank........ 34,755 22,741 18,296
---------- ---------- ----------
1,574,519 1,849,372 2,478,358
Less--Current portion................ 300,993 299,536 289,278
---------- ---------- ----------
$1,273,526 $1,549,836 $2,189,080
========== ========== ==========
</TABLE>
Long-term debt includes a (Pounds)480,000 (approximately $816,000 at the
September 30, 1998 exchange rate) note payable to the University of Sheffield,
bearing interest at 10% per annum, issued in connection with the acquisition of
Phytera Ltd. The note is payable on the closing of a qualified initial public
offering of Phytera's common stock, as defined, but may be accelerated upon the
sale or transfer of all or substantially all of Phytera's assets or upon a
voluntary petition of bankruptcy. Interest on the unpaid principal balance is
due each October 1.
In 1996, Phytera established a credit facility with a Danish organization to
fund its Danish operations. The maximum loan is DKK 13,232,700 ($2,086,797 at
the September 30, 1998 exchange rate), and is disbursed to Phytera quarterly,
based on a percentage of the operating expenses incurred by its operations in
Denmark through December 31, 1998. Interest accrues from the time of
disbursement at a rate of 7.98% per annum. The note and interest accrued are
payable quarterly beginning April 1, 1999. The loan balance outstanding,
including accrued but unpaid interest, at December 31, 1996, 1997 and September
30, 1998, was DKK 397,350, DKK 4,693,541 and DKK 9,564,726, respectively
($67,073, $685,257 and $1,510,656 at the December 31, 1996, and 1997 and
September 30, 1998 exchange rates, respectively).
F-11
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes To Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
In July 1994, Phytera entered into a $1,100,000 equipment line of credit with
a US bank. Phytera borrowed the maximum amount through December 31, 1994, at
which time the amount outstanding under the equipment line of credit was
converted into a promissory note. The note is payable in 48 equal monthly
installments, beginning in January 1995 and bearing interest at the bank's
prime rate (8.5% at September 30, 1998) plus 2%. Borrowings under the note are
secured by substantially all of Phytera's assets. The note contains certain
covenants, including minimum levels of liquidity and net worth. Phytera was in
compliance with all covenants at December 31, 1997 and September 30, 1998.
In October 1996, Phytera entered into a DKK 619,580 ($97,708 at the September
30, 1998 exchange rate) note payable with a third party for the purpose of
funding leasehold improvements. During 1997, additional leasehold improvements
for the amount of DKK 13,750 ($2,168 at September 30, 1998) were completed and
the amount was added to the existing note balance without any change in payment
terms. The note is payable quarterly over five years beginning October 1996.
The note bears interest at 6% plus a discount rate, which was 3.25% at
September 30, 1998.
In September 1996, Phytera entered into a DKK 217,700 ($34,331 at the
September 30, 1998 exchange rate) note payable with a Danish bank for the
purchase of a vehicle. The note is payable in 48 equal monthly installments,
beginning in October 1996 and bearing interest at 6.75%. The note is secured by
the vehicle.
In September 1998, Phytera entered into a $1,000,000 equipment line of credit
with a US finance company. This agreement provides for the funding of equipment
purchases made by Phytera through July 15, 1999. Separate loans are created
each time funding is provided, and each loan is to be repaid over 48 months
from the date of the funding with a final payment of 12.5% of the initial
principal amount. The repayment amount is based on a percentage of the
outstanding principal of the loan. The percentage rate can vary prior to each
funding, but is then fixed for the term of the specific loan created by the
specific funding event. The line is secured by all equipment purchased under
this agreement. There was no outstanding balance under this line of credit at
September 30, 1998.
(5) Convertible Debt
During 1995, Phytera borrowed $1,762,236 from existing investors and
affiliates under convertible promissory notes bearing interest at 7% per annum.
On January 31, 1996, these notes plus accrued interest were converted into
287,846 shares of Phytera's Series C convertible preferred stock in conjunction
with the financing discussed in note 6(c).
(6) Stockholders' Equity (Deficit)
(a) Recapitalization
On December 23, 1998, Phytera's Board of Directors approved a 0.654-for-
one reverse stock split of Phytera's common stock. The reverse stock split
became effective on February 8, 1999. All share and per share amounts of
common stock for all periods have been retroactively adjusted to reflect
the reverse stock split. Upon the closing of Phytera's proposed initial
public offering, its certificate of incorporation will be amended and
restated to, among other things, change its authorized capital stock to
25,000,000 shares of $0.01 par value common stock and 1,000,000 shares of
$0.01 par value preferred stock.
(b) Common Stock
As of September 30, 1998, Phytera had authorized 13,000,000 shares of
common stock, $0.01 par value and had issued 709,949 of such shares.
F-12
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes To Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
Phytera has authorized the issuance of up to 434,372 shares of common
stock pursuant to restricted stock agreements, of which 429,467 have been
issued at September 30, 1998. A portion of these shares vested immediately,
and the remaining shares vest ratably through 2003. All unvested stock, as
defined, is subject to repurchase at its original issuance price by Phytera
upon the employee leaving Phytera. In January 1996, Phytera exercised its
repurchase right to purchase 10,628 shares of common stock. As of December
31, 1997 and September 30, 1998, 48,069, and 57,552 shares of restricted
common stock, respectively, were unvested and subject to repurchase right.
F-13
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
(c) Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock activity since inception is as
follows:
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
-------------------- --------------------- -------------------- --------------------- --------------------
Number Carrying Number Carrying Number Carrying Number Carrying Number Carrying
of Shares Value of Shares Value of Shares Value of Shares Value of Shares Value
--------- ---------- --------- ----------- --------- ---------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of Series A
redeemable
convertible
preferred
stock........... 908,602 $1,697,381 -- $ -- -- $ -- -- $ -- -- $ --
Accretion of
preferred
stock.......... -- 6,093 -- -- -- -- -- -- -- --
------- ---------- --------- ----------- --------- ---------- --------- ----------- ------- ----------
Balance December
31, 1992........ 908,602 1,703,474 -- -- -- -- -- -- -- --
Sale of Series B
redeemable
convertible
preferred
stock.......... -- -- 1,857,884 10,144,445 -- -- -- -- -- --
Accretion of
preferred
stock.......... -- 6,093 -- 9,239 -- -- -- -- -- --
------- ---------- --------- ----------- --------- ---------- --------- ----------- ------- ----------
Balance December
31, 1993........ 908,602 1,709,567 1,857,884 10,153,684 -- -- -- -- -- --
Accretion of
preferred
stock.......... -- 6,093 -- 9,239 -- -- -- -- -- --
------- ---------- --------- ----------- --------- ---------- --------- ----------- ------- ----------
Balance, December
31, 1994........ 908,602 1,715,660 1,857,884 10,162,923 -- -- -- -- -- --
Accretion of
preferred
stock.......... -- 6,093 -- 9,239 -- -- -- -- -- --
------- ---------- --------- ----------- --------- ---------- --------- ----------- ------- ----------
Balance, December
31, 1995........ 908,602 1,721,753 1,857,884 10,172,162 -- -- -- -- -- --
Conversion of
bridge
financing loan
and interest
into preferred
stock.......... -- -- -- -- 287,846 1,799,038 -- -- -- --
Sale of Series C
redeemable
convertible
preferred
stock.......... -- -- -- -- 784,913 4,011,900 -- -- -- --
Issuance of
Series B
redeemable
convertible
preferred stock
in connection
with Neptune
Pharmaceuticals,
Inc.
acquisition.... -- -- 246,050 1,353,275 -- -- -- -- -- --
Sale of Series D
redeemable
convertible
preferred
stock.......... -- -- -- -- -- -- 1,900,000 11,233,666 -- --
Exercise of
warrants to
purchase Series
C redeemable
convertible
preferred stock
(note 6(f)).... -- -- -- -- 40,296 251,850 -- -- -- --
Accretion of
preferred
stock.......... -- 6,093 -- 9,239 -- 162,976 -- 223,267 -- --
------- ---------- --------- ----------- --------- ---------- --------- ----------- ------- ----------
Balance, December
31, 1996........ 908,602 1,727,846 2,103,934 11,534,676 1,113,055 6,225,764 1,900,000 11,456,933 -- --
Issuance of
Series D
redeemable
convertible
preferred stock
in connection
with Auda
Pharmaceuticals
ApS
acquisition.... -- -- -- -- -- -- 435,000 2,817,045 -- --
Accretion of
preferred
stock.......... -- 6,093 -- 9,239 -- 182,707 -- 225,881 -- --
------- ---------- --------- ----------- --------- ---------- --------- ----------- ------- ----------
Balance, December
31, 1997........ 908,602 1,733,939 2,103,934 11,543,915 1,113,055 6,408,471 2,335,000 14,499,859 -- --
Sale of Series E
redeemable
convertible
preferred
stock.......... -- -- -- -- -- -- -- -- 812,586 6,122,629
Amortization of
discount
ascribed to the
guaranteed rate
of return on
Series E
redeemable
convertible
preferred stock
............... -- -- -- -- -- -- -- -- -- 406,293
Exercise of
warrants to
purchase Series
C redeemable
convertible
preferred stock
(note 6(f)).... -- -- -- -- 1,656 10,350 -- -- -- --
Accretion of
preferred
stock.......... -- 4,569 -- 6,929 -- 137,030 -- 170,064 -- 94,515
------- ---------- --------- ----------- --------- ---------- --------- ----------- ------- ----------
Balance,
September 30,
1998 ........... 908,602 $1,738,508 2,103,934 $11,550,844 1,114,711 $6,555,851 2,335,000 $14,669,923 812,586 $6,623,437
======= ========== ========= =========== ========= ========== ========= =========== ======= ==========
</TABLE>
As of September 30, 1998, Phytera had authorized the issuance of up to
14,446,382 shares of preferred stock, $0.01 par value. The authorized
shares have been designated as follows: 908,602 shares of Series A
redeemable convertible preferred stock ("Series A"), 2,194,843 shares each
of Series B and Series BB redeemable convertible preferred stock ("Series
B"), 1,239,047 shares each of Series C and Series CC redeemable convertible
preferred stock ("Series C"), 2,335,000 shares each of Series D and Series
DD redeemable convertible preferred stock ("Series D") and 1,000,000 shares
of Series E and Series EE redeemable convertible preferred stock ("Series
E"), in the aggregate ("the Preferred Stock").
F-14
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
Phytera has recorded outstanding redeemable convertible preferred stock
outside the equity section of the balance sheet as a liability. The
redeemable convertible preferred stock is recorded at its net sales price
and the carrying value is accreted (increased) over time such that at the
earliest date of potential redemption the redeemable convertible preferred
stock is carried as a liability at its redemption value. The periodic
accretion recorded to increase the carrying value is charged directly to
deficit accumulated during the development stage.
In January 1996, Phytera issued 838,359 shares of Series C and warrants
to purchase 115,694 shares of Series C at $0.01 per share in exchange for
cash of $3,440,706 and the conversion of bridge notes payable of $1,762,236
and accrued interest thereon of $36,802. Phytera has recorded the value
attributed to the warrants as additional paid in capital. The total value
attributed to these warrants of approximately $635,000 will be accreted to
the redemption value of the Series C over the period to its earliest
redemption date. In addition, Phytera granted warrants to purchase 18,247
shares of Series C at $5.50 per share in exchange for a guarantee
commitment from certain stockholders. During the year ended December 31,
1996, certain stockholders exercised warrants to purchase 40,296 shares of
Series C at $0.01 per share.
In July 1996, Phytera issued 234,400 shares of Series C and warrants to
purchase 32,347 shares of Series C at $0.01 per share for $1,465,000. Total
net proceeds for the issuance of Series C totaled $6,623,683. Phytera has
recorded the value attributed to the warrants as additional paid in
capital. The total value attributed to these warrants of approximately
$177,600 will be accreted to the redemption value of the Series C over the
period to its earliest redemption date. During the nine months ended
September 30, 1998, certain stockholders exercised warrants to purchase
1,656 shares of Series C at $0.01 per share.
In October 1996, Phytera issued 1,900,000 shares of Series D at a price
of $6.50 per share for total net proceeds of $11,233,666.
In March 1997, Phytera issued 435,000 shares of its Series D for 100% of
the outstanding capital stock of Auda. Phytera recorded these shares at a
value of $7.50 per share pursuant to this transaction.
On May 26, 1998, June 25, 1998, and September 18, 1998, Phytera issued
580,086, 182,500, and 50,000 shares, respectively, of Series E at a price
of $10.00 per share for total net proceeds of $7,747,576.
The rights and privileges of the Preferred Stock are listed below:
Conversion
The Preferred Stock is convertible into common stock at the rate of 0.654
of a share of common stock for each share of Preferred Stock, adjustable
for certain dilutive events except as discussed below for the Series E.
Conversion is at the option of the preferred stockholder but is mandatory
upon the closing of an initial public offering ("IPO") of Phytera's common
stock at a per share price of at least $9.65, with gross proceeds to
Phytera in excess of $10,000,000.
The Series E is entitled to a contingent conversion price adjustment
under certain circumstances. In the event Phytera closes an IPO on or prior
to June 25, 1999, but at a price per share to the public less than a value
reflecting a 25% annualized return above the per share of $10.00, the
conversion price shall be automatically adjusted so that the Series E will
be converted into a number of common shares that would equal a 25%
annualized return. In the event that an IPO is not closed prior to June 25,
1999, the conversion rate of the Series E into common shares will be
adjusted to a rate of one and one half shares of common stock for each
share of Series E. In the event that an IPO is not closed prior to November
25, 1999, the conversion rate of Series E to common shares will be adjusted
to a rate of two shares common stock for each share of Series E. In the
event that an IPO is not closed prior to April 25, 2000, the
F-15
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes To Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
conversion rate of Series E to common shares will be adjusted to a rate of
two-and-one-half shares of common stock for each share of Series E. The
terms of this contingent conversion price adjustment are applicable when
the Series E converts to common stock under any circumstances.
Phytera has recorded the value attributed to the contingent conversion
price adjustment of the Series E as additional paid in capital. This amount
was determined to be equal to $2.00 per share which will be accreted to the
redemption value of the Series E over the estimated outstanding period of
one year. Phytera has determined that $2.00 represents the estimate of the
value of the guaranteed return as it anticipates conversion within one
year.
Voting Rights
The holders of Preferred Stock are entitled to vote on all matters and
are entitled to the number of votes equal to the number of shares of common
stock into which the Preferred Stock is convertible.
Dividends
The holders of the Series A shall be entitled to receive, when and if
declared by the Board of Directors, cumulative cash dividends at the annual
rate of $0.1544 per share. Such dividends shall accrue after the first
calendar quarter when Phytera's net after-tax income exceeds $100,360.
The holders of the Series B, C, D and E Preferred stock shall be entitled
to receive, when and if declared by the Board of Directors, cumulative cash
dividends at the annual rate of $0.44, $0.50, $0.52 and $0.80 per share,
respectively. Such dividends shall accrue after the first calendar quarter
when Phytera's net after-tax income exceeds $500,000. In addition, the
holders of the Preferred Stock shall be entitled to receive a dividend
equal to any dividend paid on common stock.
Liquidation Preference
The holders of the Preferred Stock have preference in the event of any
voluntary or involuntary liquidation, dissolution or winding up of Phytera.
The holders of the Series A are entitled to a preference of $1.93 per
share, plus any accrued but unpaid dividends. The holders of the Series B
are entitled to a preference of $5.50 per share plus any accrued but unpaid
dividends. The holders of the Series C are entitled to a preference of
$6.25 per share, plus any accrued but unpaid dividends. The holders of the
Series D are entitled to a preference of $6.50 per share, plus any accrued
but unpaid dividends. The holders of the Series E are entitled to a
preference of $10.00 per share, plus any accrued but unpaid dividends.
Redemption
Preferred Stock is redeemable at the option of the holder over a three-
year period commencing on January 1, 2001. On January 1, 2001, 2002 and
2003, Phytera shall offer to each holder of the Preferred Stock, redemption
of a maximum of 33 1/3%, 50% and 100%, respectively, of the total number of
shares of Preferred Stock held by such holder on such redemption date. The
redemption price per share shall be equal to $1.93, $5.50, $6.25, $6.50 and
$10.00 for each share of Series A, B, C, D and E, respectively, plus all
accrued and unpaid dividends.
(d) Stock Option Plans
Phytera's 1992 Stock Option Plan ("the Plan") provides for the grant of
incentive stock options ("ISOs") and nonqualified options to purchase up to
915,600 shares of common stock to key employees and consultants. Under
terms of the Plan, the exercise price of options granted shall be
determined by the Compensation Committee and for ISOs, shall not be less
than the fair market value of the stock on the date of grant. The term of
each stock option shall be determined by the Board of Directors but shall
not exceed ten years from the date of grant.
Phytera's 1998 Equity Incentive Plan ("the 1998 Plan"), which amends and
restates its 1992 Stock Option Plan, authorizes the grant of incentive
stock options, nonqualified stock
F-16
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
options, stock grants and other stock-based awards for the purchase of an
additional 654,000 shares of Common Stock to employees, consultants and
directors of Phytera or any affiliate capable of contributing to Phytera's
performance. Grants of Awards under the 1998 Equity Incentive Plan and all
questions of interpretations with respect to the 1998 Plan are determined
by the Board of Directors of Phytera. The Board of Directors has appointed
the Compensation Committee to administer the 1998 Plan. This plan has been
adopted by the Board of Directors subject to shareholder approval.
A summary of option activity under the Plan for the years ended December
31, 1996, 1997 and the nine-months ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
Exercise Average
Price per Exercise
Shares Share Price
------- ---------- --------
<S> <C> <C> <C>
Outstanding, December 31, 1995................ 172,443 $0.02-0.84 $0.49
Granted...................................... 418,429 0.84-0.99 0.92
Exercised.................................... (23,904) 0.02-0.84 0.03
Forfeited.................................... (7,030) 0.02-0.84 0.78
------- ---------- -----
Outstanding, December 31, 1996................ 559,938 $0.02-0.99 $0.83
Granted...................................... 118,485 0.99-1.15 1.13
Exercised.................................... (36,362) 0.02-0.99 0.69
Forfeited.................................... (43,034) 0.02-1.15 0.54
------- ---------- -----
Outstanding, December 31, 1997................ 599,027 $0.02-1.15 $0.92
Granted...................................... 304,437 1.15-7.65 1.56
Exercised.................................... (85,816) 0.02-1.15 0.87
Forfeited.................................... (19,810) 0.02-1.15 0.95
------- ---------- -----
Outstanding, September 30, 1998............... 797,838 $0.02-7.65 $1.16
======= ========== =====
Exercisable, September 30, 1998............... 222,096 $0.02-1.53 $1.01
======= ========== =====
</TABLE>
The range of exercise prices for options outstanding and options
exercisable at September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.02 21,566 5.06 years $0.02 17,004 $0.02
$0.84--$1.53 773,983 8.26 years 1.18 205,092 1.09
$7.65 2,289 9.96 years 7.65 -- --
------- ---------- ----- ------- -----
797,838 7.89 years $1.16 222,096 $1.01
======= ========== ===== ======= =====
</TABLE>
In connection with certain stock option grants during the nine months
ended September 30, 1998, Phytera recorded deferred compensation of
$2,115,350, which represents the aggregate difference between the exercise
price and the fair market value of the common stock determined for
accounting purposes. The deferred compensation will be recognized as an
expense over the vesting period of the underlying stock options. Phytera
recorded compensation expense of $304,466 in the nine months ended
September 30, 1998 related to these options.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which requires the measurement of the fair value of stock
options or warrants to be included in the statement of income or disclosed
in the notes to the financial statements. Phytera has determined that it
will continue to account for stock-based compensation for employees under
APB No. 25 and elected the disclosure-only
F-17
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
alternative under SFAS No. 123 for options granted in 1995, 1996, 1997 and
the nine months ended September 30, 1998 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The assumptions used are as
follows:
<TABLE>
<CAPTION>
Years Ended Nine Months
December 31, Ended
----------------------------- September 30,
1995 1996 1997 1998
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Risk-free interest rate...... 5.7%-7.8% 5.7%-6.9% 5.8%-6.9% 4.6%-5.7%
Expected dividend yield...... -- -- -- --
Expected lives............... 10 years 10 years 10 years 3-10 years
Expected volatility.......... 60% 60% 60% 60%
Weighted average fair value
per share of options
granted..................... $0.55 $0.61 $0.75 $6.71
Weighted average remaining
contractual life of options
outstanding................. 8.52 8.49 8.21 7.89
</TABLE>
Had compensation cost for Phytera's stock plan been determined based on
the fair value at the grant dates, as prescribed in SFAS No. 123, Phytera's
net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss
As reported............ $5,438,528 $8,288,880 $ 9,754,012 $7,662,366 $6,584,713
Pro forma.............. 5,457,616 8,744,691 10,266,151 8,046,471 7,566,982
Basic and diluted net
loss per common share
As reported............ $ 15.43 $ 19.99 $ 19.53 $ 15.59 $ 12.47
Pro forma.............. 15.44 20.11 19.70 15.72 12.64
</TABLE>
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option pricing models
require the input of highly subject assumptions, including expected stock
price volatility. Because Phytera's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
(e) Employee Stock Purchase Plan
In December 1997, Phytera established an Employee Share Ownership Program
("ESOP") for Phytera's employees based in Denmark. This plan authorizes
Phytera to issue and sell up to an aggregate of 6,474 shares of common
stock, of which 5,693 shares of common stock were purchased at fair market
value as of December 31, 1997.
Phytera has also adopted an Employee Stock Purchase Plan ("the Purchase
Plan") under which employees may purchase shares of common stock at a
discount from fair market value. There are 163,500 shares of common stock
reserved for issuance under the Purchase Plan. To date, no shares of common
stock have been issued under the Purchase Plan. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning
of Section 423 of the Internal Revenue Code. Rights to purchase common
stock under the Purchase Plan are granted at the discretion of the
Compensation Committee, which determines the frequency and duration of
individual offerings under the Purchase Plan and the dates when stock may
be purchased. Eligible employees participate voluntarily and may withdraw
from any offering at
F-18
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
any time before stock is purchased. Participation terminates automatically
upon termination of employment. The purchase price per share of common
stock in an offering is 85% of the lesser of its fair market value at the
beginning of the offering period or on the applicable exercise date and may
be paid through payroll deductions, periodic lump-sum payments or a
combination of both. The Purchase Plan terminates on September 17, 2008.
This plan has been adopted by the Board of Directors subject to shareholder
approval.
(f) Warrants
In connection with certain promissory notes, Phytera issued warrants to
purchase 85,637 shares of common stock. These warrants are exercisable for
shares of common stock at an exercise price of $8.41 per share. The
warrants shall be exercisable prior to the earlier of January 31, 1999 or
the effective date of an initial public offering.
As of September 30, 1998 Phytera has outstanding 106,089 and 18,247
warrants for the purchase of Series C at $0.01 and $5.50 per share,
respectively, which were issued in connection with the issuance of
convertible debt, as discussed in Note 5.
In December 1997, Phytera granted warrants to purchase 39,793 shares of
common stock to selected employees and directors in Denmark. Such warrants
have an exercise price of $1.15 per share, and vest over a three to five
year period beginning on January 1, 1999.
On December 9, 1997 warrants to purchase 22,890 shares of common stock
were granted to a consultant of Phytera in Denmark. These warrants have an
exercise price of $0.99 per share and become fully exercisable as of
January 1, 2000.
(7) Income Taxes
Phytera follows SFAS No. 109, Accounting for Income Taxes, by providing for
income taxes under the liability method. Deferred taxes are determined based on
the difference between the financial statement and tax bases of assets and
liabilities, as measured by the current tax rates. The principal differences
between assets and liabilities for financial reporting and tax return purposes
result primarily from start-up costs and of purchased research and development
costs that have been capitalized for income tax purposes.
The components of the net deferred tax asset with the approximate income tax
effect of each type of temporary difference are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Net operating loss carryforwards.............. $ 7,398,000 $ 10,096,000
Research and development tax credit
carryforwards................................ 270,000 330,000
Purchased research and development............ 600,000 640,000
Temporary differences......................... 74,000 (238,000)
----------- ------------
8,342,000 10,828,000
Valuation allowance........................... (8,342,000) (10,828,000)
----------- ------------
Net deferred tax asset........................ $ -- $ --
=========== ============
</TABLE>
Phytera has recorded a full valuation allowance against its deferred tax
assets due to uncertainties surrounding the realization of these assets.
Phytera has available net operating loss carryforwards for the period from
inception to December 31, 1996 and 1997 on an aggregate basis, of approximately
$18,495,000 and $25,200,000, respectively, for US federal income tax purposes,
which expire at various dates beginning in 2009. Phytera also has available US
federal tax credits of approximately $270,000 and $330,000 at December 31, 1996
and 1997, respectively, expiring through the year 2010. Phytera's foreign
subsidiaries have approximately $690,000 of available net operating
F-19
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
loss carryforwards for foreign income tax reporting purposes as of December 31,
1997. These carryforwards expire on various dates beginning in 2001.
The US Internal Revenue Code of 1986, as amended (the "Code"), contains
provisions that may limit the US net operating loss and tax credit
carryforwards available to be used in any given year upon the occurrence of
certain events, including changes in the ownership interests of significant
stockholders. In the event of a cumulative change in ownership in excess of 50%
over a three year period, the amount of the US net operating loss carryforwards
and tax credit carryforwards that Phytera can utilize in any one year may be
limited. In the event of a change in ownership, as defined, the annual
limitation on the use of the existing net operating loss carryforwards is equal
to an amount determined by multiplying the value of Phytera at the time of the
ownership change by the US federal applicable rate of interest as determined by
the US Internal Revenue Service.
(8) Commitments
Phytera leases certain equipment and conducts its operations in leased
facilities under noncancelable operating leases that expire through 2004. Rent
expense was approximately $694,000, $957,000 and $1,132,000, during the years
ended December 31, 1995, 1996 and 1997, respectively. Rent expense for the nine
months ended September 30, 1997 and September 30, 1998 amounted to
approximately $842,000 and $915,000, respectively. The minimum rental payments
under these lease agreements are approximately as follows:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
1998.............................. $1,219,000
1999.............................. 1,161,000
2000.............................. 963,000
2001.............................. 885,000
2002.............................. 865,000
Thereafter........................ 1,354,000
----------
$6,447,000
==========
</TABLE>
(9) Partnership Agreements
(a) Tsumura & Co.
In June 1996, Phytera entered into a partnership with Tsumura & Co.
("Tsumura") focused on the discovery of novel agents for the treatment of
inflammation and allergies. Phytera received nonrefundable payments of
$780,000, $1,002,500 and $652,125 during the years ended December 31, 1996
and 1997 and the nine months ended September 30, 1998, respectively, in
consideration of its agreement to provide certain extracts and perform
research activities for Tsumura. Phytera recognizes revenue under this
agreement as it provides the extracts to Tsumura and performs the required
research. Phytera recognized $247,000 and $1,052,657 of revenue for the
years ended December 31, 1996 and 1997 and $730,311 and $605,737 for the
nine-month periods ended September 30, 1997 and 1998, respectively.
(b) Chiron Corporation
In May 1998, Phytera entered into a collaboration agreement with Chiron
Corporation ("Chiron"), whereby Phytera provides certain extracts to Chiron
in order to facilitate the research and development of certain
pharmaceutical products. For the nine months ended September 30, 1998,
Phytera received a nonrefundable payment of $150,000 from Chiron. This
payment was related to the shipment of a specified number of extracts and
was recorded as revenue upon shipment.
(c) Eli Lilly and Company
In July 1998, Phytera entered into a research collaboration agreement
with Eli Lilly and Company ("Lilly") pursuant to which Phytera will
collaborate with Lilly on the discovery of novel agents for the
F-20
<PAGE>
PHYTERA, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements, Continued
(Including Data Applicable to Unaudited Periods)
diagnosis, treatment and prevention of infectious fungal disease in humans
and animals. Under the terms of this two-year agreement, Phytera will
receive research funding, an equity investment, and potential future
milestone and royalty payments. In September, 1998 Lilly purchased 50,000
shares of Series E for $500,000 which represented the fair value of the
Series E on the date of purchase. Phytera receives research funding from
Lilly based upon the number of full time equivalent researchers dedicated
to the agreement. Phytera recognizes the payments as revenue as the
services are provided. As of September 30, 1998, Phytera received research
funding of $428,028 of which $344,520 had been recognized as revenue.
Milestone payments will be recognized as revenue upon achievement of the
specified milestones. No milestone payments have been received as of
September 30, 1998.
(10) Accrued Expenses
Accrued expenses at December 31, 1996 and 1997 and September 30, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1996 1997 1998
-------- -------- -------------
<S> <C> <C> <C>
Accrued payroll and payroll related
expenses............................... $ 70,248 $181,074 $296,204
Other accrued expenses.................. 269,612 182,266 566,429
-------- -------- --------
$339,860 $363,340 $862,633
======== ======== ========
</TABLE>
(11) Geographic Information
Revenues, net loss and identifiable assets for Phytera's U.S. and European
operations are summarized as follows:
<TABLE>
<CAPTION>
European
United States Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended December
31, 1996
Revenues from unaffili-
ated customers......... $ 247,000 $ -- $ -- $ 247,000
Transfers between geo-
graphic regions........ -- -- -- --
----------- ---------- ----------- -----------
Total Revenue....... $ 247,000 $ -- $ -- $ 247,000
=========== ========== =========== ===========
Net Income (Loss)....... $(8,474,359) $ 185,479 $ -- $(8,288,880)
=========== ========== =========== ===========
Identifiable assets..... $11,644,970 $1,389,281 $ (638,739) $12,395,512
=========== ========== =========== ===========
Year ended December
31, 1997
Revenues from unaffili-
ated customers......... $ 1,052,657 $ -- $ -- $ 1,052,657
Transfers between geo-
graphic regions........ -- -- -- --
----------- ---------- ----------- -----------
Total Revenue....... $ 1,052,657 $ -- $ -- $ 1,052,657
=========== ========== =========== ===========
Net Loss................ $ 7,717,176 $2,036,836 $ -- $ 9,754,012
=========== ========== =========== ===========
Identifiable assets..... $ 6,147,071 $4,166,991 ($4,025,048) $ 6,289,014
=========== ========== =========== ===========
Nine months ended Sep-
tember 30, 1998
Revenues from unaffili-
ated customers......... $ 1,100,257 $ -- $ -- $ 1,100,257
Transfers between geo-
graphic regions........ -- -- -- --
----------- ---------- ----------- -----------
Total Revenue....... $ 1,100,257 $ -- $ -- $ 1,100,257
=========== ========== =========== ===========
Net Loss................ $ 3,883,837 $2,700,876 $ -- $ 6,584,713
=========== ========== =========== ===========
Identifiable assets..... $10,182,807 $5,280,802 ($6,148,955) $ 9,314,654
=========== ========== =========== ===========
</TABLE>
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
You should rely only on the information contained in this document or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. This prospectus relates only to the common
stock and is not an offer to sell or the solicitation of an offer to buy
securities in any unlawful circumstances. The delivery of this prospectus and
the sale of the common stock does not mean that the affairs of Phytera have
not changed since the date of this prospectus or that this prospectus would
not be revised if issued on a date later than the date below.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Experts.................................................................. 4
Additional Information................................................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 22
Management............................................................... 42
Certain Transactions..................................................... 48
Principal Stockholders................................................... 49
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 56
Settlement and Clearance................................................. 58
Tax Considerations....................................................... 59
Underwriting............................................................. 65
Subscription and Sale.................................................... 68
Legal Matters............................................................ 69
Index to Financial Statements............................................ F-1
</TABLE>
------------------
Until , 1999, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 Shares
Common Stock
------------------
US PROSPECTUS
------------------
SG COWEN
CARNEGIE INC.
BANCBOSTON
ROBERTSON STEPHENS
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is declared effective. This prospectus is +
+not an offer to sell these securities and we are not soliciting an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 9, 1999
EUROPEAN PROSPECTUS
2,500,000 Shares
[LOGO OF PHYTERA, INC.]
Common Stock
This is an initial public offering of the shares of common stock of Phytera,
Inc. The shares of common stock will be offered to the public in Denmark.
Additionally, shares of common stock will be offered in private placements in
other European countries. The offering in the United States, Canada and Belgium
will be limited to institutional investors. There is currently no public market
for the shares. Phytera expects that the public offering price will be between
$12.00 and $14.00 per share.
In Europe, we are offering 1,750,000 shares of common stock. In the United
States and Canada, we are offering 750,000 shares of common stock.
We have applied for admission to trading and quotation of the common stock on
the European Association of Securities Dealers Automated Quotation system,
called EASDAQ, and for listing on the Copenhagen Stock Exchange, called the
CSE. Our trading symbol on EASDAQ and our short name on the CSE will be PHYT.
We expect that these listings will become effective and that trading in the
shares of common stock will begin promptly after the initial public offering
price is determined through negotiations between Phytera and the underwriters.
Our business involves significant risks. These risks are described under the
caption "Risk Factors" beginning on page 8.
None of EASDAQ, the CSE, the US Securities and Exchange Commission nor any
state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
------------
<TABLE>
<CAPTION>
Per
Share Total
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discounts and commissions.............................. $ $
Proceeds, before expenses, to Phytera............................... $ $
</TABLE>
------------
The managers for the offering in Europe may also purchase up to an additional
262,500 shares of common stock and the underwriters for the offering in the
United States and Canada may also purchase up to an additional 112,500 shares
of common stock, an aggregate of 375,000 shares, at the public offering price,
less the underwriting discounts and commissions, within 30 days from the date
of this prospectus to cover over-allotments.
In the distribution of the offering as a firm commitment underwriting, the
underwriters will purchase the offered shares of common stock from Phytera and
resell the shares to investors.
SG COWEN INTERNATIONAL
CARNEGIE BANK A/S
BANCBOSTON ROBERTSON STEPHENS
INTERNATIONAL LTD
, 1999
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You should rely only on the information contained in this document or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. This prospectus relates only to the common stock
and is not an offer to sell or the solicitation of an offer to buy securities
in any unlawful circumstances. The delivery of this prospectus and the sale of
the common stock does not mean that the affairs of Phytera have not changed
since the date of this prospectus or that this prospectus would not be revised
if issued on a date later than the date below.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Experts.................................................................. 4
Additional Information................................................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 22
Management............................................................... 42
Certain Transactions..................................................... 48
Principal Stockholders................................................... 49
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 56
Settlement and Clearance................................................. 58
Tax Considerations....................................................... 59
Underwriting............................................................. 65
Subscription and Sale.................................................... 68
Legal Matters............................................................ 69
Index to Financial Statements............................................ F-1
</TABLE>
-----------------
Until , 1999, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,500,000 Shares
Common Stock
---------------------
EUROPEAN PROSPECTUS
---------------------
SG COWEN INTERNATIONAL
CARNEGIE BANK A/S
BANCBOSTON
ROBERTSON STEPHENS
INTERNATIONAL LTD
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Danish Application
Form Phytera, Inc
Securities codes Existing shares Temporary
Subscription period , 1999 to the date of determination of the
initial public offering price
Offer price Announced , 1999
interval
Initial Public To be announced
Offering price
Selling agents SG Cowen International L.P., Carnegie Bank A/S and
BancBoston Robertson Stephens International Ltd
Payment date The third day following the determination of the initial
public offering price (fourth day, if the determination
is made after 4:30 p.m. New York time)
Listing [The day following the determination of the initial
public offering price]
The offer price will be determined through bookbuilding,
see "Underwriting" in the prospectus dated ,
1999. Applications for subscription for amounts of up to
and including DKK 2 million can be submitted using this
form. Applications for subscription for amounts of more
than DKK 2 million can be made by contacting the
account-holding institution. If the total number of
applications for shares exceeds the number of shares
offered, an allocation will be made among the
applications received as detailed in the offering
circular.
Pursuant to the prospectus dated I/We hereby
apply for subscription of the number of shares of Common
Stock of Phytera, Inc., $0.01 par value, as indicated
below.
Up to and including the value of DKK 2 million.
Submitted as an irrevocable application.
Maximum price per share:
---------------------------------------------------------
DKK value:
---------------------------------------------------------
No. of shares:
---------------------------------------------------------
If no maximum price is indicated the application is
considered to be made at the initial public offer price,
i.e. without limitation.
Investor declares
This application is made pursuant to the conditions
detailed in the prospectus dated , 1999.
This application is irrevocable.
I/We am/are obligated to pay an amount corresponding to
the value of the allocated shares at the offer price.
Payment will take place on , 1999 subsequent to
invoice that is to be sent to me/us, against
registration of the allocated shares in the Danish
Securities Centre, "Vaerdipapircentralen". If the
applications exceed the number of shares offered, an
allocation of the shares will take place as detailed in
the prospectus.
Information and signature
Name VP-account
---------------------------------------------------------
Address Account for settlement
---------------------------------------------------------
Postal code and city Account-holding institution
---------------------------------------------------------
Date To be registered by name in
the company's stock register
[_] (check)
---------------------------------------------------------
Telephone The application has been
submitted through
---------------------------------------------------------
Signature Registration no.
---------------------------------------------------------
CD-ident.
------------------------------
Date
------------------------------
Company stamp
Telephone
---------------------------------------------------------
The application form must be submitted to the account-
holding institution on , 1999 at 4.00 p.m. at the
latest.
<TABLE>
<S> <C> <C>
SG Cowen International Carnegie Bank A/S BancBoston Robertson Stephens International Ltd
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred by Phytera in
connection with the issuance and distribution of the securities being
registered under this registration statement. Except for the SEC registration
fee and the NASD filing fees, all expenses have been estimated and are subject
to future contingencies:
<TABLE>
<S> <C>
SEC registration fee............................................. $ 9,591
EASDAQ listing fee............................................... 93,800
Copenhagen Stock Exchange filing fee............................. 5,434
CBF filing fee................................................... 15,000
NASD filing fees................................................. 3,980
Printing and engraving expenses.................................. 175,000
Accounting fees and expenses..................................... 175,000
Legal fees and expenses.......................................... 300,000
Transfer agent and registrar fees................................ 5,000
Miscellaneous expenses........................................... 82,195
--------
Total.......................................................... $865,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits Phytera to
indemnify any present or former Director, officer, employee and agent of
Phytera against actual and reasonable expenses (including attorneys' fees)
incurred by such person in connection with any action, suit or proceeding
brought against such person by reason of such person's status or service as a
Director, officer, employee or agent by or on behalf of Phytera, and, in the
case of a present or former Director or officer of Phytera, against expenses
(including attorneys' fees), judgments, fines and settlements actually and
reasonably incurred by such person in connection with any such action, suit or
proceeding, if (i) the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of Phytera,
and (ii) in the case of a criminal proceeding, the person had no reasonable
cause to believe such person's conduct was unlawful. Except as ordered by a
court, no indemnification shall be made in connection with any proceeding
brought by or in the right of the corporation where the person involved is
adjudged to be liable to Phytera.
Article TENTH of Phytera's Certificate of Incorporation as proposed to be
amended and restated effective immediately prior to the closing of this
offering (the "Restated Certificate") provides that Phytera shall, to the
fullest extent permitted by the General Corporation Law of the State of
Delaware, as amended from time to time, indemnify each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal, administrative or
investigative by reason of the fact that he is or was, or has agreed to become
a Director or officer of Phytera or is or was serving, or has agreed to serve,
at the request of Phytera, as a Director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust
or other enterprise. The indemnification provided for in Article TENTH is
expressly not exclusive of any other rights to which those seeking
indemnification may be entitled under any law, agreement or vote of
shareholders or Directors or otherwise, and shall inure to the benefit of the
heirs, executors and administrators of such persons. Article TENTH also permits
the Board of Directors to authorize the grant of indemnification rights to
other employees and agents of Phytera and such rights may be equivalent to, or
greater or less than, those set forth in Article TENTH.
Article V, Section 2 of Phytera's By-laws provides that Phytera shall have
the power to purchase and maintain insurance on behalf of its officers,
Directors, employees and agents, against any liability asserted against and
incurred by such persons in any such capacity.
Phytera has entered into indemnification agreements with each of its
Directors and executive officers and has obtained insurance covering the
officers and Directors of Phytera against certain losses and insuring Phytera
against certain of its obligations to indemnify its Directors and officers.
II-1
<PAGE>
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a corporation may eliminate or limit the personal liability of a
Director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a Director, provided that such provisions shall not
eliminate or limit the liability of a Director (i) for any breach of the
Director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware, or (iv) for any transaction from which the
Director derived an improper personal benefit. No such provision shall
eliminate or limit the liability of a Director for any act or omission
occurring prior to the date when such provision becomes effective.
Pursuant to the Delaware General Corporation Law, Article NINTH of the
Restated Certificate eliminates a Director's personal liability for monetary
damages to Phytera and its shareholders for breach of fiduciary duty as a
Director, except in circumstances involving a breach of the Director's duty of
loyalty to Phytera or shareholders, acts or omissions not in good faith,
intentional misconduct, knowing violations of the law, self-dealing or the
unlawful payment of dividends or repurchase of stock.
Phytera believes that courts in Europe and the US may have jurisdiction in an
action against Phytera, its Directors or officers. Such jurisdiction will be
delivered by the laws of the jurisdiction in effect at that time.
Item 15. Recent Sales of Unregistered Securities
Since September 1995, Phytera has issued and sold the following securities,
in each case in reliance on an exemption from required registration pursuant to
the Securities Act of 1933, as amended (the "Securities Act"):
1995 Bridge Financing
From September through December 1995, Phytera issued certain Convertible Term
Notes (the "Bridge Notes"), for an aggregate principal amount of $1,762,236
bearing interest on unpaid principal at a rate of 7% per annum and convertible
into Series C Convertible Preferred Stock $0.01 par value per share ("Series C
Stock") at the conversion price of $6.25 ($9.56 on an as converted basis) per
share, and certain warrants to purchase 85,637 shares of common stock (the
"Bridge Warrants"), exercisable at the price of $8.41 per share, to certain
current stockholders of Phytera (collectively, the "Bridge Financing").
Series C Private Placement
In January and July 1996, and Phytera sold an aggregate of 1,113,055
(convertible into 727,938 shares of common stock) shares of Series C Stock at a
price of $6.25 ($9.56 on an as converted basis) per share, and issued warrants
to purchase an aggregate of 148,041 shares of Series C Stock (convertible into
96,819 shares of common stock) at an exercise price of $0.01 ($0.02 on an as
converted basis) per share. In addition, warrants for an aggregate of 18,247
shares of Series C Stock, convertible into 11,934 shares of common stock, were
issued in consideration of certain financing guaranties by principal
stockholders at an exercise price of $5.50 ($8.41 on an as converted basis) per
share (collectively, the "Series C Private Placement").
Both the 1995 Bridge Financing and the Series C Private Placement were exempt
from the registration requirements of the Securities Act pursuant to the
private offering exemption under Section 4(2) thereof. In determining the
availability of this exemption, Phytera relied on representations made by the
purchasers in the stock purchase agreement pursuant to which the Series C Stock
was purchased.
Neptune Acquisition
On July 31, 1996, as consideration for the acquisition by Phytera of Neptune
Pharmaceuticals, Inc. ("Neptune"), a US pharmaceutical company, Phytera issued
246,050 shares of Series B Convertible Preferred Stock, $0.01 par value per
share ("Series B Stock"), convertible into 160,917 shares of common stock, to
the stockholders of Neptune. Shares of Series B Stock were valued at $5.50
($8.41 on an as converted basis) per share.
The shares issued in connection with the Neptune acquisition were exempt from
the registration requirements of the Securities Act pursuant to the private
offering exemption under Section 4(2) thereof. In determining the availability
of this exemption, Phytera relied on representations made by the stockholders
of Neptune in the acquisition agreement.
II-2
<PAGE>
Series D Private Placement
In separate closings as of each of October 30 and November 29, 1996, Phytera
issued an aggregate of 1,900,000 shares of its Series D Convertible Preferred
Stock, $0.01 par value per share ("Series D Stock"), convertible into 1,242,600
shares of common stock, to a large number of institutional and individual
investors. All purchasers of Series D Stock were "Non-US Persons" as defined by
Rule 902 under Regulation S under the Securities Act, primarily resident in
Scandinavia. In determining the availability of this exemption, Phytera relied
on representations made by investors in subscription agreements pursuant to
which the Series D Stock was purchased, as well as certain representations from
the placement agent in the placement agreement. Shares of Series D Stock were
purchased for $6.50 ($9.94 on an as converted basis) per share, which
represents the initial conversion price at which shares of Series D Stock
convert into common stock. Carnegie Bank A/S, ("Carnegie") acted as placement
agent for the sale of the Series D Stock and, pursuant to the terms of a
placement agreement between Carnegie and Phytera dated as of October 5, 1996,
received a placement fee equal to 7% of the aggregate proceeds raised, plus
accountable expenses.
Auda Acquisition
On March 11, 1997, as consideration for the acquisition by Phytera of Auda
Pharmaceuticals ApS ("Auda"), a Danish pharmaceutical company, Phytera issued
additional shares of Series D Stock to the selling stockholders of Auda.
Phytera issued 402,000 shares to Danish Venture Finance A/S (previously known
as Danish Development Finance Corporation) and 33,000 shares to GJK Holding
ApS, a Danish corporation. Such shares are convertible into 262,908 and 21,582
shares of common stock, respectively. Shares of Series D Stock were valued at
$7.50 ($11.47 on an as converted basis) per share.
The private placement of the Series D Stock and the shares issued in
connection with the Auda acquisition were exempt from the registration
requirements of the Securities Act pursuant to Regulation S. In determining the
availability of this exemption, Phytera relied on representations made by
Danish Development Finance Corporation and GJK Holding ApS in the Auda
acquisition agreement.
Series E Private Placement
In separate closings as of each of May 26 and June 25, 1998, Phytera issued
an aggregate of 762,586 shares (convertible into 678,274 shares of common
stock) of its Series E Convertible Preferred Stock, $0.01 par value per share
("Series E Stock") to certain "accredited investors" as defined by Rule 501
under Regulation D promulgated under the Securities Act. Shares of Series E
Stock were purchased for $10.00 per share. Carnegie acted as placement agent
for the sale of the Series E Stock and, pursuant to the terms of a placement
agreement between Carnegie and Phytera dated March 23, 1998, received a
placement fee equal to 7% of the gross proceeds from the subscription of Series
E Stock by new investors and 2% of the gross proceeds from the subscription of
Series E Stock by existing investors of Phytera.
An additional 50,000 shares of Series E Stock was purchased by Eli Lilly and
Company ("Lilly") on September 18, 1998 at a price of $10.00 per share. The
issuance to Lilly did not involve any compensation to Carnegie.
The total 812,586 of Series E Stock outstanding are convertible into an
aggregate of 722,746 shares of common stock, assuming the closing of this
offering on February 8, 1999 at a public offering price of $13.00 per share
(the mid-point of the expected range).
The sale of the Series E Stock and the sale to Lilly were exempt from the
Securities Act pursuant to Regulation D. In determining the availability of
this exemption, Phytera relied on representations made by Series E investors in
subscription agreements for the Series E Stock, as well as selling restrictions
contained in the agreement with the placement agent.
Employee, Director and Consultant Issuances
The following securities have been sold in reliance on an exemption from
registration pursuant to Section 4(2) of the Securities Act:
Since inception, Phytera has granted employees and consultants options under
its Amended and Restated 1992 Stock Option Plan which have a ten-year term and
are exercisable at a price equal to the fair market value
II-3
<PAGE>
of the common stock at the date of grant, as determined in good faith by the
Compensation Committee of the Board of Directors. As of November 30, 1998,
options for 792,802 shares of Phytera's common stock were outstanding. As of
such date, options for 187,775 shares of common stock had been exercised at an
average price of $0.55 per share.
In December 1997, Phytera issued warrants to purchase an aggregate of 39,793
shares of its common stock to its Danish employees and certain members of the
Board of Directors based in Denmark which vest over a three to five year period
beginning on January 1, 1999 and are exercisable at $1.15 per share, being a
price equal to the fair market value of the common stock at the date of grant,
as determined in good faith by the Compensation Committee of the Board of
Directors. Phytera also issued warrants to DACC ApS to purchase an aggregate of
22,890 shares of common stock at an exercise price of $0.99 per share. Such
warrants vest over a two-year period beginning on January 1, 1999.
In addition, from inception through November 30, 1998, Phytera made grants of
an aggregate of 434,372 shares of common stock to certain employees, Directors
and consultants to Phytera. Such shares were sold at fair market value and are
subject to repurchase rights held by Phytera.
II-4
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of European Underwriting Agreement.(1)
1.2 Form of US Underwriting Agreement.(1)
3.1 Amended and Restated Certificate of Incorporation of Phytera,
Inc., as amended through
May 26, 1998.(1)
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Phytera, Inc. filed on February 8, 1999. Filed
herewith.
3.3 Form of Amended and Restated Certificate of Incorporation of
Phytera, Inc. to be filed immediately prior to the closing of
this offering.(1)
3.4 By-laws of Phytera, Inc.(1)
3.5 Form of Amended and Restated By-laws to become effective
immediately prior to the closing of this offering.(1)
4.1 Specimen Common Stock Purchase Warrant, together with a list of
holders.(1)
4.2 Specimen Common Stock Purchase Warrant, together with a list of
holders.(1)
4.3 Agreement with VaekstFonden dated April 11, 1996.(1)
4.4 Note payable to Silicon Valley Bank dated July 15, 1994. This
exhibit has been omitted in reliance on Item 601(b)(4)(iii) of
Regulation S-K. The registrant undertakes to furnish a copy of
the debt instrument on request of the Commission.
4.5 Note payable to Danish Technology Institute dated July 26, 1996.
This exhibit has been omitted in reliance on Item 601(b)(4)(iii)
of Regulation S-K. The registrant undertakes to furnish a copy
of the debt instrument on request of the Commission.
4.6 Note payable to Unibank for the purchase of a vehicle dated
September 24, 1996. This exhibit has been omitted in reliance on
Item 601(b)(4)(iii) of Regulation S-K. The registrant undertakes
to furnish a copy of the debt instrument on request of the
Commission.
5.1 Opinion of Palmer & Dodge LLP as to the legality of the shares
being registered.(1)
10.1* 1998 Equity Incentive Plan.(1)
10.2* 1998 Employee Stock Purchase Plan.(1)
10.3* Employment Agreement between Phytera, Inc. and Malcolm Morville
dated as of June 5, 1996.(1)
10.4 Form of Indemnification Agreement between Phytera, Inc. and its
Directors and executive officers.(1) Such agreements are
materially different only as to the signing Directors and
executive officers and the dates of execution.
10.5 Amended and Restated Investors' Rights Agreement among Phytera,
Inc. and certain stockholders of Phytera, Inc. dated May 26,
1998.(1)
10.6 Confidentiality Agreement between Phytera, Inc. and Malcolm
Morville dated March 1, 1998.(1)
10.7 Confidentiality Agreement between Phytera, Inc. and Stephen
DiPalma dated November 11, 1997.(1)
10.8 Confidentiality Agreement between Phytera, Inc. and Christopher
Pazoles dated May 24, 1994.(1)
10.9 Noncompetition Agreement between Phytera, Inc. and Malcolm
Morville dated October 28, 1993.(1)
10.10 Noncompetition Agreement between Phytera, Inc. and Stephen
DiPalma dated November 7, 1997.(1)
10.11 Noncompetition Agreement between Phytera, Inc. and Christopher
Pazoles dated May 24, 1994.(1)
10.12 Lease Agreement, dated November 1, 1993, between Phytera, Inc.
and Worcester Business Development Corporation.(1)
10.13 Lease Agreement, dated October 31, 1994, between Phytera, Inc.
and the University of Sheffield.(1)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.14 Lease Agreement, dated July 26, 1996, between Phytera, Inc. and
Dansk Teknologisk Institut.(1)
10.15 Lease Agreement, dated April 1, 1997, between Phytera, Inc. and
Auda Pharmaceuticals ApS and Symbion A/S.(1)
10.16+ Research Collaboration Agreement between Phytera, Inc. and
Tsumura & Co., dated June 28, 1996, as amended on July 11, 1998.
Filed herewith.
10.17+ Research Collaboration and License Agreement between Phytera,
Inc. and Galileo Laboratories, Inc., dated April 21, 1998. Filed
herewith.
10.18+ Research Collaboration and License Agreement between Phytera,
Inc. and NeuroSearch A/S, dated May 1, 1998. Filed herewith.
10.19+ Research Collaboration Agreement between Phytera, Inc. and
Chiron Corporation, dated May 20, 1998. Filed herewith.
10.20+ Research Collaboration Agreement between Phytera, Inc. and Eli
Lilly and Company, dated July 21, 1998. Filed herewith.
10.21+ Research Collaboration Agreement between Phytera, Inc. and
Nycomed Amersham plc, dated July 30, 1993. Filed herewith.
10.22 Amendment to Research Collaboration Agreement between Phytera,
Inc. and Nycomed Amersham plc dated October 29, 1998.(1)
10.23+ License Agreement between Phytera, Inc. and University of
Maryland dated July 1, 1998. Filed herewith.
23.1 Consent of Arthur Andersen LLP. Filed herewith.
23.2 Consent of Palmer & Dodge LLP. Included in the opinion filed as
Exhibit 5.1
23.3 Consent of Dragsted & Helmer Nielsen.(1)
24 Power of attorney. Included on the signature page of the
original Registration Statement.
27 Financial Data Schedule.(1)
</TABLE>
- --------
* Indicates a management contract or compensatory plan.
+ Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to
Rule 406 of the Securities Act.
(1)Previously filed.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreements (filed
herewith as Exhibits 1.1 and 1.2), certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(b) The undersigned Registrant hereby undertakes that:
(1) 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 a 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.
(2) 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--Indemnification
of Directors and Officers" above, or otherwise, 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 its 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.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment No. 3 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Worcester,
Commonwealth of Massachusetts, on February 9, 1999.
Phytera, Inc.
/s/ Malcolm Morville, Ph.D.
By: _________________________________
Malcolm Morville, Ph.D.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Malcolm Morville, Ph.D. President, Chief Executive February 9, 1999
______________________________________ Officer and Director
Malcolm Morville, Ph.D. (Principal Executive
Officer)
* Vice President, Finance February 9, 1999
______________________________________ (Principal Financial and
Stephen DiPalma Accounting Officer)
* Director February 9, 1999
______________________________________
Steven J. Roth
* Director February 9, 1999
______________________________________
Uffe Bundgaard-Jorgensen, Ph.D.
* Director February 9, 1999
______________________________________
Poul Schluter
* Director February 9, 1999
______________________________________
Robert G. Foster
* Director February 9, 1999
______________________________________
Graham K. Crooke, M.D.
* Director February 9, 1999
______________________________________
Gustav A. Christensen
</TABLE>
/s/ Malcolm Morville, Ph.D.
* By: ________________________
Malcolm Morville, Ph.D.
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of European Underwriting Agreement.(1)
1.2 Form of US Underwriting Agreement.(1)
3.1 Amended and Restated Certificate of Incorporation of Phytera,
Inc., as amended through
May 26, 1998.(1)
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of Phytera, Inc. filed on February 8, 1999. Filed
herewith.
3.3 Form of Amended and Restated Certificate of Incorporation of
Phytera, Inc. to be filed immediately prior to the closing of
this offering.(1)
3.4 By-laws of Phytera, Inc.(1)
3.5 Form of Amended and Restated By-laws to become effective
immediately prior to the closing of this offering.(1)
4.1 Specimen Common Stock Purchase Warrant, together with a list of
holders.(1)
4.2 Specimen Common Stock Purchase Warrant, together with a list of
holders.(1)
4.3 Agreement with VaekstFonden dated April 11, 1996.(1)
4.4 Note payable to Silicon Valley Bank dated July 15, 1994. This
exhibit has been omitted in reliance on Item 601(b)(4)(iii) of
Regulation S-K. The registrant undertakes to furnish a copy of
the debt instrument on request of the Commission.
4.5 Note payable to Danish Technology Institute dated July 26, 1996.
This exhibit has been omitted in reliance on Item 601(b)(4)(iii)
of Regulation S-K. The registrant undertakes to furnish a copy
of the debt instrument on request of the Commission.
4.6 Note payable to Unibank for the purchase of a vehicle dated
September 24, 1996. This exhibit has been omitted in reliance on
Item 601(b)(4)(iii) of Regulation S-K. The registrant undertakes
to furnish a copy of the debt instrument on request of the
Commission.
5.1 Opinion of Palmer & Dodge LLP as to the legality of the shares
being registered.(1)
10.1* 1998 Equity Incentive Plan.(1)
10.2* 1998 Employee Stock Purchase Plan.(1)
10.3* Employment Agreement between Phytera, Inc. and Malcolm Morville
dated as of June 5, 1996.(1)
10.4 Form of Indemnification Agreement between Phytera, Inc. and its
Directors and executive officers.(1) Such agreements are
materially different only as to the signing Directors and
executive officers and the dates of execution.
10.5 Amended and Restated Investors' Rights Agreement among Phytera,
Inc. and certain stockholders of Phytera, Inc. dated May 26,
1998.(1)
10.6 Confidentiality Agreement between Phytera, Inc. and Malcolm
Morville dated March 1, 1998.(1)
10.7 Confidentiality Agreement between Phytera, Inc. and Stephen
DiPalma dated November 11, 1997.(1)
10.8 Confidentiality Agreement between Phytera, Inc. and Christopher
Pazoles dated May 24, 1994.(1)
10.9 Noncompetition Agreement between Phytera, Inc. and Malcolm
Morville dated October 28, 1993.(1)
10.10 Noncompetition Agreement between Phytera, Inc. and Stephen
DiPalma dated November 7, 1997.(1)
10.11 Noncompetition Agreement between Phytera, Inc. and Christopher
Pazoles dated May 24, 1994.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.12 Lease Agreement, dated November 1, 1993, between Phytera, Inc.
and Worcester Business Development Corporation.(1)
10.13 Lease Agreement, dated October 31, 1994, between Phytera, Inc.
and the University of Sheffield.(1)
10.14 Lease Agreement, dated July 26, 1996, between Phytera, Inc. and
Dansk Teknologisk Institut.(1)
10.15 Lease Agreement, dated April 1, 1997, between Phytera, Inc. and
Auda Pharmaceuticals ApS and Symbion A/S.(1)
10.16+ Research Collaboration Agreement between Phytera, Inc. and
Tsumura & Co., dated June 28, 1996, as amended on July 11, 1998.
Filed herewith.
10.17+ Research Collaboration and License Agreement between Phytera,
Inc. and Galileo Laboratories, Inc., dated April 21, 1998. Filed
herewith.
10.18+ Research Collaboration and License Agreement between Phytera,
Inc. and NeuroSearch A/S, dated May 1, 1998. Filed herewith.
10.19+ Research Collaboration Agreement between Phytera, Inc. and
Chiron Corporation, dated May 20, 1998. Filed herewith.
10.20+ Research Collaboration Agreement between Phytera, Inc. and Eli
Lilly and Company, dated July 21, 1998. Filed herewith.
10.21+ Research Collaboration Agreement between Phytera, Inc. and
Nycomed Amersham plc, dated July 30, 1993. Filed herewith.
10.22 Amendment to Research Collaboration Agreement between Phytera,
Inc. and Nycomed Amersham plc dated October 29, 1998.(1)
10.23+ License Agreement between Phytera, Inc. and University of
Maryland dated July 1, 1998. Filed herewith.
23.1 Consent of Arthur Andersen LLP. Filed herewith.
23.2 Consent of Palmer & Dodge LLP. Included in the opinion filed as
Exhibit 5.1
23.3 Consent of Dragsted & Helmer Nielsen.(1)
24 Power of attorney. Included on the signature page of the
original Registration Statement.
27 Financial Data Schedule.(1)
</TABLE>
- --------
*Indicates a management contract or compensatory plan.
+Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to
Rule 406 of the Securities Act.
(1)Previously filed.
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
PHYTERA, INC.
Phytera, Inc., a company organized and existing under and by virtue of
the General Corporation Law of the State of Delaware (the "Company"), does
hereby certify:
FIRST: That the Board of Directors of Phytera, Inc., adopted a
resolution setting forth a proposed amendment of the Restated Certificate of
Incorporation of the Corporation, and declaring that such amendment is advisable
and that such amendment should be submitted to the stockholders of the
Corporation for approval. The resolution setting forth the proposed amendment is
as follows:
That Article FOURTH of the Company's Restated Certificate of
Incorporation be amended by adding the following new paragraph after the first
paragraph of Article FOURTH:
"Upon the effectiveness of this Certificate of Amendment, each
one issued and outstanding share of Common Stock of the Company
shall thereby be combined into 0.654 validly issued, fully paid,
and nonassessable shares of Common Stock of the Company. No
scrip or fractional shares will be issued, and each fractional
share resulting from such combination shall be redeemed by the
Company for cash at a price equal to the price per share to the
public in the Company's initial public offering multiplied by
the appropriate fraction. There shall not be any change in the
number of shares authorized by reason of such combination."
SECOND: That the stockholders of said Company duly voted in favor of
said amendment by written consent, with the necessary number of shares as
required by statute and the Restated Certificate of Incorporation of the Company
being voted in favor of the adoption of said amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware and written notice of the adoption of this Certificate of Amendment
has been given as provided by Section 228 of the General Corporate Law of the
State of Delaware to every stockholder entitled to such notice.
Signed this 8th day of February, 1999.
PHYTERA, INC
/s/ Malcolm Morville
-----------------------
By: Malcolm Morville
Title: President and Chief Executive Officer
<PAGE>
EXHIBIT 10.16
RESEARCH COLLABORATION AGREEMENT
This Research Collaboration Agreement (this "Agreement") dated as of June
28, 1996 (the "Effective Date") is made between Phytera, Inc. ("Phytera"), a
Delaware corporation having its principal place of business at 377 Plantation
Street, Worcester, Massachusetts 01605, USA, and Tsumura & Co., a corporation
organized under the laws of Japan and having its principal place of business at
12-7 Nibancho, Chiyoda-ku, Tokyo 102 Japan.
RECITALS
WHEREAS, Phytera has established scientific research programs directed
towards the discovery of novel products from natural products;
WHEREAS, Tsumura has experience and capabilities in pharmaceutical
screening;
WHEREAS, Phytera and Tsumura entered into a Mutual Confidentiality
Agreement on January 17, 1996 ("Confidentiality Agreement");
WHEREAS, Phytera and Tsumura now mutually desire to enter into a research
collaboration to evaluate the pharmaceutical potential of certain plant cell
culture extracts with the primary purpose of discovering compounds for use in
therapeutic drugs for the treatment of allergies and rheumatoid arthritis;
WHEREAS, Phytera and Tsumura have agreed that (i) they will jointly own
certain patent and other intellectual property rights which arise from the
performance of this Agreement, (ii) they will cross-license each other in regard
to the use of those rights, (iii) each party will have a specific territory in
which to exercise those rights, and (iv) they will pay each other royalties in
regard to the use of those rights and products developed therefrom;
WHEREAS, Phytera and Tsumura cannot predict in advance whether their
collaborative efforts will result in the discovery of any compound which can be
successfully developed or used in a product that can be taken to market in
either party's respective territory or the marketability or profitability of any
such compound or product in those territories; and
WHEREAS, Phytera and Tsumura have agreed that, in the event that any
compound discovered during the performance of this Agreement is deemed by the
parties to be a development candidate, the parties will negotiate in good faith
the specific terms and conditions of a product development agreement concerning
the development of such compound.
NOW, THEREFORE, in consideration of the premises and of the covenants
herein contained, the parties hereto mutually agree as follows:
1
<PAGE>
ARTICLE 1 - DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
1.1 "Affiliate" of a party shall mean any corporation or other entity
---------
which controls, is controlled by, or is under common control with such party. A
corporation or other entity shall be regarded as in control of another
corporation or entity if it owns or directly or indirectly controls more than
fifty percent (50%) of the voting stock or other ownership interest of the other
corporation or entity, or if it possesses, directly or indirectly, the power to
direct or cause the direction of the management and policies of the corporation
or other entity or the power to elect or appoint more than fifty percent (50%)
of the members of the governing body of the corporation or other entity.
1.2 "Collaboration Assays" shall mean the assays in which the Extracts are
--------------------
to be tested by Tsumura as further described herein. The initial Collaboration
Assays are listed in Appendix B attached hereto. Tsumura may substitute one or
more of the Collaboration Assays in accordance with the terms of Section 2.8
below.
1.3 "Collaboration Patent Rights" shall mean all patent applications
----------------------------
heretofore or hereafter filed and having legal force in any country that are
jointly owned by Phytera and Tsumura pursuant to this agreement, or to which
Phytera and Tsumura otherwise acquire joint rights, which claim a Product or any
Compound contained in a Product, or the process of manufacture or any human
pharmaceutical use of a Product or any Compound contained in a Product, together
with any and all patents that have issued or in the future issue therefrom,
including utility model and design patents, certifications of invention and any
and all divisions, continuations, continuations-in-part but only to the extent
that the claims of such continuation-in-part cover the subject matter of this
Agreement, reissues, additions, extensions or supplementary protection
certificates to any of the aforesaid patents and patent applications; all to the
extent and only to the extent that Phytera and Tsumura now has or hereafter will
have the right to grant licenses, immunities or other rights thereunder.
1.4 "Compound" shall mean (a) a chemical compound that is isolated from an
--------
Extract as a result of the parties' performance of activities under this
Agreement, and (b) any derivative or analog of such compound regardless of
whether such derivative or analog is isolated from an Extract or chemically
synthesized.
1.5 "Extracts" shall mean the plant cell culture extracts based on
--------
Phytera's ExPAND(TM) technology provided to Tsumura pursuant to this Agreement
which technology Phytera has filed a patent application in the United States and
is currently filing patent applications in the United Kingdom and Japan.
1.6 "First Commercial Sale" of any Product shall mean the first sale for
---------------------
use or consumption by the general public of such Product in a country after
required marketing and pricing approval has been granted by the governing health
or other appropriate regulatory authority of such country.
2
<PAGE>
1.7 "Licensee" shall mean any corporation, partnership or business
--------
organization to whom Phytera or Tsumura, pursuant to the Collaboration Patent
Rights and the rights granted under Article 4, licenses their development or
marketing rights for any Compound or Product.
1.8 "Net Sales" shall mean the gross receipts from sales of Products by a
---------
party and its Affiliates less deductions for: (a) transportation charges,
including insurance; (b) sales and excise taxes and duties paid by a selling
party and any other governmental charges imposed upon the production,
importation, use or sale of such Products; (c) normal and customary trade,
quantity and cash discounts allowed; and (d) allowances or credits to customers
on account of rejection or return of Product. Sales of Products between or
among a party and its Affiliates are excluded from the computation of Net Sales,
but Net Sales shall include the subsequent sales of such Products to Third
Parties.
1.9 "Phytera Territory" shall mean North America.
------------------
1.10 "Product" shall mean any composition developed by Phytera, Tsumura
-------
or any of their respective Affiliates or Licensees that contains one or more
Compounds. Such Product may be a tablet, capsule, ointment or other drug
delivery system or pharmaceutical preparation.
1.11 "Research Collaboration Period" shall mean the period described in
------------------------------
Article 2.11.
1.12 "Research Operations Committee" shall mean the joint committee
-----------------------------
described in Article 6.2.
1.13 "Stage 3 Extract" shall have the meaning ascribed to it in Section
---------------
2.3.4.
1.14 "Steering Committee" shall mean the joint committee described in
------------------
Article 6.1.
1.15 "Support" shall mean the support in the areas of natural product
-------
chemistry and plant cell culture regrowth to be provided to Tsumura by Phytera
as described in Section 2.7 below and Appendix A attached hereto and
incorporated herein.
1.16 "Third Party" shall mean any party other than a party to this
-----------
Agreement or an Affiliate.
1.17 "Tsumura Disease Targets" shall mean rheumatoid arthritis and anti-
------------------------
allergy.
1.18 "Tsumura Territory" shall mean all countries other than those
------------------
located in North America.
1.19 "Validated Hit Extract" shall mean an Extract which (i) displays at
---------------------
least a defined level of potency activity in a Collaboration Assay (such level
to be determined
3
<PAGE>
by Tsumura in consultation with Phytera) and (ii) displays such activity in a
reproducible and dose-responsive fashion.
1.20 "Year 1" shall mean the one year period commencing on the Effective
------
Date.
1.21 "Year 2" shall mean the one year period commencing on the first
------
anniversary of the Effective Date.
1.22 "Year 3" shall mean the one year period commencing on the second
------
anniversary of the Effective Date.
ARTICLE 2 - RESEARCH COLLABORATION
2.1 Selection of Collaboration Assays. Tsumura and Phytera have mutually
---------------------------------
agreed that the Collaboration Assays shall initially be comprised of the assays
identified and described in Appendix B attached hereto and incorporated herein.
2.2 Stage 1 - Pilot Testing. Following the execution of this Agreement,
-----------------------
Phytera shall select and deliver to Tsumura [ ]* Extracts, each in a
quantity of approximately [ ]*, together with samples of extracts of culture
growth media. Promptly following receipt of such materials, Tsumura shall test
such Extracts in the Collaboration Assays and examine such Extracts and likely
culture extract constituents for activity to ensure that the Collaboration
Assays are optimally configured for screening plant culture extracts. Phytera
shall supply Tsumura with a reasonable number of additional samples of extracts
for pilot testing if requested by Tsumura. Based on the results of such testing,
(a) Tsumura shall promptly make such changes to the Collaboration Assays as are
reasonably necessary to optimally configure such assays and (b) the parties
shall determine the quantity of each Extract to be provided by Phytera to
Tsumura hereunder sufficient to enable Tsumura to conduct screening of such
Extract across each Collaboration Assay. Tsumura shall use diligent efforts to
complete the pilot testing no later than [ ]* following the date the last of all
such Extracts are received by Tsumura.
______________
* This portion of the Exhibit has been omitted pursuant to a request for
Confidential Treatment under Rule 406 of the Securities Act of 1033, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
4
<PAGE>
2.3 Stage 2 - Supply and Testing of Extracts.
----------------------------------------
2.3.1 Following completion of Stage 1 and in consideration of
Tsumura's payment of the fees specified in Section 12.1.1 below, Phytera shall
select and deliver to Tsumura Extracts in accordance wit the following schedule:
Year 1: [ ]* Extracts
Year 2: [ ]* Extracts
Year 3: [ ]* Extracts
Pythera shall deliver Extracts to Tsumura once at the beginning of each [ ]*
during Year 1, Year 2 and Year 3 unless the Research Collaboration Period is
terminated earlier. [ ]* of the annual total of Extracts shall be delivered to
Tsumura each [ ]* provided that all Year 3 Extracts shall be delivered in the [
]* of Year 3 by delivering [ ]* of the Year 3 Extracts on each [ ]*. The
quantity of each Extract to be delivered to Tsumurs shall be determined by the
parties during stage 1. All shipments of Extracts shall be in compliance with
the terms of CITES Convention.
2.3.2 Phytera shall identify each Extract with a code. The list of
plant species comprising each shipment of extracts shall accompany each shipment
of extracts. For each Validated Hit Extract, Phytera shall provide Tsumura with
the identity of the plant from which such Validated Hit Extract was derived.
Phytera shall supply all additional information reasonably requested by Tsumura
for customs clearance in Japan or any other country in the Tsumura Territory.
2.3.3 Promptly following receipt of each delivery of Extracts,
Tsumura shall screen each Extract provided by Phytera across each Collaboration
Assay and shall perform appropriate follow-up analysis on each Extract which
shows initial activity to identify whether such Extract represents a Validated
Hit Extract. Tsumura shall promptly notify Phytera of each Extract which is
determined to be a Validated Hit Extract.
2.3.4 The parties shall work together and Tsumura shall select those
Validated Hit Extracts which shall proceed to Stage 3 (collectively, "Stage 3
Extracts"). If (a) Tsumura notifies Phytera that Tsumura does not wish to
submit a particular Validated Hit Extract to Stage 3 or (b) during the [ ]*
period following Tsumura's identification of a particular Extract as a Validated
Hit Extract, Tsumura fails to select such Validated Hit Extract as one of the
Extracts to proceed to Stage 3, then (i) Tsumura's rights in such Extract under
Section 3.2.1 shall terminate, (ii) Tsumura shall
______________
* This portion of the Exhibit has been omitted pursuant to a request for
Confidential Treatment under Rule 406 of the Securities Act of 1033, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
5
<PAGE>
grant Phytera the sole and exclusive, worldwide, royalty-bearing license under
Tsumura's Collaboration Patent Rights to develop, make, have made, use,
distribute for sale and sell Compounds and Products derived from such Extract
and the right to sublicense such rights to one or more Affiliates or Third
Parties subject to Sections 7.2, 7.3 and 7.4, and (iii) Phytera shall have the
obligation to pay royalties to Tsumura in accordance with the terms of Appendix
C with respect to all sales in any country of any Product developed from such
Extract.
2.4 Stage 3 - Fractionation and Analytical Characterization of Validated
--------------------------------------------------------------------
Hit Extracts
- ------------
2.4.1 Following Tsumura's selection of each Stage 3 Extract, Phytera
shall increase production of such extract to up to [ ]* to provide sufficient
quantities for the parties' ongoing chemical isolation and identification and
shall provide Tsumura with additional quantities of each Stage 3 Extract as
necessary for Tsumura's continued screening and testing of such extract as soon
as reasonably possible.
2.4.2 Tsumura shall conduct secondary screens and other tests on each
Stage 3 Extract as Tsumura deems reasonably necessary to obtain a broader
biological profile of the Stage 3 Extract and its activity and specificity.
2.4.3 Phytera shall be responsible for isolating and identifying the
active Compound(s) in each Stage 3 Extract and the chemical composition of each
such compound as soon as possible. Phytera shall keep Tsumura appraised of its
progress by providing Tsumura with monthly progress reports within seven (7)
days of the end of each month. Tsumura shall provide Phytera with screening
protocols, key reagents and other information related to each Stage 3 Extract
sufficient to enable Phytera to perform bioassay guided fractionation of such
extract.
2.4.4 Promptly following Phytera's isolation and identification of a
Compound and notice thereof to Tsumura, Tsumura shall notify Phytera in writing
as to whether Tsumura elects to have such Compound proceed into either the lead
optimization program (Stage 4) or directly into product development (Stage 5).
If (a)Tsumura notifies Phytera that Tsumura does not wish to submit a particular
Compound into the lead optimization program (Stage 4) and does not wish to
submit such Compound into product development (Stage 5), or (b) during the [
]* period following Phytera's isolation and identification of such Compound and
notice thereof to Tsumura, Tsumura fails to notify Phytera that Tsumura elects
to submit such Compound into either the lead optimization program (Stage 4) or
directly into product development (Stage 5), then (i)
______________
* This portion of the Exhibit has been omitted pursuant to a request for
Confidential Treatment under Rule 406 of the Securities Act of 1033, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
6
<PAGE>
the licenses granted to Tsumura by Phytera pursuant to Section 4.1.1 below with
respect to such Compound shall terminate, (ii) Tsumura shall grant Phytera the
sole and exclusive, worldwide, royalty-bearing license under Tsumura's
Collaboration Patent Rights to develop, make, have made, use, distribute for
sale and sell such Compounds and Products derived from such Compounds and the
right to sublicense such rights to one or more Affiliates or Third Parties
subject to Sections 7.2, 7.3 and 7.4, and (iii) Phytera shall have the
obligation to pay royalties to Tsumura in accordance with the terms of Appendix
C with respect to all sales in any country of any Product developed from such
Compound.
7
<PAGE>
2.5 Stage 4 - Lead Optimization.
----------------------------
2.5.1 Tsumura shall perform all medicinal chemistry lead optimization
activities related to each Compound submitted to the lead optimization program,
unless otherwise requested by Phytera.
2.5.2 Upon request by Tsumura, Phytera shall perform lead
optimization activities related to plant or cell cultures, including obtaining
related plant species to search for alternative or improved compounds and
conducting additional cell culture manipulations on active plant species to
search for alternative or improved compounds. Such activities shall be
performed by Phytera only at the request of Tsumura for a fee, the amount and
payment terms of which shall be agreed upon by the parties in writing prior to
Phytera undertaking any such activity. The fee for such activity shall be
calculated on a pro-rata basis for actual services rendered and shall be based
on the full-time equivalent rates set forth in Section 12.1.2. Phytera shall
provide Tsumura with monthly progress reports within seven (7) days of the end
of each month concerning all such activities.
2.6 Stage 5 - Product Development. Stage 5 will commence when either (i)
-----------------------------
Phytera or Tsumura elects to submit a given Compound directly from Stage 3 into
product development in accordance with Section 2.4.4, or (ii) the lead
optimization stage with respect to a given Compound has been completed. The
parties expressly agree that Stage 5 Product Development shall be governed by
the terms of the specific Product Development Agreements which shall be
separately negotiated and agreed to and which shall be consistent with the
licenses and rights granted herein. Such agreements shall not affect the
obligations (financial or other) of either party under this Agreement.
2.7 Support. During the Research Collaboration Period, Phytera shall make
-------
available to Tsumura Support subject to Section 2.11 and as more fully described
in Appendix A. The committed amount of Support for Year 1, Year 2 and Year 3
and the fees associated with the same are specified in Section 12.1.2 and such
fees shall be paid in advance by Tsumura. For the purposes of this Section, the
"Prior Year's Unused Support" shall mean the lessor of (i) one-half (1/2) of the
committed amount of Support specified in Section 12.1.2 for the prior year and
(ii) the difference between the committed amount of Support specified in Section
12.1.2 for the prior year and the amount of Support actually provided by Phytera
during the prior year. The amount of the Prior Year's Unused Support shall be
cumulative. In Year 2 and Year 3, in addition to the committed amount of
Support specified in Section 12.1.2, Tsumura shall be entitled at no additional
charge, to additional Support in the amount of the accumulated Prior Year's
Unused Support, if any. In addition, during the two (2) year period following
the third anniversary of the Effective Date, Tsumura shall be entitled at no
additional charge, to additional Support in the amount of the accumulated Prior
Year's Unused Support, if any. Except as set forth in the preceding two
sentences, Tsumura shall not be entitled to any refund or credit in the event
the amount of Support provided during any period of time in response to
Tsumura's requests is less than the committed amount of support specified above
for such period. The Support fees are fully inclusive and include the costs of
all reagents, supplies and equipment necessary for Phytera to provide the
8
<PAGE>
Support. Phytera may provide additional Support to Tsumura on an as-available
basis in response to Tsumura's request for such Support. The fee for such
additional Support shall be calculated based on the full-time equivalent rates
set forth in Section 12.1.2. and include the costs of all reagents, supplies and
equipment. Within thirty (30) days of the end of each quarter, Phytera shall
provide Tsumura with a written report itemizing the amount of Support provided
during such quarter.
2.8 Substitution of Collaboration Assays. Tsumura acknowledges that
------------------------------------
Phytera may grant a Third Party the exclusive right to screen one or more of the
Extracts against one or more assays other than the Collaboration Assays.
However, Phytera shall not (i) grant any Third Party the right to screen
Extracts in the Collaboration Assays without the prior written consent of
Tsumura, nor (ii) grant any Third Party the right to screen any other plant
cell culture extracts based upon the ExPAND Technology in the Collaboration
Assays while Tsumura is conducting Stage 2 screening as described in Section
2.3 above without the prior written consent of Tsumura. If Tsumura wishes to
substitute a particular assay for one of the Collaboration Assays, Tsumura shall
notify Phytera in writing of its desire to substitute a particular assay for one
of the Collaboration Assays and such notice shall be accompanied by such
information, including the proposed assay protocol, as is reasonably required by
Phytera to evaluate the proposed substitution. Only assays in the Tsumura
Disease Targets may be substituted for the Collaboration Assays. Within twenty
(20) business days of its receipt of Tsumura's notice, Phytera shall notify
Tsumura of its decision with respect to the proposed assay substitution.
Phytera may withhold its consent to such proposed substitution only if the
proposed substitute assay is part of a collaboration between Phytera and a Third
Party or part of the internal screening program of Phytera or its Affiliates.
2.9 Data. Each party shall maintain records in sufficient detail and in
----
good scientific manner appropriate for regulatory filings and patent purposes
and as will properly reflect all work done and results achieved in the
performance of such party's activities under this Agreement (including all data
in the form required to be maintained under any applicable governmental
regulations). Such records shall include books, records, time sheets, reports,
research notes, charts, graphs, comments, computations, analyses, recordings,
photographs, computer programs and documentation thereof, computer information
storage means, samples of materials and other graphic or written data generated
in connection with the performance of such party's activities under this
Agreement. Each party shall provide the other party with the right to inspect
such records, and shall provide the other party with copies of all requested
records, to the extent reasonably required for the performance of the other
party's obligations under this Agreement and for the verification of the
performance of the party's obligation under this Agreement; provided, however,
that the other party shall maintain such records and the information contained
therein in confidence in accordance with Article 8 hereof and shall not use such
records or information except to the extent otherwise permitted by this
Agreement. In satisfying their obligations under this section, Phytera and
Tsumura shall maintain their records in English and Japanese respectively.
9
<PAGE>
2.10 Reports. Within twenty (20) business days following the end of each
-------
calendar quarter, or at the reasonable request (with mutually agreed advance
notice) of the Steering Committee, each party shall provide to the members of
the Steering Committee a written report which shall summarize in reasonable
detail the work such party has performed under this Agreement during the
preceding calendar quarter. Such reports shall be prepared in English.
2.11 Research Collaboration Period. The Research Collaboration Period
------------------------------
shall commence on the Effective Date and shall continue until all of the
Extracts delivered to Tsumura which have been selected for Stage 4 have
completed Stage 4 unless terminated earlier as provided for in Section 9.2
below. Phytera's obligation to provide Support shall continue until the earlier
of (i) the end of the Research Collateration Period and (ii) the fifth
anniversary of the effective date. Six months prior to the third anniversary of
the Effective Date, the Steering Committee shall meet to discuss the possible
extension of the Research Collaboration Period. The terms of such a possible
extension shall be negotiated at that time.
ARTICLE 3 - RIGHTS IN EXTRACTS
3.1 Phytera. Except for the rights expressly granted herein to Tsumura,
-------
Phytera retains all rights, title and interest in and to the Extracts provided
to Tsumura. Tsumura acknowledges that Phytera may grant one or more Third
Parties the right to (i) screen one or more of the Extracts against one or more
assays other than the Collaboration Assays, (ii) screen one or more plant cell
culture extracts other than the Extracts against one or more of the
Collaboration Assays after Tsumura has completed its Stage 2 screening
activities, or (iii) continue the research, development and commercialization of
one or more of those Validated Hit Extracts which Tsumura elects not to
continue to pursue under this Agreement subject to Sections 7.2, 7.3 and 7.4.
3.2 Rights Granted to Tsumura.
-------------------------
3.2.1 Extracts. Phytera hereby grants Tsumura the exclusive right to
--------
screen the Extracts against the Collaboration Assays. No other right, title or
interest in or to the Extracts is granted to Tsumura. Tsumura acknowledges that
its right to use the Extracts is limited to screening such extracts against the
Collaboration Assays and Tsumura agrees that it shall not use the Extracts for
any other purpose.
3.2.2 Termination of Rights. Tsumura acknowledges that the rights
-----------------------
granted under Section 3.2.1 may be terminated in accordance with the provisions
of Section 2.3.4 or Article 9 of this Agreement. The termination of any rights
granted
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hereunder with respect to a particular Extract, shall not affect Tsumura's
rights hereunder with respect to any other Extract .
ARTICLE 4 - RIGHTS IN COMPOUNDS AND PRODUCTS
4.1 Grant of Rights to Tsumura.
--------------------------
4.1.1 In exchange for Tsumura's agreement to pay the milestone
payments and royalties specified in Appendix C below, Phytera hereby grants
Tsumura (i) an exclusive royalty-bearing license under Phytera's
Collaboration Patent Rights to develop, make, have made, use, distribute for
sale and sell Compounds and Products in the Tsumura Territory and (ii) the right
to sublicense to an Affiliate or Third Party the aforementioned rights within
the Tsumura Territory, provided that with respect to any such sublicense to a
Third Party, Tsumura shall have obtained the prior written consent of Phytera.
Such consent shall not be unreasonably be withheld. Upon Phytera's request,
Tsumura shall provide a copy of such sublicenses to Phytera.
4.1.2 Should Tsumura's rights to any particular Compound terminate,
Tsumura shall offer to sell to Phytera all of the data it generated about such
Compound. The parties shall negotiate in good faith the terms of sale of such
data for each such Compound.
4.2 Grant of Rights to Phytera.
--------------------------
4.2.1 In exchange for Phytera's agreement to pay the royalties
specified in Appendix C below, Tsumura hereby grants Phytera (i) an exclusive
royalty-bearing license under Tsumura's Collaboration Patent Rights to develop,
make, have made, use, distribute for sale and sell Compounds and Products in the
Phytera Territory and (ii) the right to sublicense to an Affiliate or Third
Party the aforementioned rights within the Phytera Territory, provided that with
respect to any such sublicense to a Third Party, Phytera shall have obtained the
prior written consent of Tsumura. Such consent shall not be unreasonably
withheld. Upon Tsumura's request, Phytera shall provide a copy of such
sublicenses to Tsumura.
4.2.2 If Phytera fails to initiate product development for the
Phytera Territory with respect to any Compound within two (2) years following
the (i) completion of stage 4 with respect to such compound or (ii) the
designation by Tsumura of a compound as a candidate for stage 5 following the
completion of stage 3,
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whichever is applicable, then the licenses granted to Phytera by
Tsumura pursuant to Section 4.2.1 above with respect to such Compound shall
terminate, Phytera shall irrevocably assign to Tsumura all of its rights,
including without limitations, its Collaboration Patent Rights, in and to such
Compound, Tsumura shall have the sole and exclusive worldwide right to undertake
any and all further research, development and commercialization activities
related to such Compound and to license such rights to one or more Affiliates or
Third Parties and Tsumura shall have the obligation to pay royalties to Phytera
in accordance with the terms of Section Appendix C with respect to all sales in
any country of any Product for human pharmaceutical use developed from such
Compound.
4.3 Termination of Rights. Each party acknowledges that the rights granted
---------------------
under this Article 4 may be terminated in accordance with the provisions of
Section 2.4.4, 4.2.2 or Article 9 of this Agreement. The termination of any
rights granted hereunder with respect to any other Compound.
4.4 Satisfaction of Development Obligation. Each party may satisfy its
---------------------------------------
respective obligations with respect to product development of Compounds by
having one or more Affiliates or Licensees fulfill such obligations.
ARTICLE 5 - DUE DILIGENCE
5.1 Diligent Efforts. Phytera and Tsumura each represent that each shall
----------------
use its reasonable best efforts to bring each Compound it elects to enter into
product development (Stage 5) to the marketplace through a diligent and
aggressive program of development, production and distribution and each party
acknowledges that the exclusive license granted by the other party pursuant to
Section 4 above was granted based on such representation. However, in so doing
and otherwise meeting its obligations hereunder with respect to the development,
production and distribution of Products, Phytera and Tsumura shall each be
entitled to exercise prudent and reasonable business judgement, and shall be
considered to be meeting such obligations so long as each is reporting to the
other party and the Steering Committee as provided herein and is providing the
necessary financial, personnel and other resources which are reasonably required
to maintain progress in accomplishing the development, production and
distribution of Products, and conducts the activities reasonably required to
maintain scheduled progress in accomplishing the same. Neither Phytera nor
Tsumura shall be responsible for any failure which arises as a direct result of
(i) unanticipated technical or scientific problems or other causes outside the
direct control of the parties and their Affiliates and Licensees, (ii)
failure of the other party to meet its obligations hereunder, or (iii) action
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or inaction of any federal, state or other governmental agency whose approval is
required for clinical investigation or commercial sales of the Products where
such activity or inactivity does not arise from the intentional or negligent
acts or failures to act on the part of Phytera or Tsumura, their Affiliates or
Licensees.
ARTICLE 6 - MANAGEMENT OF THE COLLABORATION
6.1 Steering Committee.
------------------
6.1.1 Description. Promptly after the Effective Date, a Steering
-----------
Committee comprised of up to three named representatives of Phytera and up to
three named representatives of Tsumura shall be appointed. The Steering
Committee shall have the responsibilities of monitoring and coordinating the
activities of the parties under the terms of this Agreement and ensuring that
appropriate resources are available to carry out the objectives of this
Agreement provided, however that (i) the express terms of this Agreement shall
govern the Steering Committee's activities and the decisions allocated to a
respective party hereunder shall be made by that party and (ii) the Steering
Committee shall have no authority to increase a party's financial or other
obligations hereunder. The Steering Committee shall be co-chaired by a Phytera
representative and a representative of Tsumura. Each party shall designate its
representatives to the Steering Committee within forty-five (45) days of the
effective date of this Agreement. Meetings of the Steering Committee shall be
held at least two ( 2) times per year, once in Japan and once in the U.S. Each
party may change one or more of its representatives to the Steering Committee at
any time by providing prior written notice to the other party. Members of the
Steering Committee may be represented at any meeting by another member of the
Steering Committee so designated by the absent member, or by a deputy.
6.1.2 Minutes. The Steering Committee shall keep accurate minutes
-------
of its deliberations. Each co-chair shall be responsible for the preparation of
draft minutes for every other meeting or in such other manner as the co-chairs
shall agree. Draft minutes shall be sent to all members of the Steering
Committee within twenty ( 20) business days after each meeting. All records of
the Steering Committee shall be available to both parties. Such minutes and
records shall be in English.
6.1.3 Disagreements. Subject to Article 6.1.1 above, all
-------------
disagreements within the Steering Committee shall be subject to the following
(a) The representatives of the Steering Committee shall promptly present the
disagreement to a designated representative of Phytera and a designated
representative of Tsumura (the "Designated Representatives"); (b) The
Designated Representatives shall meet or discuss in a
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telephone or video conference each party's view and explain the basis for such
disagreement; (c) If the Designated Representatives cannot promptly resolve such
disagreement, then such disagreement shall be submitted to arbitration in
accordance with the provisions of Section 13.6 below. The Designated
Representatives shall be named promptly after the Effective Date of this
Agreement.
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6.2 Research Operations Committee.
-----------------------------
6.2.1 Description. Promptly after the Effective Date, a Research
-----------
Operations Committee comprised of up to three named representatives of Phytera
and up to three named representatives of Tsumura shall be appointed. The
Steering Committee shall have the responsibilities of monitoring and
coordinating the activities of the parties under the terms of this Agreement and
ensuring that appropriate resources are available to carry out the objectives of
this Agreement provided, however that (i) the express terms of this Agreement
shall govern the Steering Committee's activities and the decisions allocated to
a respective party hereunder shall be made by that party and (ii) the Steering
Committee shall have no authority to increase a party's financial or other
obligations hereunder. The Steering Committee shall be co-chaired by a Phytera
representative and a representative of Tsumura. Each party shall designate its
representatives to the Steering Committee within forty-five (45) days of the
effective date of this Agreement. Meetings of the Steering Committee shall be
held at least two ( 2) times per year, once in Japan and once in the U.S. Each
party may change one or more of its representatives to the Steering Committee at
any time by providing prior written notice to the other party. Members of the
Steering Committee may be represented at any meeting by another member of the
Steering Committee so designated by the absent member, or by a deputy.
6.2.2 Minutes. The Research Operations Committee shall keep accurate
--------
minutes of its deliberations. Each co-chair shall be responsible for the
preparation of draft minutes for every other meeting or in such other manner as
the co-chairs shall agree. Draft minutes shall be sent to all members of the
Research Operations Committee within twenty ( 20) business days after each
meeting. All records of the Research Operations Committee shall be available to
both parties. Such minutes and records shall be in English.
6.2.3 Disagreements. Subject to Article 6.2.1 above, all
-------------
disagreements that cannot be resolved by the members of the Research Operations
Committee shall be presented to the Steering Committee for resolution.
ARTICLE 7 - INTELLECTUAL PROPERTY RIGHTS
7.1 Ownership of Extracts. Phytera shall own all right, title and interest
---------------------
in and to all Extracts and, except as expressly provided in Article 3, no rights
of any kind to any
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<PAGE>
Extract shall pass to Tsumura as a result of this Agreement or any activity
conducted pursuant to this Agreement.
7.2 Ownership of Compounds, Products and Inventions. Phytera and Tsumura
-----------------------------------------------
shall jointly and equally co-own all right, title and interest in and to all
Compounds and Products whether discovered jointly or severally by Phytera or
Tsumura or any Licensee. In addition, Phytera and Tsumura shall jointly and
equally co-own all right, title and interest in all ideas, methods, writings,
inventions, discoveries, improvements and other technology, whether or not
patentable or copyrightable, and any patent applications, patents or copyrights
based thereon that are discovered, made or conceived during the term of this
Agreement by employees or Licensees of Phytera or Tsumura as a result of the
screening program conducted pursuant to this Agreement (collectively,
"Inventions").
7.3 Disclosure; Cooperation. During the term of this Agreement, each
-----------------------
party shall disclose to the other the making, conception or reduction to
practice of Inventions by employees or others acting on behalf of such party.
Each party represents and agrees that its employees and consultants and
Licensees shall be obligated under a binding written agreement to assign to
either (i) such party individually or (ii) Phytera and Tsumura jointly all
rights in all Inventions made or conceived during the term of this Agreement as
a result of any activity conducted pursuant to this Agreement by such employees,
consultants or Licensees. In the event that under any such agreement, such
rights are assigned to one party individually, that party hereby assigns and
agrees to assign joint ownership of such rights to the other party. Each party
agrees to sign or cause to have signed all documents relating to such
assignment. Each party agrees to enforce such agreements with employees,
consultants and Licensees, including, where appropriate, by legal action.
7.4 Patent Applications. Each party shall have the exclusive right and
-------------------
responsibility, subject to the terms of this Section, to file, prosecute and
maintain patent applications included in the Collaboration Patent Rights in all
countries of its respective Territory. All such patent applications shall be in
the name of Phytera and Tsumura jointly. For the purposes of this Section, the
"Primary Patenting Party" shall mean Tsumura in the Tsumura Territory and
Phytera in the Phytera Territory. In the event that the Primary Patenting
Party fails or elects not to file, prosecute or maintain such patent
applications in a specific country in its Territory, then such party shall
notify the other of its decision and the other party shall have the right but
not the obligation to file, prosecute or maintain any such patent applications
in such country in the joint names of Tsumura and Phytera. If the other party
chooses to file, prosecute or maintain any such patent applications in such
country, then (i) the license granted to the Primary Patenting Party pursuant to
Article 4 with respect to any Compound or Product identified in any such patent
application shall terminate for such country, (ii) the other party shall have
the right to undertake development and commercialization activities related to
such Compound or Product in such country and (iii) the other party shall have
the obligation to pay royalties to the Primary Patenting Party in accordance
with Appendix C with respect to all sales in such country of any Product
identified in such patent application. Each Primary Patenting Party shall to
the extent reasonably possible notify the other party of
16
<PAGE>
its intention not to pursue such patent applications with sufficient time to
allow the other party to protect such patent rights prior to the expiration or
abandonment of such rights. In addition, when the Primary Patenting Party's
rights granted under Article 4 with respect to any particular Compound or
Product terminate pursuant to Sections 2.4.4 or 4.2.2 or when Tsumura's rights
to any Extract granted under Section 3.2.1 terminate pursuant to Section 2.3.4,
the other party shall have the right but not the obligation to file, prosecute
or maintain any patent applications with respect to such Compound or Product or
any discoveries with respect to such Extract in any country in the world. For
avoidance of any doubt, the parties acknowledge that, in any event and under any
circumstance, any and all patent applications shall be made in the joint names
of Phytera and Tsumura. Each patenting party shall be responsible for all costs
associated with the preparation, filing, prosecution and maintenance of such
patent applications filed, or to be filed, in the countries in which the party
is filing patent applications. Each party shall make available to the other
party or its authorized attorneys, agents or representatives, employees, agents
or consultants to the extent necessary or appropriate to enable such party to
file, prosecute and maintain patent applications and resulting patents for its
respective Territory with respect to Inventions and for periods of time
sufficient for such party to obtain the assistance it needs from such personnel.
Where appropriate, each party shall sign or cause to have signed all documents
relating to said patent applications or patents at no charge to the other party.
7.5 Cooperation. The parties shall, at their expense, cooperate as
-----------
necessary to enable the other to establish and protect its rights under this
Article 7.
7.6 No Other Technology Rights. Except as otherwise expressly provided in
--------------------------
this Agreement, under no circumstances shall a party hereto, as a result of this
Agreement, obtain any ownership interest in or other right to any technology,
know-how, patents, pending patent applications, products, vaccines, antibodies,
cell lines or cultures, or animals of the other party, including items owned,
controlled or developed by the other party, or transferred by the other party to
said party at any time pursuant to this Agreement. It is understood and agreed
by the parties that this Agreement does not grant to either party any license or
other right in basic technology of the other party.
7.7 Enforcement of Collaboration Patent Rights. Each party shall promptly
------------------------------------------
notify the other in writing of any alleged or threatened infringement of the
Collaboration Patent Rights of which it becomes aware. Each party is responsible
for the enforcement of the Collaboration Patent Rights in its respective
Territory except for the countries in which the other party has filed patent
applications and in its sole discretion may choose to prosecute any such
infringement in which case any recovery or damages received by such party shall
be retained by and be the sole property of such party. In the event that one
party brings an infringement action, such party shall control the litigation and
the
17
<PAGE>
other party shall cooperate fully , including, if required to bring such action,
the furnishing of a power of attorney. Each party agrees that (i) if more than
six (6) months passes following the date such party first becomes aware of any
actual or alleged infringement and during such time such party is not successful
in causing such actual or alleged infringer to desist and such party does not
file an infringement action in a court of competent jurisdiction, or (ii) prior
to the end of such six (6) month period, such party notifies the other party of
its intention not to bring suit against such infringer, then the other party
shall have the right, but not the obligation, to prosecute at its own expense
such actual or alleged infringement and any recovery or damages received by such
party shall be retained by such party.
7.8 Trademarks. Phytera and Tsumura, each at their own expense, shall be
----------
responsible for the selection, registration and maintenance of all trademarks,
tradenames and service marks that such party employs in connection with the
Products and shall individually own and control such trademarks, tradenames and
service marks.
ARTICLE 8 - CONFIDENTIALITY
8.1 Confidential Information. From time to time during the term of this
------------------------
Agreement, and in order to carry out the provisions of this Agreement, it may be
necessary for one of the parties to disclose confidential information
("Confidential Information") to the other. For the purposes of this Agreement,
Confidential Information shall include the Extracts, including the identity of
the Extracts, supplied by Phytera under this Agreement, the data generated by
the Collaboration or any other activity conducted pursuant to this Agreement,
the Compounds, the Products, the Inventions, Phytera's cell culture techniques
and any strategies, plans or developments relating to any of the foregoing, the
identity of the Collaboration Assays and Tsumura's protocols for the
Collaboration Assays, the business, financials, technology, research strategy,
employees, infrastructure, collaborators, advisors, consultants, Board of
Directors and Scientific Advisory Board of Phytera and its Affiliates and the
business, financials, technology, research and research strategy of Tsumura and
its Affiliates.
8.2 Non-Disclosure Obligations.
--------------------------
(a) The recipient of such Confidential Information (the "Recipient")
undertakes to treat any and all of such Confidential Information as the other
party may disclose (the "Discloser") to the Recipient during the term of this
Agreement and for a period of ten (10) years thereafter as strictly confidential
and shall not divulge it to any Third Party for any purpose whatsoever and shall
not make use of such Confidential
18
<PAGE>
Information or any part thereof for any purpose other than carrying out the
terms of this Agreement without the Discloser's prior written consent. Any data
or information generated by or as a result of the Collaboration or any other
activity conducted pursuant to this Agreement or any data or information with
respect to the Compounds, the Products or the Inventions shall not be disclosed
to any Third Party nor be used for any purpose other than carrying out the terms
of this Agreement without the other party's written consent. Notwithstanding the
foregoing, either party may disclose Confidential Information to consultants,
preclinical and clinical development organizations and investigators and
contract manufacturers to the extent reasonably necessary to develop and
manufacture the Compounds and Products derived from this Collaboration provided
such consultants, development organizations and investigators and contract
manufacturers have entered into a written confidentiality agreement containing
provisions at least as restrictive as those set forth in Section 8 of this
Agreement prior to such disclosure.
(b) In the event that the Recipient visits any of the establishments
of the Discloser, the Recipient undertakes that any further Confidential
Information which may come to the Recipient's knowledge, as a result of any such
visit, shall be deemed to be Confidential Information and shall be subject to
the provisions of Paragraph (a) of this Section 8.2.
8.3 Limitations. The undertakings in Paragraphs (a) and (b) of Section 8.2
-----------
shall not apply to information that (i) at the time of disclosure is published
or otherwise generally available to the public; (ii) after disclosure by
Discloser is published or becomes generally available to the public otherwise
than through any act or omission on the part of Recipient; (iii) the Recipient
can establish by written documentation that such information was in its
possession at the time of disclosure and that such information was not acquired
directly or indirectly from the Discloser; (iv) was rightfully acquired from a
third party who did not obtain it under pledge of secrecy to the Discloser or
another party; or (e) was required to be disclosed by law.
8.4 Samples. Neither Phytera nor Tsumura shall supply or send any samples
-------
of Compounds to any Third Party, other than to regulatory agencies or for use in
pre-clinical testing or clinical trials, unless such samples are protected by
an appropriate form of materials transfer agreement approved by Phytera and
Tsumura.
8.5 Publications.
------------
8.5.1 Procedure. Phytera and Tsumura recognize the need to obtain
---------
valid patent protection. Consequently, Phytera, Tsumura and their respective
employees and consultants and any other Third Party wishing to make a
publication (including any oral disclosure made without obligation of
confidentiality) relating to work performed by such party as part of the
collaboration described in this Agreement (the "Publishing Party") shall deliver
to the other party (the "Reviewing Party") a copy of the proposed written
publication at least ninety (90) days prior to submission for publication, or an
abstract of such oral disclosure at least thirty (30) days prior to submission
of the abstract or the oral disclosure, whichever is earlier. The Reviewing
Party shall have the right (a)
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<PAGE>
to propose modifications to the publication for patent reasons, (b) to request a
delay in publication or presentation in order to protect patentable information,
or (c) to request that the information be maintained as a trade secret and, in
such case, the Publishing Party shall not make such publication or disclosure.
If the Reviewing Party requests a delay as described in clause (b) in the
preceding sentence, the Publishing Party shall delay submission or presentation
of the publication for a period sufficient to enable protection of the Reviewing
Party's rights in such information to be filed.
8.5.2 Resolution. Only upon the receipt of written approval of the
----------
Reviewing Party may the Publishing Party proceed with the written publication or
the oral presentation.
8.6 Injunctive Relief. The parties hereto understand and agree that
-----------------
remedies at law may be inadequate to protect against any breach of any of the
provisions of this Article 8 by either party or their employees, agents,
officers or directors or any other person acting in concert with it or on its
behalf. Accordingly, each party shall be entitled to the granting of injunctive
relief by a court of competent jurisdiction against any action that constitutes
any such breach of this Article 8. It is understood that such injunctive relief
is intended solely as provisional relief pending the dispute resolution
procedures described in Section 13.6.
ARTICLE 9 - EXPIRATION AND TERMINATION
9.1 Expiration. Unless earlier terminated pursuant to Section 9.2, the
----------
rights and obligations of each party and the terms and conditions related to the
research collaboration shall terminate at the close of the Research
Collaboration Period, but all other rights and obligations of each party and the
remaining terms and conditions of this Agreement and the licenses granted
hereunder shall expire on the last to occur of (i) ten (10) years after the
First Commercial Sale of the last Product to be commercialized hereunder or (ii)
the last to expire of any of the then existing patents included in the Patent
Rights.
9.2 Right of Termination.
--------------------
9.2.1 For Convenience. Commencing eighteen (18) months following the
---------------
Effective Date, Tsumura shall have the right to terminate this Agreement at any
time by delivering written notice to Phytera at least six (6) months prior to
the effective date of such termination. If Tsumura elects to terminate this
Agreement pursuant to the terms of this Section 9.2.1, then Tsumura shall remit
to Phytera all payments that become due
20
<PAGE>
and payable in accordance with the terms of this Agreement prior to the
effective date of such termination, and each such payment shall be made in
accordance with the applicable payment terms set forth herein. Unless otherwise
expressly indicated by Tsumura, the termination of the Agreement by Tsumura
under this Section 9.2.1 shall not affect any rights and obligations of the
parties under this Agreement with respect to any Extracts delivered to Tsumura
before the termination of this Agreement. Further, pursuant to this Section
9.2.1, Tsumura may terminate this Agreement for convenience at its sole
discretion with respect to particular one or more Extracts and/or Compounds. In
such case, this Agreement shall be terminated to the extent that it applies to
such particular Extracts and/or Compounds, and shall remain effective and in
full force with respect to other Extracts and Compounds
9.2.2 For Cause. Each party shall have the right to terminate this
---------
Agreement by giving to the other party not less than ninety (90) days prior
written notice in the event that the other party commits a material breach of
any of its material obligations hereunder and fails to cure such breach during
such notice period. For purposes of this Section, the occurrence of any of the
following shall be deemed to be a material breach of this Agreement but material
breaches shall not be limited to the following:
(i) failure to make any payment when such payment is due and
payable, provided such payment is not the subject of a good faith dispute
between the parties and the amount of such payment exceeds $50,000; or
(ii) failure by either party to use diligent efforts, as described in
Section 5.1 above, to commercialize Products.
(iii) failure by Phytera to deliver the Extracts or provide Support to
Tsumura in accordance with the terms of this Agreement.
In addition, either party shall have the right to terminate this Agreement
effective immediately upon giving notice to the other party upon the occurrence
of any of the following events: (a) an assignment by the other party for the
benefit of creditors; or (b) the filing of a petition in bankruptcy or
comparable debtor's relief law by the other party; or (c) the filing of a
petition in bankruptcy or comparable debtor's relief law against the other party
by its creditors which petition is not dismissed within sixty (60) days; or (d)
the appointment of a receiver, trustee, liquidator, receiver-manager or similar
custodian for the other party and the appointment is not dismissed within sixty
(60) days; or (e) the other party has voluntarily or involuntarily commenced
proceedings for dissolution,
21
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liquidation or winding up, or has ceased to carry on its business in the
ordinary course; or (f) the institution of any other proceeding involving the
insolvency of the other party or the protection of, or from, its creditors,
which proceeding remains undismissed for a period of sixty (60) consecutive
days.
9.3 Effect of Expiration or Termination.
-----------------------------------
9.3.1 If this Agreement is terminated for convenience by Tsumura or
for cause by Phytera, Tsumura shall immediately cease performing all its
screening activities associated with this Agreement and return all of the
Extracts in its possession at that time for which this Agreement is terminated
(as described in Section 9.2.1) or, upon election by Phytera, Tsumura shall
destroy all such Extracts. Each party shall promptly return to the other party
all materials, including all Confidential Information of the other party,
previously delivered to such party to the extent that this Agreement is
terminated, and within ten (10) business days following the effective date of
such expiration or termination of this Agreement, an officer of each party shall
certify in writing to the other party that such party has complied with its
obligations set forth in this Section 9.3.1.
9.3.2 If this Agreement is terminated for cause by Tsumura, Phytera
shall immediately cease performing all its Support activities associated with
this Agreement. Tsumura shall have the right to retain any Extracts, Compounds,
Products and any data and information relating thereto then in its possession
and to use such Extracts, Compounds, Products and any data and information
relating thereto for the purposes set forth in this Agreement. Phytera shall
return to Tsumura all payments made to it pursuant to Section 12.1 on a pro rata
basis based on the actual number of Extracts delivered to Tsumura and the actual
amount of Support provided to Tsumura without prejudice to Tsumura's rights set
forth in the second sentence of this Section 9.3.2. Each party shall promptly
return to the other party all materials, including all Confidential Information
of the other party, previously delivered to such party, and within ten (10)
business days following the effective date of such expiration or termination of
this Agreement, an officer of each party shall certify in writing to the other
party that such party has complied with its obligations set forth in this
Section 9.3.2.
9.3.3 Subject to Section 9.2.2 (i), if Tsumura fails to make
milestone payments for any Compound or Product as required by Section C1 below
or either party fails to make royalty payments for any Compound or Product as
required by Section C2 below, then such party shall (i) cease all research and
development activities associated with such Compound or Product, (ii) cease
manufacturing, marketing and selling such Compound or Product, (iii) irrevocably
assign its Collaboration Patent Rights to such Compound or Product to the other
party and (iv) the license granted to such party under Section 4 with respect to
such Compound or Product shall terminate.
9.3.4 Upon termination or expiration of this Agreement, each party
shall retain its respective Collaboration Patent Rights, except to the extent
such rights have been irrevocably assigned to the other party pursuant to this
Agreement. The expiration of this Agreement or the termination of this Agreement
by either party for any reason
22
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shall not relieve either party from any obligation that matured prior to the
effective date of the expiration or termination.
ARTICLE 10 - REPRESENTATIONS AND WARRANTIES
10.1 General. Each party warrants and represents to the other that it has
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the legal right and power to enter into this Agreement, to extend the rights and
licenses granted to the other in this Agreement, and to perform fully its
obligations hereunder, and that it has not made nor will it make any commitments
to others in conflict with or in derogation of such rights or this Agreement.
10.2 Services. Each party warrants and represents to the other that it
--------
shall conduct its activities in a good scientific manner and in compliance with
all applicable good laboratory and manufacturing practices and all applicable
legal requirements.
10.3 Phytera's Technology. Phytera warrants and represents that it has
--------------------
filed patent applications for the ExPAND(TM) Technology in the United States and
is currently filing patent applications for the ExPAND(TM) Technology in the
United Kingdom and Japan.
10.4 Extracts. Phytera warrants and represents that all shipments of
--------
Extracts shall be in compliance with the terms of the CITES Convention.
ARTICLE 11- INDEMNITY; INSURANCE
11.1 Indemnity Obligations. Each party shall indemnify and hold harmless
---------------------
the other party and its officers, directors, employees and agents from and
against all liabilities, claims, actions and proceedings and all expenses
arising in connection therewith (including without limitation, damages,
judgments, awards, costs and attorney's fees and disbursements) which they may
incur or which may be asserted against them arising out of or by reason of the
activities of such party, its Affiliates or Licensees, or by their respective
officers, directors, employees or agents pursuant to this Agreement with the
exception of those arising from the intentional wrongful actions or gross
negligence of the other party or any of its employees or agents or from the
breach of any representation, warranty or obligation of the other party as
specified herein.
11.2 Procedure. Promptly after learning of the occurrence of any event
---------
which gives rise to its rights under the provisions of Section 11.1, the
indemnified party shall notify the other party in writing of any such matter.
The indemnified party shall cooperate with the other party in the negotiation,
compromise and defense of any such matter. The indemnifying party shall be in
charge of and control such negotiations, compromise and defense. In no event
shall the indemnified party compromise or settle any such matter without the
prior consent of the other party and such party shall not be bound by any such
compromise or settlement without its prior written consent.
23
<PAGE>
11.3 Insurance. For the period starting with the initiation of clinical
---------
trials of a Product by Phytera, Tsumura or an Affiliate or Licensee of either ,
such party shall maintain product liability insurance in an amount acceptable to
the other party with respect to the development, manufacture and sale of the
Products developed pursuant to this Agreement for the term of this Agreement (if
such insurance is an occurrence-basis policy) or for an additional ten years
after the expiration or termination of this Agreement (if such insurance is a
claims-made basis policy).
ARTICLE 12 - RESEARCH PAYMENTS
12.1 Research Payments.
-----------------
12.1.1 Extracts. In consideration of Phytera's agreement to
--------
provide the Extracts to Tsumura under the terms of this Agreement, Tsumura
agrees to pay Phytera as follows:
Year 1 ( []* Extracts) - [ ]*
Year 2 ( []* Extracts) - [ ]*
Year 3 ( []* Extracts) - [ ]*
12.1.2 Support. In consideration of Phytera's agreement to provide
-------
Support to Tsumura under the terms of this Agreement, Tsumura agrees to pay
Phytera for Support in the area of [ ]* of Stage 3 Extracts as follows:
Year 1 ([]* Full-time equivalent) - [ ]*
Year 2 ([]* Full-time equivalent) - [ ]*
Year 3 ([]* Full-time equivalent) - [ ]*
and Tsumura agrees to pay Phytera for Support in the area of [ ]* as
follows:
Year 1 ([]* Full-time equivalent) - [ ]*
Year 2 ([]* Full-time equivalent) - [ ]*
Year 3 ([]* Full-time equivalent) - [ ]*
These fees are fully inclusive and include the cost of all reagents, supplies,
and equipment.
________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
24
<PAGE>
The fee for additional Support provided by Phytera at Tsumura's request in
Year 1 shall be [ ]* per United States full-time equivalent and [ ]*
per United Kingdom full-time equivalent calculated on a pro-rata basis for
actual services rendered. Thereafter, such amounts may be adjusted once per year
provided that any increase in such amounts shall not exceed the percentage by
which the Consumer Price Index for all Urban Consumers, U.S. City Average (as
published by the U.S. Department of Labor, Bureau of Labor Statistics) increased
during the 12-month period prior to the date of the notice of such increase.
12.1.3 Timing of Payments. The payments specified above shall be
------------------
paid annually in advance and shall be due and payable as follows:
(i) Payments associated with Year 1 shall be due and
payable within [ ]*;
(ii) Payments associated with Year 2 shall be due and
payable within [ ]*; and
(iii) Payments associated with Year 3 shall be due and
payable within [ ]*.
12.1.4 Time Records. Phytera shall keep accurate and reliable
------------
records of Support specifying the area of Support and the time spent by each
employee of Phytera on a daily basis and shall send a summary of such monthly
records to Tsumura within seven (7) days following the end of each calendar
month.
ARTICLE 13 - MISCELLANEOUS
13.1 Force Majeure. Neither party shall be held liable or responsible to
-------------
the other party nor be deemed to have defaulted under or breached this Agreement
for failure or delay in fulfilling or performing any term of this Agreement when
such failure or delay is caused by or results from causes beyond the reasonable
control of the affected party including but not limited to fire, floods,
embargoes, war, acts of war (whether war is declared or not), insurrections,
riots, civil commotions, strikes, lockouts or other labor disturbances, acts of
God or acts, omissions or delays in acting by any governmental authority or the
other party.
13.2 Severability. Should one or more provisions of this Agreement be or
------------
become invalid, the parties hereto shall substitute, by mutual consent, valid
provisions for such invalid provisions which valid provisions in their economic
effect are sufficiently
_________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
25
<PAGE>
similar to the invalid provisions that it can be reasonably assumed that the
parties would have entered into this Agreement with such valid provisions. In
case such valid provisions cannot be agreed upon, the invalidity of one or
several provisions of this Agreement shall not affect the validity of this
Agreement as a whole, unless the invalid provisions are of such essential
importance to this Agreement that it is to be reasonably assumed that the
parties would not have entered into this Agreement without the invalid
provisions.
13.3 Notices. Any consent, notice or report required or permitted to be
-------
given or made under this Agreement by one of the parties hereto to the other
shall be in writing, delivered personally or by facsimile (and promptly
confirmed by personal delivery or courier) or courier, postage prepaid (where
applicable), addressed to such other party at its address indicated below, or to
such other address as the addressee shall have last furnished in writing to the
addressor and shall be effective upon receipt by the addressee.
If to Phytera: Phytera, Inc.
377 Plantation Street
Worcester, Massachusetts 01605
USA
Attention: President and CEO
Fax: 001 508 792 1339
If to Tsumura: Tsumura & Co.
12-7 Nibancho
Chiyoda-ku
Tokyo 102 Japan
Attention: General Manager, Research & Development
Fax: 81 3 3221 5105
13.4 Assignment. This Agreement may not be assigned or otherwise
----------
transferred by either party without the prior written consent of the other
party; provided, however, that either party may, without such consent, assign
this Agreement and its rights and obligations hereunder to its Affiliates or in
connection with the transfer or sale of all or substantially all of its business
or in the event of its merger or consolidation or change in control or similar
transaction. Any purported assignment in violation of the preceding sentence
shall be void. Any permitted assignee shall assume all obligations of its
assignor under this Agreement.
13.5 Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the Commonwealth of Massachusetts, without giving
effect to the choice of law provisions thereof.
13.6 Dispute Resolution. Except as provided in Section 6.1.3, any
------------------
disputes arising between the parties relating to, arising out of or in any way
connected with this Agreement or any term or condition hereof, or the
performance by either party of its obligations hereunder, whether before or
after termination of this Agreement, shall be promptly presented to the
Designated Representatives for resolution and if such persons
26
<PAGE>
or their designees cannot promptly resolve such disputes, then such dispute
shall be finally resolved by binding arbitration in accordance with following
provisions. Whenever a party shall decide to institute arbitration proceedings,
it shall give written notice to that effect to the other party. The party giving
such notice shall refrain from instituting the arbitration proceedings for a
period of sixty (60) days following such notice. Any arbitration hereunder shall
be conducted pursuant to the Japan-American Trade Arbitration Agreement of
September 16, 1952, by which each party is bound. If the request for arbitration
is initiated by Phytera, the arbitration shall take place in Tokyo, Japan. If
the request for arbitration is initiated by Tsumura, the arbitration shall take
place in Boston, MA, USA
13.7 Exports. The parties acknowledge that the export of technical data,
--------
materials or products is subject to the exporting party receiving any necessary
export licenses and that the parties cannot be responsible for any delays
attributable to export controls which are beyond the reasonable control of
either party. Each party agrees not to export or re-export, directly or
indirectly, any materials, information, technical data, the direct product of
such data, samples or equipment received or generated under this Agreement in
violation of any governmental regulations which may be applicable, including,
but not limited to, the Export Administration Act of 1979, as amended, its rules
and regulations, including, but not limited to, Part 779 of the United States
Export Control Regulations, published by the United States Department of
Commerce (collectively the "U.S. Export Laws"), and other applicable export
control laws. Each party agrees to obtain similar covenants from each of their
Affiliates and Licensees with respect to the subject matter of this Section.
Phytera shall make a commercially reasonably effort to provide Tsumura with such
information as Phytera deems important for Tsumura to comply with the U.S.
Export Laws.
13.8 Waiver. The waiver by either party hereto of any right hereunder or
------
the failure to perform or of a breach by the other party shall not be deemed a
waiver of any other right hereunder or of any other breach or failure by said
other party whether of a similar nature or otherwise.
13.9 Survival. The provisions of Articles 7, 8, 10 and 11, and Sections
--------
9.3, , 13.3, 13.5, 13.6 and C2.4 and any other obligation under this Agreement
that is expressly stated to survive or to be performed after the expiration or
termination of this Agreement shall survive the expiration or termination of
this Agreement.
13.10 Entire Agreement. This Agreement, together with all appendices
----------------
attached hereto and incorporated herein, contains the entire understanding of
the parties with respect to the subject matter hereof. This Agreement supersedes
all express or implied agreements, representations and understandings, either
oral or written, heretofore made between or by the parties with respect to the
subject matter hereof. This Agreement may be amended, or any term hereof
modified, only by a written instrument duly executed by both parties hereto.
27
<PAGE>
13.11 Independent Contractors. It is expressly agreed that Tsumura and
-----------------------
Phytera shall be independent contractors and that the relationship between the
two parties shall not constitute a partnership, joint venture or agency. Neither
Phytera nor Tsumura shall have the authority to make any statement,
representation or commitment of any kind, or to take any action which shall be
binding on the other without the prior written consent of the other party.
13.12 Headings. The captions to the articles and sections of this
--------
Agreement are not a part of this Agreement, but are merely guides or labels to
assist in locating and reading the several articles and sections hereof.
13.13 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the date first set
forth above.
PHYTERA, INC. TSUMURA & CO.
By:/s/ Malcolm Morville By: /s/ Hachizaemon Kazama
---------------------- ------------------------------
Malcolm Morville Hachisaemon Kazama
- ---------------- ------------------------------
Name Name
President and CEO President
- ----------------- ------------------------------
Title Title
28
<PAGE>
APPENDIX A - SUPPORT
--------------------
Phytera shall provide Tsumura with support in the areas of [
]*.
Phytera shall provide the following committed level of support to Tsumura:
- --------------------------------------------------------------------------------
YEAR [ ]* SUPPORT [
---- ------------------ --------------
]* SUPPORT
-------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1 [ ]* FTE [ ]* FTE
- --------------------------------------------------------------------------------
2 [ ]* FTE [ ]* FTE
- --------------------------------------------------------------------------------
3 [ ]* FTE [ ]* FTE
- --------------------------------------------------------------------------------
Phytera shall provide additional support to Tsumura on an as-available basis if
so requested by Tsumura. The fees for such additional support shall be
calculated on a pro-rata basis for actual services rendered as described in
Section 12.1.2 of the Agreement.
_____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
29
<PAGE>
APPENDIX B - COLLABORATION ASSAYS
The initial Collaboration Assays are:
[
- -
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
30
<PAGE>
APPENDIX C - MILESTONES AND ROYALTIES
C1. Milestones. In consideration of the rights and licenses granted
----------
to Tsumura, Tsumura shall pay to Phytera the milestone payments shown in Table
C1 for the first Compound or Product to reach each of the defined milestones
which have not been reached by a previous Compound or Product. Tsumura shall
make [ ]* payments for the second Compound or Product to reach each milestone.
For the third and subsequent Compounds or Products to reach each milestone,
Tsumura shall pay [ ]* of the milestone payments specified in Table C1. However,
Tsumura shall only pay each of the milestones once for any Compound or Product
regardless of the number of countries in which the milestone may occur. Each
milestone payment shall be payable within [ ]* following the achievement of such
milestone. For the purpose of clarification, examples of Tsumura's milestone
obligations under three different scenarios are shown in Appendix D.
Table C1
- --------
- -------------------------------------------------------------------------------
Milestone Net Payment
--------- -----------
===============================================================================
1. [ [ ]*
]*.
2. [ [ ]*
]*.
3. [ [ ]*
]*.
4. [ ]*. [ ]*
- -------------------------------------------------------------------------------
C2. Royalties on Net Sales.
----------------------
C2.1 Royalties Payable by Tsumura. In consideration of the rights and
----------------------------
licenses granted to Tsumura hereunder, Tsumura shall pay to Phytera a royalty on
Net Sales of each Product sold by Tsumura or its Affiliates at the rates set
forth below. For the purpose of determining royalty payments, the Net Sales of
all Products sold by Tsumura and its Affiliates containing the same Compound
shall be aggregated.
C2. Royalties on Net Sales.
----------------------
C2.1 Royalties Payable by Tsumura. In consideration of the
rights and licenses granted to Tsumura hereunder, Tsumura shall pay to Phytera a
royalty on Net Sales of each Product sold by Tsumura or its Affiliates at the
rates set forth below. For the purpose of determining royalty payments, the Net
Sales of all Products sold by Tsumura and its Affiliates containing the same
Compound shall be aggregated.
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
31
<PAGE>
In the event that [ ]*. Tsumura shall pay royalties of [ ]* Tsumura's Net
sales. In the event that [ ]*, Tsumura shall pay royalties of [ ]* Tusumura's
Net Sales.
C2.2 Royalties Payable by Phytera. In consideration of the rights and
----------------------------
licenses granted to Phytera hereunder, Phytera shall pay to Tsumura a royalty on
Net Sales of each Product sold by Phytera or its Affiliates as set forth below.
For the purpose of determining royalty payments, the Net Sales of all Products
sold by Phytera and its Affiliates containing the same Compound shall be
aggregated. For all Products, Phytera shall pay royalties of [ ]* of Phytera's
Net Sales.
C2.3 Sublicense Royalties. If either party grants a license or sublicense
--------------------
to any Third Party to make, use or sell a Product or Compound, , such party
shall provide the other party with written notice of such license or sublicense,
as the case may be, and shall pay to the other party in lieu of the royalties
payable under Section C2.1 or C2.2, as the case may be, [ ]* of each milestone
and royalty payments and other fees received from such Third Party as a result
of such license or sublicense.
C2.4 Survival of Obligation to Pay Milestones and Royalties.
------------------------------------------------------
Tsumura's obligation to pay milestones as set forth in Section C1 above and
each party's respective obligation to pay royalties as set forth in this Section
C2 shall survive the termination of this Agreement or any of the licenses and
rights granted hereunder.
C2.5 Other Business Terms. Each product development agreement covering
--------------------
Compounds and Products discovered pursuant to the activities under this
Agreement shall contain those business terms typically present in pharmaceutical
licensing agreements. Such business terms, which shall include the timing of
payment of royalties, method of royalty payments and the right to audit, shall
be consistent with the norms of pharmaceutical licensing agreements subject to
the parties' good faith negotiations.
C2.6 Net Payments. All payments pursuant to this Agreement except royalty
------------
payments are exclusive of any and all withholding or similar taxes imposed or
assessed by reason of this Agreement or the transactions contemplated hereby and
the party making such payment shall pay any and all such taxes, and any
penalties, interest and collection or withholding costs associated with such
taxes, at the time the payment of such tax is due. Royalty payments are
inclusive of any and all withholding or similar taxes imposed or assessed by
reason of this Agreement or the transactions contemplated
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
32
<PAGE>
hereby and the party making such payment may deduct and pay any and all such
taxes, and any penalties, interest and collection or withholding costs
associated with such taxes, at the time the payment of such tax is due, and
shall be borne by the party receiving such payment.
C2.7 Incorporation of Appendix C into the Agreement. The parties agree that
----------------------------------------------
this Appendix C is an integral part of, and incorporated by reference into, the
Research Collaboration Agreement, dated as of May 22, 1996, between Phytera,
Inc. and Tsumura & Co. As used in this Appendix, the term "Agreement" shall
mean the aforementioned agreement together with all appendices thereto. Each
capitalized term used in this Appendix and not defined in this Appendix shall
have the meaning ascribed to it in the Agreement. Each reference herein to
section numbers other than to those beginning with the letter "C" shall refer to
the applicable section in this Agreement.
_________________ ___________________
Initial (Tsumura) Initial (Phytera)
33
<PAGE>
APPENDIX D - EXAMPLES OF TSUMRUA'S MILESTONE OBLIGATIONS
34
<PAGE>
Senario 1
---------
[
]*
_________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
35
<PAGE>
Senario 2
---------
[
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
36
<PAGE>
Senario 3
---------
[
]*
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
37
<PAGE>
AMENDMENT
THIS AMENDMENT TO, THE RESEARCH COLLABORATION AGREEMENT (hereinafter
referred to as the "AMENDMENT") dated as of _____________, ____ 1998, is made
between Phytera, Inc. (hereinafter referred to as "PHYTERA"), a Delaware
corporation having its principal place of business at 377 Plantation Street,
Worcester, Massachusetts 01605, USA, and Tsumura & Co. (hereinafter referred to
as "TSUMURA"), a corporation organized under the laws of Japan and having its
principal place of business at 12-7 Niban-cho, Chiyoda-ku, 102-8422 Tokyo,
Japan.
WHEREAS, Phytera and Tsumura are parties to the Research Collaboration
Agreement dated as of June 28, 1996 (hereinafter referred to as the "ORIGINAL
AGREEMENT"), pursuant to which Phytera and Tsumura established a research,
development and marketing collaboration to discover and develop compounds with
applications to certain disease targets; and
WHEREAS, Phytera and Tsumura each desire to amend and/or supplement certain
provisions of the Original Agreement.
NOW THEREFORE, each of Phytera and Tsumura hereby agrees that the Original
Agreement shall be amended and/or supplemented as follows:
1. ARTICLE 1.5 OF THE ORIGINAL AGREEMENT SHALL BE AMENDED TO READ AS FOLLOWS:
"EXTRACTS shall mean the plant cell culture extracts based on Phytera's
--------
ExPAND(R) technology provided to Tsumura pursuant to this Agreement which
technology Phytera has filed a patent applications in the United States and
is currently filing patent applications in the United Kingdom and Japan
provided always that, as agreed upon following the Steering Committee
meeting in Worcester, USA, on July 21, 1997, the marine microbial extracts
based on Phytera's proprietary uMARIINE(R) technology may serve as a
substitute for a portion of the above mentioned plant cell culture extracts
(as defined below)."
2. SECTION 2.3.1 OF THE ORIGINAL AGREEMENT SHALL BE AMENDED TO READ AS
FOLLOWS:
"Following completion of Stage 1 and in consideration of Tsumura's payment
of fees specified Section 12.1.1 below, Phytera shall select and deliver to
Tsumura Extracts in accordance with the following schedule:
38
<PAGE>
Year 1: [ ]* Extracts
Year 2: [ ]* Extracts
Year 3: [ ]* Extracts
Year 4: [ ]* Extracts
The schedule for Extract delivery in Years 2, 3 and 4 shall be determined
by the Steering Committee."
3. SECTION 2.7 OF THE ORIGINAL AGREEMENT SHALL BE AMENDED TO READ AS FOLLOWS:
"SUPPORT. During the Research Collaboration Period, Phytera shall make
-------
available to Tsumura Support subject to Section 2.11 and as more fully
described in Appendix A. The committed amount of Support for Year 1, Year
2, Year 3 and Year 4, and the fees associated with the same are specified
in Section 12.1.2 and such fees shall be paid in advance by Tsumura. In
Year 2 and Year 3, in addition to the committed amount of Support specified
in Section 12.1.2, Tsumura shall be entitled at no additional charge, to
additional Support in the amount of the accumulated Prior Year's Unused
Support, if any. In addition, during the two (2) year period following
the third anniversary of the Effective Date, Tsumura shall be entitled at
no additional charge, to additional Support in the amount of the
accumulated Prior Year's Unused Support, if any. Except as set forth in
the preceding two sentences, Tsumura shall not be entitled to any refund or
credit in the event the amount of Support provided during any period of
time in response to Tsumura's requests is less than the committed amount of
support specified above for such period. For the purposes of this Section,
the "PRIOR YEAR'S UNUSED SUPPORT" shall mean the lessor of (i) one-half
(1/2) of the committed amount of Support specified in Section 12.1.2 for
the prior year and (ii) the difference between the committed amount of
Support specified in Section 12.1.2 for the prior year and the amount of
Support actually provided by Phytera during the prior year. The amount of
the Prior Year's Unused Support shall be cumulative. The Support fees are
fully inclusive and include the costs of all reagents, supplies and
equipment necessary for Phytera to provide the Support. Phytera may
provide additional Support to Tsumura on an as-available basis in response
to, Tsumura's request for such Support. The fee for such additional
Support shall be calculated based on the full-time equivalent rates set
forth in Section 12.1.2 and include the costs of all reagents, supplies and
equipment. Within thirty (30) days of the end of each quarter, Phytera
shall provide Tsumura with a written report itemizing the amount of Support
provided during such quarter.
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
39
<PAGE>
Furthermore, in order to assist Phytera's work under this Agreement,
Tsumura shall dispatch [ ]*("[ ]*full-time
equivalents") to the program at Phytera's US facilities in Year 3 and Year
4. Phytera shall provide facilities, equipment, training and supervision
for the above mentioned personnel of Tsumura, and Tsumura shall reimburse
Phytera for the associated overhead costs as defined in Section 12.1.2
herein and Appendix A attached hereto."
4. SECTION 9.2.1 OF THE ORIGINAL AGREEMENT SHALL BE AMENDED TO READ AS
FOLLOWS: -
"FOR CONVENIENCE. Commencing forty-two (42) months following the Effective
---------------
Date, Tsumura shall have the right to terminate this Agreement at any time
by delivering written notice to Phytera at least six (6) months prior to
the effective date of such termination. If Tsumura elects to terminate this
Agreement pursuant to the terms of this Section 9.2.1, then Tsumura shall
remit to Phytera all payments that become due and payable in accordance
with the terms of this Agreement prior to the effective date of such
termination, and each such payment shall be made in accordance with the
applicable payment terms set forth herein. Unless otherwise expressly
indicated by Tsumura, the termination of the Agreement by Tsumura under
this Section 9.2.1 shall not affect any rights and obligations of the
parties under this Agreement with respect to any Extracts delivered to
Tsumura before the termination of this Agreement. Further, pursuant to this
Section 9.2.1, Tsumura may terminate this Agreement for convenience at its
sole discretion with respect to particular one or more Extracts and/or
Compounds. In such case, this Agreement shall be terminated to the extent
that it applies to such particular Extracts and/or Compounds, and shall
remain effective and in full force with respect to other Extracts and
Compounds."
5. SECTION 12.1.1 OF THE ORIGINAL AGREEMENT SHALL BE AMENDED TO READ AS
FOLLOWS:
"EXTRACTS. In consideration of Phytera s agreement to provide the Extracts
--------
to Tsumura under the provisions of this Agreement, Tsumura agrees to pay
Phytera as follows:
Year 1 ([ ]* Extracts) [ ]*
Year 2 ([ ]* Extracts) [ ]*
Year 3 ([ ]* Extracts) [ ]*
Year 4 ([ ]* Extracts) [ ]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
40
<PAGE>
6. SECTION 12.1.2 OF THE ORIGINAL AGREEMENT SHALL BE AMENDED TO READ AS
FOLLOWS:
"SUPPORT. In consideration of Phytera's agreement to provide Support to
-------
Tsumura under the provisions of this Agreement, Tsumura agrees to pay
Phytera for support in the area of [ ]* as follows:
Year 1 ([ ]* full-time equivalent) [ ]*
Year 2 ([ ]* full-time equivalent) [ ]*
Year 3 ([ ]* full-time equivalent) [ ]*
Year 4 ([ ]* full-time equivalent) [ ]*
and Tsumura agrees to pay Phytera for Support in the area of [ ]* as
follows:
Year 1 ([ ]* full-time equivalent) [ ]*
Year 2 ([ ]* full-time equivalent) [ ]*
Year 3 ([ ]* full-time equivalent) [ ]*
Year 4 ([ ]* full-time equivalent) [ ]*
The fees are fully inclusive and include the cost of all reagents,
supplies, and equipment.
The justification for the aforementioned fees which Tsumura has agreed to
pay Phytera are indicated in Appendix E (Support in the area of [ ]*) attached
hereto.
The reference fee for additional support provided by Phytera at Tsumura's
request in Years 1 and 2 shall be [
]* per United States full-time equivalent and [
]* per United Kingdom
full-time equivalent, calculated on a pro-rata bais for actual services
rendered. For Years 3 and 4, the reference fee shall be increased to [
]* per United States full-time
equivalent and [
]*per United Kingdom full-time equivalent or per United States
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
41
<PAGE>
full-time equivalent engaged in [ ]* calculated on a pro-rata
basis for actual services rendered."
7. APPENDIX A - SUPPORT OF THE ORIGINAL AGREEMENT SHALL BE AMENDED TO READ AS
FOLLOWS:
"Phytera shall provide Tsumura with support in the areas of [
]*. Phytera shall conduct assays in support of the [
]* activities for such Collaboration Assays as indicated in Appendix B
except that Tsumura shall conduct assays in support of the [
]*.
Phytera shall provide the following committed level of support to Tsumura:
Year [ ]* Support [ ]/
[ ]* Support
1 [ ]* FTE [ ]* FTE
2 [ ]* FTE [ ]* FTE
3 [ ]* FTE [ ]* FTE
4 [ ]* FIFE [ ]* FTE
In order to assist Phytera's work under this Agreement, Tsumura shall
dispatch [ ]* ([ ]* full-time equivalents) to
the program at Phytera's US facilities in Year 3 and Year 4. Tsumura shall
be responsible for all travel, accommodation, relocation and subsistence
costs associated with the said full-time equivalents. Phytera shall provide
the above mentioned personnel of Tsumura with laboratory space, appropriate
equipment, supplies and appropriate supervision for an overhead charge to
Tsumura of [ ]* per full-time equivalent in
Year 3. The overhead charge for Year 4 shall be determined by the Steering
Committee prior to the commencement thereof taking into account such
charges incurred in the previous Year 3.
Phytera shall provide additional support to Tsumura on an as-available
basis if so requested by Tsumura. The fees for such additional support
shall be calculated on a pro-rata basis for actual services rendered as
described in Section 12.1.2 of the Agreement".
__________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
42
<PAGE>
8. The following language shall be inserted and attached to the Original
Agreement as Appendix E - Support in the Area of [ ]*:
"For convenience purposes only, the fees for the Support provided by
Phytera to-Tsumura in Year 1 (equivalent to [ ]* United
Kingdom fulltime equivalent) shall be divided in [ ]*
United Kingdom full-time equivalent and each of such installments shall be
applied to the fees charged in Year 2 and Year 3, respectively.
Consequently, the fees to be paid by Tsumura to Phytera in Year 1 shall be
Zero.
The fees to be paid by Tsumura to Phytera in Year 2 are calculated by adding
[ ]* United Kingdom full-time equivalent of Year 1 [
]* to the Year 2's[ ]* United Kingdom full time
equivalent [ ]*.
The fees to be paid by Tsumura to Phytera in Year 3 are calculated by adding
[ ]* United Kingdom full-time equivalent of Year 1 [ ]* to the
[ ]* United Kingdom full-time equivalent or United States full-time
equivalent engaged in [ ]*[
]* of year 1 plus the equivalent of [ ]*
United Kingdom full time equivalent or United States full-time equivalent
engaged in [ ]*[ ]*of Year 1.
In this Amendment, the additional of [ ]* of [ ]* United Kingdom full-
time equivalent or United States full time equivalent engaged in [
] of Year 1 shall mean the percentage increase
determined by the Steering Committee at the Hawaii meeting of February 11,
1998, USA, and which is aimed at adjusting the increase of the associated
costs arising in the course of the collaborative research activities pursuant
to the provisions of Section 12.1.1 of this Agreement.
The fees to be paid by Tsumura to Phytera in Year 4 is [ ]
per United Kingdom full-time equivalent or United States fulltime equivalent
engaged in [ ]*."
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
43
<PAGE>
9. Capitalized terms utilized and not otherwise defined herein shall have the
meanings ascribed to such terms in the Original Agreement.
10. All of the remaining Sections in the Original Agreement other than the
changes made and agreed to under this Amendment shall remain effective.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Amendment in duplicate, original counterparts as
of the day and year first appearing hereinabove. Each party shall retain one
signed counterpart.
PHYTERA, INC. TSUMURA & CO.
By: /s/ Malcolm Morville By: /s/ Hachizaemon Kazama
---------------------- ------------------------
Hachizaemon Kazama
Title: President Title: President
------------------- ---------------------
July 14, 1998 June 30, 1998
- ------------------------- ----------------------------
Date Date
44
<PAGE>
APPENDIX E -- SUPPORT IN THE AREA OF [ ]*
"For convenience purposes only, the fees for the Support provided by Phytera to
Tsumura in Year 1 (equivalent to [ ]* United Kingdom full-time equivalent)
shall be divided in [ ]* United Kingdom full-time equivalent and each of
such installments shall be applied to the fees charged in Year 2 and Year 3,
respectively. Consequently, the fees to be paid by Tsumura to Phytera in Year 1
shall be Zero.
The fees to be paid by Tsumura to Phytera in Year 2 are calculated by adding [
]* United Kingdom full-time equivalent of Year 1 [
]* to the Year 2's [ ]* United Kingdom full-time equivalent
[ ]*.
The fees to be paid by Tsumura to Phytera in Year 3 are calculated by adding [
]* United Kingdom full-time equivalent of Year 1 [
]* to the [ ]* United Kingdom full-time equivalent or
United States full-time equivalent engaged in [
]*[
]* of Year 1 plus the equivalent of [ ]* of [ ]* United Kingdom
full-time equivalent or United States full-time equivalent engaged in [
]*[
]* of Year 1. In this Amendment, the additional of [ ]* of [ ]*
United Kingdom full-time equivalent or United States full-time equivalent
engaged in [
]*[
]* of Year 1 shall mean the percentage increase
determined by the Steering Committee at the Hawaii meeting of February 11, 1998,
USA, and which is aimed at adjusting the increase of the associated costs
arising in the course of the collaborative research activities pursuant to the
provisions of Section 12.1.1 of this Agreement.
The fees to be paid by Tsumura to Phytera in Year 4 is [
]* per United Kingdom full-time equivalent or United States
full-time equivalent engaged in [
]*"
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
45
<PAGE>
Exhibit 10.17
RESEARCH COLLABORATION AND LICENSE AGREEMENT
--------------------------------------------
This Research Collaboration and License Agreement (this "Agreement") is
entered into as of April 21, 1998 (the "Effective Date") by and between Phytera,
Inc. ("Phytera"), a Delaware corporation, and Galileo Laboratories, Inc.
("Galileo"), a California corporation.
R E C I T A L S
---------------
WHEREAS, Phytera owns an inventory of distinct natural product extracts
("Extracts") derived from plant or marine microbes, including a library of [ ]*
such Extracts (the "Library") that is the subject matter of this Agreement
(Extracts from the Library are sometimes referred to herein as "Library
Extracts");
WHEREAS, Galileo has certain expertise related to the identification of
compounds and mixtures of compounds capable of modulating cell energy
metabolism; and
WHEREAS, Phytera wishes to provide its Library to Galileo for screening
and Galileo wishes to screen the Library in order to identify and develop
pharmaceutical agents for the treatment and prevention of ischemia in humans.
NOW, THEREFORE, Phytera and Galileo hereby each agree as follows:
1. Certain Definitions.
-------------------
1.1 "Affiliate" means any legal entity (such as a corporation,
---------
partnership, or limited liability company) that is controlled by a party. For
the purposes of this definition, the term "control" means (i) beneficial
ownership of at least fifty percent (50%) of the voting securities of a
corporation or other business organization with voting securities or (ii) a
fifty percent (50%) or greater interest in the net assets or profits of a
partnership or other business organization without voting securities.
1.2 "Assay" means tests, methods and know-how employed by Galileo to
-----
identify compounds or mixtures of compounds capable of modulating cell energy
metabolism.
1.3 "Candidate Compound" means a Lead Molecule or a compound
------------------
synthesized, identified or produced on the basis of a Lead Molecule that, in the
reasonable determination of the Steering Committee pursuant to Section 2.4 (i),
a) exhibits an in vitro activity and profile acceptable for Development, b)
exhibits an in vivo activity and profile in a relevant animal model of disease
acceptable for Development, c) is potentially patentable or otherwise
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
p.1
<PAGE>
protectable and does not infringe the intellectual property rights of third
parties, d) is one for which a plausible manufacturing strategy can be devised,
and e) exhibits an acceptable therapeutic ratio in a 14-day toxicity model
compared to the efficacy dose required in an animal model of disease.
1.4 "Collaborative Research Program" means the collaborative research
------------------------------
program described in Article 3 of this Agreement.
1.5 "Committee" means the Steering Committee charged with oversight of
---------
the Collaborative Research Program, as described in Section 2.1 of this
Agreement.
1.6 "Confidential Information" means certain proprietary information
------------------------
which may be disclosed by either party to the other pursuant to this Agreement,
as described in Section 9.1 hereof.
1.7 "Development" or "Development Strategy" means the processes, steps
-------------------------------------
and activities required to advance the pre-clinical or clinical assessment of a
Candidate Compound as a potential product, either inside or outside the Field.
1.8 "Evaluation Period" means, for each distinct batch of Library
-----------------
Extracts delivered to Galileo, the period of time beginning when the batch is
delivered and ending when the Committee determines which Extracts from the batch
are to be designated as "Lead Extracts" in accordance with Section 3.6(c)
hereof.
1.9 "Field" means pharmaceutical agents for the treatment and
------
prevention of ischemia in humans.
1.10 "Lead Extract" means a Library Extract that the Committee has,
------------
based on its review of the Assays performed by Galileo, determined to possess
Requisite Activity.
1.11 "Lead Molecule" means the specific chemical entity responsible for
-------------
identified Requisite Activity in a Lead Extract and/or any analogs, derivatives
and homologs of such a specific chemical entity which are synthesized,
identified or produced on the basis of such specific chemical entity or Lead
Molecule derived above.
1.13 "Patent Rights" means any United States patent application and any
-------------
divisional, continuation, or continuation-in-part of such patent application (to
the extent the claims are directed to subject matter specifically described
therein), as well as any patent issued thereon and any reissue or reexamination
of such patent, and any foreign counterparts to such patents and patent
applications. "Phytera Patent Rights" means Patent Rights that are either (i)
---------------------
owned solely by Phytera, (ii) owned jointly by Phytera and a party other than
Galileo, (iii) licensed solely to Phytera or (iv) licensed jointly to Phytera
and a party other than Galileo, in each case to the extent that Phytera has the
ability to license or sublicense the rights required
p.2
<PAGE>
under this Agreement. "Galileo Patent Rights" means Patent Rights that are
---------------------
either (i) owned solely by Galileo, (ii) owned jointly by Galileo and a party
other than Phytera, (iii) licensed solely to Galileo or (iv) licensed jointly to
Galileo and a party other than Phytera, in each case to the extent that Galileo
has the ability to license or sublicense the rights required under this
Agreement. "Joint Patent Rights" means Patent Rights owned by both Phytera and
-------------------
Galileo as joint owners. Joint Patent Rights will include (i) Patent Rights
claiming Joint Technology and (ii) Patent Rights claiming both Phytera
Technology and Galileo Technology in a single filing.
1.14 "Progression" or "Progression Strategy" means the processes, steps
-------------------------------------
and activities required to advance a Lead Molecule into a Candidate Compound,
either inside or outside the Field. These steps may include various studies to
assess the preclinical credentials of a Lead Molecule in terms of in vitro and
in vivo activity in relevant pharmacology/disease models, initial studies
relating to the synthesis, production, manufacture, formulation,
pharmacokinetics, metabolism and toxicity of the Lead Molecule and investigation
of the intellectual protection opportunities around the Lead Molecule. Such
studies will be reasonably consistent in nature and cost to studies normally
conducted within the pharmaceutical and biotechnology industries in order to
advance a Lead Molecule into a Candidate Compound. These steps may also include
synthesis, acquisition or production of analogs, derivatives and homologs of the
Lead Molecule in order to optimize the pharmaceutical credentials of the Lead
Molecule and to define and optimize the intellectual protection opportunities
stemming from the Lead Molecule.
1.15 "Requisite Activity" means desired biological activity observed in
------------------
Library Extracts during Assays, as determined by the Committee pursuant to
Section 2.4(f) of this Agreement.
1.16 "Technology" means any proprietary development, idea, design,
----------
concept, technique, process, invention, research material, discovery, or
improvement, whether or not patentable or copyrightable. "Phytera Technology"
------------------
means Technology that is either (i) owned or invented or discovered solely by
Phytera, (ii) owned jointly by Phytera and a party other than Galileo, (iii)
licensed solely to Phytera or (iv) licensed jointly to Phytera and a party other
than Galileo, in each case to the extent that Phytera has the ability to license
or sublicense the rights required under this Agreement. "Galileo Technology"
------------------
means Technology that is either (i) owned or invented or discovered solely by
Galileo, (ii) owned jointly by Galileo and a party other than Phytera, (iii)
licensed solely to Galileo or (iv) licensed jointly to Galileo and a party other
than Phytera, in each case to the extent that Galileo has the ability to license
or sublicense the rights required under this Agreement. "Joint Technology" means
----------------
Technology that is developed or discovered jointly by one or more employees or
consultants of Galileo and one or more employees or consultants of Phytera in
connection with and pursuant to the Collaborative Research Program, including
specifically but without limitation all Lead Extracts, Lead Molecules and
Candidate Compounds.
p.3
<PAGE>
2. Management of Collaborative Research Program.
--------------------------------------------
2.1 Steering Committee. The parties hereby create a Steering Committee
------------------
(the "Committee") which shall consist of four (4) members, two (2) of whom shall
be designated by Phytera and two (2) of which shall be designated by Galileo.
The members initially designated by Phytera are Dr. Malcolm Morville, its CEO,
and Christopher Pazoles, Vice President of Research, and the members initially
designated by Galileo are Dr. Guy Miller, its CEO, and Josef Baumgartner,
Director of BioInformatics. If any member of the Committee dies, resigns, or
becomes incapacitated, the party which designated such member shall designate
his or her successor (whose term shall commence immediately), and any party may
withdraw the designation of any of its members of the Committee and designate a
replacement (whose term shall commence immediately) at any time by giving notice
of the withdrawal and replacement to the other party. The Committee shall
designate one or more of its members to act as secretary for the Committee.
2.2 Meetings of the Committee. Regular meetings of the Committee shall
-------------------------
be held within forty-five (45) days of the end of each calendar quarter, or at
such other times as the parties may deem appropriate, at such times and places
as the members of the Committee shall from time to time agree. Special meetings
of the Committee may be called by either party on fourteen (14) days written
notice to the other party unless notice is waived by the parties. All meetings
shall alternate between the offices of the parties unless the parties otherwise
agree. Discussions among Committee members shall not constitute an official
Committee meeting unless either (i) written notice has been furnished to each
Committee member at least fourteen (14) business days prior to such meeting or
(ii) each Committee member executes a written waiver of such notice.
2.3 Actions By the Committee. A quorum of the Committee shall be
------------------------
present at any meeting of the Committee if at least three members are present at
such meeting in person or by telephone. If a quorum exists at any meeting, the
unanimous consent of all members of the Committee present at such meeting is
required to take any action on behalf of the Committee. In no event shall any
action (other than a determination not to proceed to Phase II, as described in
Section 3.7 below, which may occur upon the vote of any two Committee members)
be taken by the Committee if there is other than unanimous consent. Unless
otherwise specifically stated to the contrary herein, no individual party shall
purport to act on behalf of the other party unless and then only to the extent
authorized to do so by the Committee.
2.4 Responsibilities of The Committee. The Committee shall be
---------------------------------
responsible for the day-to-day conduct, progress and evaluation of the
Collaborative Research Program and its activities, including, without
limitation:
p.4
<PAGE>
(a) managing all technical aspects of the Collaborative Research
Program;
(b) resolving matters involving scientific questions;
(c) review of results of Assays performed by Galileo on the initial
[ ]* Extracts from the Library through Phase I of the
Collaborative Research Program, as described in Section 3.6
below;
(d) following the conclusion of Phase I, determining
whether to proceed with screening of the remaining [ ]*
Library Extracts in Phase II, as described in Section 3.8 below;
(e) determining the criteria of significant biological activity
("Requisite Activity") necessary for a Library Extract following
the completion of Assays to qualify as a Lead Extract and
determining whether any given Library Extract qualifies as a
Lead Extract;
(f) in the event that Requisite Activity is identified in any
Library Extract and any such Library Extract is designated by
the Committee as a Lead Extract, to determine whether and how to
initiate Deconvolution (as defined below) of such Lead
Extract(s);
(g) rank ordering of Lead Extracts based upon various criteria,
including without limitation potency, scale-up potential and
toxicity, the purpose of which will be to subject the highest
ranked Lead Extracts to successive chemical isolation and
identification technologies ("Deconvolution") to identify
specific chemical entities ("Lead Molecules") that are
responsible for the observed Requisite Activity;
(h) responsibility for Progression tactics and commercialization
strategy for Lead Molecules or Candidate Compounds, including
the determination of whether to enter into a development
agreement between the parties for any Lead Molecules or
Candidate Compounds;
(i) determining the criteria for acceptance, in general, of a Lead
Molecule as a Candidate Compound acceptable for Development,
including (i) in vitro activity and profile, (ii) in vivo
activity and profile in a relevant animal model of disease,
(iii) potential to patent or otherwise protect the intellectual
property rights around the Lead Molecule without
__________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for wich confidential treatment has
been requested, has been filed separately with the Securities and Exchange
Commission.
p.5
<PAGE>
infringing the intellectual property rights of third parties,
(iv) the likelihood of devising a plausible manufacturing
strategy for the Lead Molecule, and (v) the therapeutic ratio
for toxicity in a 14-day toxicity model compared to the efficacy
dose required in an animal model of disease. Such determinations
shall be consistent with usual and customary practices in the
pharmaceutical and biotechnology industries.
(j) subsequent to the receipt of notice pursuant to Section 5.2,
determination of whether a Lead Molecule or compound satisfies
the criteria established for a Candidate Compound
2.5 Committee Reports. Within ten (10) days following each meeting of
-----------------
the Committee held pursuant to Section 2.2, the secretary of the Committee shall
prepare and send to each party a written report of actions taken at the meeting
in such form and containing such detail as shall be determined by the Committee.
2.6 Deadlock. In the event that the Committee cannot reach agreement
--------
within sixty (60) days as to any matter that is subject to its decision-making
authority, the matter shall be referred to binding arbitration in accordance
with the procedures set forth in Article 12; provided, however, that such
arbitration shall not apply to any deadlock in connection with whether to
proceed with Phase II screening of Extracts, as described in Section 3.8 below.
3. Conduct of Collaborative Research Program.
-----------------------------------------
3.1 Objective of Collaboration. The overall objective of this Agreement
--------------------------
is to discover and develop compounds that demonstrate potential as human
pharmaceutical agents for treatment and prevention of ischemia (sometimes also
referred to herein as the "Program").
3.2 Responsibilities of Each Party. Each of the parties shall have the
------------------------------
general responsibilities for research and development tasks as are described in
detail in Appendix A. However, the Committee shall have discretion to allocate
----------
specific research and development tasks in a particular situation to the party
that has the best current capability, capacity, and desire to complete the task
and advance the objectives of the Program, irrespective of whether that task
comes within the general responsibilities assigned to that party. If the members
of the Committee disagree on whether a party should participate in a particular
task, the task will be assigned to the party who has general responsibility for
such activities as set forth on Appendix A. Galileo agrees to conduct all Assays
----------
of the delivered Extracts, its assigned Deconvolution tasks and all other
actions required of it in connection with the Program expeditiously and in a
scientifically sound manner. Phytera also agrees to deliver all Extracts
p.6
<PAGE>
on a timely basis and to conduct its assigned Deconvolution tasks and all other
actions required of it in connection with the Program expeditiously and in a
scientifically sound manner.
3.3 Reports and Records. Each party agrees to promptly and regularly
-------------------
communicate to the other party all research results from the Program, including
quarterly reports to the Committee detailing all tests conducted and results
obtained by such party in connection with the Program. Each party shall prepare
and maintain adequate records, including bound laboratory notebooks maintained
in accordance with standard scientific procedures, containing all appropriate
data reflecting all research results from the Program. In addition, each party
shall retain under appropriate conditions any necessary or desirable samples of
research materials that are developed or used in the Program.
3.4 Grant of License. For the duration of the term of this Agreement,
----------------
Phytera hereby grants to Galileo an exclusive, worldwide license in the Field
(without the right to sublicense) under the Phytera Patent Rights and the
Phytera Technology to (i) test Library Extracts for assay interference prior to
the initiation of Phase I (as described in Section 3.5 below), (ii) test, screen
and perform Assays on any and all Library Extracts in order to determine which,
if any, of the Library Extracts (or combinations thereof) possesses Requisite
Activity and (iii) if duly authorized by the Committee, to perform necessary
research and development tasks associated with Deconvolution of Lead Extracts,
each as set forth in detail on Appendix A.
----------
3.5 Pilot Phase.
-----------
(a) Commencement of Pilot Phase/Delivery of Extracts. The
------------------------------------------------
parties agreed that it is desirable to test the compatibility of the Assays and
the Extracts prior to committing resources to the full research program
contemplated by this Article 3. Consequently, in order to facilitate such
testing, Phytera delivered [ ]* Extracts (the "Pilot Extracts") to Galileo
on or about [ ]*, and Galileo acknowledges receipt thereof.
(b) Conduct of Initial Screens. Promptly following receipt of
--------------------------
the Pilot Extracts, Galileo did (i) test such Pilot Extracts for activity to
ensure that Assays are optimally configured for screening and (ii) begin to
evaluate the Pilot Extracts for assay interference. In the event that such
interference is identified, Galileo shall attempt to modify its Assays as
necessary in order to enable successful completion. Galileo shall promptly
notify the Committee of any modification so implemented. As of the Effective
Date, the Pilot Extract evaluation has not been completed, but sufficient
analysis has been conducted to ensure that there is adequate compatibility
between the Assays and Pilot Extracts to conclude that the Program can be
successfully pursued and should proceed. Upon the completion of the
__________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for wich confidential treatment has
been requested, has been filed separately with the Securities and Exchange
Commission.
p.7
<PAGE>
evaluation of the Pilot Extracts, Galileo shall promptly provide to the
Committee a detailed description of all evaluations performed and all Assays
successfully conducted. All such information disclosed by Phytera and Galileo
shall be deemed Confidential Information and, as such, is subject to the
restrictions set forth in Article 7 hereof.
3.6 Phase I.
-------
(a) Delivery of Phase I Extracts. Phase I of the Collaborative
----------------------------
Research Program shall commence as soon as is practical following the delivery
of the Initial Phase I Extracts by Phytera to Galileo. It is anticipated that
the initial portion of Phase I shall commence on or about [ ]*, although
Phase I may commence on such other date as shall be designated by the Committee.
Prior to the Effective Date, Phytera has delivered and Galileo hereby
acknowledges receipt of [ ]* Extracts, including [ ]* Pilot
Extracts. As soon as is practical following the Effective Date, Phytera shall
promptly deliver an additional [ ]* plant cell and marine microbe culture
extracts for a total of [ ]* Extracts (the "Initial Phase I Extracts") to
Galileo. Phytera shall then deliver an additional [ ]* plant and marine
extracts (the "Final Phase I Extracts" and, collectively with the Initial Phase
I Extracts, the "Phase I Extracts") on or about [ ]*, or such other date
as shall be specified by the Committee. Phase I shall consist of (i) Assays
(Phase I Assays") on Phase I Extracts and (ii) if determined in the sole
discretion by the Committee, Deconvolution of Lead Extracts identified from
Phase I Extracts.
(b) Conduct of Phase I Assays. Promptly following the receipt
-------------------------
of each batch of Phase I Extracts, Galileo shall screen such Extracts in
accordance with the procedures set forth on Appendix A hereto. Galileo shall
----------
promptly report to Phytera each Extract in which its Assays detect signs of
Requisite Activity.
(c) Identification and Labeling of Lead Extracts. Promptly
--------------------------------------------
following the conclusion of Phase I Assays on each of the Initial Phase I
Extracts and the Final Phase I Extracts, respectively, Galileo shall provide a
detailed report of all Assays conducted to the Committee. Within thirty (30)
days from the date of Galileo's report described above, the Committee shall meet
to review the results of all of the Assays conducted up to that point and
evaluate the overall progress of the Program. The Committee shall in its sole
discretion label each Library Extract (or combination thereof) determined by the
Committee to possess Requisite Activity as a "Lead Extract", provided, however,
that in no event may more than [ ]* Extracts from Phase I be labeled as
Lead Extracts without Phytera's written consent. At such time as a Library
Extract is labeled a "Lead Extract," Phytera shall no longer provide such
Library Extract to any third party without Galileo's prior written consent.
3.7 Continuation of Program Following Phase I Assays. At the final
------------------------------------------------
meeting held
__________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for wich confidential treatment has
been requested, has been filed separately with the Securities and Exchange
Commission.
p.8
<PAGE>
to evaluate the Final Phase I Extracts (or at one or more meetings to be held on
a later date) the Committee shall select, in its sole discretion, one of the
following actions:
(i) to proceed only with the Deconvolution of any or all of the Lead
Extracts identified from the Assays conducted to date;
(ii) to proceed with the Deconvolution of any or all of the Lead
Extracts identified from the Assays conducted to date and to
initiate the screening of the [ ]* Extracts remaining
from the Library ("Phase II," as described in Section 3.8
below); or
(iii) regardless of whether or not any Lead Extracts have been
identified following completion of the Phase I Assays, to forego
the Deconvolution of such Lead Extracts and proceed directly to
screening of the remaining [ ]* Library Extracts in Phase
II.
3.8 Phase II.
--------
(a) Commencement of Phase II. In the event that the Committee
------------------------
determines to proceed with Phase II of the Collaboration Program, Phase II shall
commence within 30 days following the Committee's determination to so proceed.
Phase II shall consist of (i) Assays ("Phase II Assays") on the Phase II
Extracts (as defined in subsection (b) below) and (ii) if determined in the sole
discretion of the Committee, Deconvolution of Lead Extracts identified from the
Phase II Extracts.
(b) Conduct of Phase II Assays. In the event that the
--------------------------
Committee elects to proceed with the Phase II Assays, Phytera shall deliver
promptly to Galileo in one batch all of the [ ]* remaining Library
Extracts (the "Phase II Extracts"). Galileo shall use all reasonable efforts to
conduct the Phase II Assays in an expeditious and scientifically sound manner.
(c) Identification and Labeling of Lead Extracts. Promptly
--------------------------------------------
following the conclusion of Phase II Assays on each of the Phase II Extracts,
respectively, Galileo shall provide a detailed report of all Assays conducted to
the Committee. Within thirty (30) days from the date of Galileo's report
described above, the Committee shall meet to review the results of all of the
Assays conducted up to that point and evaluate the overall progress of the
Program. The Committee shall in its sole discretion label each Library Extract
(or combination thereof) determined by the Committee to possess Requisite
Activity as a "Lead Extract", provided, however, that in no event may more than
[ ]* Extracts from Phase II be labeled as Lead Extracts without Phytera's
written consent. At such time as a
__________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for wich confidential treatment has
been requested, has been filed separately with the Securities and Exchange
Commission.
p.9
<PAGE>
Library Extract is labeled a "Lead Extract," Phytera shall no longer provide
such Library Extract to any third party without Galileo's prior written consent.
3.9 Deconvolution of Lead Extracts. In the event the Committee
------------------------------
determines to undertake Deconvolution activities, those Lead Extracts designated
for Deconvolution by the Committee, whether during Phase I or Phase II, shall be
rank ordered by the Committee based upon certain criteria developed in advance
by the Committee, which criteria shall include without limitation potency,
scale-up potential and toxicity. In descending rank-order, each such Lead
Extract shall be subjected to Deconvolution in order to identify the specific
chemical entities ("Lead Molecules") that are responsible for the desired Lead
Extract biological activity. Responsibilities of each party during the
Deconvolution process are set forth in detail on Appendix A. Following
structural identification of Lead Molecules, further development of Lead
Molecules shall be subject to the provisions of Section 5 below. In the event
that, following Deconvolution, a Lead Extract is determined not to contain a
Lead Molecule or if, after reasonable effort a Lead Molecule cannot be
deconvoluted, or in the event a Lead Extract has not entered into Deconvolution
within [ ]* of designation by the Committee as a Lead Extract, any
encumbrances placed upon Phytera's use of such Lead Extract outside this
Agreement shall lapse and Phytera shall be free to use the Lead Extract in other
research programs.
4. Term; Early Termination of Program.
----------------------------------
4.1 Term. This Agreement shall commence on the Effective Date and shall
----
continue until the earliest to occur of (i) the execution and delivery by both
parties of a final agreement regarding the development of Candidate Compounds
identified pursuant to the Program in accordance with Sections 5.2 or 5.3 below
or (ii) the termination of the Program pursuant to this Sections 4.2, 4.3, 4.4
or 4.5 below.
4.2 Lack of Merit. The Program shall terminate immediately in the event
-------------
of a decision by the Committee to terminate the Program for lack of scientific
or business merit. For purposes of this Section 4.2, in the event the activities
described in Article 3 are completed and an agreement regarding the development
of Candidate Compounds, as described in Section 4.1(i) has not been executed and
is not being actively negotiated, the conditions constituting such lack of
scientific or business merit shall be deemed to have been met and either party
may terminate this Agreement upon 30 days written notice.
4.3 Termination Upon Default. In the event that either party commits a
------------------------
material breach of its obligations under this Agreement and fails to cure that
breach within sixty (60) days after receiving written notice thereof, the
nonbreaching party may terminate this Agreement immediately upon written notice
to the party in breach.
p.10
<PAGE>
4.4 Force Majeure. Neither party will be responsible for or considered
-------------
in breach of this Agreement because of delays resulting from acts beyond the
control of such party, provided that the nonperforming party uses commercially
reasonable efforts to avoid or remove such causes of nonperformance and
continues performance hereunder with reasonable dispatch whenever such causes
are removed.
4.5 Bankruptcy. If during the term of this Agreement, either party
----------
files a voluntary petition in bankruptcy, is adjudicated as bankrupt, makes a
general assignment for the benefit of creditors, admits in writing that it is
insolvent or fails to discharge within 60 days after an involuntary petition in
bankruptcy filed against it, then this Agreement may be immediately terminated
by the other party, with notice.
4.6 Effect of Termination. Except as otherwise agreed by the parties,
---------------------
upon the expiration or termination of this Agreement, all of the provisions of
this Agreement shall immediately terminate, except that this Section 4.6 and
Articles 5 (Development of Joint Technology), 7 (Intellectual Property) and 9
(Confidentiality) of this Agreement shall survive in their entirety. Further, in
the event that issues arise or decisions must be reached subsequent to the
termination of this Agreement that would, were this Agreement still in effect,
fall within the authority of the Steering Committee, then the party that first
becomes aware of such issue or need for a decision shall so notify the other in
writing, and the parties shall meet within 60 days of such notice to address
such issue or reach such decision in accordance with the responsibilities and
authorities of the Steering Committee as defined in this Agreement. Upon
termination, except as may otherwise be agreed by the parties:
(i) In the event that either party terminates this Agreement pursuant to
Sections 4.2 or 4.4 above,
(a) Galileo shall have no further rights under the Phytera Patent
Rights or Phytera Technology;
(b) Phytera shall have no further rights under the Galileo Patent
Rights or Galileo Technology, and;
(c) Each party shall retain its equal one-half (1/2) joint ownership
interest in any Joint Patent Rights or Joint Technology in the
Field.
(ii) In the event that Phytera shall terminate this Agreement pursuant to
Sections 4.3 or 4.5 above, Galileo
(a) hereby grants to Phytera an exclusive, perpetual, worldwide,
royalty-free license (with the right to sublicense) in the Field
under Galileo's interest in the Joint Patent Rights and the Joint
Technology for
P.11
<PAGE>
research, development, and to make, have made, use, sell and
import Joint Technology and products comprising or derived from
or developed utilizing the Joint Patent Rights or the Joint
Technology; and
(b) agrees to use reasonable commercial efforts at such time to
assist Phytera's use of such Joint Patent Rights and Joint
Technology.
(iii) In the event that Galileo shall terminate this Agreement
pursuant to Sections 4.3 or 4.5 above, Phytera shall grant to Galileo,
(a) a nonexclusive, perpetual, worldwide, royalty-free license (with
right to sublicense) in the Field under Phytera's interest in
the Phytera Patent Rights and the Phytera Technology to make,
have made and use those Lead Extracts delivered to Galileo on or
----
prior to the date of such termination by Galileo; and
(b) an exclusive, perpetual, worldwide, royalty-free license (with
the right to sublicense) in the Field under Phytera's interest
in the Joint Patent Rights and the Joint Technology for
research, development, and to make, have made, use, sell and
import Joint Technology and products comprising or derived from
or developed utilizing the Joint Patent Rights or the Joint
Technology.
5. Development of Joint Technology.
-------------------------------
5.1. Progression of Lead Molecules. Within ninety (90) days following the
-----------------------------
identification of one or more Lead Molecules, and upon notice by one party to
the other, the Committee shall determine a Progression Strategy for applications
of such Lead Molecules. Such Progression Strategy may involve one of the
following with respect to each such Lead Molecule:
(i) joint Progression of such Lead Molecules by Galileo and Phytera into
one or more Candidate Compounds; or
(ii) independent Progression of such Lead Molecules by either Galileo and
/or Phytera into one or more Candidate Compounds.
In the event that the Committee cannot agree on the appropriate Progression
Strategy, Galileo and Phytera shall each be free to elect to proceed under
clause 5.1(ii) above.
5.2 Development of Candidate Compounds. Regardless of the Progression
----------------------------------
Strategy agreed upon pursuant to Section 5.1 above, at any time a party
determines that a Lead Molecule has developed into a Candidate Compound, such
party shall promptly notify the
P.12
<PAGE>
other party and within 90 days of such notice the parties shall attempt to agree
upon the Development Strategy to be employed with respect to such Candidate
Compound. The Development Strategy to be employed may include any one of the
following:
(i) joint Development of one or more selected Candidate Compounds;
(ii) independent Development of the same Candidate Compound by each party;
or
(iii) independent Development of a different Candidate Compound by a
party.
In the event the parties cannot agree on the appropriate Development
Strategy, each party shall be free to independently develop such Candidate
Compound under Section 5.2(iii) above.
5.3 Support during Progression of a Lead Molecules. The parties agree to
----------------------------------------------
support each other during Progression of Lead Molecules, regardless of the
Progression Strategy agreed upon pursuant to Section 5.1 above, as follows:
(i) Phytera will use reasonable commercial efforts to provide extracts
and natural products chemistry support to Galileo; and
(ii) Galileo will use reasonable commercial efforts, (i) to perform Assays
on Lead Molecules and analogs of compounds derived from Lead
Molecules by acquisition, medicinal chemistry, combinatorial
chemistry synthesis or other technologies provided by Phytera, and
(ii) at Galileo's discretion, to perform such testing in relevant
animal models.
Neither party shall be required to provide support in excess of [ ]* full time
equivalents ("FTEs") per year to render the support contemplated in this Section
5.3, provided that, in the event that either party does not have the in-house
capacity at the time support is requested to provide such support, such party
will have a reasonable amount of time to secure or acquire the needed capacity,
including but not limited to the recruitment of additional staff.
5.4 Cost Reimbursement for Support during Progression of Lead Molecules.
-------------------------------------------------------------------
Each party shall reimburse the other its reasonable costs incurred in providing
the support described above during Progression of a Lead Molecules to a
Candidate Compounds. Each party that provides such support shall prepare and
submit invoices to the other according to a schedule agreed upon by the
Committee, such invoices to be due and payable within thirty (30) days of
receipt.
_________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
p.13
<PAGE>
5.5 Reimbursement of Costs Incurred during Progression of Lead Molecules;
--------------------------------------------------------------------
Payment of Development Costs. In the event the parties agree to proceed with the
- ----------------------------
Development of one or more Candidate Compounds pursuant to Section 5.2 (i) or
Section 5.2 (ii) above, the party responsible for Progression of the chosen
Candidate Compounds from a Lead Molecule will be reimbursed 50% of its total,
fairly allocated costs incurred during such Progression by the other party,
including but not limited to costs incurred related to support provided by the
other party during such Progression. In the event the parties agree to jointly
proceed with Development of a Candidate Compound pursuant to Section 5.2 (i),
each party shall be obligated to pay fifty percent (50%) of the costs of
Development. In the event the parties agree to independently proceed with
Development of the same Candidate Compound, each party shall pay its own costs
of such Development. In the event the parties do not agree on the Development
Strategy and a party elects to independently proceed with the Development of
Candidate Compound pursuant to Section 5.2 (iii) above, such party shall pay the
costs of Development and no reimbursement will be due with regard to such
Candidate Compound (either for its Progression or its Development) provided that
if either party elects to Develop a Candidate Compound that was progressed from
a Lead Molecule to a Candidate Compound by the other party, who does not agree
to proceed with the Development of such Candidate Compound, the party
responsible for Progression of the chosen Candidate Compounds from a Lead
Molecule will be reimbursed 50% of its total, fairly allocated costs incurred
during such Progression by the party electing to Develop said Candidate
Compound, including but not limited to costs incurred related to support
provided by the other party during such Progression, and the party electing to
Develop said Candidate Compound shall pay all costs of Development.
5.6 Support during Pre-Clinical Development of a Candidate Compounds.
----------------------------------------------------------------
In the event the parties elect to proceed with the Development of Candidate
Compounds pursuant to Section 5.2 (i) or Section 5.2 (ii) above, the parties
agree to provide the support described in Section 5.3 above to each other during
the pre-clinical Development of a Candidate Compounds to the point of filing an
Investigational New Drug ("IND") application with the Food and Drug
Administration ("FDA"), or equivalent filing outside the United States. The
following provisions shall apply in the event the parties elect to proceed with
the Development of Candidate Compounds pursuant to Section 5.2 (iii) above;
(i) if the Development programs being pursued by the parties are
considered by either party to be competitive (defined as targeting the
same or very similar clinical indications), the parties shall be under
no obligation to provide the support described in Section 5.3 with
regard to such Candidate Compounds,
(ii) if the Development programs being pursued by the parties are not
considered by either party to be competitive (defined as in 5.6(i)
above), the parties shall provide the support described in Section 5.3
with regard to such Candidate Compounds.
5.7 Support during Clinical Development of Candidate Compounds. In the
----------------------------------------------------------
event the
p.14
<PAGE>
parties elect to proceed with the Development of Candidate Compounds pursuant to
Section 5.2 (i) or Section 5.2 (ii) above, the parties agree to provide the
support described in Section 5.3 above to each other during the clinical
Development of Candidate Compounds. The following provisions shall apply in the
event the parties elect to proceed with the Development of Candidate Compounds
pursuant to Section 5.2 (iii);
(i) if the Development programs being pursued by the parties are
considered by either party to be competitive (defined as targeting the
same or very similar clinical indications) the parties shall be under
no obligation to provide the support described in Section 5.3 with
regard to such Candidate Compounds,
(ii) if the Development programs being pursued by the parties are not
considered by either party to be competitive (defined as in 5.7(i)
above) the parties shall provide the support described in Section 5.3
with regard to such Candidate Compounds.
5.8 Cost Reimbursement for Support during Development of Candidate
--------------------------------------------------------------
Compounds. Each party shall reimburse the other its fairly allocated costs
- ---------
incurred in providing the support described in Sections 5.6 and 5.7 above during
the Development of Candidate Compounds. Each party that provides such support
shall prepare and submit invoices to the other according to a schedule agreed
upon by the Committee, such invoices to be due and payable within thirty (30)
days of receipt.
5.9 Rights to Joint Technology. The parties shall share rights to Joint
--------------------------
Technology as follows:
(i) in the event the parties continue to jointly collaborate on the
Development of Candidate Compounds each party will have an equal one-
half (1/2) ownership interest in the Joint Technology related to such
Candidate Compounds, and the parties shall agree on the appropriate
commercialization strategy.
(ii) in the event the parties elect to Develop the same chosen Candidate
Compounds independently pursuant to Section 5.2 (ii) above or cannot
agree on the appropriate commercialization strategy under Section 5.9
(i) above, the rights to commercialize products derived from such
Candidate Compounds, including but not limited to the right to license
third parties and subject to the license agreement described in
Section 5.10 below, shall be as follows:
(a) Galileo shall have exclusive commercialization rights in the
Field in North America and outside the Field in Europe;
(b) Phytera shall have exclusive commercialization rights in the
Field in Europe and outside the Field in North America (subject to
Section 5.11 below); and
p.15
<PAGE>
(c) the parties shall have coexclusive commercialization rights
equally in the rest of the world.
(iii) in the event a party elects to Develop a Candidate Compound
independently pursuant to Section 5.2 (iii) above, such party shall have
exclusive worldwide rights (including the right to sublicense) to products
derived from such Candidate Compound(s) it has independently developed subject
to the license agreement described in Section 5.10 below, provided that, in the
event that such party enters into any agreement of any type with a third party
related to the Development or commercialization of said Candidate Compounds (the
"Third Party Agreement"), the following terms shall apply;
(a) in the event the Third Party Agreement is entered into prior to the
initiation of Phase II clinical trials in the U.S. or the equivalent
outside the U.S. for such Candidate Compounds, the other party to
this Agreement shall be entitled to [ ]* of the consideration,
including but not limited to upfront payments, milestone payments and
royalties, to which the licensing party becomes entitled pursuant to
the Third Party Agreement, excluding only a) the sale of equity or
debt securities by the licensing party to the third party pursuant to
the Third Party Agreement or b) funding received by the licensing
party in direct support of research and development activities or
reimbursement of expenses directed to the Candidate Compounds; and
(b) in the event the Third Party Agreement is entered into subsequent to
the initiation of Phase II clinical trials in the U.S. or the
equivalent outside the U.S. for such Candidate Compounds, the other
party to this Agreement shall be entitled to royalties as described
in Section 5.10(ii) below.
5.10 License Agreement. In the event that the parties become entitled to
-----------------
commercialization rights as described in Sections 5.9 (ii) or 5.9 (iii) above,
the parties shall enter into a License Agreement that provides that a royalty
shall be payable as follows:
(i) in the event that commercialization rights are governed by
Section 5.9 (ii) above, the royalty rate shall reflect each
party's relative contribution to the development of the
Candidate Compounds. In the event either party licenses its
rights to a third party, the royalty rate so determined shall
apply to the net sales of such third party.
(ii) in the event rights are governed by Section 5.9 (iii) above and
(a) if no support (as described in Section 5.3) has been
provided pursuant to
__________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
p.16
<PAGE>
Sections 5.6(ii) or 5.7(ii), the royalty rate shall reflect
industry standard terms taking into account each party's
relative contribution to the development of such Candidate
Compounds, or:
(b) if support (as described in Section 5.3) has been provided
pursuant to Sections 5.6(ii) or 5.7(ii) and the party
receiving such support does not enter into a Third Party
Agreement or enters into a such an agreement pursuant to
Section 5.9(iii)(b) above, the royalty rate shall reflect
industry standard terms taking into account each party's
relative contribution to the development of such Candidate
Compounds, increased by [ ]* to reflect the additional
contribution made by the party providing such support. In
the event such support has been provided and the party
receiving such support enters into a Third Party Agreement
pursuant to Section 5.9(iii)(a) above, the party providing
such support shall be entitled to [ ]* of the royalty to
which the licensing party becomes entitled pursuant to the
Third Party Agreement.
5.11 Development of Nutritional and Organ Preservation Applications.
--------------------------------------------------------------
Phytera hereby grants to Galileo an option to exclusively license for
development and commercialization Phytera's interest in any Lead Extracts, Lead
Molecules, Candidate Compounds or other Joint Technology for nutritional, organ
and tissue preservation applications. Upon written notice by Galileo of its
exercise of such option, which shall be received by Phytera within sixty (60)
days following the designation by Galileo of such Lead Extract, Lead Molecules,
Candidate Compounds or other Joint Technology having such applications, Phytera
and Galileo shall enter into good faith negotiations with respect to such
exclusive license. The terms of such license agreement to be negotiated shall
contain customary and commercially reasonable terms, in light of typical license
agreements in the particular industry involved. In the event that the parties
are unable reach final agreement on the terms of the license agreement within
one hundred twenty (120) days following the commencement of good faith
negotiations, the matter shall be submitted to binding arbitration in accordance
with Section 12 below.
6. Allocation of Program Expenses through Identification of Lead Molecules.
-----------------------------------------------------------------------
6.1 Extract Production and Screening Costs. Each party shall bear the
--------------------------------------
costs of its own activities performed in connection with the initial screening
of and performance of Assays on Library extracts. Phytera shall be responsible
for all costs associated with the production of Library Extracts and the
furnishing of such Extracts to Galileo for evaluation. Galileo shall be
responsible for all costs associated with performance of the Assays and
______________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which Confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
p.17
<PAGE>
reporting results to the Committee.
6.2 Deconvolution. Each party shall pay fifty percent (50%) of the
-------------
aggregate costs incurred in connection with the conduct of Deconvolution on Lead
Extracts and the designation of Lead Molecules, including without limitation
fully loaded costs of all employees and/or consultants and all out-of-pocket
expenses (collectively, "Deconvolution Costs"). After the commencement of
Deconvolution activities, each party shall on a calendar quarter basis prepare a
report to the Committee detailing all Deconvolution Costs incurred by it during
such quarter and aggregate Deconvolution Costs less reimbursements hereunder. To
the extent that any such report shows aggregate Deconvolution Costs incurred by
one party in an amount exceeding those incurred by the other by at least [ ]*,
the party incurring the lesser Deconvolution Costs shall, within [ ]* after
receipt of such report, reimburse the party incurring the greater costs to the
extent that such other party's Deconvolution Costs exceed 50% of the aggregate
Deconvolution Costs incurred by both parties. Estimates of costs associated with
their respective tasks, as such tasks are set forth in detail on Appendix A,
----------
shall be furnished by both Phytera and Galileo as soon as practicable following
a determination by the Committee to undertake Deconvolution with respect to a
Lead Extract. Such estimates shall be approved in advance by the Committee, and
precise terms of cost reimbursement shall be stated in writing by the Committee
prior to commencement of Deconvolution.
7. Ownership and Management of Intellectual Property.
-------------------------------------------------
7.1 Intellectual Property Developed Outside of the Program. Except as
------------------------------------------------------
expressly set forth in this Agreement, neither party shall have any rights in
Patent Rights and Technology that is developed or discovered by the other party
prior to the Effective Date or outside of the context of the Program. For
example, Phytera shall have sole ownership of all right, title, and interest in
Library Extracts provided to Galileo, and Galileo shall have sole ownership of
all right, title and interest in Assays developed by Galileo. Each party shall
have sole responsibility for and control over Patent Rights claiming any of its
Technology that was developed or discovered prior to the Effective Date or
outside of the Program. Neither party shall have any right to review and comment
on such Patent Rights of the other party.
7.2 Ownership of Intellectual Property Arising From the Program.
-----------------------------------------------------------
Ownership of Patent Rights and Technology arising from the Program shall be
allocated in the following manner:
(i) Phytera shall have sole ownership of all right, title, and
interest in Phytera Patent Rights and Phytera Technology;
________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
p.18
<PAGE>
(ii) Galileo shall have sole ownership of all right, title, and interest
in Galileo Patent Rights and Galileo Technology; and
(iii) Phytera and Galileo shall have joint ownership of all right, title,
and interest in Joint Patent Rights and Joint Technology, which shall
be subject to the provisions of Article 5 hereof.
Each party shall ensure that its employees, consultants, agents, and
representatives are contractually required to assign to such party all Patent
Rights and other rights in Technology arising from the Program and to promptly
disclose to such party all patentable inventions within that Technology.
7.3 Notice of Intellectual Property Arising From the Program. Each party
--------------------------------------------------------
shall provide prompt written notice to the Committee of the internal disclosure
of any significant Technology developed by its personnel in connection with the
Program.
7.4 Responsibility for Patent Rights Arising from the Program. Phytera
---------------------------------------------------------
shall be responsible for and shall control, at its expense, the preparation,
filing, prosecution, grant, and maintenance of any Patent Rights claiming only
Phytera Technology and shall consult with Galileo on, and give Galileo a
reasonable opportunity to review, all such filings to the extent they directly
relate to the Collaborative Research Program. Galileo shall be responsible for
and shall control, at is expense, the preparation, filing, prosecution, grant,
and maintenance of all Patent Rights claiming only Galileo Technology and shall
consult with Phytera on, and give Phytera a reasonable opportunity to review,
all such filings to the extent they relate directly to the Collaborative
Research Program. In the case of Joint Technology, the Committee will decide
whether to seek Joint Patent Rights claiming that Technology or to maintain that
Technology as a trade secret. The Committee will also decide whether to seek
Patent Rights claiming both Phytera Technology and Galileo Technology in one
filing, which also constitutes a Joint Patent Right. If the Committee decides to
seek any Joint Patent Rights, the parties shall jointly prepare, file,
prosecute, and maintain such Patent Rights, and all related expenses shall be
borne equally by the parties.
7.5 Assumption of Rights by Other Party. In the event that a party
-----------------------------------
desires to decline responsibility for obtaining or maintaining Patent Rights in
a country for any of its Technology that is developed or discovered in
connection with the Program, such party will notify the other party before
taking such action and, upon request, will allow the other party to assume
responsibility for, and all expenses relating to, the relevant Patent Rights in
those countries; provided, however, that neither party shall have the right to
seek patent protection for any Technology that a party has decided, in its
discretion, to maintain as a trade secret. In the event that a party desires to
cease further payment of patent-related expenses for a Joint Patent Right in any
country, such party may assign to the other party all rights in that Joint
Patent Right in such country and thereafter have no further obligation to pay
such expenses.
p.19
<PAGE>
7.6 Cooperation. Each party agrees to cooperate fully in the preparation,
-----------
filing, prosecution, and maintenance of all Patent Rights claiming Technology
arising from the Program. Such cooperation includes, without limitation, (i)
promptly executing all papers and instruments, or requiring its employees,
consultants, and agents to execute such papers and instruments, as reasonable
and appropriate so as to enable one or both parties to file, prosecute, and
maintain such Patent Rights in any country; (ii) promptly informing the other
party of matters that may affect the preparation, filing, prosecution, or
maintenance of any such Patent Rights; and (iii) undertaking no actions that are
potentially deleterious to the preparation, filing, or prosecution of any such
Patent Rights.
7.7 Abandonment of Joint Patent Rights. In the event that the parties fail
----------------------------------
to complete the Program due to lack of merit pursuant to Section 4.2 above, the
parties shall discuss in good faith whether to abandon any unpublished patent
applications within the Joint Patent Rights relating to the Program. The parties
recognize that publication of such Joint Patent Rights could adversely affect
each of their interests after reversion occurs under such Section 4.2.
8. Research Materials.
------------------
8.1 Ownership of Research Materials. In the course of the Program, one
-------------------------------
party (the "Provider") may transfer to the other party (the "Recipient") certain
of its research materials. The Recipient acknowledges and agrees that such
research materials are and shall be owned by the Provider. The Recipient agrees
to execute and deliver any documents of assignment or conveyance to effectuate
the ownership rights of the Provider in such research materials. Specifically,
Galileo acknowledges and agrees that all Library Extracts provided to Galileo in
the Program are proprietary to and owned by Phytera and are or may be covered by
claims of Phytera Patent Rights.
8.2 Use and Transfer of Research Materials. Except as otherwise agreed by
--------------------------------------
the Committee, the Recipient agrees to use research materials provided by the
Provider solely for purposes set forth in this Agreement and shall not
distribute such research materials to any third party other than its employees
and consultants who are working on the Program.
8.3 Additional Restrictions for Proprietary Research Materials. In the
----------------------------------------------------------
case of proprietary research materials furnished by a Provider, Recipient agrees
(i) not to transfer such proprietary research materials to any third party
without the prior written consent of the Provider, (ii) to permit access to the
proprietary research materials only to its employees and consultants requiring
such access, (iii) to inform such employees and consultants of the proprietary
nature of the proprietary research materials, and (iv) to take reasonable
precautions, at least as stringent as those observed by Recipient to protect its
own proprietary materials, to ensure that such employees and consultants observe
the obligations of Recipient under this Section 8.3.
p.20
<PAGE>
8.4 Disposition of Unused Research Materials. At the request of Provider,
----------------------------------------
Recipient will return or destroy any unused research materials furnished by
Provider.
8.5 Compliance with Law. Recipient agrees to comply with all federal,
-------------------
state, and local laws and regulations applicable to the use, storage, disposal,
and transfer of research materials furnished by Provider, including without
limitation the Toxic Substances Control Act (15 USC 2601 et seq.) and
------
implementing regulations (in particular, 40 CFR 720.36 [Research and Development
Exemption]), the Food, Drug, and Cosmetic Act (21 USC 301 et seq.) and
------
implementing regulations, and all Export Administration Regulations of the
Department of Commerce. Recipient assumes sole responsibility for any violation
of such laws or regulations by Recipient or any of its Affiliates or
Sublicensees.
8.6 Limitation of Liability. Galileo and Phytera specifically disclaim any
-----------------------
guarantee that the collaboration contemplated by this Agreement will be
successful, in whole or in part. The failure of the parties to successfully
develop Lead Molecules or Candidate Compounds will not constitute a breach of
any representation or warranty or other obligation under this Agreement. Neither
Galileo nor Phytera makes any representation or warranty or guaranty that the
collaboration contemplated by this Agreement will be successful. Any research
materials delivered pursuant to this Agreement are understood to be experimental
in nature and may have hazardous properties. Recipient of such research
materials should assume that the compounds are dangerous and should use
appropriate precautions. PHYTERA AND GALILEO MAKE NO REPRESENTATIONS, AND
EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO
THE RESEARCH MATERIALS FURNISHED TO RECIPIENT AND THE ASSAYS. THERE ARE NO
EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, OR THAT THE USE OF THE RESEARCH MATERIALS OR THE ASSAYS WILL NOT
INFRINGE ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY.
9. Confidentiality.
---------------
9.1 Confidential Information. From time to time during the term of this
------------------------
Agreement, and in order to carry out the provisions of this Agreement, it may be
necessary for one of the parties to disclose Confidential Information to the
other. For the purposes of this Agreement, Confidential Information shall
include the Extracts, including the identity of the Extracts, supplied by
Phytera under this Agreement, the data generated by the Collaboration or any
other activity conducted pursuant to this Agreement, the Lead Extracts, the Lead
Molecules, Phytera's cell culture techniques and any strategies, plans or
developments relating to any of the foregoing, the identity of the Assays and
Galileo's protocols for the Assays, the business, financials, technology,
research strategy, employees, infrastructure, collaborators, advisors,
consultants, Boards of Directors and Scientific Advisory Boards of Phytera and
Galileo, respectively, and their respective Affiliates.
p.21
<PAGE>
9.2 Non-Disclosure Obligations.
--------------------------
(a) The recipient of such Confidential Information (the "Recipient")
undertakes to treat any and all of such Confidential Information as the other
party may disclose (the "Discloser") to the Recipient during the term of this
Agreement and for a period of ten (10) years thereafter as strictly confidential
and shall not divulge it to any third party for any purpose whatsoever and shall
not make use of such Confidential Information or any part thereof for any
purpose other than carrying out the terms of this Agreement without the
Discloser's prior written consent. Any data or information generated by or as a
result of the Collaboration or any other activity conducted pursuant to this
Agreement or any data or information with respect to the Library Extracts, or
the Patent Rights hereunder shall not be disclosed to any third party nor be
used for any purpose other than carrying out the terms of this Agreement without
the other party's written consent.
(b) In the event that the Recipient visits any of the establishments
of the Discloser, the Recipient undertakes that any further Confidential
Information which may come to the Recipient's knowledge, as a result of any such
visit, shall be deemed to be Confidential Information and shall be subject to
the provisions of Paragraph (a) of this Section 9.2.
9.3 Limitations. The undertakings in Paragraphs (a) and (b) of this
-----------
Section 9.2 shall not apply to information that (i) at the time of disclosure is
published or otherwise generally available to the public; (ii) after disclosure
by Discloser is published or becomes generally available to the public otherwise
than through any act or omission on the part of Recipient; (iii) the Recipient
can establish by written documentation that such information was in its
possession at the time of disclosure and that such information was not acquired
directly or indirectly from the Discloser; (iv) was rightfully acquired from a
third party who did not obtain it under pledge of secrecy to the Discloser or
another party; or (v) was required to be disclosed by law.
9.4 Samples. Galileo shall not supply or send any samples of Extracts to
-------
any third party, other than to regulatory agencies as required by law, unless
the sending of such samples shall have been approved by the Committee and such
samples are subject to Section 8 of this Agreement.
9.5 Publications.
------------
(a) Procedure. Phytera and Galileo recognize the need to obtain valid
---------
patent protection. Consequently, Phytera, Galileo and their respective employees
and consultants and any other Third Party wishing to make a publication
(including any oral disclosure made
p.22
<PAGE>
without obligation of confidentiality) relating to work performed by such party
as part of the collaboration described in this Agreement (the "Publishing
Party") shall deliver to the other party (the "Reviewing Party") a copy of the
proposed written publication at least ninety (90) days prior to submission for
publication, or an abstract of such oral disclosure at least thirty (30) days
prior to submission of the abstract or the oral disclosure, whichever is
earlier. The Reviewing Party shall have the right (i) to propose modifications
to the publication for patent reasons, (ii) to request a delay in publication or
presentation in order to protect patentable information, or (iii) to request
that the information be maintained as a trade secret and, in such case, the
Publishing Party shall not make such publication or disclosure. If the Reviewing
Party requests a delay as described in clause (ii) in the preceding sentence,
the Publishing Party shall delay submission or presentation of the publication
for a period sufficient to enable protection of the Reviewing Party's rights in
such information to be filed.
(b) Resolution. Only upon the receipt of written approval of the
----------
Reviewing Party may the Publishing Party proceed with the written publication or
the oral presentation.
9.6 Injunctive Relief. The parties hereto understand and agree that
-----------------
remedies at law may be inadequate to protect against any breach of any of the
provisions of this Article 9 by either party or their employees, agents,
officers or directors or any other person acting in concert with it or on its
behalf. Accordingly, each party shall be entitled to the granting of injunctive
relief by a court of competent jurisdiction against any action that constitutes
any such breach of this Article 9. It is understood that such injunctive relief
is intended solely as provisional relief pending the dispute resolution
procedures described in Section 12 below.
10. Representations and Warranties
------------------------------
10.1 General. Each party warrants and represents to the other that it has
-------
the legal right and power to enter into this Agreement, to extend the rights and
licenses granted to the other in this Agreement, and to perform fully its
obligations hereunder, and that it has not made nor will it make any commitments
to others in conflict with or in derogation of such rights or this Agreement.
10.2 Services. Each party warrants and represents to the other that it
--------
shall conduct its activities in a good scientific manner and in compliance with
all applicable good laboratory and manufacturing practices and all applicable
legal requirements.
11. Indemnity.
---------
11.1 Indemnity Obligations. Each party shall indemnify and hold harmless
---------------------
the other party and its officers, directors, employees and agents from and
against all liabilities, claims, actions and proceedings and all expenses
arising in connection therewith (including without limitation, damages,
judgments, awards, costs and attorney's fees and disbursements)
p.23
<PAGE>
which they may incur or which may be asserted against them arising out of or by
reason of the activities of such party, its Affiliates or Licensees, or by their
respective officers, directors, employees or agents pursuant to this Agreement
with the exception of those arising from the intentional wrongful actions or
gross negligence of the other party or any of its employees or agents or from
the breach of any representation, warranty or obligation of the other party as
specified herein.
11.2 Procedure. Promptly after learning of the occurrence of any event
---------
which gives rise to its rights under the provisions of Section 11.1, the
indemnified party shall notify the other party in writing of any such matter.
The indemnified party shall cooperate with the other party in the negotiation,
compromise and defense of any such matter. The indemnifying party shall be in
charge of and control such negotiations, compromise and defense. In no event
shall the indemnified party compromise or settle any such matter without the
prior consent of the other party and such party shall not be bound by any such
compromise or settlement without its prior written consent.
12. Arbitration
-----------
12.1 Selection of the Arbitrator. Other than the decision to proceed with
---------------------------
Phase II, which shall in all events require the unanimous determination of the
Committee, any controversy or dispute between Phytera and Galileo arising out of
or relating to this Agreement or the breach by either party thereof that cannot
be resolved by mutual accord shall be settled by binding arbitration in
accordance with this Section 12. The Committee shall institute these arbitration
provisions in the event it becomes deadlocked by giving notice to each of the
parties that it is electing to arbitrate the matter or matters in dispute. Such
arbitration shall take place in Boston, Massachusetts. The Committee shall
select an arbitrator during the 30 days following the notice of arbitration. If
the Committee is not able to agree on an arbitrator, an arbitrator shall be
chosen by the American Arbitration Association in accordance with its Commercial
Arbitration Rules. The parties shall facilitate the arbitration by participating
in discovery and permitting depositions to be taken. All such discovery and
depositions shall be completed within 90 days after the arbitrator is chosen.
12.2 Decisions of the Arbitrator. All decisions and awards rendered by the
---------------------------
arbitrator shall be binding upon the parties hereto and will be final as to all
questions submitted to the arbitrator. The parties hereto shall execute promptly
all decisions and awards of the arbitrator. The arbitrator shall have authority
to award expenses (including fees of counsel and any experts) in such manner as
the arbitrator determines is just and equitable. The decision of the arbitrator
may be entered in any court having jurisdiction over either or both parties.
13. Miscellaneous.
-------------
13.1 Publicity. Except as provided in Section 9.5 above, no press release,
---------
advertising,
p.24
<PAGE>
promotional sales literature, or other promotional oral or written statements to
the public in connection with or alluding to work performed under this Agreement
or the relationship between the parties created by it, having or containing any
reference to Phytera or Galileo, shall be made by either party without the prior
written approval of the other party, except for restatements of previously
approved statements and disclosures required by applicable law or regulation.
13.2 Relationship of Parties. For the purposes of this Agreement, each
-----------------------
party is an independent contractor and not an agent or employee of the other
party. Neither party shall have authority to make any statements,
representations, or commitments of any kind, or to take any action which shall
be binding on the other party, except as may be explicitly provided for herein
or authorized in writing. In particular, (i) neither party shall represent to
creditors or vendors that such party has any authority to obligate or bind the
other party, and shall affirmatively correct any misconception to that effect
and (ii) neither party shall use the name of the other party in connection with
such transactions without the prior written consent of the other party, which
consent may be withheld in its sole discretion.
13.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.
13.4 Headings. All headings in this Agreement are for convenience only and
--------
shall not affect the meaning of any provision hereof.
13.5 Binding Effect. This Agreement shall inure to the benefit of and be
--------------
binding upon the parties and their respective lawful successors and assigns.
13.6 Assignment. This Agreement may not be assigned by either party without
----------
the prior written consent of the other party, except that either of the parties
may assign this Agreement to a successor in connection with the merger,
consolidation, or sale of all or substantially all of its assets or that portion
of its business pertaining to the subject matter of this Agreement. Each Party
under this Agreement shall have the right to assign to an Affiliate all rights
and obligations under this Agreement.
13.7 Notices. All notices, requests, demands and other communications
-------
required or permitted to be given pursuant to this Agreement shall be in writing
and shall be deemed to have been duly given upon the date of receipt if
delivered by hand, recognized national overnight courier, confirmed facsimile
transmission, or registered or certified mail, return receipt requested, postage
prepaid, to the following addresses or facsimile numbers:
If to Galileo:
Galileo Laboratories, Inc.
935 E. Arques Avenue
Sunnyvale, CA 94086
p.25
<PAGE>
Attn: Dr. Guy Miller, Chairman & CEO
Tel: (408) 524-6200
Fax: (408) 524-6210
with a copy (which shall not constitute notice) to:
Wilson, Sonsini, Goodrich & Rosati
1117 California Avenue
Palo Alto, CA 94304
Attn: Michael O'Donnell, Esq.
Tel: (650) 493-9300
Fax: (650) 493-6811
If to Phytera:
Phytera, Inc.
377 Plantation Street
Worcester, MA 01605
Attn: Dr. Malcolm Morville, President
Tel: (508) 792-6800
Fax: (508) 792-1339
with a copy (which shall not constitute notice) to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attn: Lynnette C. Fallon, Esq.
Tel: (617) 573-0220
Fax: (617) 227-4420
Either party may change its designated address and facsimile number by notice to
the other party in the manner provided in this Section 13.8.
13.9 Amendment and Waiver. This Agreement may be amended, supplemented, or
--------------------
otherwise modified at any time, but only by means of a written instrument signed
by both parties. Any waiver of any rights or failure to act in a specific
instance shall relate only to such instance and shall not be construed as an
agreement to waive any rights or fail to act in any other instance, whether or
not similar.
13.10 Governing Law. This Agreement and the legal relations among the
-------------
parties shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts, irrespective of any conflict of laws principles.
p.26
<PAGE>
13.11 Severability. In the event that any provision of this Agreement
------------
shall, for any reason, be held to be invalid or unenforceable in any respect,
such invalidity or unenforceability shall not affect any other provision hereof,
and this Agreement shall be construed as if such invalid or unenforceable
provision had not been included herein.
13.12 Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and supersedes any
and all prior or contemporaneous oral and prior written agreements and
understandings between the parties.
p.27
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Agreement as a sealed instrument effective as of the date first above written.
GALILEO LABORATORIES, INC.
By: /s/ Guy Miller
--------------------------------------
Dr. Guy Miller
Chairman and Chief Executive Officer
PHYTERA, INC.
By: /s/ Malcolm Morville
--------------------------------------
Dr. Malcolm Morville
President and Chief Executive Officer
p.28
<PAGE>
Appendix A
Statement of Work
-----------------
[
]*
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
p.29
<PAGE>
Exhibit 10.18
RESEARCH COLLABORATION AND LICENSE AGREEMENT
This Research Collaboration and License Agreement (this "Agreement") is
entered into as of May 1, 1998 (the "Effective Date") by and between Phytera,
Inc. ("Phytera"), a Delaware corporation, and NeuroSearch A/S ("NeuroSearch"), a
Danish corporation (together, the "Parties").
R E C I T A L S
---------------
WHEREAS, Phytera owns an inventory of distinct natural product extracts
("Extracts") derived from plant or marine microbes, including a library of [ ]*
such Extracts (the "Library") that is the subject matter of this Agreement
(Extracts from the Library are sometimes referred to herein as "Library
Extracts");
WHEREAS, NeuroSearch has certain expertise and know-how related to the
identification of compounds and mixtures of compounds capable of interacting
with K+ channels (the "Assays"); and
WHEREAS, Phytera wishes to provide its Library to NeuroSearch for
screening and NeuroSearch wishes to screen the Library in order to identify and
develop pharmaceutical agents for the treatment and prevention of diseases which
interact with K+ channels in humans (the "Field").
NOW, THEREFORE, Phytera and NeuroSearch hereby each agree as follows:
1. Certain Definitions.
--------------------
1.1. "Affiliate" means any legal entity (such as a corporation,
---------
partnership, or limited liability company) that is controlled by a party. For
the purposes of this definition, the term "control" means (i) beneficial
ownership of at least fifty percent (50%) of the voting securities of a
corporation or other business organization with voting securities or (ii) a
fifty percent (50%) or greater interest in the net assets or profits of a
partnership or other business organization without voting securities.
1.2. "Assay" means tests, methods and know-how employed by NeuroSearch
-----
to identify compounds or mixtures of compounds capable of interacting with K+
channels as defined in Appendix A.
1.3. "Collaboration Compounds" means an individual compound as to which
------------------------
Phytera has completed NPCII, has identified the compound's chemical structure
and NeuroSearch has
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
<PAGE>
verified its biological activity in primary and secondary screens. By
definition, all Collaboration Compounds constitute Joint Technology.
1.4 "Collaborative Research Program" or the "Program" means the
------------------------------
collaborative research program described in Article 3 of this Agreement.
1.5 "Committee" means the Steering Committee charged with oversight of
---------
the Collaborative Research Program, as described in Section 2.1. of this
Agreement
1.6 "Confidential Information" means certain proprietary information
------------------------
which may be disclosed by either party to the other pursuant to this Agreement,
as described in Section 9.1 hereof.
1.7 "Development Compound" means a Collaboration Compound from the
--------------------
screening or lead optimization programs that has been selected by the Committee
for entry into a pre-clinical or clinical development program.
1.8. "Development" or "Development Strategy" means the processes,
-------------------------------------
steps and activities required to advance the pre-clinical or clinical assessment
of a Development Compound as a potential product in the Field.
1.9 "Evaluation Period" means, for each distinct batch of Library
-----------------
Extracts delivered to NeuroSearch, the period of time beginning when the batch
is delivered and ending when the Committee determines which Extracts from the
batch are to be designated as "Validated Hit Extracts" in accordance with
Section 3.6(c) hereof.
1.10 "Field" means pharmaceutical agents for the treatment of diseases
-----
which interact with K+ channels in humans.
1.11 "Natural Products Chemistry Isolation and Identification" or
-------------------------------------------------------
"NPCII" means the process whereby Extracts agreed upon pursuant to Section 3.6
are analyzed by Phytera for the identification of Collaboration Compounds.
1.12 "Patent Rights" means any United States patent application and any
-------------
divisional, continuation, or continuation-in-part of such patent application (to
the extent the claims are directed to subject matter specifically described
therein), as well as any patent issued thereon and any reissue or reexamination
of such patent, and any foreign counterparts to such patents and patent
applications. "Phytera Patent Rights" means Patent Rights that are (i) owned
---------------------
solely by Phytera, (ii) owned jointly by Phytera and a party other than
NeuroSearch, (iii) licensed solely to Phytera or (iv) licensed jointly to
Phytera and a party other than NeuroSearch, in each case to the extent that
Phytera has the ability to license or sublicense the rights required under this
Agreement. "NeuroSearch Patent Rights" means Patent Rights that are (i) owned
-------------------------
solely by NeuroSearch, (ii) owned jointly by NeuroSearch and a party other than
Phytera, (iii) licensed
-2-
<PAGE>
solely to NeuroSearch or (iv) licensed jointly to NeuroSearch and a party other
than Phytera, in each case to the extent that NeuroSearch has the ability to
license or sublicense the rights required under this Agreement. "Joint Patent
------------
Rights" means Patent Rights owned by both Phytera and NeuroSearch as joint
- ------
owners. Joint Patent Rights will include (i) Patent Rights claiming Joint
Technology and (ii) Patent Rights claiming both Phytera Technology and
NeuroSearch Technology in a single filing.
1.13. "Progression" or "Progression Strategy" means the processes,
-------------------------------------
steps and activities required to advance the assessment of a Collaboration
Compound as a potential Development Compound.
1.14 "Requisite Activity" means desired biological activity observed
------------------
in Library Extracts during Assays, as determined by the Committee pursuant to
Section 2.4(c) of this Agreement.
1.15 "Technology" means any proprietary development, idea, design,
----------
concept, technique, process, invention, research material, discovery, or
improvement, whether or not patentable or copyrightable. "Phytera Technology"
------------------
means Technology that is (i) owned solely by Phytera, (ii) owned jointly by
Phytera and a party other than NeuroSearch, (iii) licensed solely to Phytera or
(iv) licensed jointly to Phytera and a party other than NeuroSearch, in each
case to the extent that Phytera has the ability to license or sublicense the
rights required under this Agreement. "NeuroSearch Technology" means Technology
----------------------
that is (i) owned solely by NeuroSearch, (ii) owned jointly by NeuroSearch and a
party other than Phytera, (iii) licensed solely to NeuroSearch or (iv) licensed
jointly to NeuroSearch and a party other than Phytera, in each case to the
extent that NeuroSearch has the ability to license or sublicense the rights
required under this Agreement. "Joint Technology" means Technology that is
----------------
developed or discovered jointly by one or more employees or consultants of
NeuroSearch and one or more employees or consultants of Phytera in connection
with the Collaborative Research Program, including specifically but without
limitation all Validated Hit Extracts and Lead Molecules.
1.16 "Validated Hit Extract" means a Library Extract that the Committee
---------------------
has, based on its review of the Assays performed by NeuroSearch, determined to
possess Requisite Activity. By definition all Validated Hit Extracts constitute
Joint Technology.
2. Management of Collaborative Research Program.
--------------------------------------------
2.1. Steering Committee. The Parties hereby create a Steering Committee
------------------
(the "Committee") which shall consist of four (4) members, two of whom shall be
-3-
<PAGE>
designated by Phytera and two (2) of which shall be designated by NeuroSearch.
The members initially designated by Phytera are Neil Goldsmith, its Senior
Manager of European Operations, and Christopher Pazolee, Vice President of
Research, and the members initially designated by NeuroSearch are Jorgen
Dreiger, Director of Cell Buology, and Philip K. Aling, Head of Molecular
Screening. A Committee member may resign, provided that if any member of the
Committee dies, resigns, or becomes incapacitated the party which designated
such member shall designate his or her successor (whose term shall commence
immediately), and any party may withdraw the designation of any of its members
of the Committee and designate a replacement (whose term shall commence
immediately) at any time by giving notice of the withdrawal and replacement to
the other party. The Committee shall designate one or more of its members to act
as secretary for the Committee.
2.2. Meetings of the Committee. Regular meetings of the Committee shall
-------------------------
be held within forty-five (45) days of the end of each calendar quarter, or at
such other times as the Parties may deem appropriate, at such times and places
as the members of the Committee shall from time to time agree. Special meetings
of the Committee may be called by either party on fourteen (14) days written
notice to the other party unless notice is waived by the parties. All meetings
shall alternate between the offices of the parties unless the parties otherwise
agree. Although informal and more frequent interactions between Committee
members will occur as necessary for the efficient conduct of the Collaboration,
discussions among Committee members shall not constitute an official Committee
meeting unless either (i) written notice has been furnished to each Committee
member at least fourteen (14) business days prior to such meeting or (ii) each
Committee member executes a written waiver of such notice.
2.3. Actions By the Committee. A quorum of the Committee shall be
------------------------
present at any meeting of the Committee if at least three members are present at
such meeting in person or by telephone. If a quorum exists at any meeting, the
unanimous consent of all members of the Committee present at such meeting is
required to take any action on behalf of the Committee. In no event shall any
action be taken by the Committee if there is other than unanimous consent.
Unless otherwise specifically stated to the contrary herein, no individual party
shall purport to act on behalf of the other party unless and then only to the
extent authorized to do so by the Committee.
2.4. Responsibilities of The Committee. The Committee shall be
---------------------------------
responsible for the day-to-day conduct, progress and evaluation of the
Collaborative Research Program (the "Program") and its activities, including,
without limitation:
(a) planning and efficient prosecution of the Program
-4-
<PAGE>
(b) preparation of Quarterly Reports of Program activities
(c) selection and prioritization of Validated Hit Extracts for
NPCII and agreeing to the work plan and budget for these
activities, including the determination of the criteria of
significant biological activity ("Requisite Activity")
necessary for a Library Extract following the completion of
Assays to qualify as a Validated Hit Extract;
(d) selection and prioritization of Collaboration Compounds for
entry into early preclinical studies and agreeing to the
work plan and budget for these activities
(e) selection and prioritization of Collaboration Compounds for
entry into lead optimization and agreeing to the work plan
and budget for these activities
(f) nomination and prioritization of Development Compounds for
entry into development and agreeing to the work plan and
budget for these activities
(g) deciding on the long-term development plan for any
Development Compound and/or on the appropriate stage and
program to seek an outlicense partner
(h) agreeing on any publication strategy for any results, data,
discoveries or compounds from the Program
2.5. Committee Reports. Within ten (10) days following each meeting of
-----------------
the Committee held pursuant to Section 2.2, the secretary of the Committee shall
prepare and send to each party a written report of actions taken at the meeting
in such form and containing such detail as shall be determined by the Committee.
2.6. Deadlock. In the event that the Committee cannot reach agreement
--------
within sixty (60) days as to any matter that is subject to its decision-making
authority, either party may request that the matter be referred to the Chief
Executive Officers ("CEO's") of the parties for resolution. If, in the sole
discretion of either CEO, a meeting between the CEO's is advisable or required
to resolve the matter, such a meeting shall be requested in writing and the
CEO's will endeavor in good faith to meet at the earliest possible time and in a
place of mutual convenience. In the event that the CEO's cannot reach agreement
on the matter in question, the parties agree to submit the dispute to binding
arbitration in accordance with the procedures set forth in Article 13.
3. Conduct of Collaborative Research Program.
-----------------------------------------
3.1. Objective of Collaboration. The overall objective of this
--------------------------
Agreement is to discover
-5-
<PAGE>
and develop compounds that demonstrate potential as human pharmaceutical agents
for treatment and prevention of diseases which interact with K+ channels.
3.2. Responsibilities of Each Party. Each of the parties shall have the
------------------------------
general responsibilities for research and development tasks as are described in
detail in Appendix A. However, the Committee shall have discretion to allocate
----------
specific research and development tasks in a particular situation to the party
that has the best current capability, capacity, and desire to complete the task
and advance the objectives of the Program, irrespective of whether that task
comes within the general responsibilities assigned to that party. If the members
of the Committee disagree on whether a party should participate in a particular
task, the task will be assigned to the party who has general responsibility for
such activities as set forth on Appendix A. NeuroSearch agrees to conduct all
----------
Assays of the delivered Extracts and all other actions required of it in
connection with the Program expeditiously and in a scientifically sound manner.
Phytera also agrees to deliver all Extracts on a timely basis and to conduct
NPCII on Validated Hit Extracts and all other actions required of it in
connection with the Program expeditiously and in a scientifically sound manner.
3.3. Reports and Records. Each party agrees to promptly and regularly
-------------------
communicate to the other party all research results from the Program, including
quarterly reports to the Committee detailing all tests conducted and results
obtained by such party in connection with the Program. Each party shall prepare
and maintain adequate records, including bound laboratory notebooks maintained
in accordance with standard scientific procedures, containing all appropriate
data reflecting all research results from the Program. In addition, each party
shall retain under appropriate conditions any necessary or desirable samples of
research materials that are developed or used in the Program.
3.4. Grant of License. For the duration of the term of this Agreement,
----------------
Phytera hereby grants to NeuroSearch a license (without the right to sublicense)
under the Phytera Patent Rights and other rights in Phytera Technology to (i)
test Library Extracts for assay interference (as described in Section 3.5(b)
below), (ii) test, screen and perform Assays on any and all Library Extracts in
order to determine which, if any, of the Library Extracts (or combinations
thereof) possesses Requisite Activity and (iii) if duly authorized by the
Committee, to perform necessary research and development tasks associated with
NPCII of Validated Hit Extracts, each as set forth in detail on Appendix A.
----------
3.5. Pilot Phase.
-----------
(a) Delivery of Extracts. The Pilot Phase of the Program
--------------------
shall commence
-6-
<PAGE>
Pilot Phase, Phytera shall promptly deliver a total of approximately [ ]*
Extracts, approximately [ ]* each of plant and marine origin (the "Pilot
Extracts"), to NeuroSearch.
(b) Conduct of Initial Screens. Promptly following receipt of
--------------------------
the Pilot Extracts, NeuroSearch shall (i) test such Pilot Extracts for activity
to ensure that Assays are optimally configured for screening and (ii) evaluate
the Pilot Extracts for assay interference. In the event that such interference
is identified, NeuroSearch shall attempt to modify its Assays as necessary in
order to enable successful completion. NeuroSearch shall promptly notify the
Committee of any modification so implemented. NeuroSearch shall promptly provide
to the Committee a detailed description of all evaluations performed and all
Assays successfully conducted. All such information disclosed by Phytera and
NeuroSearch shall be deemed Confidential Information and, as such, is subject to
the restrictions set forth in Article 10 hereof.
(c) Termination of Research. In the event that NeuroSearch is
-----------------------
unable to perform successful Assays of any of the Pilot Extracts during the
Pilot Phase (as such Assays may be modified by NeuroSearch), either party may
(but shall have no obligation to) terminate this Agreement upon fifteen (15)
days written notice to the other party; provided, however, that such termination
must occur prior to the commencement of the Program, as described in Section 3.6
below.
3.6. Commencement of the Collaborative Research Program
--------------------------------------------------
(a) Delivery of Extracts. The Program shall commence
-------------------
following the successful evaluation of Pilot Extracts in the Assays by
NeuroSearch. It is anticipated that, assuming that one or more Pilot Extracts is
successfully Assayed during the Pilot Phase, the Program shall commence on or
about [ ]*, although the Program may commence on such other date as
shall be designated by the Committee. Upon commencement of the Program Phytera
shall promptly deliver an additional [ ]* plant cell and marine microbe
culture extracts (the "Year One Extracts") to NeuroSearch.
(b) Conduct of Year One Assays. As soon as is reasonably
--------------------------
practical following the receipt of the Year One Extracts, NeuroSearch shall
initiate screening of such Extracts in accordance with the procedures set forth
on Appendix A hereto. NeuroSearch shall report to Phytera each Extract in which
----------
its Assays detect signs of Requisite Activity. Phytera shall, in a reasonable
period of time thereafter, provide NeuroSearch with information as to species
(plant) or isolate type (marine microbe) and extract type for each Extract with
Requisite Activity.
(c) Identification and Labeling of Validated Hit Extracts.
-----------------------------------------------------
Within 30 days of completion of the Assays on each of the Year One Extracts,
NeuroSearch shall provide a
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
-7-
<PAGE>
detailed report of all Assays conducted to the Committee. The Committee shall in
its sole discretion label each Library Extract (or combination thereof)
determined by the Committee to possess Requisite Activity as a "Validated Hit
Extract."
(d) Evaluation Meetings. Within thirty (30) days following
-------------------
NeuroSearch's completion of Assays on each of the Year One Extracts, the
Committee shall meet to review the results of all of the Assays and evaluate the
overall progress of the Program. The Committee shall determine, based upon the
results of the Assays performed by NeuroSearch whether any of such Extracts
possesses Requisite Activity. If so, the Committee shall then designate between
[ ]* Extracts that have been determined to possess Requisite Activity as
Validated Hit Extracts.
(e) Conduct of NPCII Activities. Within 30 days of the
---------------------------
Committee designation of Validated Hit Extracts, the Parties will proceed to
conduct NPCII activities on the Validated Hit Extracts. Phytera will conduct
regrowth of cultures to facilitate NPCII and for the fractionation, analytical
characterization and structural identification of compounds responsible for the
Requisite Activity seen in the Assays (such fractionation, analytical
characterization and structural identification constituting the "Chemistry
Effort"). NeuroSearch will conduct Assays as needed to enable Phytera to conduct
NPCII. In addition, NeuroSearch will conduct Assays as needed to validate the
biological activity of isolated active compounds resulting from NPCII
activities. In the event the parties mutually agree that it is preferable to
transfer the Assays from NeuroSearch to Phytera in order to facilitate NPCII,
the parties shall use best efforts to complete such transfer and NeuroSearch
shall grant Phytera a limited-use license to permit Phytera to use the Assays
for the sole purpose of conducting NPCII under this Agreement. In the event the
parties mutually agree that it is preferable to transfer the Chemistry Effort
from Phytera to NeuroSearch in order to facilitate NPCII, the parties shall use
best efforts to complete such transfer and Phytera shall grant NeuroSearch a
limited-use license, to the extent such license may be necessary, to permit
NeuroSearch to conduct the Chemistry Effort for the sole purpose of conducting
NPCII under this Agreement. In the event of Early Termination of this Agreement,
pursuant to Section 5.2, the obligations of the Parties to continue to fund
NPCII activities that are underway, with respect to specific Validated Hit
Extracts at the time notice of Early Termination is received shall survive such
termination. Phytera will identify those Validated Hit Extracts which are
undergoing NPCII at the time of such notice, and no new Validated Hit Extracts
shall be entered into NPCII under this Agreement subsequent to receipt of such
notice of termination.
3.7 Year Two Extracts. At approximately the first anniversary of the
-----------------
Effective Date of this Agreement, the Parties shall meet to discuss and agree
upon the expansion of the Program to include additional Extracts (the "Year Two
Extracts"). The Parties may agree to conduct the
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
-8-
<PAGE>
Program on any number of Extracts that Phytera has available (thereby altering
the number of Extracts in the Library), but it is currently anticipated that
[ ]* Extracts would be designated as Year Two Extracts.
4. Exclusivity
-----------
During the term of this Agreement, Phytera will collaborate exclusively
with NeuroSearch on the K+ channel screens and NeuroSearch will collaborate
exclusively with Phytera with respect to screening natural products extracts
against the K+ channel targets. Notwithstanding the foregoing, the Parties
recognize that it may become necessary or desirable for either party to
collaborate with a third party in a manner that would violate the exclusivity
described above. In such an event, the party seeking to enter into such a third
party collaboration shall notify the other party to that effect and request that
party's consent to the third party collaboration. Notwithstanding the
obligations of the Parties to collaborate exclusively, as described above, [
]*.
5. Term; Early Termination of Program.
----------------------------------
5.1. Term. This Agreement shall commence on the Effective Date and
----
shall continue until the earliest to occur of (i) termination of research under
Section 3.5(c), (ii) with respect to the Research Collaboration, the third
anniversary of the Effective Date, subject to extension by mutual agreement
(iii) with respect to activities involving the development and marketing of any
Collaboration Compound, the completion of all such activities related to any
such Collaboration Compound or termination by mutual consent (iv) the
termination of the Program pursuant to Sections 5.2, 5.3 or 5.4 below.
5.2 Early Termination. Either party may terminate this Agreement upon
-----------------
providing written notice to the other party no less than 90 days of the
effective date of such termination. Any obligations of the terminating party
that exist at the time of early termination pursuant to this paragraph shall
survive such termination, including but not limited to the obligation to remit
to the other party all payments that become due and payable in accordance with
the terms of this Agreement prior to the effective date of such termination and
to those obligations defined in Section 5.5 and Section 5.6.
5.3 Termination Upon Default. In the event that either party commits
------------------------
a material
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
-9-
<PAGE>
breach of its obligations under this Agreement and fails to cure that breach
within sixty (60) days after receiving written notice thereof, the nonbreaching
party may terminate this Agreement immediately upon written notice to the party
in breach.
5.4 Force Majeure. Neither party will be responsible for or
-------------
considered in breach of this Agreement because of delays resulting from acts
beyond the control of such party, provided that the nonperforming party uses
commercially reasonable efforts to avoid or remove such causes of nonperformance
and continues performance hereunder with reasonable dispatch whenever such
causes are removed.
5.5 Effect of Termination. Except as otherwise agreed by the parties,
---------------------
upon the expiration or termination of this Agreement, all of the provisions of
this Agreement shall immediately terminate, except that this Section and
Sections 6 (Development of Joint Technology), 8 (Intellectual Property) and 10
(Confidentiality) of this Agreement shall survive in their entirety. Upon
termination, except as may otherwise be agreed by the parties:
(a) NeuroSearch shall have no further rights under the Phytera Patent
Rights or Phytera Technology;
(b) Phytera shall have no further rights under the NeuroSearch Patent
Rights or NeuroSearch Technology;
(c) NeuroSearch shall grant Phytera an exclusive, worldwide, royalty-
free license (with the right to sublicense) under any Joint
Patent Rights and other rights in Joint Technology to the extent
applicable to the composition or use of the Library Extracts
within the Field;
(d) Phytera shall grant NeuroSearch an exclusive, worldwide, royalty-
free license (with the right to sublicense) under any Joint
Patent Rights and other rights in Joint Technology to the extent
applicable to the Assays within the Field.
5.6 Continuing Development under Early Termination. In the event this
----------------------------------------------
Agreement is terminated pursuant to Section 5.2 above, the Parties shall
continue the joint development of Collaboration Compound(s) and/or Development
Compound(s) identified prior to such termination, including any such compound(s)
that is or are identified through NPCII activities that are ongoing at the time
of such termination, pursuant to Section 3.6(e). With respect to any identified
Collaboration Compound(s) and/or Development Compound(s), all other terms,
conditions, obligations and agreements related to joint development under this
Agreement shall survive such termination.
-10-
<PAGE>
6. Development of Joint Technology.
-------------------------------
6.1 Exploitation of Collaboration/Development Compounds. Within
---------------------------------------------------
ninety (90) days following the identification of one or more Collaboration
Compounds, the Committee shall determine a Progression Strategy for applications
of such Collaboration Compound(s), the objective of which Progression Strategy
is to enable the Committee to assess the Collaboration Compound(s) for possible
entry into pre-clinical development (at which point the Collaboration
Compound(s) would be designated a Development Compound). The intent of the
parties is to progress such Development Compounds through Phase I clinical
trials (or equivalent) prior to seeking a licensing partner. Following Phase I
studies, the Committee shall mutually agree on licensing strategy and tactics
and commercial terms for a license or licenses to a third party or parties.
Licensing activities will be funded on a 50:50 basis and all proceeds from any
license will be shared equally by the Parties.
6.2 Alternative Plans for Exploitation of Development Compounds. The
-----------------------------------------------------------
Parties may mutually agree to deviate from the intent stated in Section 6.1 as
follows:
(i) to jointly develop a Development Compound beyond Phase I to any
further stage of development, continuing to share costs and
rights on a 50:50 basis, prior to licensing rights to a third
party
(ii) to jointly develop a Development Compound beyond Phase I and
complete the registration and approval requirements for the
product in one or more regions of the world, prior to marketing
jointly, individually or via a marketing partner, continuing to
share costs and rights on a 50:50 basis
(iii) to enable one party (the "Developing Party") to pursue further
development and potential marketing and outlicensing
opportunities in one or more regions of the world, on terms
acceptable to the Non-Developing Party
6.3 Default Mechanism for Development. In the event that the
---------------------------------
Committee is unable to agree on a development strategy, outlicensing tactics, or
commercial terms for a Development Compound within ninety (90) days after the
notice initiating such determination under Section 6.1 above, the impasse will
be resolved by:
(i) NeuroSearch will retain exclusive commercial rights to the
Development Compound in Europe
(ii) Phytera will retain exclusive commercial rights to the
Development Compound in North America
(iii) the Parties will share commercial rights to the Development
Compound in the rest of
-11-
<PAGE>
the world and will agree on a strategy to license rights to a
third party or parties. Proceeds from such license or licenses
shall be shared equally by the Parties
(iv) the Parties will share relevant information to assist with the
development of the Development Compound in the respective party's
exclusive territories, or in the non- exclusive territory
(v) each party will receive a royalty of [ ]* on the net sales of the
other party and will receive [ ]* of the other party's outlicense
proceeds in such party's exclusive territory
6.4 Development Outside of the Field. In the event that it is
--------------------------------
discovered that a Collaboration Compound(s) or a Development Compound(s) may
have potential application outside the Field, the Parties will, within 90 days
of such discovery, agree upon a development strategy for such application, which
may involve one or more of the following: (i) co-development of such
Collaboration Compound(s) or Development Compound(s) by the Parties, (ii)
licensing by either party to the other party, or (iii) licensing of such
Collaboration Compound(s) or Development Compound(s) to a third party.
6.5 Election not to Proceed. In the event that either party elects
-----------------------
not to proceed with or to fund its fairly allocated portion of the cost of the
Program at any time prior to the identification of any Development Compound (the
"Non-Developing Party"), the other party shall be entitled to an exclusive
license to pursue the discovery and development and commercialize any resulting
product (the "Developing Party"). Such license shall provide a royalty to the
Non-Developing Party of [ ]* of the Developing Party's net sales and [ ]* of any
outlicense proceeds received by the Developing Party, after deducting the
Developing Party's development costs from such net sales or outlicense proceeds.
Such license shall further provide that the Non-Developing Party shall transfer
to the Developing Party such technology as is required by the Developing Party
to continue development of Development Compound(s), (the "Transferred
Technology") provided that the Developing Party's right to use the Transferred
Technology shall be limited to internal use for the sole purpose of developing
the Development Compound(s), with the right to sublicense or assign the
Transferred Technology to a third party for the sole purpose of developing the
Development Compound(s). In the event the Developing Party desires to sublicense
or assign the Transferred Technology to a third party, it shall so notify the
Non-Developing Party and request the Non-Developing Party's consent to such
sublicense or assignment, such consent not to be unreasonably withheld or
delayed.
7. Allocation of Program Expenses.
------------------------------
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
-12-
<PAGE>
7.1 Extract Production and Screening Costs. Each party shall bear the
--------------------------------------
costs of its own activities performed in connection with the initial screening
of and performance of Assays on Library extracts. Phytera shall be responsible
for all costs associated with the production of Library Extracts and the
furnishing of such Extracts to NeuroSearch for evaluation. NeuroSearch shall be
responsible for all costs associated with performance of the Assays and
reporting of results to the Committee.
7.2 NPCII. Prior to the initiation of NPCII activities, the Committee
-----
shall review and approve a budget that will reflect all the relevant direct
costs associated with NPCII (collectively, "NPCII Costs"). Budget estimates
shall be furnished by both Phytera and NeuroSearch as soon as practicable
following a determination by the Committee to undertake NPCII with respect to
one or more Validated Hit Extracts. At the time the budget is approved, the
Committee shall agree upon and state in writing the precise terms of cost
reimbursement prior to commencement of NPCII. The intent of the Parties is that
each party shall pay approximately fifty percent (50%) of the NPCII Costs, which
shall reflect the direct cost per full time equivalent ("FTE") to be incurred by
each party and shall be between [ ]* per FTE per twelve (12) month
period (equal to approximately [ ]* Danish kroner).
7.3 Expense Reporting. After the commencement of NPCII activities, each
-----------------
party shall on a calendar quarter basis prepare a report to the Committee
detailing all NPCII Costs incurred by it during such quarter and aggregate NPCII
Costs less reimbursements hereunder. To the extent that any such report shows
aggregate NPCII Costs incurred by one party in an amount exceeding those
incurred by the other by at least [ ]*, the party incurring the lesser
NPCII Costs shall, within [ ]* after receipt of such report, reimburse the
party incurring the greater costs. In the event that the difference between the
NPCII Costs incurred by each party is less, in the aggregate, than [ ]* during
any twelve (12) month period beginning on the Effective Date, the party
incurring the lesser NPCII Costs shall reimburse the party incurring the greater
costs within [ ]* following the receipt of such report of NPCII Costs
incurred during such period. In the event that either party anticipates a
material deviation from the approved budget, such party shall immediately notify
the Committee of such anticipated deviation, specifying the expected amount of
the deviation, the reason(s) for the deviation, and any alternative or remedial
actions that are available. As soon as practical following such notification,
the Committee will decide whether the deviation should be permitted.
8. Ownership and Management of Intellectual Property.
-------------------------------------------------
8.1 Intellectual Property Developed Outside of the Program. Except as
------------------------------------------------------
expressly set forth in this Agreement, neither party shall have any rights in
Patent Rights and Technology that is developed or discovered by the other party
prior to the Effective Date or outside of the context
_________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
-13-
<PAGE>
of the Program. For example, Phytera shall have sole ownership of all right,
title, and interest in Library Extracts provided to NeuroSearch, and NeuroSearch
shall have sole ownership of all right, title and interest in Assays developed
by NeuroSearch. Each party shall have sole responsibility for and control over
Patent Rights claiming any of its Technology that was developed or discovered
prior to the Effective Date or outside of the Program. Neither party shall have
any right to review and comment on such Patent Rights of the other party.
8.2 Ownership of Intellectual Property Arising From the Program.
-----------------------------------------------------------
Ownership of Patent Rights and Technology arising from the Program shall be
allocated in the following manner:
(i) Phytera shall have sole ownership of all right, title, and
interest in Phytera Patent Rights and Phytera Technology;
(ii) NeuroSearch shall have sole ownership of all right, title, and
interest in NeuroSearch Patent Rights and NeuroSearch
Technology; and
(iii) Phytera and NeuroSearch shall have joint ownership of all right,
title, and interest in Joint Patent Rights and Joint Technology,
which shall be subject to the provisions of Section 6 hereof.
Each party shall ensure that its employees, consultants, agents, and
representatives are contractually required to assign to such party all Patent
Rights and other rights in Technology arising from the Program and to promptly
disclose to such party all patentable inventions within that Technology.
8.3 Notice of Intellectual Property Arising From the Program. Each party
--------------------------------------------------------
shall provide prompt written notice to the Committee of the internal disclosure
of any significant Technology developed by its personnel in connection with the
Program.
8.4 Responsibility for Patent Rights Arising from the Program.
---------------------------------------------------------
(i) Phytera shall be responsible for and shall control, at its expense,
the preparation, filing, prosecution, grant, and maintenance of any
Patent Rights claiming only Phytera Technology and shall consult with
NeuroSearch on, and give N NeuroSearch a reasonable opportunity to
review all such filings to the extent they directly relate to the
Program.
(ii) NeuroSearch shall be responsible for and shall control, at its
expense, the preparation, filing, prosecution, grant, and maintenance
of all Patent Rights claiming only NeuroSearch Technology and shall
consult with Phytera on, and give Phytera a reasonable opportunity to
review all such filings to the extent they relate directly to the
Program.
-14-
<PAGE>
(iii) in the case of Joint Technology, NeuroSearch shall be responsible for
and shall facilitate, through its Patent Department, the preparation,
filing, prosecution, grant, and maintenance of all Joint Patent
Rights in Denmark, and for ensuring that such patent activities are
conducted in full compliance with United States requirements, such
that intellectual property rights in the United States are prosecuted
and maintained to the full extent possible. The Committee shall
govern all such patent activities, and Phytera's representatives
shall have the right to comment on patent strategy, the preparation,
filing and prosecution of all patent applications related to Joint
Patent Rights. Further, Phytera shall have the right to take whatever
actions it deems, in its sole discretion, to be necessary to protect
U.S. rights under any patent applications prepared, filed or
prosecuted in Denmark by NeuroSearch, provided that Phytera shall
notify NeuroSearch prior to taking any such action and shall,
whenever possible without comprising Phytera's ability, in Phytera's
sole discretion, to protect said rights, provide NeuroSearch the
opportunity to comment on the actions Phytera is contemplating.
(iv) regarding Patent Rights, it will be the responsibility of the
Committee to decide how all material patent matters related to or
resulting from the Program shall be resolved, including without
limitation (a) whether to seek Joint Patent Rights claiming that
Joint Technology or to maintain that Joint Technology as a trade
secret (b) whether to seek Patent Rights claiming both Phytera
Technology and NeuroSearch Technology in one filing, which also
constitutes a Joint Patent Right
(v) all expenses related to the preparation, filing, prosecution, grant,
and maintenance of all Joint Patent Rights shall be borne equally by
the parties.
8.5 Assumption of Rights by Other Party. In the event that a party
-----------------------------------
desires to decline responsibility for obtaining or maintaining Patent Rights in
a country for any of its Technology that is developed or discovered in
connection with the Program, such party will notify the other party before
taking such action and, upon request, will allow the other party to assume
responsibility for, and all expenses relating to, the relevant Patent Rights in
those countries; provided, however, that neither party shall have the right to
seek patent protection for any Technology that a party has decided, in its
discretion, to maintain as a trade secret. In the event that a party desires to
cease further payment of patent-related expenses for a Joint Patent Right in any
country, such party may assign to the other party all rights in that Joint
Patent Right in such country and thereafter have no further obligation to pay
such expenses.
8.6 Cooperation. Each party agrees to cooperate fully in the preparation,
-----------
filing, prosecution, and maintenance of all Patent Rights claiming Technology
arising from the Program. Such cooperation includes, without limitation, (i)
promptly executing all papers and instruments, or requiring its employees,
consultants, and agents to execute such papers and instruments, as reasonable
and appropriate so as to enable one or both parties to file, prosecute,
-15-
<PAGE>
and maintain such Patent Rights in any country; (ii) promptly informing the
other party of matters that may affect the preparation, filing, prosecution, or
maintenance of any such Patent Rights; and (iii) undertaking no actions that are
potentially deleterious to the preparation, filing, or prosecution of any such
Patent Rights.
8.7 Abandonment of Joint Patent Rights. In the event that the parties
----------------------------------
fail to complete the Program , for whatever reason, the parties shall discuss in
good faith whether to abandon any pending or unpublished patent applications
within the Joint Patent Rights relating to the Program. The parties recognize
that publication of such Joint Patent Rights could adversely affect each of
their interests after reversion occurs under such Section 5.5.
9. Research Materials.
------------------
9.1 Ownership of Research Materials. In the course of the Program, one
-------------------------------
party (the "Provider") may transfer to the other party (the "Recipient") certain
-------- ---------
of its research materials. The Recipient acknowledges and agrees that such
research materials are and shall be owned by the Provider. The Recipient agrees
to execute and deliver any documents of assignment or conveyance to effectuate
the ownership rights of the Provider in such research materials. Specifically,
NeuroSearch acknowledges and agrees that all Library Extracts provided to
NeuroSearch in the Program are proprietary to and owned by Phytera and are or
may be covered by claims of Phytera Patent Rights.
9.2 Use and Transfer of Research Materials. Except as otherwise agreed
--------------------------------------
by the Committee, the Recipient agrees to use research materials provided by the
Provider solely for purposes set forth in this Agreement and shall not
distribute such research materials to any third party other than its employees
and consultants who are working on the Program.
9.3 Additional Restrictions for Proprietary Research Materials. In the
----------------------------------------------------------
case of proprietary research materials furnished by a Provider, Recipient agrees
(i) not to transfer such proprietary research materials to any third party
without the prior written consent of the Provider, (ii) to permit access to the
proprietary research materials only to its employees and consultants requiring
such access, (iii) to inform such employees and consultants of the proprietary
nature of the proprietary research materials, and (iv) to take reasonable
precautions, at least as stringent as those observed by Recipient to protect its
own proprietary materials, to ensure that such employees and consultants observe
the obligations of Recipient under this Section 9.3.
9.4 Disposition of Unused Research Materials. At the request of
----------------------------------------
Provider, Recipient will return or destroy any unused research materials
furnished by Provider.
9.5 Compliance with Law. Recipient agrees to comply with all laws and
-------------------
regulations applicable to the use, storage, disposal, and transfer of research
materials furnished by Provider. Recipient assumes sole responsibility for any
violation of such laws or regulations by Recipient or any of its Affiliates or
Sublicensees.
-16-
<PAGE>
9.6 Limitation of Liability. Any research materials delivered pursuant
-----------------------
to this Agreement are understood to be experimental in nature and may have
hazardous properties. Recipient should assume that the compounds are dangerous
and should use appropriate precautions. PROVIDER MAKES NO REPRESENTATIONS, AND
EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO
THE RESEARCH MATERIALS FURNISHED TO RECIPIENT. THERE ARE NO EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE
USE OF THE RESEARCH MATERIALS WILL NOT INFRINGE ANY PATENT OR OTHER INTELLECTUAL
PROPERTY RIGHTS OF A THIRD PARTY.
10. Confidentiality.
---------------
10.1 Confidential Information. From time to time during the term of
------------------------
this Agreement, and in order to carry out the provisions of this Agreement, it
may be necessary for one of the parties to disclose Confidential Information to
the other. For the purposes of this Agreement, Confidential Information shall
include the Extracts, including the identity of the Extracts, supplied by
Phytera under this Agreement, the data generated by the Collaboration or any
other activity conducted pursuant to this Agreement, the Validated Hit Extracts,
the Lead Molecules, Phytera's cell culture techniques and any strategies, plans
or developments relating to any of the foregoing, the identity of the Assays and
NeuroSearch's protocols for the Assays, the business, financials, technology,
research strategy, employees, infrastructure, collaborators, advisors,
consultants, Boards of Directors and Scientific Advisory Boards of Phytera and
NeuroSearch, respectively, and their respective Affiliates.
10.2 Non-Disclosure Obligations.
--------------------------
(a) The recipient of such Confidential Information (the "Recipient")
undertakes to treat any and all of such Confidential Information as the other
party may disclose (the "Discloser") to the Recipient during the term of this
Agreement and for a period of ten (10) days thereafter as strictly confidential
and shall not divulge it to any third party for any purpose whatsoever and shall
not make use of such Confidential Information or any part thereof for any
purpose other than carrying out the terms of this Agreement without the
Discloser's prior written consent. Any data or information generated by or as a
result of the Collaboration or any other activity conducted pursuant to this
Agreement or any data or information with respect to the Library Extracts, or
the Patent Rights hereunder shall not be disclosed to any third party nor be
used for any purpose other than carrying out the terms of this Agreement without
the other party's written consent.
-17-
<PAGE>
(b) In the event that the Recipient visits any of the establishments
of the Discloser, the Recipient undertakes that any further Confidential
Information which may come to the Recipient's knowledge, as a result of any such
visit, shall be deemed to be Confidential Information and shall be subject to
the provisions of Paragraph (a) of this Section 10.2.
10.3 Limitations. The undertakings in Paragraphs (a) and (b) of this
-----------
Section 10.2 shall not apply to information that (i) at the time of disclosure
is published or otherwise generally available to the public; (ii) after
disclosure by Discloser is published or becomes generally available to the
public otherwise than through any act or omission on the part of Recipient;
(iii) the Recipient can establish by written documentation that such information
was in its possession at the time of disclosure and that such information was
not acquired directly or indirectly from the Discloser; (iv) was rightfully
acquired from a third party who did not obtain it under pledge of secrecy to the
Discloser or another party; or (v) was required to be disclosed by law.
10.4 Samples. NeuroSearch shall not supply or send any samples of
-------
Extracts to any third party, other than to regulatory agencies as required by
law, unless the sending of such samples shall have been approved by the
Committee and such samples are subject to Section 9 of this Agreement.
10.5 Publications.
------------
(a) Procedure. Phytera and NeuroSearch recognize the need to
---------
obtain valid patent protection. Consequently, Phytera, NeuroSearch and their
respective employees and consultants and any other Third Party wishing to make a
publication (including any oral disclosure made without obligation of
confidentiality) relating to work performed by such party as part of the
collaboration described in this Agreement (the "Publishing Party") shall deliver
to the other party (the "Reviewing Party") a copy of the proposed written
publication at least ninety (90) days prior to submission for publication, or an
abstract of such oral disclosure at least thirty (30) days prior to submission
of the abstract or the oral disclosure, whichever is earlier. The Reviewing
Party shall have the right (i) to propose modifications to the publication for
patent reasons, (ii) to request a delay in publication or presentation in order
to protect patentable information, or (iii) to request that the information be
maintained as a trade secret and, in such case, the Publishing Party shall not
make such publication or disclosure. If the Reviewing Party requests a delay as
described in clause (ii) in the preceding sentence, the Publishing Party shall
delay submission or presentation of the publication for a period sufficient to
enable protection of the Reviewing Party's rights in such information to be
filed.
(b) Resolution. Only upon the receipt of written approval of the
----------
Reviewing Party may the Publishing Party proceed with the written publication or
the oral presentation.
10.6 Injunctive Relief. The parties hereto understand and agree that
-----------------
remedies at law may be inadequate to protect against any breach of any of the
provisions of this Article 10 by
-18-
<PAGE>
either party or their employees, agents, officers or directors or any other
person acting in concert with it or on its behalf. Accordingly, each party shall
be entitled to the granting of injunctive relief by a court of competent
jurisdiction against any action that constitutes any such breach of this Article
10. It is understood that such injunctive relief is intended solely as
provisional relief pending the dispute resolution procedures described in
Section 13 below.
11. Representations and Warranties.
------------------------------
11.1 General. Each party warrants and represents to the other that it
-------
has the legal right and power to enter into this Agreement, to extend the rights
and licenses granted to the other in this Agreement, and to perform fully its
obligations hereunder, and that it has not made nor will it make any commitments
to others in conflict with or in derogation of such rights or this Agreement.
11.2 Services. Each party warrants and represents to the other that it
--------
shall conduct its activities in a good scientific manner and in compliance with
all applicable good laboratory and manufacturing practices and all applicable
legal requirements.
12. Indemnity.
---------
12.1 Indemnity Obligations. Each party shall indemnify and hold harmless
---------------------
the other party and its officers, directors, employees and agents from and
against all liabilities, claims, actions and proceedings and all expenses
arising in connection therewith (including without limitation, damages,
judgments, awards, costs and attorney's fees and disbursements) which they may
incur or which may be asserted against them arising out of or by reason of the
activities of such party, its Affiliates or Licensees, or by their respective
officers, directors, employees or agents pursuant to this Agreement with the
exception of those arising from the intentional wrongful actions or gross
negligence of the other party or any of its employees or agents or from the
breach of any representation, warranty or obligation of the other party as
specified herein.
12.2 Procedure. Promptly after learning of the occurrence of any event
---------
which gives rise to its rights under the provisions of Section 12.1, the
indemnified party shall notify the other party in writing of any such matter.
The indemnified party shall cooperate with the other party in the negotiation,
compromise and defense of any such matter. The indemnifying party shall be in
charge of and control such negotiations, compromise and defense. In no event
shall the indemnified party compromise or settle any such matter without the
prior consent of the other party and such party shall not be bound by any such
compromise or settlement without its prior written consent.
13. Arbitration.
-----------
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<PAGE>
Licensor and Licensee shall devote all reasonable efforts to amicably
resolve any disputes between them concerning their respective rights and
obligations under the Agreement. However, if the parties are unable to resolve a
dispute within sixty (60) days following the day on which either party provides
written notice of the dispute to the other party, the dispute will be resolved
or settled at the request of either party by arbitration to be conducted in
London, in accordance with the rules of the International Chamber of Commerce by
three (3) arbitrators selected by the parties in conformity with those rules. In
addition to dealing with the merits of the case, the arbitration award shall fix
the costs of the arbitration and decide which of the parties shall bear such
costs or in which proportion such costs shall be borne by the parties. The
language of the arbitration shall be the English language. The decision of the
arbitrators shall be final and binding upon the parties and their respective
Affiliates and the parties hereby waive their respective rights to any form of
appeal therefrom. Notwithstanding anything contained above to the contrary,
issues involving the validity of patents will be decided by the courts or patent
offices of the country which issued the patents in question. Both parties shall.
continue their respective obligations under the Agreement during any such
arbitration proceedings.
14. Miscellaneous.
-------------
14.1. Publicity. Except as provided in Section 9.5 above, no press
---------
release, advertising, promotional sales literature, or other promotional oral or
written statements to the public in connection with or alluding to work
performed under this Agreement or the relationship between the parties created
by it, having or containing any reference to Phytera or NeuroSearch, shall be
made by either party without the prior written approval of the other party,
except for restatements of previously approved statements and disclosures
required by applicable law or regulation.
14.2 Relationship of Parties. For the purposes of this Agreement,
-----------------------
each party is an independent contractor and not an agent or employee of the
other party. Neither party shall have authority to make any statements,
representations, or commitments of any kind, or to take any action which shall
be binding on the other party, except as may be explicitly provided for herein
or authorized in writing. In particular, (i) neither party shall represent to
creditors or vendors that such party has any authority to obligate or bind the
other party, and shall affirmatively correct any misconception to that effect
and (ii) neither party shall use the name of the other party in connection with
such transactions without the prior written consent of the other party, which
consent may be withheld in its sole discretion.
14.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.
14.4 Headings. All headings in this Agreement are for convenience only and
--------
shall not affect the meaning of any provision hereof.
-20-
<PAGE>
14.5 Binding Effect. This Agreement shall inure to the benefit of and be
--------------
binding upon the parties and their respective lawful successors and assigns.
14.6 Assignment. This Agreement may not be assigned by either party
----------
without the prior written consent of the other party, except that either of the
parties may assign this Agreement to a successor in connection with the merger,
consolidation, or sale of all or substantially all of its assets or that portion
of its business pertaining to the subject matter of this Agreement. Each Party
under this Agreement shall have the right to assign to an Affiliate all rights
and obligations under this Agreement.
14.7 Notices. All notices, requests, demands and other communications
-------
required or permitted to be given pursuant to this Agreement shall be in writing
and shall be deemed to have been duly given upon the date of receipt if
delivered by hand, recognized national overnight courier, confirmed facsimile
transmission, or registered or certified mail, return receipt requested, postage
prepaid, to the following addresses or facsimile numbers:
If to NeuroSearch:
NeuroSearch A/S
26B Smedeland
DK-2600
Glostrup, Denmark
Attn: Dr. J0rgen Buus Lassen, President
If to Phytera:
Phytera, Inc.
377 Plantation Street
Worcester, MA 01605
Attn: Dr. Malcolm Morville, President
Either party may change its designated address and facsimile number by notice to
the other party in the manner provided in this Section 14.7.
14.8 Amendment and Waiver. This Agreement may be amended, supplemented,
--------------------
or otherwise modified at any time, but only by means of a written instrument
signed by both parties. Any waiver of any rights or failure to act in a specific
instance shall relate only to such instance and shall not be construed as an
agreement to waive any rights or fail to act in any other instance, whether or
not similar.
14.9 Governing Law. This Agreement and the legal relations among the
-------------
parties shall be governed by and construed in accordance with the laws of the
United Kingdom, irrespective of any conflict of laws principles.
-21-
<PAGE>
14.10 Severability. In the event that any provision of this Agreement
------------
shall, for any reason, be held to be invalid or unenforceable in any respect,
such invalidity or unenforceability shall not affect any other provision hereof,
and this Agreement shall be construed as if such invalid or unenforceable
provision had not been included herein.
14.11 Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties with respect to the subject matter hereof and supersedes any
and all prior or contemporaneous oral and prior written agreements and
understandings between the parties.
-22-
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Agreement as a sealed instrument effective as of the date first above written.
NEUROSEARCH A/S
By: /s/ Jorgen Buus Lassen
----------------------------------------
Dr. Jorgen Buus Lassen
President and Chief Executive Officer
PHYTERA, INC.
By: /s/ Stephen DiPalma
----------------------------------------
Stephen DiPalma
Vice President and Chief Financial Officer
-23-
<PAGE>
Appendix A
[
]*
_____________________
* This portion of the Exhibit has been omitted pursuant to a Request for the
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
-24-
<PAGE>
EXHIBIT 10.19
PHYTERA, INC.
and
CHIRON CORPORATION
________________________________________________________________________________
COLLABORATION
AGREEMENT
________________________________________________________________________________
THIS AGREEMENT is made on May 20, 1998 between:
1. PHYTERA, INC., incorporated in Delaware, and located at 377 Plantation
Street, Worcester, Massachusetts 01605 ("PHYTERA") and
2. CHIRON CORPORATION, incorporated in Delaware, and located at 4560 Horton
Street, Emeryville, California 94608 ("CHIRON").
RECITALS
Phytera has an extensive library of natural product extracts derived from
plants and marine organisms, including, without limitation, the ExPAND and
uMARINE extracts.
Chiron is an international pharmaceutical company experienced in
discovering, developing, registering and marketing pharmaceutical products and
is able to facilitate the research and development of such products.
Chiron wishes to collaborate with Phytera in the area of identifying
healthcare products associated with the Targets referenced herein with both
parties participating in the proceeds of commercialization of such products.
IT IS AGREED as follows.
1. DEFINITIONS AND INTERPRETATION
The following definitions apply unless the context requires otherwise.
1.1 "ADDITIONAL EXTRACTS" has the meaning referenced in Section 3.6.
1.2 "AFFILIATE" means, with respect to any party hereto, any entity that
directly or indirectly controls, is controlled by, or under common control with,
that party. For such purpose the terms "control" means ownership or control of
at least 50% of the voting interest in the entity in question. Without limiting
the generality of the foregoing, the Affiliates of Chiron expressly exclude
Novartis AG, a Switzerland corporation, or any Affiliates of Novartis AG, or any
successors in interest thereof, ("Novartis"), unless and until such time as
Novartis exercises its rights to control Chiron in accordance with the terms and
conditions of the November 20, 1994 Governance Agreement between Chiron and
Novartis' predecessor Ciba Geigy Limited.
1
<PAGE>
1.3 "AGREEMENT TERM" has the meaning referenced in Section 14.4.
1.4 "ASSAYS" means the assays to be utilized for identification of
molecules by screening against targets in the Research Field, including any
primary or secondary assay or test proposed by Chiron for the purposes of this
Agreement.
1.5 "COLLABORATION TERM" shall have the meaning referenced in Section
14.1.
1.6 "DERIVATIVE COMPOUND SERIES" means homologs, isomers, analogs and
derivatives, substitutions or formulations of a Licensed Compound, as those
terms are defined below in this Section. "Homolog" means a compound differing
by one to three (1-3) R groups (e.g., ethyl, propyl, methylene group or ethylene
group, or similar or equivalent combinations thereof). "Isomer" means a
compound differing by position isomery, geometric isomery, or stereochemical
isomery. "Analog" shall have the meaning generally understood by practitioners
of the art (e.g., a compound differing by removal of one or two (1 or 2)
individual small elements or one larger element thereof and/or addition of zero
to three (0-3) suggested small elements). Small elements include substituent
groups such as OH, OCH3, N02, NH2, halogen, S03H and similar groups. A larger
element may include up to 10 carbons and up to 3 heteroatoms. "Derivative"
means a compound derived by one to three (1-3) substitutions, deletions or
additions or simple oxidations or reductions made to a Licensed Compound or any
compound within a Derivative Compound Series. Salts, formulations and prodrugs
of a Licensed Compound or any compound within a Derivative Compound Series shall
also be included within the Derivative Compound Series.
1.7 "EFFECTIVE DATE" means the date of signing of this Agreement.
1.8 "EXEMPT PRODUCT" means a compound which is based on a Licensed
Compound, which arises as a result of the activities referenced in this
Agreement, which is not a Tertiary Product, and which is discovered more than
five (5) years after the LC Declaration Date for the relevant Licensed Compound
in question, irrespective of whether such compound is inside or outside the
Derivative Compound Series for such Licensed Compound, and for which Chiron, its
Affiliate or licensee has received governmental health regulatory approval to
market and sell in a country(s).
1.9 "EXTRACT" means a solution or suspension of chemicals derived from
fermenting a plant or marine microorganism, or the residue remaining from the
evaporation of solvent from such a solution or suspension.
1.10 "INFORMATION" has the meaning set out in Article 12.
1.11 "INITIAL EXTRACTS" has the meaning referenced in Section 3.1.
1.12 "LICENSE" has the meaning set forth in Section 5.2.
1.13 "LICENSED COMPOUND" OR "LC" means a compound within a Licensed
Compound Series.
2
<PAGE>
1.14 "LICENSED COMPOUND SERIES" OR "LCS" means all compounds contained
within a Optioned Validated Lead Structure Series, and analogues or derivatives
thereof, which are the subject of Chiron's Licensed Compound Declaration in
accordance with Section 5. 1.
1.15 "LC DECLARATION DATE" shall mean, with respect to any Licensed
Compound Series (and any Licensed Compounds within such Series), the date upon
which Chiron declares its intent to secure a License to such Licensed Compound
Series pursuant to Section 5. 1.
1.16 "NET SALES" means, in relation to a Product, the actual invoiced
price at which the Product is sold by Chiron or any of its sub-licensees to an
independent third party in a bona fide arms length transaction less the
following deductions to the extent actually allowed and taken:
(i) all trade, cash and quantity credits, discounts, refunds or rebates;
and
(ii) allowances or credits for returns; and
(iii) packaging and handling fees (if charged separately); and
(iv) prepaid freight and insurance; and
(v) sales tax and other governmental charges (including a value added
tax) actually paid in connection with the sale (but excluding what
are commonly known as income taxes).
In the event that Products are sold in combination with another product or
active component, (a "Combination Product") for a single price, Net Sales from
sales of Combination Product for purposes of calculating royalties due under
this Agreement shall be calculated by multiplying the Net Sales of that
Combination Product by the fraction A/(A+B), where A is the gross selling price
of the Product sold separately in the country of sale and B is the gross selling
price of the other product(s) or component(s) sold separately in the country of
sale. In the event that no such separate sales are made, Net Sales, for purposes
of determining royalty payments on such Combination Products, shall be a
reasonable apportionment of the gross amount invoiced therefor based upon the
relative contribution of the Products to the price of the Combination Product.
Such apportionment shall be negotiated in good faith between the parties and
such apportionment shall be established prior to the time that a party hereto
shall have the right to sell such Combination Products.
1.17 "NATURAL PRODUCTS CHEMISTRY ISOLATION AND IDENTIFICATION" OR "NPCH"
means the process whereby Extracts agreed upon by Chiron and Phytera pursuant to
Section 3.3 are analyzed by Phytera for the identification of Validated Lead
Structures.
1.18 "OPTIONED VALIDATED LEAD STRUCTURE" OR "OVLS" means a compound as to
which the parties have identified a Validated Lead Structure, and is contained
within a Optioned Validated Lead Structure Series.
1.19 "OPTIONED VALIDATED LEAD STRUCTURE SERIES" OR "OVLSS" means the
compound series which contains all Validated Lead Structures for any Target,
which compound series is the subject of Chiron's OVLS Declaration referenced in
Article 5.
1.20 "OVLS EVALUATION LICENSE AND OPTION TERM" shall have the meaning
referenced in Article 5 and Section 14.3 herein.
3
<PAGE>
1.21 "PATENT" means a governmental grant in any country, and any
provisional or regular application therefor and any divisions or continuations
in whole or in part thereof, of exclusive rights to the practice of an invention
or discovery. Any subsequent addition, extension, registration, confirmation,
reexamination, reissue, supplementary protection certificate or renewal of such
governmental grant is included. Patents include any Patent owned, licensed or
otherwise acquired by Phytera which is useful or necessary in the development or
commercialization of Optioned Validated Lead Structures, Licensed Compounds or
Products, including, without limitation, Pre-LC Declaration Patents, Post-LC
Declaration Patents, or Phytera Independent Patents. Expressly excluded from
Patents are any patents claiming inventions discovered or reduced to practice by
Chiron outside of this Agreement and the collaboration contemplated herein,
including, without limitation, Chiron patents covering libraries or compounds
outside the scope of this Agreement.
1.22 "POST-LC DECLARATION PATENTS" means, with respect to any Licensed
Compound, all Patents claiming Products or Licensed Compounds, and any and all
derivatives thereof, and methods of making or using Licensed Compounds or
formulations of Licensed Compounds and Products, which are filed after the LC
Declaration Date, regardless of inventorship.
1.23 "PRE-LC DECLARATION PATENT" means, with respect to any Licensed
Compound and its precursor or related compounds and any analogues or derivatives
thereof (including, without limitation, Optioned Validated Lead Structures), all
Patents claiming such precursor or related compounds and any analogues or
derivatives thereof and methods of making or using Licensed Compounds or
formulations of Licensed Compounds filed prior to the LC Declaration Date,
regardless of inventorship.
1.24 "PRIMARY PRODUCT" means a compound which is a Licensed Compound or a
compound within the Derivative Compound Series of such Licensed Compound, which
arises as a result of the activities referenced in this Agreement and is
discovered within five years after the LC Declaration Date for the Licensed
Compound in question, for which Chiron, its Affiliate or licensee has received
governmental health regulatory approval to market and sell in a country(s).
1.25 "PRODUCT" means a Primary Product, Secondary Product, Tertiary
Product or Exempt Product.
1.26 "PRODUCT PATENT" means, with respect to a Product, an issued Patent
containing valid issued claims directed to such Product or methods of making or
using a Product or formulations of a Product, which patent claims are directed
to subject matter conceived or reduced to practice as a result of the activities
referenced in this Agreement.
1.27 "RESEARCH FIELD" means the screening of natural products against
Targets, for the identification and commercialization of compounds useful as
healthcare products.
1.28 "SCIENTIFIC COMMITTEE" means the committee referenced in Article 11.
1.29 "SECONDARY PRODUCT" means a compound which is based on a Licensed
Compound but which is outside the Derivative Compound Series for such Licensed
Compound, which arises as a result of the activities referenced in this
Agreement and which is discovered within five (5) years after the LC Declaration
Date for the relevant Licensed Compound in
4
<PAGE>
question, for which Chiron, its Affiliate or licensee has received governmental
health regulatory approval to market and sell in a country(s).
1.30 "PHYTERA INDEPENDENT PATENT" means an issued patent owned by Phytera
which contains issued valid claims directed to a process, method or composition
of matter practiced by Chiron in making or using a Tertiary Product, which
process, method or composition of matter was discovered by Phytera independently
of this Agreement.
1.31 "TERTIARY PRODUCT" means a compound which is not a Primary or
Secondary Product, but which is covered by a Phytera Independent Patent.
1.32 "TARGETS" means the Targets referenced in Exhibit A.
1.33 "VALIDATED HIT EXTRACT" OR "VHE" means an Extract with appropriate
evidence of biological activity in an Assay sufficient to warrant progression to
NPCII as determined by the Scientific Committee from time to time.
1.34 "VALIDATED LEAD STRUCTURE" means an individual compound as to which
Phytera (or, if applicable, Chiron) has completed NPCII, has identified the
compound's chemical structure and verified its biological activity in primary
and secondary screens.
1.35 "VLS EVALUATION TERM" shall have the meaning referenced in Section
14.2 herein.
2. SCOPE OF THE COLLABORATION
2.1 Exclusive Collaboration.
During the Collaboration Term, Phytera shall collaborate exclusively with
Chiron in the Research Field. Further, Phytera agrees that its rights to (a)
undertake any natural product screening or other drug discovery and development
activity against Targets in the Research Field for any third party or on its own
behalf, or (b) supply any Extracts to or undertake any screening activities for
any third party for screening against any Targets in the Research Field shall be
subject to the Non-Competition Covenants referenced in Article 9 herein.
3. COLLABORATION WORKPLAN
This Article 3 outlines the schedule of activities associated with Extract
delivery, screening, compound identification, structural analysis, reporting of
compound data and other activities to be undertaken by the parties hereto, which
schedule shall be reviewed and updated by the Scientific Committee from time to
time. Phytera shall notify Chiron of any problems or projected delays in
meeting the timelines referenced herein.
3.1 DELIVERY OF EXTRACTS.
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<PAGE>
No later than [ ]* after the Effective Date Phytera will deliver to
Chiron for natural product screening [ ]* ExPAND and uMARINE Extracts (the
"Initial Extracts") with appropriate corresponding documentation. With respect
to ExPAND Extracts, such documentation shall indicate the number of extracts
from various plant orders (as represented on a phylogenic tree) and the number
of species represented in the Extracts. With respect to uMARINE Extracts, the
documentation shall indicate the geographic locations from which the samples
used to derive the Extracts were sourced and the type of microorganisms (e.g.,
fungus, actinomycetes or eubacterium) represented in the Extracts. Such
Extracts shall be selected by Phytera from its library of existing Extracts in
an effort to achieve the broadest possible chemical diversity, taking into
consideration phylogenic and habitat characteristics. Extracts selected by
Phytera shall be supplied in a form generally compatible with Chiron's assay
protocols based on Chiron's test of controls previously supplied by Phytera.
3.2 SCREENING AND SECONDARY TESTS.
(a) Chiron shall conduct primary screening of the Initial Extracts
against the Targets. The parties agree that Chiron shall have
the right to screen any or all of the Extracts provided by
Phytera hereunder against any or all of the Targets. It is
anticipated that Chiron will use commercially reasonable efforts
to conclude primary screening within [ ]* following Chiron's
receipt of the Initial Extracts, and shall attempt to conclude
primary screening of approximately [ ]* of the Initial Extracts
against [ ]* Targets within [ ]* following Chiron's receipt of
the Initial Extracts.
(b) Chiron shall conduct secondary in vitro or in vivo evaluation of
the Initial Extracts, or fractions thereof as necessary, to
better define activity and specificity parameters for the
selection of Validated Hit Extracts for submission to NPCII.
(c) When necessary and mutually agreed, Chiron will transfer
appropriate assays, protocols, and reagents to Phytera, solely
for Phytera's internal use in carrying out NPCH pursuant to this
Agreement. In the event that both parties agree to a transfer
pursuant to this Section 3.2(c), Chiron shall reimburse
Phytera's fairly allocable out of pocket travel and equipment
costs (e.g., excluding FTE costs under Section 6.2) attributable
to such transfer and subsequent performance of assays and NPCH
activities conducted by Phytera pursuant to this Agreement. As a
condition of such reimbursement, Phytera shall submit its
estimate of such costs prior to such transfer. Further, Phytera
shall deliver extracts and other necessary reagents to Chiron's
facilities, and Chiron shall have the right to conduct assays in
support of NPCII activities at its own facilities, in the event
that Chiron determines in its reasonable discretion that the
costs associated
________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
6
<PAGE>
with the transfer of assays, protocols and reagents to Phytera
referenced in this Section 3.2 (c) are unreasonable or
unacceptable to Chiron. Chiron grants Phytera no other right or
license to any Chiron materials, Patents or Information.
3.3 NPCHII.
(a) In conjunction with Chiron's conduct of the activities
referenced in Section 3.2 above with respect to other Targets,
Chiron and Phytera shall review the screening data generated
pursuant to Section 3.2 for each Target, and the parties shall
jointly select [ ]* Extracts which demonstrate sufficient
activity, specificity or other characteristics for entry into
NPCH ("Validated Hit Extracts.")
(b) On a Target by Target basis, with respect to the Validated Hit
Extracts, Phytera shall undertake all activities reasonably
necessary to obtain Validated Lead Structures for each of the [
]* Validated Hit Extracts, which activities shall commence
subsequent to the joint selection of Validated Hit Extracts from
[ ]* Targets. Phytera shall provide up to [
]* to perform such activities, subject to receipt of the R&D FTE
Support payment referenced in Section 6.2(a). It is anticipated
that the activities referenced in this Section 3.3 (b) shall be
completed within the Collaboration Term. The parties will
mutually agree to extend the Collaboration as reasonably
necessary to complete these activities.
3.4 REPORTING.
As soon as practicable, but in no event less than thirty (30) days after
the completion of each phase of the Collaboration Workplan referenced above for
each Target, each party shall provide the other party with a written report in
reasonable detail summarizing the activities undertaken during that phase. In
the case of Phytera, such reports shall include documentation describing the
biological sources of hit extracts under review, along with available
information describing the chemical characterization of such extracts, fractions
or isolates thereof. The parties shall confer together through the Scientific
Committee by mutually acceptable means, including, including, without
limitation, by telephone or by means of a video conference facility for the
purpose of discussing the report and recommending further activities.
3.5 OTHER DELIVERABLES.
________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
7
<PAGE>
(a) At any time during the Collaboration Term, in addition to the
reports referenced in Section 3.4 Phytera will, if requested by
Chiron, exercise best efforts to provide to Chiron reasonable
additional quantities of Validated Hit Extracts for Chiron's use
in (i) confirming activity in primary and secondary assays; and
(ii) confirming selectivity and other pharmacologically relevant
characteristics, subject to Chiron's reimbursement of Phytera's
fairly allocable costs.
(b) At any time prior to expiration of the VLS Evaluation Term,
Phytera will, if requested by Chiron, exercise best efforts to
provide larger amounts of Validated Lead Structures or Validated
Hit Extracts, subject to Chiron's reimbursement of Phytera's
fairly allocable costs.
(c) At any time prior to expiration of the OVLS Evaluation License
and Option Term, if requested by Chiron, Phytera shall transfer
to Chiron its cell culture materials and protocols necessary for
scale-up and production of OVLS, solely for Chiron's evaluation
purposes, subject to Chiron's reimbursement of Phytera's fairly
allocable costs and Chiron's compliance with the confidentiality
provisions of Article 12 herein. Phytera grants Chiron no other
rights or licenses to materials referenced in this Section 3.5
(c).
3.6 PURCHASE OF ADDITIONAL EXTRACTS.
At any time prior to the expiration of the OVLS Evaluation License and
Option Term, on a Target by Target basis, Chiron shall have the right to order
and screen, and Phytera shall have the obligation to deliver additional ExPAND
and uMARINE Extracts (the "Additional Extracts"), subject to availability of
such Extracts. Such Additional Extracts shall be subject to the terms of this
Agreement as if included in the Initial Extracts, subject to the provisions of
Section 6.4 regarding payment for the Additional Extracts.
4. OPTIONED VALIDATED LEAD STRUCTURES
4.1 Declaration of Optioned Validated Lead Structure Series by Chiron..
For a period of [ ]* after Chiron receives from
Phytera a complete report detailing all information relevant to the Validated
Lead Structures for the Target in question, (the "VLS EVALUATION TERM") Chiron
shall have the right to undertake whatever activities it deems necessary to
determine the suitability of the Validated Lead Structures for its commercial
activities, and shall have the right to declare by notice to Phytera that it
wishes to acquire the OVLS Evaluation
_________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
8
<PAGE>
License referenced in Section 4.2 below with respect to any or all Validated
Lead Structures for the given Target (the "OVLS DECLARATION"). Upon Chiron's
exercise of the OVLS Declaration, and subject to Section 4. 1 (a) and Chiron's
payment obligations referenced in Section 6.5, the entire series of compounds
which are the subject of such OVLS Declaration, and any analogs or derivatives
thereof, shall be deemed the Optioned Validated Lead Structures Series, and all
compounds contained within the Optioned Validated Lead Structure Series shall be
deemed Optioned Validated Lead Structures.
(a) In the event that Phytera or a third party collaborator of
Phytera independently of this Agreement discovers verifiable
biological activity for a Validated Lead Structure declared by
Chiron, and such discovery has occurred before the discovery of
biological activity for the VLS by Phytera or Chiron under this
Agreement (a "Prior Discovery"), and such VLS is therefore
encumbered, either by virtue of a pre-existing obligation to a
third party or under an internal Phytera discovery program,
Chiron shall not have the right to obtain an OVLS Evaluation
License with respect to such Validated Lead Structure(s) (an
"Exempt VLS"), provided that:
(1) Phytera shall notify Chiron in writing within [
]* following Phytera's characterization of such VLS
that any such Exempt VLS is the subject of a Prior
Discovery, and
(2) Phytera shall provide Chiron a written report which
identifies when such Prior Discovery occurred, and which
otherwise substantiates Phytera's claim that such compound
is an Exempt VLS (e.g., a structural data as shown by NMR or
HPLC analysis in a report showing the date such data was
discovered.)
4.2 OVLS EVALUATION LICENSE.
Once Chiron has made the OVLS Declaration pursuant to Section 4. 1, Phytera
shall grant Chiron an exclusive worldwide license, with right to suublicense,
under all Patents and Information owned, licensed, acquired or controlled by
Phytera, to undertake research and development activities with respect to all
Optioned Validated Lead Structures which are the subject of the OVLS Declaration
and derivatives and analogues thereof (the "OVLS EVALUATION LICENSE") for a
period of [ ]* after the OVLS Declaration (the "OVLS EVALUATION LICENSE AND
OPTION TERM") During such OVLS Evaluation License Option Term, and any relevant
term of non-competition referenced in Article 9, Phytera shall not engage in any
screening, research or development activities with respect to any Optioned
Validated Lead Structures on its own or enter into any third party agreements
with respect to such activities, or grant any other parties rights to any
Optioned Validated Lead Structures.
_____________________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately wiht the Securities and Exchange
Commission.
9
<PAGE>
5. LICENSED COMPOUNDS
5.1 CHIRON'S LICENSED COMPOUND DECLARATION AND EXERCISE OF OPTION TO
LICENSED COMPOUND.
(a) At any time within the OVLS Evaluation License and Option
Term., Chiron may secure the License referenced in Section
5.2 with respect to any or all compounds contained within a
Optioned Validated Lead Structure Series by notifying
Phytera of Chiron's interest in obtaining the License
referenced in Section 5.2 (the "LC DECLARATION") Chiron's
provision of the LC Declaration to Phytera shall constitute
Chiron's exercise of its option to the Optioned Validated
Lead Structure Series in question, and upon Phytera's
receipt of Chiron's LC Declaration (the "LC DECLARATION
DATE"), any and all compounds which are the subject of
Chiron's LC Declaration will be deemed to be a Licensed
Compound(s) subject to the License referenced in Section
5.2.
(b) Phytera shall execute (and shall ensure that any of its
employees execute and that any third party involved in the
discovery or invention over whom they have control executes)
all necessary documents to perfect Chiron's rights pursuant
to this Article 5.
5.2 LICENSED COMPOUND AND PRODUCT LICENSE.
(a) In consideration of the License Fee referenced in Section
6.6, upon Phytera's receipt of the LC Declaration referenced
in Section 5.1, Phytera shall immediately grant and does
hereby grant to Chiron an exclusive worldwide license, with
right to sublicense, to make, have made, use, import, offer
for sale, sell, have sold or otherwise commercialize any
Product based on or derived from a Licensed Compound and any
analogues or derivatives thereof under any and all Patents,
other intellectual property and Information owned, licensed,
acquired or controlled by Phytera as of the LC Declaration
Date, and any other Patent(s) or Information owned,
licensed, acquired or controlled by Phytera before or after
the LC Declaration Date (the "LICENSE").
6. PAYMENTS
Chiron shall make payments to Phytera as follows:
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<PAGE>
6.1 EXTRACT DELIVERY PAYMENT. For Phytera's delivery to Chiron of the
Initial Extracts referenced in Section 3.1, [ ]* payable within
[ ]* following such delivery.
6.2 R&D FTE SUPPORT. Subject to Sections 6.2(a)(b) and (c), for Phytera's
provision of [ ]* in Phytera's performance of the NPCII Program
(the "Total FTE Payment"), Chiron shall pay Phytera a total of up to [
]*, as follows:
(a) Chiron shall pay Phytera [ ]* of the Total FTE
Payment within [ ]* after the parties have selected
Validated Hit Extracts pursuant to Section 3.3
(b) Chiron shall pay to Phytera [ ]* of FTE Payment
upon [
]*
(c) Phytera shall keep and provide Chiron with accounting
records for its FTE efforts undertaken pursuant to this
Section 6.2. In the event that Phytera does not utilize
[ ]* in its performance of the NPCII Program,
Chiron may elect to apply such unused FTE effort to other
activities performed by Phytera under this Agreement, as
mutually agreed by the parties. In the event that the
parties are unable to mutually agree upon other activities
to be performed by Phytera, Phytera shall provide Chiron
with a cash payment equivalent to such unused FTE effort
within [ ]* following the conclusion of the Collaboration
Term.
6.3 SCALE-UP. In the event that Phytera engages in scale up manufacturing
of VHEs or OVLSs pursuant to Section 3.5, Chiron shall reimburse Phytera for its
fairly allocated costs associated with such scale up manufacturing.
6.4 ADDITIONAL EXTRACTS. In the event that Chiron purchases Additional
Extracts pursuant to Section 3.6, Phytera shall deliver such Extracts to Chiron.
For each Additional Extract delivered by Phytera to Chiron, and the right to
screen such Additional Extract against one (1) Target, Chiron shall pay Phytera
[ ]*. Chiron shall have the right to screen any and all such Additional
Extracts against any and all of the Targets, but shall pay Phytera an additional
[ ]* for each additional Target (i.e, second, third, fourth and fifth
Targets) against which the Additional Extract is screened. All payments made by
Chiron under this Section 6.4 shall be creditable, on a Target by Target basis,
against the non-competition fee referenced in Section 9.4.
__________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
11
<PAGE>
6.5 OVLS EVALUATION LICENSE AND OPTION FEE.
Within [ ]* following the OVLS Declaration by Chiron referenced
in Section 4. 1, Chiron shall pay to Phytera a non-refundable fee of [ ]*
(the "OVLS Evaluation License and Option Fee") for the exclusive right to
evaluate such Optioned Validated Lead Structure(s) and derivatives and analogues
thereof as a potential Licensed Compound until the conclusion of the OVLS
Evaluation License and Option Term. Such fee shall be a one time only obligation
per Optioned Validated Lead Structure Series and shall not be credited against
any royalty or other payment payable by Chiron to Phytera under this Agreement.
6.6 LICENSE FEE.
With respect to each Licensed Compound Series for which Chiron has taken a
License by making the LC Declaration referenced in Section 5.1, Chiron shall pay
Phytera within [ ]* after procuring such License a fee of [ ]* (the
"License Fee"). The License Fees paid by Chiron for Licensed Compounds shall not
be credited against any royalty payable by Chiron to Phytera under this
Agreement.
6.7 PAYMENT TERMS AND ARRANGEMENTS. All payments due by Chiron to Phytera
pursuant to this Agreement shall be (a) made payable to Phytera; and (b) made by
bank draft or telegraphic transfer to a bank account nominated by Phytera; and
(c) payable in United States currency, converted in accordance with Chiron's
standard accounting procedures, as modified by Chiron from time to time and (d)
unless otherwise agreed pursuant to this Agreement paid within [ ]* of any
notification or declaration pursuant to this Agreement.
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
12
<PAGE>
7. MILESTONE PAYMENTS
7.1 MILESTONE PAYMENTS.
Chiron shall pay to Phytera the milestone payments referenced below in
Section 7.2 with respect to the Licensed Compounds, subject to the foregoing:
(a) Chiron's milestone payment obligations shall apply only to
Licensed Compounds which are submitted as a product for an
indication which is separate and distinct from indications for
which other Licensed Compounds were submitted (e.g., in the event
that two Licensed Compounds are submitted to clinical evaluation
for the same indication, the second Licensed Compound shall not
be subject to additional milestone payments).
(a) With respect to the [ ]* Licensed Compounds
submitted to clinical evaluation as separate and distinct
products which satisfy the conditions referenced in Section
7.1(a), Chiron's milestone payments shall be [ ]* of the
payments referenced in Section 7.2. With respect to the [ ]*
Licensed Compound submitted to clinical evaluation as a separate
product for separate indication, the milestones payments
referenced in Section 7.2 shall be reduced by [ ]*. With
respect to the [ ]* Licensed Compound submitted to clinical
evaluation as a separate product for a separate indication, and
[ ]* Licensed Compounds submitted to clinical evaluation
as separate products for separate indications, the milestone
payments referenced in Section 7.2 shall be reduced by [ ]*.
(b) In the event that any Licensed Compound has been submitted to
clinical evaluation once for any indication, Chiron shall have no
obligation to pay any milestone fees in the event that the same
Licensed Compound is submitted to any subsequent clinical
evaluations for any indication.
(b) With respect to derivative compounds of Licensed Compounds which
are discovered more than [ ]* after the Declaration Date for the
Licensed Compound in question, Chiron shall have no obligation to
make the milestone payments referenced in this Article 7.
7.2 Subject to Sections 7.1 and 7.3, Chiron shall make the following
milestone payments within [ ]* of the occurrence of the following events:
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
13
<PAGE>
(a) [ ]* upon either (a) the [
]* or (b) the [
]* whichever occurs first; and
(b) [ [ * upon [
]*; and
(c) [ ]* upon [
]*; and
(d) [ ]* upon [
]*; and
(e) [ ]* at such time as [
]*.
7.3 APPLICATION OF MILESTONE PAYMENTS AS CREDITS AGAINST ROYALTIES.
(a) The milestone payments referenced in Sections 7.2(a) through
7.2(d) shall not be credited against any royalty payable by Chiron to Phytera
pursuant to Article 8, and;
(b) The [ ] milestone payment referenced in Section 7.2(e) shall
be fully recreditable against any royalty payable by Chiron to Phytera pursuant
to Article 8.
8. ROYALTIES
8.1 PAYMENTS ON NET SALES OF PRODUCTS. Chiron shall pay to Phytera
royalties on the Net Sales of Products sold by Chiron, its Affiliates or any of
its sublicensees on a country by country basis, during the royalty terms
specified in Section 8.2, at the following royalty rates:
(a) [ ]* of Net Sales of [ ]*;
(b) [ ]* of Net Sales of [ ]*; and
(c) [ ]* of Net Sales of [ ]*.
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
14
<PAGE>
No royalty shall be payable by Chiron with respect to Exempt Products.
Chiron's payment obligations under this Section 8.1 shall be due concurrently
with the statement referenced in Section 8.3.
8.2 TERM OF ROYALTY OBLIGATION.
(a) Subject to Section 8.2(b) and 8.2(c), Chiron's royalty
obligations to Phytera as to each Primary Product, Secondary
Product or Tertiary Product (excluding Exempt Products) as
provided in Section 8.1 shall terminate on a country-by-
country basis, on the expiration date of the last to expire
of the Product Patent(s), or, if applicable with respect to
a Tertiary Product, a Phytera Independent Patent, which
includes at least one claim covering the Product which has
not been disclaimed or held invalid by a court of competent
jurisdiction from which no appeal can be taken or, after
mutual consultation and agreement, an appeal is not taken.
(b) Subject to Section 8.2(d), Chiron shall pay royalties on
Primary Products and Secondary Products pursuant to Section
8.1 in any country(s) where no Product Patent has issued,
regardless of whether or not there are pending unissued
Product Patent claims in such country, provided that
Chiron's royalty obligations to Phytera as to each Primary
Product and Secondary Product sold in such country shall
terminate on the fifth anniversary of the first commercial
sale of each such Primary Product or Secondary Product in
such country. If, and at such time as, a Product Patent
issues in such country after such fifth anniversary,
Chiron's royalty obligation shall be revived and shall
thereafter terminate with respect to Primary Product(s) and
Secondary Product(s) sold in such country upon the last to
expire Product Patent(s) in such country
(c) If no Product Patent including at least one claim covering
the Primary Product or Secondary Product has been granted in
the country of sale within five (5) years from the filing
date of such Product Patent in that country, and at such
time any product is sold in that country which (i) would
infringe a claim of the Product Patent(s) or (ii) has the
same or closely related chemical formula as the Product
("Competitive Product"), then the royalties owing to Phytera
with respect to the Primary Product or Secondary Product
shall be reduced by [ ]* (the "Reduced Royalty"). If no
Product Patent issues in such country prior to the fifth
anniversary of the first commercial sale of such Primary
Product or Secondary Product, upon such anniversary Chiron's
obligation to pay the Reduced Royalty on Net Sales of
Primary Product or Secondary Product in such country shall
terminate, unless and until such time as a Product Patent
issues in such
15
<PAGE>
country, in which case Chiron's royalty obligation shall
terminate upon the last to expire Product Patent in such
country.
Upon expiration of Chiron's royalty obligations referenced in this Section
8.2 on a Product by Product and country by country basis, Chiron shall have a
fully paid up license under all Patents and intellectual property of Phytera
with respect to such Product in such country.
8.3 STATEMENT RELATING TO ROYALTIES.
For the purpose of notifying and paying royalties under Section 8.1 Chiron
shall, within [ ]* after each six month period from the date of the first
sale of each Product, furnish to Phytera a statement showing the Net Sales of
Products sold by Chiron, Affiliates of Chiron or its sublicensees during the six
months immediately preceding the end of such six month period and the royalties
and their method of calculation. The amount due as royalty in accordance with
the statement referred to in this Section 8.3 shall be paid by bank draft
accompanying the statement or by telegraphic transfer to an account nominated by
Phytera and shall be paid to Phytera by Chiron in United States currency.
8.4 RETENTION OF RECORDS.
At its usual place of business, Chiron shall keep true and accurate records
of all matters connected with the manufacture and sale of Products and shall
also keep proper books of account relating to money payable to Phytera hereunder
containing such true entries complete in every particular as may be necessary
for enabling the amount of such money to be conveniently ascertained.
8.5 RIGHT OF INSPECTION.
Phytera shall have the right at its own expense to appoint an independent
certified public accounting firm reasonably acceptable to Chiron and under
customary confidentiality obligations to Chiron, to audit the records and books
of account referred to in Section 8.4 solely for the purpose of verifying the
royalty payments made by Chiron to Phytera. Chiron shall give such accounting
firm all necessary assistance, including access to facilities and other
documents, subject to reasonable prior notice and during normal business hours,
to enable the amount of any royalty payable under this Agreement to be
ascertained or verified. Phytera's right of audit may be exercised no more
frequently than once in any calendar year. The accounting firm shall disclose to
Phytera only information relating solely to the accuracy of the royalties paid
and associated royalty reports.
9. NON-COMPETITION COVENANTS
9.1 During the Collaboration Term Phytera shall, without the payment of any
additional consideration by Chiron, refrain from engaging in research and
development activities, internally
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
16
<PAGE>
or in collaboration with other parties, with respect to the use of any Phytera
Extracts against any Targets.
9.2 Until the expiration of the VLS Evaluation Term, on a Target by Target
basis, Phytera shall, without the payment of any additional consideration from
Chiron, refrain from engaging in research and development activities, internally
or in collaboration with other parties, with respect to the use of any Extracts
purchased by Chiron pursuant to Article 3 against any Targets for which Chiron
is evaluating Validated Lead Extracts or Validated Lead Structures.
9.3 During the OVLS Evaluation License and Option Term, on a Target by
Target basis, Phytera shall:
(a) without payment of additional consideration from Chiron,
refrain from engaging in research and development activities, internally or in
collaboration with other parties, with respect to the use of any Extracts
purchased by Chiron pursuant to Article 3 against any Targets for which Chiron
has exercised its OVLS Declaration, and
(b) refrain from engaging in research and development
activities, internally or in collaboration with other parties, with respect to
the use of any and all Phytera extracts against a specified Target, on a Target
by Target basis, for which Chiron has exercised its OVLS Declaration pursuant to
Article 4, provided that Chiron paid Phytera a non-competition fee of [ ]* in
lieu of the OVLS Evaluation License and Option Fee referenced in Section 6.5
(the "OVLS Non-Competition Covenant").
9.4 Following the conclusion of the OVLS Evaluation License and Option
Term, on a Target by Target basis, Phytera shall for a period of [ ]* refrain
from engaging in research and development activities, internally or in
collaboration with other parties, with respect to the use of any and all Phytera
extracts against any specified Target, on a Target by Target basis, for which
Chiron has exercised its OVLS Declaration/Option, provided that Chiron pays
Phytera a non-competition fee in the amount of [ ]*, which fee shall be
in lieu of the License Fee referenced in Section 6.6 and shall be subject to the
credit referenced in Section 6.4 herein (the "Commercial Non-Competition
Covenant").
10. PATENTS
10.1 FILING AND PROSECUTION OF PATENTS.
(a) Ownership of Patents and Prosecution of Pre-LC Declaration
----------------------------------------------------------
Patents. All Patents, including Pre-LC Declaration Patents and
--------
Post-LC Declaration
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
17
<PAGE>
Patents, shall be owned by and filed in the name of the party to
whom inventorship is attributed under United States Patent Law
(i.e., patents claiming sole Phytera inventions shall be in the
name of Phytera, patents claiming sole Chiron inventions shall be
in the name of Chiron, and patents claiming joint inventions
shall be in the name of Phytera and Chiron), subject to any
assignment obligations referenced herein. The owner of any Pre-LC
Declaration Patent shall be responsible for preparing, filing,
prosecuting and maintaining its Pre-LC Declaration Patents.
(b) Assignment of Pre-LC Declaration Patents. Within thirty (30) days
----------------------------------------
following the LC Declaration Date Phytera shall assign to Chiron
at Chiron's cost all of Phytera's interest in any Pre-LC
Declaration Patents which claim compositions of matter or uses
which relate primarily to Licensed Compounds, or which claim
methods of manufacturing compounds which relate exclusively to
Licensed Compounds.
(c) Assignment of Post-LC Declaration Patents. After the LC
-----------------------------------------
Declaration Date, initial ownership of all inventions relating to
the Licensed Compound shall be based upon inventorship as
determined by U.S. Patent Law, and Post-LC Declaration Patents
shall initially be owned by and filed in the name of the party to
whom inventorship is attributed under United States Patent Law.
After the LC Declaration Date, and upon Chiron's request, Phytera
shall assign to Chiron all of Phytera's interest in any and all
Post-LC Declaration Patents which claim compositions of matter or
uses which relate primarily to Licensed Compounds, or which claim
methods of manufacturing compounds which relate exclusively to
Licensed Compounds.
(d) Prosecution of Post-LC Declaration Patents. Chiron shall be
------------------------------------------
responsible for preparing, filing, prosecuting to grant and
maintaining any Post-LC Declaration Patents claiming inventions
invented solely by Chiron, and any Post-LC Declaration Patents
which are assigned to Chiron, including, without limitation,
Post-LC Declaration Patents claiming inventions invented solely
by Phytera or jointly invented by Chiron and Phytera. Chiron
shall be obligated to pay for the preparation, filing,
prosecution or maintenance of any Patents which are assigned to
Chiron or exclusively licensed to Chiron under this Agreement, to
the extent provided in Section 10.1(g).
(e) It is the intent of the parties that intellectual property shall
be protected as effectively as possible for the mutual benefit of
Phytera and Chiron and in support of such intent each party shall
supply to the other party any and all data generated by either
party in respect of any compound to which Chiron has rights under
this Agreement.
18
<PAGE>
(f) The parties shall collaborate so that the most effective
patenting strategy is implemented to give Chiron exclusivity in
respect of any Optioned Validated Lead Structure, Licensed
Compound, Licensed Compound or Product, both in respect of time
before publication and scope of patent claims. Further, to
facilitate the assignment of Phytera Patents to Chiron pursuant
to Section 10. 1 (b) and 10. 1 (c), in the event a Phytera Patent
contains subject matter directed to the composition, use or
making of Licensed Compounds, and also contains subject matter
not directed to the Licensed Compounds (i.e., subject matter
which relates generally to Phytera's business activities outside
the scope of this Agreement) the patent counsels of Phytera and
Chiron shall, where possible and practical, cooperate to develop
patenting strategies to generate a set of Patent(s) which contain
only subject matter directed to the composition, use or making of
Licensed Compounds (e.g., divisional practice and the like) which
patent(s) shall be assigned to Chiron in accordance with this
Section, and a set of patent(s) which claim the subject matter
not directed to the Licensed Compounds. In the event that (1) a
Post LC Declaration Patent or Pre-LC Declaration Patent contains
claims directed to compositions of matter or uses or
manufacturing methods which relate to Licensed Compounds, and
also contains claims which do not relate to Licensed Compounds;
(a "Mixed Patent") and (2) it is not practical or feasible to
divide the Mixed Patent to generate a set of Patents which
contain only subject matter directed to the composition, use or
making of Licensed Compounds; and (3) the claims of the Mixed
Patent which do not relate to the Licensed Compound are of
importance or relevance to Phytera's business activities and
third party obligations outside of this Agreement; and (4) there
is a good faith dispute between the parties as to whether the
claims of such Mixed Patent is subject to an assignment
obligation pursuant to Sections 10.1(b) and (c), (i.e, whether
the claims of such Mixed Patent relate primarily to Licensed
Compounds) (the "Mixed Patent Assignment Dispute") the parties
shall discuss in good faith whether such Mixed Patent should be
assigned to Chiron, and Phytera shall have no obligation to
assign such Mixed Patent unless both parties have agreed to such
assignment, provided that Phytera shall not unreasonably withhold
its agreement to such assignment.
(g) Responsibility for Patent Prosecution Costs. Chiron shall
-------------------------------------------
reimburse Phytera for its costs incurred in prosecuting Phytera
owned Pre-LC Declaration Patents pursuant to Section 10.1(a),
provided that:
(1) Such Phytera owned Pre-LC Declaration Patents relate
primarily to the Licensed Compounds (i.e., the claims of
such Patents are directed primarily to the composition, uses
or methods of making the Licensed Compounds, and are not
directed primarily to methods of making compounds which have
broad applicability to Phytera's business outside the scope
of this Agreement).
19
<PAGE>
(2) Phytera shall consult with Chiron prior to undertaking
significant patent prosecution activities which would incur
significant expense; and
(3) Phytera shall submit to Chiron customary invoices setting
forth in reasonable detail the patent prosecution expenses
for which Phytera seeks reimbursement; and
(4) Chiron's obligation to pay for patenting activities for any
Pre-LC Declaration Patent shall cease at such time as
Chiron's right to acquire a License to such Pre-LC
Declaration Patent under this Agreement expires, or Chiron
indicates to Phytera that it does not wish to obtain a
License to such Pre-LC Declaration Patent. After the LC
Declaration Date, Chiron shall bear the costs of patenting
activities with respect to any Pre-LC Declaration Patents or
Post-LC Declaration Patents which are assigned to Chiron
(5) Further, Chiron shall bear the costs of patenting activities
with respect to Pre-LC Declaration Patents or Post-LC
Declaration Patents which are exclusively licensed to Chiron
and which relate primarily to the Licensed Compounds (i.e.,
Patents in which the claims are directed primarily to the
composition, uses or methods of making the Licensed
Compounds, and are not directed primarily to methods of
making compounds which have broad applicability to Phytera's
business outside the scope of this Agreement).
10.2 INFRINGEMENT.
(a) Each party shall promptly notify the other party in writing of
any alleged or threatened infringement of an issued Patent of
which such party becomes aware, provided that Chiron is
commercializing a Product under such Patent. Chiron shall have
the right to bring and control any action or proceeding with
respect to such alleged or threatened infringement (a
"PROCEEDING") at its own expense and represented by legal
advisers of its own choice.
(b) In the event Chiron brings a Proceeding, Phytera shall reasonably
cooperate with Chiron including, if required, undertaking any
action or agreeing to be joined as a party to such Proceeding,
the reasonable costs of which shall be at Chiron's expense.
(c) In the event Chiron commences a Proceeding, and the subject of
such Proceeding is a Product Patent, any recovery realized as a
result of such Proceeding which is directly attributable to
infringement of the Product Patent, after reimbursement of any
and all litigation expenses and reasonable costs of Chiron, shall
be treated as Net Sales under this Agreement.
20
<PAGE>
(d) With respect to an actual infringement, if within one hundred
twenty (120) days following the notice of infringement referenced
in Section 10.2(a), Chiron has not brought a Proceeding or
commenced licensing negotiations to abate such actual
infringement, Phytera shall have the. following rights:
(1) In the event that Chiron possesses a sole or joint ownership
interest in the Patent which is the subject of such
infringement, or such Patent is solely owned by Phytera but
covers (i.e., contains claimsdirected to) a Chiron Product
(a "Phytera Owned Product Patent"), Phytera may propose to
Chiron that Chiron and Phytera participate in such
Proceeding as partners, with the understanding that Phytera
and Chiron shall share equally all costs and all recoveries
arising from the Proceeding unless otherwise mutually
agreed(the "Joint Proceeding"). If Chiron does not elect to
proceed with Phytera in a Joint Proceeding within sixty (60)
days after receiving Phytera's Joint Proceeding proposal,
Phytera may undertake a Proceeding on its own with respect
to a Phytera Owned Product Patent, provided that Phytera
shall consult with Chiron and shall obtain Chiron's consent
prior to undertaking any actions which would affect Chiron's
commercial interests with respect to such Phytera Owned
Product Patent, such consent not to be unreasonably withheld
or delayed, provided that Chiron shall be under no
obligation to consent to actions which would materially
affect Chiron's commercial interests.
10.3 INFRINGEMENT OF THIRD PARTY RIGHTS.
In the event that any allegation of infringement of any third party patent
rights is raised by a third party by reason of the exercise by Chiron or any of
its sub-licensees of any rights pursuant to this Agreement ("Third Party
Infringement Action") Chiron, or any sub-licensee of Chiron, as may be
determined by Chiron, shall have the right to control any defense of any such
Third Party Infringement Action at its own expense and represented by legal
advisers of its own choice. In the event that Phytera is named as a defendant or
otherwise becomes involved in such Third Party Infringement Action, Phytera
shall have the right, at its own expense, to be represented in any such action
by legal advisers of its own choice. In the event of such Third Party
Infringement Action, Phytera shall cooperate in good faith with Chiron or any
sub-licensee of Chiron (as the case may be) on a reasonable basis to negotiate
and settle any dispute with a Third Party in relation to such infringement or
alleged infringement of any Alleged Third Party Patent Rights and otherwise
resolve any such infringement or alleged infringement and secure Chiron's
continued rights to the Alleged Third Party Patent Rights, if necessary or
desirable.
10.4 COOPERATION IN CONNECTION WITH INFRINGEMENT DISPUTES.
In any suit or dispute involving infringement or alleged infringement by a
third party of a Product Patent (including Pre-LC Declaration Patents and Post-
LC Declaration Patents), or Third Party Infringement Action, the parties shall
cooperate fully and, upon the request and at the reasonable expense of Chiron,
Phytera shall make available to Chiron or its sub-licensees at reasonable times
and under appropriate conditions all relevant personnel, and the like which are
in its possession or control provided, however, that Phytera shall not be
obliged to provide such assistance if to do so would materially disrupt its
normal business activities.
11. SCIENTIFIC COMMITTEE AND REPORTING
11.1 ESTABLISHMENT AND PURPOSES.
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<PAGE>
Phytera and Chiron shall coordinate the activities to be undertaken
pursuant to this Agreement by means of a joint committee consisting of an agreed
equal number of representatives from Chiron and Phytera (the "Scientific
Committee"). Decisions of the Scientific Committee shall be by consensus. The
Scientific Committee will meet at least during the Collaboration Term, VLS
Evaluation Term, or OVLS Evaluation License and Option Term at such times or at
such other locations as may be determined by Phytera and Chiron (including by
means of telephone or video conference) for the purpose of:
(a) reviewing the progress and the results of screening, NPCII and
related information and collaboration activities;
(b) discussing inventions arising from the collaboration and
patenting strategy for the benefit of both parties;
(c) discussing any reports made in the previous six months in
connection with any activities undertaken under this Agreement.
11.2 MINUTES OF SCIENTIFIC COMMITTEE.
Minutes of any meeting of the Scientific Committee shall be taken by a
representative of Phytera and/or Chiron and shall be circulated promptly after
the meeting for any comment by Phytera and Chiron. Once consensus has been
reached as to the contents of the minutes, the minutes shall represent the
formal decisions of the Scientific Committee.
12. CONFIDENTIALITY AND PUBLICATIONS
12.1 CONFIDENTIAL INFORMATION.
Except as otherwise provided in this Article 12, during the Agreement
Term, and thereafter for five (5) years, both parties shall maintain in
confidence and use only for purposes of this Agreement all information and data
(herein referred to as "Information") resulting from or related to or arising
from the activities of the parties hereunder which is supplied by the other
party under this Agreement.
The obligations of confidentiality shall not apply to any part of such
Information that:
(a) is or becomes published or otherwise part of the public domain
other than by acts of the party obligated not to disclose such
Information in the contravention of this Agreement;
(b) is disclosed to the receiving party by a third party, provided
such Information was not obtained by such third party directly or
indirectly from the other party under this Agreement;
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
22
<PAGE>
(c) prior to disclosure under this Agreement, was already in the
possession of the receiving party, provided such Information was
not obtained directly or indirectly from the other party under
this Agreement;
(d) is developed independently of the Information obtained from the
disclosing party, as demonstrated by written evidence;
(e) is required to be disclosed under any applicable legislation or
other legal requirement or under the rules or regulations of any
recognized stock exchange which are applicable to the disclosing
party or any of its Affiliates but only to the extent required;
or
(f) is disclosed by a party with the prior written consent of the
other party; or
(g) is otherwise agreed by the Parties can be disclosed.
12.2 PERMITTED DISCLOSURES.
To the extent it is reasonably necessary or appropriate to fulfill its
obligations or exercise its rights under this Agreement, a party may disclose
Information it is otherwise obligated under this Article not to disclose, to a
Affiliate or a potential licensee or sub-licensee on a need-to-know basis on
condition that such entities or persons agree to keep the Information
confidential for the same time periods and to the same extent as such party is
required to keep the Information confidential; and a party or any potential
licensee may disclose such Information to government or other regulatory
authorities to the extent that such disclosure is reasonably necessary to obtain
a Patent, or to secure authorization to conduct a clinical trial, or to market a
Product commercially.
12.3 PUBLICATION.
Notwithstanding the confidentiality obligations contained in this Article
12, each party recognizes the interest of the other in publishing results of its
scientific research to obtain recognition within the scientific community and to
advance the state of scientific knowledge. Both Parties also recognize their
mutual interest in obtaining valid Patent protection. Consequently, during the
term of this Agreement and thereafter until the date of expiration of the last
of the Patents, if any employee of a party (the Publishing Party) wishes to make
a publication (including any oral disclosure made without obligation of
confidentiality) relating to or arising out of the performance of that party's
obligations under this Agreement, the Publishing Party shall transmit to the
other party (the Reviewing Party) a copy of the proposed written publication at
least 60 days prior to submission for publication, or a summary in writing of
such oral disclosure at least 30 days prior to presentation. The Reviewing Party
shall have the right:
(a) to request modifications to the publication for Patent reasons;
and
(b) to request a delay in the proposed publication or oral
presentation in order to protect patentable information. If the
Reviewing Party requests such a delay, the Publishing Party shall
delay submission or presentation of the publication for a period
of 90 days to enable Patent applications protecting such
information to be filed. If the Reviewing Party reasonably claims
that such information, whether or not patentable, may have
significant commercial value and can be maintained as a trade
secret, the Publishing
23
<PAGE>
Party shall publish or disclose only such Information which would
not adversely affect such commercial value.
Upon the expiration of sixty (60) days from transmission to the Reviewing
Party, the Publishing Party shall be free to proceed with the written
publication or the presentation, respectively, unless the Reviewing Party has
requested the delay described above.
13. INDEMNITY BY CHIRON
13.1 Indemnity by Chiron.
Chiron shall indemnify and hold harmless Phytera and the officers,
directors employees and agents of Phytera from and against any and all
liability, loss, and damages they may suffer as the result of claims, demands,
costs or judgments which may be made or instituted against them arising directly
from the manufacture, use or sale by Chiron of Optioned Validated Lead
Structures, Licensed Compounds, or Products, or any negligent acts or omissions
by Chiron or third parties who are Chiron sub-licensees of the License
referenced in Section 5.2.
14. TERM AND EARLY TERMINATION
14.1 Collaboration Term. The Collaboration Term shall commence on the date
Phytera completes delivery to Chiron of the entire first set of Initial Extracts
referenced in Section 3.1 and shall conclude on the date fifteen (15) months
after such date of delivery, unless otherwise mutually agreed.
14.2 VLS EVALUATION TERM. With respect to each Target and on a Target by
Target basis, the VLS Evaluation Term shall commence on the date Phytera
delivers to Chiron all Validated Lead Structures and all related information for
the Target pursuant to section 4.1 and shall conclude ninety (90) days after
such date, unless otherwise mutually agreed.
14.3 OVLS EVALUATION LICENSE AND OPTION TERM. With respect to each Target,
and on a Target by Target basis, the OVLS Evaluation License and Option Term
shall commence on the date Chiron delivers to Phytera the OVLS Declaration
referenced in section 4.1, and shall conclude twelve (12) months after such
date, unless otherwise mutually agreed.
14.4 AGREEMENT TERM. Subject to Section 14.8 (Survival), and on a Target
by Target basis, this Agreement shall terminate upon the conclusion of the last
to expire of OVLS Evaluation License and Option Term for the last Target which
is the subject of such OVLS Evaluation License and Option Term (the "AGREEMENT
TERM").
14.5 EXTENSION OF TERM.
_____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
24
<PAGE>
In the event that the Parties agree to extend the Term of this Agreement,
or any of the terms referenced in Sections 14.1, 14.2, 14.3 or 14.4, the parties
will negotiate mutually agreed terms and conditions to govern the relationship
during the period of any extension.
14.6 EARLY TERMINATION FOR BREACH.
During the Term, either party may terminate this Agreement upon the
occurrence of any of the following:
(a) upon or after the bankruptcy, insolvency, dissolution or winding
up of the other party (other than dissolution or winding up for
the purposes of reconstruction or amalgamation); or
(b) upon or after the breach of any material provision of this
Agreement by the other party if the breaching party has not
commenced to cure such breach within [ ]* after written notice
thereof by the other party and thereafter proceeded diligently to
cure such breach within a reasonable time. In no event shall such
reasonable time to cure such breach exceed [ ]* from the date
of such notice.
14.7 VOLUNTARY TERMINATION OF AGREEMENT.
Chiron shall be entitled to terminate this Agreement at any time after the
conclusion of the Collaboration Term. Such termination shall be effective [
]* after Chiron provides Phytera notice of its intent to terminate. Chiron
shall pay costs incurred by Phytera pursuant to this Agreement prior to
Phytera's receipt of Chiron's termination notice. Chiron shall also pay costs
associated with noncancellable commitments undertaken by Phytera prior to
Chiron's receipt of Chiron's termination notice, provided such costs are
reasonable and Phytera undertakes best efforts to mitigate such costs.
14.8 SURVIVAL OF ACCRUED OBLIGATIONS.
Expiration or termination of this Agreement shall not relieve the parties
of any obligation accruing prior to such expiration or termination. In addition
Articles 5, 7, 8, 9, 10, 12, 13, 14.9, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24
and 25 shall survive termination of this Agreement, where applicable in
accordance with their respective terms.
14.9 BANKRUPTCY.
All rights and licenses granted under or pursuant to this Agreement by
Phytera to Chiron are, and shall otherwise be deemed to be, for purposes of
Section 365(n) of the Bankruptcy Code, licenses of rights to "intellectual
property" as defined under Section 101(52) of the Bankruptcy Code. The parties
agree that Chiron, as licensee of such rights under this Agreement, shall retain
and may
____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
25
<PAGE>
fully exercise all of its rights and elections under the Bankruptcy Code. The
parties further agree that, in the event of the commencement of a bankruptcy
proceeding by or against Phytera under the Bankruptcy Code, Chiron shall all be
entitled to a complete duplicate of all embodiments of such intellectual
property, and same, if not already in its possession, shall be promptly
delivered to Chiron (i) upon any such commencement of a bankruptcy proceeding
unless Phytera elects to continue to perform all of its obligations under this
Agreement, or (ii) if not delivered under (i) above, immediately upon the
rejection of this Agreement by or on behalf of Phytera.
14.10 FORCE MAJEURE.
Neither party shall be liable or considered in breach of this Agreement for
delays which are the direct result of acts or events beyond the control of such
party, (i.e., delays occasioned by acts of God, industrial disputes, war
declared or undeclared, civil disturbance, acts or omissions of Government or
other competent authority, fire, lightning, earthquake, explosion or flood)
provided that the nonperforming party is in compliance with this Section 14.10.
(a) In the event that either party wishes to claim Force Majeure,
such party shall provide the other party prompt notice of the
Force Majeure with a description of the cause of the Force
Majeure and, wherever possible, an estimate of the extent and
duration in its delay in performance, or its inability to
perform; and
(b) The party claiming Force Majeure shall use all possible diligence
to remove the Force Majeure and/or the impairment in its
performance as quickly as possible; and
(c) If the delay caused by the Force Majeure continues beyond fifteen
(15) days after provision of the notice referenced in Section 14.
10(a), the parties shall meet to discuss in good faith a mutually
satisfactory resolution of the problem. If the parties are
unable to reach such a resolution within a further forty five
(45) days, the other party may elect to terminate this Agreement
subject to the provision of thirty (30) days prior written
notice, provided that such termination shall not be effective if
the Force Majeure is removed prior to the effective date of such
termination.
26
<PAGE>
15. RESOLUTION OF DISPUTES
15.1 EXCLUSIVE DISPUTE RESOLUTION MECHANISM.
The parties further agree that matters of business judgment shall be
resolved between the parties without recourse to arbitration. The parties agree
the procedures set forth in this Article 15 shall be the exclusive mechanism for
resolving any non-business judgment bona fide disputes that arise from time to
time pursuant to this Agreement relating to any party's rights and/or
obligations hereunder that cannot be resolved through good faith negotiation
between the parties.
15.2 SCIENTIFIC COMMITTEE MEDIATION.
Any such dispute must first be submitted to the Scientific Committee or
their successors, for attempted resolution by good faith negotiations for a
period of at least thirty (30) days. In the event the designated Scientific
Committee members are not able to resolve such dispute within such thirty (30)
day period, the dispute shall be referred to Executive Mediation as referenced
in Section 15.3 below.
15.3 EXECUTIVE MEDIATION.
In the event that the dispute can not be resolved by mediation at the
Scientific Committee pursuant to Section 15.2, such dispute shall be submitted
to the appropriate designated officers of each party, for attempted resolution
by good faith negotiation for a period of at least thirty (30) days. In the
event the designated officers are not able to resolve such dispute within such
thirty (30) day period, and such dispute does not relate to a matter of business
judgment, any party may invoke the mediation provisions of Section 15.4 below.
15.4 MEDIATION.
If the dispute cannot be resolved by the mechanism referenced in Section
15.3, the dispute shall be referred to non-binding mediation. The
mediation shall be conducted by an independent mediator acceptable to both
parties. Subject to Section 15.2 and Section 15.3, either party may serve
upon the other a written demand for mediation. Such mediation shall
commence within thirty (30) days following the other party's receipt of
such demand, unless otherwise agreed in writing 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.
15.5 INITIATION OF ARBITRATION.
In the event that such dispute is not resolved within thirty (30) days
after the matter is referred to mediation pursuant to Section 15.4, and if a
party intends to initiate an arbitration (or other ADR mechanism) to resolve a
dispute, such party shall provide written notice (the "ADR Request") to counsel
for the other party informing such other party of such intention and the issues
to be resolved. From the date of the ADR Request and until such time as any
matter has been finally settled by ADR, the running of the time periods
contained in this Agreement within which party must cure a breach of this
Agreement shall be suspended as to the subject matter of the dispute.
27
<PAGE>
15.6 ARBITRATION.
If it is not otherwise possible to settle a dispute within thirty (30) days
from the referral of the dispute then either party shall have the right to
submit the same to binding arbitration in accordance with, and subject to the
American Arbitration Association. If initiated by Chiron, such arbitration
shall be conducted in Worcester, Massachusetts. If initiated by Phytera, such
arbitration shall be conducted in San Francisco, California.
15.7 BINDING NATURE OF DECISION.
The decision of the arbitrator shall be binding upon the Parties and
judgment upon the award rendered by the arbitrator may be enforced in accordance
with the provisions hereof.
16. WARRANTY
16.1 POWER TO ENTER AGREEMENT.
Phytera and Chiron warrant to the other that it has the power to enter into
and perform its obligations under this Agreement. Phytera represents and
warrants no third party possesses any option or license rights with respect to
any intellectual property which would impair Chiron's rights under this
Agreement.
16.2 PHYTERA WARRANTY TO CHIRON.
Phytera warrants to Chiron that:
(a) it is the legal and beneficial owner of the Extracts;
(b) to the best of its information knowledge and belief Phytera has
the necessary rights in respect to satisfy its obligations under
this Agreement.
16.3 ACKNOWLEDGMENTS BY PHYTERA.
With respect to any agreements executed prior to the Effective Date of this
Agreement which relate to Phytera Patents which are the subject of Chiron's
rights hereunder (the "Original Agreements") including, without limitation,
Phytera agreements with third party providers of material, including, without
limitation, rights to plant and organism samples and protocols, or intellectual
property embodied or contained in Phytera's extracts (the "Original Parties")
Phytera warrants, acknowledges and agrees that as of the Effective Date:
(a) there are no outstanding breaches of the Original Agreements;
(b) there are no acts, facts, circumstances or omissions of which it
is presently aware, which would give the Original Parties, either
presently or with the passage of time, the right to terminate the
Original Agreements.
16.4 GENERAL WARRANTIES.
Each party represents and warrants to the other that:
28
<PAGE>
(a) this agreement does not contravene any law, regulation or
official directive or any obligations or undertakings by which it
or any of its assets are bound or cause a limitation on its
powers to be exceeded; and
(b) it is not a party to any pending or threatened action or
proceeding affecting it or any of its assets before a court,
governmental agency, commission or arbitrator where an adverse
outcome could reasonably be expected to adversely impact upon the
performance of its obligations under this agreement; and
(c) it has no immunity from the jurisdiction of a court or from legal
process (whether through service of notice, attachment prior to
judgment, attachment in aid of execution, execution or
otherwise).
17. NOTICES
Any notice, demand, consent or other communication (the Notice) given or
made under this Agreement other than communications made under Article 11
hereof:
(a) must be in writing and signed by a person duly authorized by the
sender;
(b) must either be delivered to the intended recipient by prepaid
post (if posted to an address in another country, by airmail) or
by hand or fax to the address or fax number below or the address
or fax number_last notified by the intended recipient to the
sender:
(1) to Phytera: Phytera Inc.
377 Plantation Street
Worcester, NlA 01605
Attention:
Fax Number:
(2) to Chiron: Chiron Corporation
4560 Horton Street
Emeryville, California 94608
United States of America
Attention: President, Chiron Technologies
Fax Number: (510) 923 7460; and
with copies to: General Counsel
Fax No: (510) 654-5360
(c) will be taken to be duly given or made:
(1) in the case of delivery in person, when delivered;
(2) in the case of delivery by post, two business days after the
date of posting (if posted to an address in the same
country) or seven business days after the date of posting
(if posted to an address in another country); and
29
<PAGE>
(3) in the case of fax, on receipt by the sender of a
transmission control report from the dispatching machine
showing the relevant number of pages and the correct
destination fax machine number or name of recipient and
indicating that the transmission has been made without
error, but if the result is that a Notice would be taken to
be given or made on a day that is not a business day in the
place to which the Notice is sent or is later than 4:00 p.m.
local time) it will be taken to have been duly given or made
at the commencement of business on the next business day in
that place.
18. ENTIRE AGREEMENT
This Agreement contains the entire agreement between the Parties with
respect to its subject matter and supersedes all prior agreements,
understandings and communications between the Parties in connection with it.
19. AMENDMENT
No amendment or variation of this Agreement is valid or binding on a party
unless made in writing executed by all parties.
20. ASSIGNMENT
Neither party may, or will have the power to, assign this Agreement without
the prior written consent of the other, except that either party may assign its
rights and obligations under this Agreement without the approval of the other,
to a successor in interest or any of its Affiliates which expressly assumes such
party's obligations and responsibilities hereunder, provided that the assigning
party remains fully liable for and shall not be relieved from the full
performance of all obligations under this Agreement.
21. NO WAIVER
No failure to exercise nor any delay in exercising any right, power or
remedy by a party operates as a waiver. A single or partial exercise of any
right, power or remedy does not preclude any other or further exercise of that
or any other right, power or remedy. A waiver is not valid or binding on the
party granting that waiver unless made in writing.
22. FURTHER ASSURANCES
Each party agrees to do all things and execute all deeds, instruments,
transfers or other documents as may be necessary or desirable to give full
effect to the provisions of this Agreement and the transactions contemplated by
it.
23. GOVERNING LAW AND JURISDICTION
This Agreement is governed by the laws of California, and subject to
Article 15, the parties submit to the non-exclusive jurisdiction of the courts
of that state.
30
<PAGE>
24. INTERPRETATION
Headings are for convenience only and do not affect interpretation. The
following rules apply unless the context requires otherwise.
(a) The singular includes the plural and conversely.
(b) A gender includes all genders.
(c) If a word or phrase is defined, its other grammatical forms have
a corresponding meaning.
(d) A reference to an agreement or document (including, without
limitation, a reference to this Agreement) is to the agreement or
document as amended, varied, supplemented, novated or replaced,
except to the extent prohibited by this Agreement or that other
agreement or document.
(e) A reference to a party to this Agreement or another agreement or
document includes the party's successors, permitted substitutes
and permitted assigns (and, where applicable, the party's legal
personal representatives).
(f) A reference to legislation or to a provision of legislation
includes a modification or re-enactrnent of it, a legislative
provision substituted for it and a regulation or statutory
instrument issued under it.
(g) A reference to an agreement includes any undertaking, deed,
agreement and legally enforceable arrangement, and a reference to
a document includes an agreement (as so defined) in writing and
any certificate, notice, instrument and document of any kind.
A reference to dollars and $ is to United States currency.
31
<PAGE>
25. COUNTERPARTS
This Agreement may be executed in any number of counterparts. All
counterparts together will be taken to constitute one instrument.
IN WITNESS HEREOF, the parties have executed this Agreement of the Effective
Date.
SIGNED FOR AND BEHALF OF SIGNED FOR AND BEHALF OF
PHYTERA, INC. CHIRON CORPORATION
By: /s/ Malcolm Morville By: /s/ [ILLEGIBLE SIGNATURE]
-------------------------- ----------------------------------
Name:_________________________ Name:________________________________
Title: President Title: PRESIDENT, CHIRON TECHNOLOGIES
------------------------ ------------------------------
32
<PAGE>
EXHIBIT A
---------
Targets
-------
[
]*
_________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
33
<PAGE>
EXHIBIT 10.20
ANTIFUNGAL RESEARCH COLLABORATION
RESEARCH AGREEMENT
between
PHYTERA, INC.
and
ELI LILLY AND COMPANY
<PAGE>
RESEARCH AGREEMENT
THIS RESEARCH AGREEMENT ("AGREEMENT") is entered into as of the 21st
day of July, 1998 ("EFFECTIVE DATE") between ELI LILLY AND COMPANY, a
corporation of the State of Indiana, having its principal place of business at
Lilly Corporate Center, Indianapolis, Indiana 46285, hereinafter called,
together with its Affiliates, "LILLY."
AND
Phytera, Inc., a corporation of the State of Delaware, having its
principal place of business at 377 Plantation Street, Worcester, Massachusetts
01605, hereinafter called, together with its Affiliates, "PHYTERA."
RECITALS
WHEREAS, Phytera is a natural products biopharmaceutical company that
has developed screening technologies for antifungal drugs involving multiple
drug resistance gene knockouts and natural product libraries; and
WHEREAS, Lilly is interested in collaborating with Phytera in the
further development and exploitation of Phytera technologies, including its
natural product libraries, in order to discover Compounds with Antifungal
Activity for development and commercialization by Lilly; and
WHEREAS, Phytera and Lilly believe that each Party can bring
significant and complementary strengths to a research collaboration and wish to
proceed in accordance with the terms of the following Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter recited, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
When used in this Agreement, each of the following terms shall have
the meanings as set forth below:
1.1 "AFFILIATE" shall mean any company or entity controlled by,
controlling, or under common control with a Party hereto and shall include
without limitation any company fifty percent (50%) or more of whose voting stock
(or other comparable ownership interest for an entity other than a corporation)
is owned or controlled, directly or indirectly, by a Party, and any company
which owns or controls, directly or indirectly, fifty percent (50%) or more of
the voting stock (or other comparable ownership interest for an entity other
than a corporation) of a Party.
Page 2
<PAGE>
1.2 "ANALOGS" shall mean Compounds which are structurally related to
another compound. An analog is obtained by structural modification (either by a
chemist or by a microorganism or by a plant cell) pursuant to structure activity
relationship studies of a Compound.
1.3 "ANTIFUNGAL ACTIVITY" shall mean evidence that an Extract or
Compound tests positive in a Program Screen in accordance with the criteria for
"hits" as set forth and defined in the Research Plan.
1.4 "CALENDAR QUARTER" shall mean the three month period ending on
March 31, June 30, September 30, or December 31.
1.5 "CALENDAR YEAR" shall mean the twelve month period ending on
December 31.
1.6 "CLOSELY RELATED DERIVATIVE" shall mean a Compound that is
structurally related to and developed using a Research Compound as a lead
structure for SAR Studies.
1.7 "COMPOUND" shall mean a discrete chemical entity of known
structure.
1.8 "CONFIDENTIAL INFORMATION" shall mean each Party's confidential
information, inventions, know-how and data, and shall include, without
limitation, manufacturing, marketing, financial, regulatory, personnel and other
business information and plans, whether in oral, written, graphic or electronic
form and whether in existence as of the Effective Date or developed or acquired
in the future, except where such information (i) is public knowledge at the time
of disclosure by the disclosing Party, (ii) becomes public knowledge through no
fault of the receiving Party, (iii) was in the possession of the receiving Party
at the time of disclosure by the disclosing Party as evidenced by proper
business records or (iv) is disclosed to the disclosing Party by a Third Party,
to the extent such Third Party's disclosure was not in violation of any
obligation of confidentiality.
1.9 "COVER" (including variations of thereof such as "Covering",
"Covered", and "Coverage") shall mean that the identification, manufacture, use,
import, offer for sale or sale of Program Screens, Research Compounds, Closely
Related Derivatives or Products would infringe a Valid Claim; provided, with
respect to a process, screening or manufacturing patent, that such a Valid Claim
therein effectively precludes Third Parties from identifying, manufacturing,
using, importing, offering for sale, and selling Program Screens, Research
Compounds, Closely Related Derivatives or Products. The determination of
whether Program Screens, Research Compounds, Closely Related Derivatives or
Products are covered by a particular Valid Claim shall be made on a country by
country basis. A Valid Claim shall be deemed to provide effective preclusion
hereunder where (i) there is no competing product being marketed or (ii) if a
product is being marketed by a competitor, it infringes the Valid Claim
(including any period in which, and provided that, the Valid Claim is being
litigated).
1.10 "EFFECTIVE DATE" shall mean the date indicated at the beginning
of this Agreement.
1.11 "EXCLUDED COMPOUNDS" shall mean a Compound which (i) is in
development or is being marketed by Lilly or Phytera or a sublicensee of either
Party anywhere in the world prior to the Effective Date of this Agreement, or
(ii) is derived
Page 3
<PAGE>
from the Lilly Compound Library and is subject to Third Party restrictions
preventing Lilly from using such Compound in the Program. Each Party shall
promptly notify the other Party upon determining that a Compound being
researched or developed in the Program is an Excluded Compound. Consistent with
the obligations of confidentiality under Section 5.1 and except as otherwise
provided in this Agreement, neither Lilly nor Phytera shall use Confidential
Information derived from the Program in connection with the development of
Excluded Compounds.
1.12 "EXTRACT" shall mean a subset of Compounds solubilized from a
culture by a defined solvent.
1.13 "FDA" shall mean the United States Food and Drug Administration.
1.14 "FIELD" shall mean the diagnosis, treatment or prevention of
fungal infectious diseases in humans and animals.
1.15 "FIRST COMMERCIAL SALE" shall mean, in any particular country,
the first sale for use by the general public of a particular Product after
receipt of Regulatory Approval in that country.
1.16 "FIRST RIGHT PRE-EXISTING ANTIFUNGAL PROGRAMS" shall mean the
two Pre-Existing Antifungal Programs which are designated in APPENDIX E as
----------
subject to a Lilly first right of negotiation under Section 2.23 of this
Agreement.
1.17. "FTE" shall mean the equivalent of the scientific work of one
scientific person full time for one year (consisting of a total of [
]* per year (excluding vacations and holidays) of scientific work on or directly
related to the Program), carried out by a Phytera employee or Third Party
mutually agreed upon by the Research Team, where at least [ ]* of all such
scientific persons have completed at least a doctorate of philosophy (Ph.D.) or
its equivalent in a relevant scientific field or having an equivalent level of
scientific training and/or experience.
1.18 "GAAP" shall mean U.S. Generally Accepted Accounting Principles,
consistently applied.
1.19 "GOOD CLINICAL PRACTICE" shall mean the regulations and
guidelines established by the FDA, the Declaration of Helsinki, and the
regulating bodies of countries and economic affiliations worldwide that relate
to the standard of Good Clinical Practice for trials of medicinal products in
human beings.
1.20 "IN-LICENSED THIRD PARTY COMPOUND" shall mean a defined Compound
which is at least at the stage of animal pre-clinical studies in preparation for
trials and licensed in or acquired from a Third Party by Phytera for further
development in the Field. For the avoidance of doubt, a Compound or Compound
series that requires SAR studies prior to identification of a development
candidate shall not qualify.
______________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
Page 4
<PAGE>
1.21 "LILLY COMPOUND LIBRARY" shall mean Compounds contained in the
Lilly research records libraries and individual Compounds or mixtures of small
numbers of Compounds, synthesized by combinatorial chemistry methods, contained
in Lilly's combinatorial chemistry libraries.
1.22 "LILLY NATURAL PRODUCTS LIBRARY" shall mean Extracts available
for screening at Lilly that have been prepared from cultures of organisms or
Extracts from plant materials.
1.23 "LILLY PATENTS" shall mean all patents, both foreign and
domestic (including without limitation, all substitutions, extensions, reissues,
renewals, reexaminations, patents of addition, supplementary protection
certificates and inventors' certificates thereof and pediatric data package
exclusivity extensions), and all pending patent applications (including
provisional applications, divisions, continuations and continuations-in-part)
which, as of the Effective Date, are owned, controlled, or licensed in (with the
right to disclose and sublicense), in whole or in part, by Lilly or any
Affiliate of Lilly and that contain or result in a Valid Claim which Covers the
identification, manufacture, use, import, offer for sale or sale of Program
Screens, Research Compound(s), Closely Related Derivatives, or Products
including but not limited to those patents and patent applications listed on
APPENDIX B attached hereto.
- ----------
1.24 "LILLY PROGRAM PATENTS" shall mean all patents, both foreign and
domestic (including without limitation, all substitutions, extensions, reissues,
renewals, reexaminations, patents of addition, supplementary protection
certificates and inventors' certificates thereof and pediatric data package
exclusivity extensions), and all pending patent applications (including
provisional applications, divisions, continuations and continuations-in-part)
owned, in whole or in part, by Lilly or licensed in by Lilly (with the right to
disclose and sublicense) that contain or result in a Valid Claim which Covers an
invention conceived during the Research Term and as a result of the Research
Program.
1.25 "LILLY PROGRAM TECHNOLOGY" shall mean all tangible or intangible
(whether or not patentable) know-how, trade secrets, inventions , data, clinical
and preclinical results, information, and any physical, chemical or biological
material, or any replication of any part of such material, which is developed or
acquired (with the right to disclose and sublicense) by Lilly after the
Effective Date and on or before the end of the Research Term, to the extent such
Technology relates to the identification, manufacture, use, import, offer for
sale or sale of Program Screens, Research Compound(s), Closely Related
Derivatives or Products in the Field.
1.26 "LILLY SCREEN" shall mean a high throughput screen developed by
Lilly independent of this Program for the identification of antifungal compound
leads.
1.27 "LILLY TECHNOLOGY" shall mean all tangible or intangible
(whether or not patentable) know-how, trade secrets, inventions, data, clinical
and preclinical results, information, and any physical, chemical or biological
material, or any replication of any part of such material reasonably necessary
for the development and manufacture of Program Screens, Research Compound(s),
Closely Related Derivatives or Products, that Lilly or any Affiliate of Lilly
owns, controls or has a license to (with the right to disclose and sublicense)
as of the Effective Date.
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1.28 "MAJOR EUROPE" shall mean the United Kingdom, France, Germany,
Italy and/or Spain.
1.29 "MDR KNOCKOUTS" shall mean fungal organisms in which multiple
drug resistance genes (one or more) that have the function of pumping toxins out
of the cell have been genetically disabled.
1.30 "NATURAL PRODUCT CHEMISTRY" shall mean the process of isolating
Compounds from Extracts, elucidating their structures, and obtaining these
Compounds in sufficient amounts and purity for chemical and biological
evaluation.
1.31 "NDA" shall mean with respect to any particular Product, the New
Drug Application filed with the FDA pursuant to 21 U.S.C. Section 357 and 21
C.F.R. Section 314 with respect to that Product, together with all additions,
deletions and supplements thereto.
1.32 "NET SALES" shall mean, with respect to a Product, [
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<PAGE>
]*
1.33 "PHASE I CLINICAL TRIALS" shall mean human clinical trials
conducted anywhere in the world in accordance with Good Clinical Practice in a
small number of healthy volunteers or patients to establish an initial safety
profile and the pharmacokinetics/pharmacodynamics of a Research Compound,
Closely Related Derivative or Product.
1.34 "PHASE II CLINICAL TRIALS" shall mean human clinical trials
conducted in patients anywhere in the world in accordance with Good Clinical
Practice to achieve a statistically significant data regarding a Research
Compound, Closely Related Derivative or Product in the particular indication
tested, as well as to obtain a preliminary indication of the limit and/or daily
dosage regimen required.
1.35 "PHASE III CLINICAL TRIALS" shall mean large scale human
clinical trials conducted in patients anywhere in the world in accordance with
Good Clinical Practice and intended to generate data concerning the safety and
efficacy of a Research
____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
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<PAGE>
Compound, Closely Related Derivative or Product in the particular indication
tested sufficient to support registration of the Product with health regulatory
authorities.
1.36 "PHYTERA BIODIVERSITY LIBRARIES" shall mean all natural product
Extracts that Phytera owns as of the Effective Date of this Agreement or
acquires or creates during the Research Term.
1.37 "PHYTERA PATENTS" shall mean all patents, both foreign and
domestic (including without limitation, all substitutions, extension, reissues,
renewals, reexaminations, patents of addition, supplementary protection
certificates and inventors' certificates thereof and pediatric data package
exclusivity extensions), and all pending patent applications (including
provisional applications, divisions, continuations and continuations-in-part)
which, as of the Effective Date, are owned, controlled, or licensed in (with the
right to disclose and sublicense), in whole or in part, by Phytera or any
Affiliate of Phytera and that contain or result in a Valid Claim which Covers
the identification, manufacture, use, import, offer for sale or sale of Program
Screens, Research Compound(s), Closely Related Derivatives or Products,
including but not limited to those patents and patent applications listed on
APPENDIX C attached hereto.
- ----------
1.38 "PHYTERA PROGRAM PATENTS" shall mean all patents, both foreign
and domestic (including without limitation, all substitutions, extensions,
reissues, renewals, reexaminations, patents of addition, supplementary
protection certificates and inventors' certificates thereof and pediatric data
package exclusivity extensions), and all pending patent applications (including
provisional applications, divisions, continuations and continuations-in-part)
owned, in whole or in part, by Phytera or licensed in by Phytera (with the right
to disclose and sublicense) that contain or result in a Valid Claim which Covers
an invention conceived during the Research Term and as a result of the Research
Program.
1.39 "PHYTERA PROGRAM TECHNOLOGY" shall mean all tangible or
intangible (whether or not patentable) know-how, trade secrets, inventions,
data, clinical and preclinical results, information, and any physical, chemical
or biological material, or any replication of any part of such material, which
is developed or acquired (with the right to disclose and sublicense) by Phytera
after the Effective Date and on or before the end of the Research Term, to the
extent such Technology relates to the identification, manufacture, use, import,
offer for sale or sale of Program Screens, Research Compound(s), Closely Related
Derivatives or Products in the Field.
1.40 "PHYTERA TECHNOLOGY" shall mean all tangible or intangible
(whether or not patentable) know-how, trade secrets, inventions, data, clinical
and preclinical results, information, and any physical, chemical or biological
material, or any replication of any part of such material, reasonably necessary
for the development and manufacture of Program Screens, Research Compound(s),
Closely Related Derivatives or Products, that Phytera or any Affiliate of
Phytera owns, controls or has a license to (with the right to disclose and
sublicense) as of the Effective Date.
1.41 "PRE-EXISTING ANTIFUNGAL PROGRAMS" shall mean Phytera's current
antifungal programs listed in APPENDIX E, including, without limitation, the
----------
First Right Pre-Existing Antifungal
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Programs, which programs are (i) in existence as of the Effective
Date, and (ii) directly related to research and development of specific leads
generated or identified by Phytera prior to the Effective Date. APPENDIX E
----------
attached hereto and incorporated herein by reference.
1.42 "PRODUCT" shall mean any product that contains a Research
Compound or a Closely Related Derivative that is ready for ultimate commercial
sale or use.
1.43 "PROGRAM" shall mean the program to be conducted jointly by
Phytera and Lilly to discover, evaluate and identify chemical entities and
biological materials which may be useful in the Field. A description of the
Program is provided in the Research Plan, which is incorporated herein by
reference and made a part of this Agreement. The Research Plan and the scope
and goals of the Program are subject to modification as provided herein.
1.44 "PROGRAM PATENTS" shall mean Lilly Program Patents and Phytera
Program Patents, collectively, whether or not developed solely or jointly by
Phytera and/or Lilly. For avoidance of doubt, Program Patents shall include any
patents Covering Closely Related Derivatives, notwithstanding when such patents
are filed.
1.45 "PROGRAM SCREENS" shall mean any screen or assay approved by the
Research Team for use in the Program.
1.46 "PROGRAM TECHNOLOGY" shall mean Lilly Program Technology and
Phytera Program Technology, collectively, whether or not developed solely or
jointly by Phytera and/or Lilly.
1.47 "QUARTERLY RESEARCH ACCOUNTING REPORT" shall have the meaning as
set forth in Section 2.9 of this Agreement.
1.48 "QUARTERLY RESEARCH ACTIVITY REPORT" shall have the meaning as
set forth in Section 2.6 of this Agreement.
1.49 "REGULATORY APPROVAL" shall mean all authorizations by the
appropriate governmental entity or entities necessary for commercial sale of
Product (including exports) in each jurisdiction in which Lilly elects to market
the Product including, without limitation, approval of labeling, price,
reimbursement and manufacturing.
1.50 "RESEARCH COMPOUND" shall mean any Compound which during the
Research Term and as a part of the Program, is identified, conceived,
synthesized, structurally characterized and/or demonstrated to have Antifungal
Activity in the Field. Research Compound shall also encompass any Extract which
during the Research Term and as a part of the Program is shown to have
Antifungal Activity and which is selected by the Research Team for Natural
Product Chemistry. For avoidance of any doubt, Research Compounds shall
include, but not be limited to, those Lilly Compounds designated as Research
Compounds under Section 2.11 of this Agreement. Research Compounds shall not
include Excluded Compounds or derivatives thereof.
1.51 "RESEARCH FUNDS" shall mean the FTE funding being paid by Lilly
to Phytera pursuant to Section 2.7 herein.
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1.52 "RESEARCH PLAN" shall have the meaning set forth in Section
2.2(b) of this Agreement.
1.53 "RESEARCH TEAM" shall have the meaning assigned in Section
2.2(a) of this Agreement.
1.54 "RESEARCH TERM" shall be the period commencing on the Effective
Date and ending two (2) years thereafter plus any extensions thereof, as
provided for in Section 2.14, unless earlier terminated by Lilly pursuant to
Section 2.18 or Article 10 hereof.
1.55 "RESEARCH YEAR" means a twelve-month period during the term of
the Program. The first Research Year shall be deemed to have commenced on the
Effective Date.
1.56 "SAR STUDIES" shall mean structure activity relationship studies
in which chemical modifications are made to Research Compounds in an attempt to
obtain or improve desirable feature or features such as activity against a
molecular target or target organism, efficacy in animal models of disease,
pharmacokinetic properties, or toxicity profile.
1.57 "TECHNOLOGY" shall mean all tangible or intangible know-how,
trade secrets, inventions (whether or not patentable), data, information,
including and without limitation any physical, chemical, or biological material.
1.58 "THIRD PARTY" shall mean any entity which is not a Party or an
Affiliate of either Party to this Agreement.
1.59 "VALID CLAIM" shall mean any claim issued in an unexpired patent
which has not been held unenforceable, unpatentable or invalid by a decision of
a court or other governmental agency of competent jurisdiction following
exhaustion of all possible appeal processes, and which has not been admitted to
be invalid or unenforceable through reissue, reexamination or disclaimer. If in
any country there should be two or more such decisions conflicting with respect
to the validity of the same claim, the decision of the higher or highest
tribunal shall thereafter control; however, should the tribunals be of equal
rank, then the decision or decisions upholding the claim shall prevail when the
decisions are equal in number, and the majority of decisions shall prevail when
the conflicting decisions are unequal in number.
ARTICLE 2
COLLABORATION SCOPE AND GOVERNANCE
2.1 PURPOSE AND SCOPE.
(A) Consistent with the terms described herein, the Parties intend
to collaborate in the research and discovery of Research Compounds or Closely
Related Derivatives for development and commercialization by Lilly. In
accordance with the Research Plan, Phytera shall develop, validate and use
Program Screens to screen Phytera Biodiversity Libraries and the Lilly Natural
Products Library for Extracts demonstrating Antifungal Activity. Additionally,
if requested, Phytera shall enable use by Lilly of the
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Program Screens to screen the Lilly Compound Library to identify Lilly Compounds
demonstrating Antifungal Activity.
(B) As more fully described below, Phytera and Lilly through the
Research Team will have joint responsibility for conducting the Program in
accordance with the Research Plan and the terms described herein. Lilly will
have sole responsibility for the development and commercialization of Research
Compounds and Closely Related Derivatives, as well as the filing and maintenance
of any and all regulatory documents necessary for applicable Regulatory
Approvals. Additionally, Lilly will have sole responsibility for distribution
and marketing of the Product. All pricing for Product shall be determined
solely by Lilly. Except as otherwise provided in this Agreement, it is expected
that any Product will be marketed by Lilly or its Affiliates (or in selected
territories, by Third Parties selected by Lilly) in each jurisdiction in which
it is determined by Lilly to be feasible and commercially attractive.
2.2 RESEARCH TEAM.
(A) Within thirty (30) days following signature of this Agreement by
both Parties, Phytera and Lilly shall each appoint three (3) representatives to
serve as members of the Research Team ("Research Team"). Phytera
representatives shall consist of a biologist, molecular biologist, and a natural
products chemist. Lilly representatives shall consist of a microbiologist, a
chemist, and a natural products chemist. The respective individual
representatives of each Party may be changed from time to time at the discretion
of Phytera or Lilly upon written notification by the Party making such change to
the other.
(B) Phytera and Lilly have agreed upon an initial Research Plan for
research under the Program which is set forth in APPENDIX A ("Research Plan").
----------
By execution of this Agreement, the initial Research Plan is hereby approved by
each Party and incorporated herein by reference.
(C) The Research Team shall provide general oversight and direction
for the Program. As part of providing such oversight and direction, the
Research Team specifically shall review (i) the personnel assigned to the
Program, (ii) all spending of Research Funds, (iii) all proposed modifications
or additions to the Research Plan, (iv) all proposed research collaborations
with a Third Party related to the Program and its cost, (v) all proposed
additions to APPENDIX B and APPENDIX C, (vi) quarterly additions to the list of
---------- ----------
Program Technology created in the Program, and (vii) all research results
related to the Program.
(D) Decisions of the Research Team shall be made by unanimous
consent; provided, however, that in the event the Research Team is unable to
arrive at a decision, Lilly's Vice President, Infectious Diseases Research, or
his/her successor shall confer with Phytera's Vice President of Research and
seek to resolve the disagreement. In the event the disagreement cannot be
resolved in this manner, Lilly's Vice President, Infectious Diseases Research
shall decide based on reasonable economic and scientific factors not
inconsistent with this Agreement. Notwithstanding the foregoing, decisions by
the Research Team with respect to inclusion of a Lilly Screen as Program Screen
shall be made by unanimous consent.
2.3 CONDUCT OF PROGRAM. Each Party agrees to conduct the Program
according to the Research Plan, as amended from time to time by the Research
Team. All
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research done in connection with the Program shall be carried out in strict
compliance with any federal, state, or local laws, regulations, or guidelines
governing the conduct of such research. The Parties do not intend Excluded
Compounds to be developed in the Program. Each Party shall advise the other
promptly upon becoming aware that a Compound being researched or developed in
the Program is an Excluded Compound, whereupon each Party shall cease to have
any obligation or right to work on such Excluded Compound as part of the
Program.
2.4 EFFORT. Both Phytera and Lilly shall use their best efforts to
conduct work on the Program so as to achieve the agreed-to-goals for the Program
as described in the Research Plan. During the first Research Year, Phytera
shall devote to the Program and Lilly shall fund [ ]* FTEs, unless
otherwise agreed by the Parties in writing. The number of FTEs to be dedicated
to the Program for subsequent Research Years shall be determined by Lilly in its
sole discretion; provided, however, that (i) the effort of Phytera funded by
Lilly for the second Research Year can be no less than [ ]* FTEs, and (ii)
Lilly's decision with respect to the number of FTEs to be dedicated to the
Program and to thereby be funded by Lilly for Research Years after the first
Research Year shall be communicated in writing to Phytera at least [ ]*
prior to the end of the preceding Research Year. The FTEs dedicated by Phytera
to the Program shall have an optimal combination of experience and training in
the Field. Lilly shall provide reasonable scientific effort as required by the
Research Team during the course of the Program. Such scientific effort shall be
consistent with sound scientific and business judgment as determined by Lilly.
2.5 KEY PERSONNEL. Phytera agrees that so long as the individuals
identified as key Phytera personnel in APPENDIX D continue to be employed by
----------
Phytera, Phytera shall maintain a level of direct involvement appropriate for
the successful conduct of the Program of such key personnel in the Program. In
the event any such individuals cease to be Phytera employees or to be directly
involved in the Program, Lilly shall have a right to terminate the Program
consistent with Section 2.18 herein. In the event a replacement of such Key
Personnel becomes necessary for any reason and Lilly does not exercise its right
to terminate under Section 2.18, Phytera shall consult with Lilly concerning
such replacements and Lilly shall have a right to approve replacement
candidates, which approval shall not be unreasonably withheld.
2.6 RESEARCH TEAM MEETINGS AND REPORTS. Except as the Research Team
may otherwise agree, during the Research Term, the Research Team shall meet
formally at least four (4) times each year to review the Program, to modify the
strategy and goals of the Program if deemed necessary by the Research Team, and
to prepare the reports required under Section 4.1(a). The times and places for
such meetings shall be mutually agreed upon by the Parties, alternating between
Indianapolis and Worcester, or such other location as members of the Research
Team shall agree. Each Party shall also bear its own costs associated with
holding and attending such meetings. Any modification to the strategy and goals
of the Program as described in the Research Plan shall require the approval of
the Research Team as reflected in written minutes, and an appropriate written
amendment to the Research Plan. The Research Team shall keep minutes of all
meetings at which a decision is made and shall circulate such minutes to all
members of the Research Team. Minutes shall be deemed approved unless any
member of the Research
___________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
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Team objects to the accuracy of such minutes within ten (10) days of receipt.
Additionally, Phytera and Lilly, to the extent each is involved in the Program,
shall each provide the Research Team with a written quarterly status report
regarding the quarterly research activity of each in connection with the Program
(the "Quarterly Research Activity Report"). The Quarterly Research Activity
Report shall be furnished to the Research Team within thirty (30) days following
the end of each Calendar Quarter.
2.7 RESEARCH FUNDING. During the Research Term and subject to the
fulfillment of all terms and conditions of this Agreement, Lilly shall fund the
Program at a rate of [ ] *per FTE. The relevant number of FTE's for any
Research Year shall be determined in accordance with Section 2.4 herein. It is
understood by the Parties that the Research Team shall have the right to
allocate an appropriate amount of FTE funding support to reasonable costs
associated with culture regrowth required in connection with the Program
2.8 SCHEDULING PAYMENT OF RESEARCH FUNDS. Research Funds during the
Research Term shall be paid to Phytera by Lilly in U.S. Dollars. The payment of
Research Funds due in each Research Year will be made in [ ]* installments
within [ ]*, provided that the first such payment
hereunder shall be made on a prorated basis and within [ ]* of the
Effective Date hereof.
2.9 ACCOUNTING.
(A) Phytera shall maintain complete and accurate books and records of
all monies expended by it for research under the Program and shall provide
Lilly, within sixty (60) days after the end of each Calendar Quarter during the
Research Term, with a report ("Quarterly Research Accounting Report")
accompanied by a certificate signed by the Chief Financial Officer of Phytera
stating (i) the dollar amount of Research Funds that were expended on research
activities during any Calendar Quarter for which the report is made; (ii) a
general description of the research activities conducted; (iii) the name of each
Phytera employee (with job title) who worked on the Program during that Calendar
Quarter, along with the functional department in which each employee worked and
the actual number of hours (including the source of such hourly data) each such
employee worked on the Program during that Calendar Quarter; and (iv) whether
Phytera provided the FTEs required under this Agreement or the Research Plan for
that Calendar Quarter of the Program. In the event Phytera has not provided the
required FTE's and there has consequently been an overpayment by Lilly, Phytera
shall remit the amount of such overpayment to Lilly with the Quarterly Research
Accounting Report or Lilly shall be entitled to apply such overpayment as a
credit against future Research Funds payments. Lilly shall be entitled to any
tax credits due on account of research and development expenses, to the extent
permitted by law, for the Research Funds paid by Lilly. Phytera shall cooperate
with Lilly to provide any information or documentation necessary or useful for
Lilly to claim such credits.
(B) Upon reasonable written notice to Phytera, Lilly shall have the
right, either itself or using Lilly's independent certified public accountant,
at its own expense and not more than annually in or in respect of any Calendar
Year, and during normal business hours, to audit those books and records as may
be reasonably necessary to verify the
___________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
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accuracy of the Quarterly Research Accounting Reports furnished by Phytera to
Lilly pursuant to this Section 2.9, in respect of any Calendar Year ending not
more than one (1) year prior to the date of such notice. If an independent
certified public accountant is used by Lilly for the conduct of such audits, the
report prepared by the independent public accountant, shall be provided to
Phytera at the same time it is sent or otherwise provided to Lilly and shall
contain the conclusions of the independent public accountant regarding the
audit. In the event an audit conducted by an independent public accountant
concludes there has been any overpayment by Lilly, Phytera shall remit to Lilly
within thirty (30) days after Phytera's receipt of the auditor's report, (i) the
amount of such overpayment and (ii) if such overpayment exceeds ten percent
(10%) of the total amount paid or payable for the Calendar Year then being
audited, the reasonable and necessary fees and expenses of the independent
public accountant performing the audit, subject to reasonable substantiation.
Any Phytera information received or obtained by Lilly in connection with an
audit under this Section 2.9 is Confidential Information and Lilly shall retain
and cause its auditors to retain all such information in confidence.
2.10 PROGRAM COSTS. After the Effective Date, Phytera shall pay all
costs incurred by it in the Program pursuant to the Research Plan. Phytera shall
not be entitled to any payment from Lilly in connection with the Program except
the Research Funds and the milestones and royalties provided under this
agreement. Lilly shall be responsible for its own costs in providing
consultation, advice and research efforts.
2.11 SCREENING LILLY COMPOUND LIBRARIES. The Program includes the
possibility of screening by Phytera of up to [ ]* Compounds from the Lilly
Compound Libraries using the Program Screens. If Lilly elects to have additional
screening performed by Phytera, there shall be either (i) an adjustment to the
FTE effort funded by Lilly sufficient to enable Phytera to conduct such
screening without adversely impacting Phytera's ability to satisfy its existing
obligations under the Program or (ii) Phytera's existing obligations under the
Program shall be evaluated and adjusted appropriately so that Phytera can
reasonably achieve all its obligations, including such new screening activities,
with the same FTE effort as existed prior to Lilly's election to request such
additional screening be done by Phytera. In the event that screening of Lilly
Compound Libraries by Lilly or Phytera results in the identification of a
Compound demonstrating Antifungal Activity, such Compound shall be included in
the Program for research consistent with the Research Plan and shall become and
be designated a Research Compound under the Agreement upon written designation
by the Research Team of such Compound as a Research Compound and appendage of
such written designation to this Agreement, such written designation not to be
unreasonably withheld or delayed. For avoidance of any doubt, in the event that
such written designation does not occur, a Compound from the Lilly Compound
Libraries shall not become a Research Compound. Additionally, notwithstanding
anything to the contrary in this Agreement, under no circumstance shall (a)
Phytera receive any license, rights, or other interest in the Lilly Compound
Libraries or Lilly owned Excluded Compounds; or (b) an Excluded Compound ever
become or be deemed a Research Compound.
2.12 EXCLUSIVITY. During the Research Term, Phytera shall work
exclusively with Lilly in the Field except to the extent that such work pertains
to Pre-Existing Antifungal Programs or In-Licensed Third Party Compounds.
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Furthermore, during the Research Term, Phytera agrees to provide Lilly with
exclusive (even as to Phytera) use of and access to the Phytera Biodiversity
Libraries, MDR Knockouts, and Program Screens for research and development in
the Field; provided that (1) Phytera shall have the right to use and access such
for purposes of complying with its obligations under this Agreement; and (2)
commencing on the third anniversary of the Effective Date and every anniversary
thereafter, Lilly's exclusivity with respect to individual Extracts in the
Phytera Biodiversity Libraries shall expire if (i) the Extract has not been
screened against a Program Screen at least once during the preceding twelve (12)
month period, and (ii) the Extract is not directly related to a Research
Compound. For the avoidance of doubt, it is understood that Pre-Existing
Antifungal Programs and In-Licensed Third Party Compounds shall be subject to
the limitations imposed in this Section 2.12 with respect to Phytera
Biodiversity Libraries, MDR knockouts, and Program Screens.
Additionally, Phytera shall not use Program Technology for In-Licensed Third
Party Compounds or in any other manner for the benefit of Third Parties.
Otherwise, Phytera shall be free to use other Phytera Technology in connection
with Pre-Existing Antifungal Programs and In-License Third Party Compounds. For
one (1) year following the end of the Research Term, Phytera shall not use or
access or permit Third Parties to use or access the Phytera Biodiversity
Libraries, MDR Knockouts, and/or Program Screens for research or development in
the Field.
2.13 THIRD PARTY TECHNOLOGY. Neither Lilly nor Phytera will bring
into or use in the Program any Technology in which a Third Party has ownership
rights unless specifically authorized to do so under a written agreement with
such Third Party. Unless the Parties specifically agree in a written document
signed by their respective authorized representatives to share the royalty or
other expenses associated with using any Technology of a Third Party, then any
royalties or other obligations associated with using the Third Party Technology
shall be borne solely by the Party who entered into the agreement with the Third
Party containing such obligations, or, if there is no such agreement, then all
expenses associated with using Third Party technology shall be borne solely by
the Party who brought the Third Party Technology into the Program.
2.14 EXTENSION OF PROGRAM. Lilly shall have the option to extend the
Research Term for up to three (3) additional years in one-year increments by
giving written notice not later than three (3) months prior to the end of the
initial Research Term and each one-year extension. Lilly shall specify in such
notice the level of Research Funding it will pay to Phytera during the extended
term, provided, however, such Research Funding shall at a minimum support [
]* FTEs.
2.15 STAFF AVAILABILITY. Each Party shall make its employees,
consultants, subcontractors engaged in the Program reasonably available upon
reasonable notice during normal business hours at their respective places of
employment to consult with the other Party on issues arising during the Program
and in connection with any request from any regulatory agency, including those
relating to regulatory, scientific, and technical issues.
2.16 LILLY OPTION REGARDING RESEARCH COMPOUNDS AND CLOSELY RELATED
DERIVATIVES. Lilly shall have the option to develop and commercialize, either
by itself or in conjunction with one or more sublicensees, on an exclusive basis
throughout the world
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any Research Compound or Closely Related Derivative. Lilly shall notify Phytera
promptly of its decision to develop any such Research Compound or Closely
Related Derivative. Upon such selection, Lilly shall be responsible for
undertaking, at Lilly's sole expense, all activities necessary for the
development, preclinical and clinical testing and the commercialization of the
Research Compound and/or Closely Related Derivative. After the expiration or
termination of the Program, Lilly shall provide an annual written report to
Phytera describing in reasonable detail and specificity (a) Lilly's development
activities during the prior calendar year on Research Compound(s), Closely
Related Derivatives and/or Products; and (b) the development activities for
Research Compounds, Closely Related Derivatives and/or Products planned by Lilly
for the current year.
2.17 FACILITY VISITS. Representatives of Lilly and Phytera may, upon
reasonable notice during normal business hours, (a) visit the facilities where
the Program is being conducted, (b) consult informally, during such visits and
by telephone, with personnel for the other Party performing work on the Program,
and (c) with the other Party's prior approval, which approval shall not be
unreasonably withheld, visit the sites of any experiments or tests being
conducted by such other Party in connection with the Program. On such visits,
an employee of the Party conducting the research shall accompany the employee(s)
of the visiting Party. If requested by the other Party, Phytera and Lilly shall
cause appropriate individuals working on the Program to be reasonably available
for meetings at times and places reasonably convenient to the Party responding
to such request.
2.18 TERMINATION OF PROGRAM.
(A) WITHOUT CAUSE. After the second anniversary of the Effective
Date, Lilly may terminate the Program and related Research Funding at any time
without cause upon sixty (60) days prior written notice to Phytera, which notice
may be provided prior to the second anniversary of the Effective Date.
(B) FOR MATERIAL BREACH. Lilly may terminate the Program and related
Research Funding at any time for material breach by Phytera, upon thirty (30)
days prior to written notice and opportunity to cure during the notice period.
Phytera may terminate the Program for material breach by Lilly upon thirty (30)
days prior written notice and opportunity to cure during the notice period.
(C) LOSS OF KEY PERSONNEL. Lilly may terminate the Program and
related Research Funding at any time upon thirty (30) days prior written notice
to Phytera, if any one or more of Phytera Key Personnel leave the employment of
Phytera for any reason and Phytera is unable to find replacements acceptable to
Lilly within six (6) months from the last day of such employment. Approval by
Lilly of replacement candidates shall not be unreasonably withheld.
(D) TERMINATION DUE TO CHANGE OF CONTROL. Lilly may terminate the
Program and related Research Funding at any time upon thirty (30) days prior
written notice if majority control of Phytera is acquired by any health care
company or any other party reasonably deemed by Lilly to be a competitor of
Lilly.
2.19 RIGHTS OF PARTIES FOLLOWING TERMINATION OR EXPIRATION OF THE
PROGRAM (EXCEPT FOR MATERIAL BREACH). Whenever the Program terminates for
reasons other than material breach or expires, each of the Parties shall have
the following rights and obligations:
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(A) CONTRIBUTED TECHNOLOGY. Each Party shall cease using and return
to the other Party and thereafter maintain in confidence pursuant to Article 5
all Technology that was contributed by the other Party that is reflected on the
form of APPENDIX B or APPENDIX C in effect as of the end of the Program, but
---------- ----------
only to the extent such Technology is not necessary or useful to Lilly for the
manufacture, use or development of Research Compounds, Closely Related
Derivatives or Products.
(B) PRE-EXISTING TECHNOLOGY. Each Party shall continue to have the
right to use and to disclose in any manner all Technology that it owned or had a
license under prior to the Program, except to the extent such Technology is
subject to the exclusivity requirements of Section 2.12.
(C) PROGRAM TECHNOLOGY.
(1) OWNERSHIP. Ownership of Program Technology shall continue to be
governed by Section 4.1(b) of this Agreement; provided, however, that Lilly
shall transfer and hereby does transfer all of its right, title and
interest in jointly owned Program Technology to Phytera, subject only to
the retention by Lilly of a license in accordance with Section 3.1(b).
(2) USE. With respect to Program Technology and Program Patents
which (i) are owned by Phytera solely or jointly with Lilly and (ii) are
not necessary or useful to Lilly for the manufacture, use, or development
of Research Compounds, Closely Related Derivatives or Products, Phytera
shall be free to use, transfer, commercialize or collaborate with Third
Parties in any manner that Phytera elects. With respect to all other
Program Technology or Program Patents, Lilly shall retain an exclusive
license in accordance with Section 3.1(b).
(D) PAYMENT OBLIGATIONS. Lilly shall continue to have the payment
obligations set forth in Section 2.7 for any accrued but unpaid FTE costs as of
the date of termination and in Article 6 with respect to any Research Compound,
Closely Related Derivative or Product that it develops or commercializes
pursuant to Section 2.16.
(E) OTHER TERMS OF THE AGREEMENT. All terms and conditions of this
Agreement unrelated specifically to Research Program activities shall otherwise
continue in full force and effect, including, without limitation,
confidentiality obligations and all rights and obligations concerning the
development and commercialization of Research Compounds, Closely Related
Derivatives and Products and any future Compounds arising therefrom.
2.20 RIGHTS OF PARTIES FOLLOWING TERMINATION OF THE PROGRAM FOR MATERIAL
BREACH. In the event of termination of the Program by Lilly for material breach
by Phytera, all licenses granted under this Agreement to Lilly shall not be
affected and shall continue in full force and effect, and Lilly shall have the
right to exercise all such licenses. All licenses granted under this Agreement
by Lilly to Phytera shall automatically terminate upon such termination by
Lilly. In the event of termination of the Program by Phytera for material breach
by Lilly, all licenses granted under this Agreement to Phytera shall not be
affected and shall continue in full force and effect, and Phytera shall have the
right to exercise all such licenses. In the event that termination by Phytera is
based upon a breach for non-payment, all licenses granted under this Agreement
by Phytera to Lilly shall automatically terminate upon such termination by
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Phytera. In the event that termination by Phytera under this Section 2.20 occurs
for any other reason, licenses granted under this Agreement by Phytera to Lilly
that are necessary for the continuing development or commercialization by Lilly
of Research Compounds, Closely Related Derivatives or Products pursuant to
Section 2.16 of this Agreement shall continue in full force and effect.
2.21 PUBLICATIONS. While it is understood that employees of Lilly and
Phytera at some point shall be free to publish the results of their studies
carried out under the Program, each Party agrees to provide the other the
opportunity to review any proposed manuscripts at least sixty (60) days prior to
their intended submission for publication and, upon request, shall delay
submission for a period sufficient to permit adequate steps to be taken to
secure patent protection for any patentable subject matter referred to therein.
The disclosing party shall avoid disclosure of any trade secret information of
the other Party. Each Party agrees to respond to requests for review within
sixty (60) days of receipt. In the event the Parties disagree with respect to
the nature of the disclosure to be made in a proposed publication, the Parties
shall refer such disagreement to the Research Team for resolution. All
publications shall give due credit to all individuals contributing to the
developments described in the publication.
2.22 PRE-EXISTING ANTIFUNGAL PROGRAMS. Lilly acknowledges that prior to
the Effective Date of this Agreement, Phytera had (and continues to have) Pre-
Existing Antifungal Programs. Phytera agrees that as of the Effective Date it
shall not screen Extracts from the Phytera Biodiversity Libraries in connection
with any antifungal target except those covered by the Program; provided,
however, Phytera shall be entitled to use its chemical libraries or libraries of
Third Parties in connection with the Pre-Existing Antifungal Programs.
2.23 RIGHT OF FIRST NEGOTIATION. In the event that Phytera seeks a
research, development or commercialization collaboration with a Third Party
relating to the First Right Pre-Existing Antifungal Programs or a Third Party
commences discussions with Phytera which Phytera intends to seriously consider
in connection with Compounds resulting from the First Right Pre-Existing
Antifungal Programs, Phytera hereby grants to Lilly a right of first negotiation
to (i) fund, in whole or in part, any research development, or commercialization
collaboration or program ("Relevant Program") to be undertaken by Phytera with a
Third Party with respect to a First Right Pre-Existing Antifungal Program
Compound and (ii) obtain certain license rights to any intellectual property
that results from such Relevant Program. This right shall be effective during
the Research Term and shall operate as follows:
(a) Phytera shall promptly send to Lilly a reasonably detailed written
notification of any Relevant Program contemplated by Phytera using a First Right
Pre-Existing Antifungal Program Compound;
(b) Lilly shall respond to Phytera within thirty (30) days of its
receipt of such notification indicating its interest in funding, in whole or in
part, the Relevant Program and in obtaining rights to any intellectual property
resulting therefrom.
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(c) For a period of up to sixty (60) days after Phytera receives notice
of Lilly's interest in funding, in whole or in part, the Relevant Program and
obtaining license rights to any intellectual property resulting therefrom, the
Parties shall negotiate in good faith a reasonable agreement based upon the
anticipated contributions of the Parties to the Relevant Program and any
products that result from such Relevant Program. If, after good faith
negotiations, an agreement cannot be reached between Lilly and Phytera on the
Relevant Program, Phytera shall be free to pursue such Relevant Program and
commercialize any products that result from such Relevant Program, either
independently or with one or more Third Parties.
(d) In the event that Lilly (i) fails to respond to Phytera within
thirty (30) days of notification by Phytera of the contemplated Relevant
Program, or (ii) indicates that it is not interested in funding such Relevant
Program and obtaining rights to any intellectual property resulting therefrom,
Phytera shall be free to pursue such Relevant Program and commercialize any
products that result from such Relevant Program, either independently or with
one or more Third Parties.
ARTICLE 3
---------
3.1 LICENSES TO LILLY.
(a) Except as otherwise provided in Sections 2.12 and 2.22 herein,
during the Research Term and the term of this Agreement and subject to the other
provisions of this Agreement, Phytera hereby grants to Lilly an exclusive,
worldwide license in the Field, with the right to sublicense, under the Phytera
Patents, Phytera Technology, Program Patents (to the extent Phytera has an
interest in such Patents) and Program Technology (to the extent Phytera has an
interest in such Technology) (i) to make, have made, use, import, offer for
sale, sell and have sold Research Compounds, Closely Related Derivatives and
Products; (ii) to conceive, discover, evaluate, identify, characterize,
research, develop, market and sell the Research Compounds, Closely Related
Derivatives and Products and (iii) to otherwise comply with its obligations
under this Agreement. Notwithstanding the foregoing grant, Phytera shall have
the right to practice under Phytera Patents, Phytera Technology, Phytera Program
Patents, and Phytera Program Technology as necessary to comply with its
obligations and exercise its rights under this Agreement. Phytera shall retain
all rights under Phytera Patents and Phytera Technology outside the Field.
(b) Upon termination or expiration of the Program, Phytera shall
grant and hereby does grant to Lilly a worldwide, perpetual, royalty-free (i)
exclusive license, with a right to sublicense, to make, have made, use, offer
for sale, sell, have sold and import any and all Phytera Patents, Phytera
Technology, and Program Technology (to the extent Phytera has an interest) and
Program Patents (to the extent Phytera has an interest) that is necessary or
useful for the manufacture, use or development of Research Compounds, Closely
Related Derivatives or Products; and (ii) non-exclusive license, with a right to
sublicense, to make, have made, use, offer for sale, sell, have sold and import
any and all other Program Technology (to the extent Phytera has an interest) and
Program Patents (to the extent Phytera has an interest).
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(C) Upon expiration or termination of the Agreement, except
termination by Phytera pursuant to sections 10.2 or 10.4, Phytera shall grant
and hereby does grant to Lilly a worldwide, perpetual, non-exclusive, royalty-
free license, with a right to sublicense, to make, have made, use, offer for
sale, sell, have sold and import any and all Program Technology (to the extent
Phytera has an interest) and Program Patents (to the extent Phytera has an
interest).
3.2 LICENSES TO PHYTERA. During the Research Term and subject to the
other provisions of this Agreement, Lilly hereby grants to Phytera a
nonexclusive, worldwide license in the Field during the Research Term under the
Lilly Patents, Lilly Technology, Program Patents (to the extent Lilly has an
interest) and Program Technology (to the extent Lilly has an interest) for the
sole purpose of conceiving, discovering, evaluating, identifying,
characterizing, and researching Research Compounds or Closely Related
Derivatives in connection with the Program and otherwise complying with its
obligations under this Agreement.
ARTICLE 4
---------
INTELLECTUAL PROPERTY
---------------------
4.1 PATENTABLE INVENTIONS AND KNOW-HOW
(A) DISCLOSURES AND REPORTS. Phytera and Lilly shall disclose to one
another promptly the results achieved in conducting the Program and all Program
Technology developed in the Program. Disclosure shall be in sufficient detail
to permit each Party to employ such results and Program Technology as provided
herein. Such disclosures may take the form of limited visits by Lilly and
Phytera personnel to the facilities being utilized for the Program to permit
observation of the procedures being employed pursuant to Section 2.17. While
the Program is being conducted, the Research Team shall submit to Phytera and
Lilly a detailed written quarterly report on the progress of the Program.
Within ninety (90) days after completion of the Program, the Research Team shall
provide Phytera and Lilly with a comprehensive final written report.
(B) OWNERSHIP. Any Program Technology made by either Party will be
disclosed to the other Party promptly after the disclosing Party recognizes the
significance thereof. All Program Patents and Program Technology, except
patents Covering Research Compounds, Closely Related Derivatives or Products,
shall be owned by the Party making the invention claimed or contained therein
or, if such invention is made jointly, shall be jointly owned all as determined
in accordance with U.S. laws of inventorship. Patents Covering Research
Compounds, Closely Related Derivatives and Products shall be, and hereby are,
assigned to and owned solely by Lilly.
(C) PATENT PROSECUTION. Phytera shall be responsible for preparing,
filing, prosecuting, maintaining and taking such other actions as are reasonably
necessary or appropriate with respect to the Phytera Patents and any patentable
inventions encompassed by Phytera Technology and Phytera Program Technology,
excluding jointly invented Program Technology. Lilly shall be responsible for
preparing, filing, prosecuting, maintaining and taking such other actions as are
reasonably necessary or
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appropriate with respect to the Lilly Patents and any patentable inventions
encompassed by Lilly Technology and Lilly Program Technology, which shall
include, without limitation, patents which Cover Research Compounds, Closely
Related Derivatives and Products and jointly invented Program Technology. The
Parties shall agree upon the countries for which patent coverage as described in
this Article 4 should be sought and the responsible Party shall prepare, file,
prosecute and maintain patents in accordance with that agreement, subject to the
provisions of Section 4.1(e) below; provided, however, that the responsible
Party shall at a minimum be required to seek patent coverage in the United
States, Japan and the European Economic Community. To the extent either Party
desires to engage external counsel in connection with activities described in
this Section 4.1(c), the engaging Party will consult the other Party with
respect to its choice of external patent counsel. Each Party shall also keep the
other Party continuously informed of all significant matters relating to the
preparation, filing, prosecution and maintenance of patents and patent
applications covered by this Agreement. Each Party shall provide the other Party
with copies of any substantial prosecution papers within thirty (30) days of
receipt. Each Party shall endeavor in good faith to coordinate its efforts with
those of the other Party to minimize or avoid interference with the prosecution
of the other Party's patent applications. To the extent practicable, each Party
shall provide the Research Team with a copy of any patent application which
first discloses any specific Program Technology, prior to filing the first of
such applications in any jurisdiction, for review and comment by the Research
Team. Each Party shall minimally provide the other Party with written notice
regarding the subject matter within Program Technology that such Party plans to
claim in a patent application or provisional.
(D) COSTS. Subject to the provisions of subsection (e) below, Lilly
shall bear all costs incurred in the preparation, filing, prosecution and
maintenance of Lilly Patents and Lilly Program Patents, and Phytera shall bear
all costs incurred in the preparation, filing, prosecution and maintenance of
Phytera Patents and Phytera Program Patents owned solely by Phytera; provided,
however, that Phytera shall pay [ ]* of all reasonable external expenses
incurred by Lilly while prosecuting and maintaining jointly invented Program
Patents. External expenses will include patent office fees and taxes in
connection with the filing, prosecution and maintenance of any patent or patent
application and the reasonable fees of any patent attorneys or agents external
to Lilly, in connection with the ex parte preparation, filing, prosecution and
-- -----
maintenance thereof. The allocation of such expenses will occur on an annual
basis at the end of the last quarter of each Calendar Year, at which time Lilly
will provide Phytera with an itemized list of external expenses denominated in
United States dollars incurred during the previous annual period in prosecuting
and maintaining jointly owned Program Patents. Phytera will then reimburse
Lilly's reasonable expenses within [ ]* of the date of receipt of this
itemized list. Notwithstanding the foregoing, upon written notice to Lilly,
Phytera may elect not to share in the prosecution or maintenance costs as
described in this Section 4.1(d) related to a patent or patent application in a
particular country and incurred by Lilly after receipt of that notice; and in
such event Phytera will grant to Lilly
____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
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all of its patent rights associated with such patent in such country.
(E) DISCONTINUANCE OF PATENT PROSECUTION. The Party initially
responsible for preparation, filing, prosecution and maintenance (including the
costs or reimbursement of costs related thereto) of a particular Program Patent,
Lilly Patent or Phytera Patent (the "Initial Responsible Party") shall give
thirty (30) days advance notice (the "Discontinuance Election") to the other
Party of any decision to cease preparation, filing, prosecution and maintenance
of that Patent (a "Discontinued Patent") provided, however, that abandonment of
a patent application in favor of a continuation or a continuation-in-part
thereof shall not constitute discontinuance of the patent application. In such
case, the other Party may elect at its sole discretion to continue preparation,
filing, prosecution or maintenance of the Discontinued Patent at its sole
expense. The Party so continuing shall own any such patent application and
patents maturing therefrom; and the Initial Responsible Party shall execute such
documents and perform such acts as may be reasonably necessary for the other
Party to file or to continue prosecution or maintenance, including assigning
ownership of such patents and inventions to such electing Party. Discontinuance
may be on a country-by-country basis or for a patent application or patent
series in total. In the event that Lilly exercises its Discontinuance Election
with respect to a Discontinued Patent in a particular country, Lilly's license
hereunder with respect to that Discontinued Patent shall terminate with respect
to such country.
4.2 SAMPLES. Phytera shall provide Lilly with samples of any
materials, including cell lines, animals, reagents, lead Compounds, Research
Compounds or Closely Related Derivatives which are produced or developed within
the scope of the Program.
4.3 INFRINGEMENT CLAIMS BY THIRD PARTIES.
(a) If the manufacture, use or sale of Research Compounds,
Closely Related Derivatives or Products or the execution of the Research Plan
results in a claim against a Party for patent infringement or for inducing or
contributing to patent infringement ("Infringement Claim"), the Party first
having notice of an Infringement Claim shall promptly notify the other in
writing. The notice shall set forth the facts of the Infringement Claim in
reasonable detail.
(b) In the event that the execution of the Research Plan
necessarily involves working within the scope of a Third Party's patent, then
Phytera will use diligent efforts to obtain a required license under the Third
Party's patents with a right to sublicense to Lilly, under terms reasonably
acceptable to both Lilly and Phytera. If the required license is either
unavailable or its terms are unacceptable, then Phytera and Lilly will agree
upon alternatives for proceeding with the Research Plan or to undertake the
defense of a patent infringement action with respect to the Third Party patents.
(c) In the event that the sale of a Product in any country
necessarily involves working within the scope of a Third Party's patent, then
Lilly will use diligent efforts to obtain a required license under the Third
Party's patents with a right to sublicense to Phytera, under terms reasonably
acceptable to Lilly and Lilly will bear any royalty obligation payable under
such license. If the required license is either unavailable or its terms are
unacceptable, then Lilly may elect in its sole discretion to discontinue sales
of the Product in such country or to undertake the defense of a patent
infringement action with respect to the Third Party patents.
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(d) Except as provided in subsection (e) below, the Parties shall
share all reasonable out-of-pocket costs and expenses (including reasonable
attorney fees) incurred in conducting the defense of such Infringement Claims,
including the investigation and settlement thereof, equally. To the extent
either Party desires to engage external counsel in connection with activities
described in this Section 4.3, the engaging Party will consult the other Party
with respect to its choice of external patent counsel. Each Party shall also
keep the other Party continuously informed of all significant matters relating
to infringement claims of Third Parties. Except as otherwise provided in this
Agreement, any and all royalties, amounts paid in settlement and damages
resulting from settlement or a final nonappealable judgment pursuant to
litigation relating to an Infringement Claim shall be shared equally by the
Parties, except as otherwise provided in subsection (e) below.
(e) Phytera shall bear all costs, expenses (including reasonable attorney
fees) and royalty obligations associated with obtaining a license under Section
4.3(b) and defending any related Infringement Claim, including the investigation
and settlement thereof; provided, however, Lilly shall bear royalty obligations
associated with any license that is required to settle or avoid an Infringement
Claim related to Technology contributed by Lilly to the Program.
4.4 INFRINGEMENT CLAIMS AGAINST THIRD PARTIES.
(a) Phytera and Lilly each agree to take reasonable actions to
protect their respective patents and technology from infringement and from
unauthorized possession or use.
(b) If any Phytera Technology, Lilly Technology, Program Patents or
Program Technology is infringed or misappropriated, as the case may be, by a
Third Party, the Party to this Agreement first having knowledge of such
infringement or misappropriation, shall promptly notify the other in writing.
The notice shall set forth the facts of such infringement or misappropriation in
reasonable detail. Subject to the rights of Third Parties, the owner of the
Patent or Technology shall have the primary right, but not the obligation, to
institute, prosecute, and control any action or proceeding with respect to
infringement or misappropriation of such Patent or Technology by its own counsel
and the other Party shall have the right, at its own expense, to be represented
in such action by its own counsel. The Research Team shall determine which
Party shall have the primary responsibility to institute, prosecute, and control
any action or proceeding with respect to infringement or misappropriation of
jointly owned Patents or Technology and the other Party shall have the right, at
its expense, to be represented by its counsel.
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(c) The costs and expenses of all infringement suits brought by a
Party under this Section 4.4 shall be reimbursed to such filing Party and the
participating Party, pro rata, out of any damages or other monetary awards
recovered therein in favor of Phytera or Lilly. Any remaining damages shall then
be split twenty-five percent (25%) to Phytera and seventy-five percent (75%) to
Lilly. If the Party having the primary right or responsibility to institute,
prosecute, and control such action or prosecution fails to do so within a period
of one hundred twenty (120) days after receiving notice of the infringement, the
other Party, subject to the prior rights of any Third Party, shall have the
right to bring and control any such action by counsel of its own choice, and the
other shall not have the right to participate in such action or proceeding,
except that such Party may be joined as a Party plaintiff and, in case of
joining, such Party agrees to give the other Party reasonable assistance and
authority to file and to prosecute such suit. All costs and expenses of any suit
brought by the Party not having the primary right or responsibility to
institute, prosecute, and control such action or prosecution (including the
costs and expenses incurred by the other Party in providing reasonable
assistance to the Party initiating the action or proceeding) shall be paid, and
all damages or other monetary rewards recovered therein shall be retained, by
the Party initiating, the action or proceeding. No settlement or consent
judgment or other voluntary final disposition of a suit under this Section 4.4
may be entered into without the joint consent of Phytera and Lilly (which
consent shall not be unreasonably withheld or delayed).
4.5 NOTICE OF CERTIFICATION. Phytera and Lilly each shall immediately
give notice to the other of any certification filed under the U.S. "Drug Price
Competition and Patent Term Restoration Act of 1984" claiming that a Program
Patent, Phytera Patent or Lilly Patent is invalid or that any infringement will
not arise from the manufacture, use or sale of any product by a Third Party. If
Phytera decides not to bring infringement proceedings against the entity making
such a certification with respect to a Phytera Patent or Program Patent, Phytera
shall give notice to Lilly of its decision not to bring suit within twenty-one
(21) days after receipt of notice of such certification. Lilly may then, but is
not required to, bring suit against the Party that filed the certification. If
Lilly decides not to bring infringement proceedings against the entity making
such a certification with respect to a Lilly Patent, Lilly shall give notice to
Phytera of its decision not to bring suit within twenty-one (21) days after
receipt of notice of such certification. Phytera may then, but is not required
to, bring suit against the Party that filed the certification. Any suit by Lilly
or Phytera shall either be in the name of Lilly or in the name of Phytera, or
jointly by Lilly and Phytera, as may be required by law. For this purpose, the
Party not bringing suit shall execute such legal papers necessary for the
prosecution of such suit as may be reasonably requested by the Party bringing
suit. Any costs incurred or benefits received as a result of proceeding under
this Section 4.5 shall be paid or received entirely by the Party who pursued the
action.
4.6 PATENT TERM EXTENSIONS. The Parties shall cooperate with each other
in gaining patent term extension wherever applicable to Phytera Patents, Lilly
Patents or Program Patents covering Research Compounds and Closely Related
Derivatives. Lilly shall determine which patents shall be extended. All filings
for such extension shall be made by the Party to whom the patent is assigned,
provided, however, that in the event that the Party to whom the patent is
assigned elects not to file for an extension, such Party
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shall (i) inform the other Party of its intention not to file, (ii) grant the
other Party the right to file for such extension, and (iii) cooperate as
necessary to assist the other Party in filing such extension.
4.7 AUDIT OF COSTS. Upon reasonable written notice to Phytera, Lilly
shall have the right at its own expense and not more than annually in or in
respect of any Calendar Year, and during normal business hours, to audit those
books and records as may be reasonably necessary to verify the accuracy and
reasonableness of any costs incurred by Phytera and for which Phytera is seeking
or has received partial reimbursement from Lilly pursuant to this Article 4, in
respect of any Calendar Year ending not more than one (1) year prior to the date
of such notice. Any Phytera information received or obtained by Lilly in
connection with an audit under this Section 4.7 is Confidential Information and
Lilly shall retain all such information in confidence.
ARTICLE 5
---------
CONFIDENTIALITY AND PUBLICATION
-------------------------------
5.1 CONFIDENTIALITY. Unless otherwise set forth in this Agreement,
for a period from the Effective Date until [ ]* following the later
of: (a) the expiration or termination of this Agreement or (b) if Lilly is
marketing a Product, the date on which Lilly ceases to market any Product, Lilly
and Phytera shall maintain in confidence all Confidential Information disclosed
by the other Party or generated during the Program, and shall not, except as
contemplated by this Agreement, use it for its benefit or the benefit of others,
without the written consent of the disclosing Party. Lilly and Phytera agree not
to disclose any trade secret information belonging to the other Party for so
long as the trade secret remains confidential, provided that any disclosure of
such trade secret is in no way through the fault of the of the other Party to
this Agreement. Documents made available to the receiving Party shall remain the
property of the disclosing Party and shall be returned upon written request,
except that one copy of all such information may be retained for legal archival
purposes by the receiving Party.
5.2 AUTHORIZED DISCLOSURE. Each Party may disclose Confidential
Information disclosed by the other Party or generated during the Program for the
purpose of making various regulatory filings and complying with applicable
governmental regulations, and to consultants and others having a need to know
for the purposes of development, manufacture or marketing of Research Compounds
or Product(s) pursuant to this Agreement, provided that such consultants and
others shall also agree to appropriate and comparable confidentiality and non-
use provisions. In addition, each Party shall be entitled to disclose
Confidential Information to the extent required by applicable law, orders of
court, regulatory authorities or similar bodies having jurisdiction over the
Party ("Legal Process"). The Receiving Party shall promptly notify the
Disclosing Party of any request or demand by Legal Process for disclosure of
Confidential Information. With respect to any disclosure of Confidential
Information, including the text of this Agreement, for the purpose of complying
with applicable government regulations, the Disclosing Party shall give the
other Party an opportunity to review and comment upon the extent of any such
disclosure of Confidential Information prior to disclosure.
_____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
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5.3 NONDISCLOSURE OF AGREEMENT. Neither Party shall disclose any
information about this Agreement without the prior written consent of the other.
Consent shall not be required, however, for (a) disclosures to tax authorities
or to bona fide potential sublicensees, to the extent required or contemplated
by this Agreement, provided, that in connection with such disclosure, each Party
agrees to use its commercially reasonable efforts to secure confidential
treatment of such information, (b) disclosures of information for which written
consent has previously been obtained, or (c) information which had previously
been publicly disclosed. Each Party shall have the further right to disclose the
terms of this Agreement as required by applicable law, including the rules and
regulations promulgated by the Securities and Exchange Commission and/or the
regulatory bodies/authorities governing securities issues in foreign
jurisdictions and to disclose such information to shareholders or potential
investors as is customary for privately or publicly-held companies (as the case
may be at the time of disclosure), provided the disclosing Party provides to the
other Party, to the extent practicable, a copy of the information to be
disclosed and an opportunity to comment thereon prior to such disclosure, and,
to the extent practicable, consults within a reasonable time in advance of the
proposed disclosure with the other on the necessity for the disclosure and the
text of the proposed release. Any copy of this Agreement to be filed with the
Securities and Exchange Commission shall be redacted to the satisfaction of both
Parties; provided, however, in the event that the Securities and Exchange
Commission objects to the redaction of any portion of the Agreement after the
initial submission, the filing Party shall inform the other Party of the
objections and shall in good faith respond to the objections in an effort to
limit the disclosure required by the Securities and Exchange Agreement, but in
any event the filing Party shall be free to include any portions of the
Agreement it deems necessary to respond to the objections in any future filings.
5.4 SURVIVAL. The confidentiality obligations of this Article 5 shall
survive the termination or expiration of the Agreement.
5.5 PRESS RELEASES. Attached hereto as APPENDIX F is a form of press
----------
release which Phytera intends to release upon the execution of this Agreement or
shortly thereafter, which is hereby approved by Lilly. All press releases or
other public communication by either Party relating to the collaboration
contemplated by this Agreement shall be approved in advance by each Party which
approval shall not be unreasonably withheld, except for those communications
required by law. To the extent a disclosure is required by law, each Party shall
provide the other with prior written notification of such disclosure.
5.6. INQUIRIES FROM MEDIA AND FINANCIAL ANALYSTS. During and after the
term of this Agreement, Phytera may receive inquiries from reporters or
financial analysts related to the Program or Products. Phytera shall confer
with Lilly's corporate communications department (317-276-3655) before
responding to such inquiries and shall receive approval from Lilly for its
planned response to such inquiries.
5.7 USE OF NAMES, LOGOS OR SYMBOLS. No Party hereto shall use the name,
trademarks, logos, physical likeness, employee names or owner symbol of any
other Party for any purpose, including, without limitation, private or public
securities placements, without the prior written consent of the affected Party,
such consent not to be unreasonably withheld or delayed so long as such use of
name is limited to objective statements of fact, rather than for endorsement
purposes. Nothing contained herein shall
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be construed as granting either Party any rights or license to use any of the
other Party's trademarks or tradenames without separate, express written
permission of the owner of such trademark or tradename.
ARTICLE 6
---------
EQUITY INVESTMENT, MILESTONES AND ROYALTIES
-------------------------------------------
6.1 UPFRONT EQUITY INVESTMENT. In consideration of Phytera entering into
this Agreement and allowing Lilly the use of the Phytera Technology, within
sixty (60) business days of Lilly receiving a fully executed original of this
Agreement, Lilly shall purchase and Phytera shall sell to Lilly for an
aggregate price of Five Hundred Thousand Dollars ($500,000) that number of
shares of Phytera Series E Preferred Stock referenced in the Stock Subscription
Agreement dated as of the same date hereof.
6.2. MILESTONE BASED FEES AND INVESTMENT. In further consideration of
Phytera entering into this Agreement and provided that Phytera is not then in
breach of any of its obligations under this Agreement, Lilly shall, upon the
achievement of one or more of the milestones listed below for a Research
Compound, Closely Related Derivative, or Product, (a) notify Phytera promptly of
such achievement and (b) pay a milestone fee as listed below to Phytera within [
]* of such achievement:
Milestone 1: $500,000
Written approval by the Research Team in Research
Team meeting minutes or otherwise of the First
Research Compound as a lead (as "lead" is defined
in the then current Research Plan) for which SAR
Studies should commence. This milestone shall be
triggered and paid only once during the term of
the Agreement and shall be made in the form of an
equity investment. The equity investment shall be
based then-prevailing market price of Phytera
stock or upon terms substantially similar to the
then-most recent placement of equity by Phytera.
The per recent private share price of Phytera
equity shall be based on the following: (1) if
Phytera stock is being publicly traded, the per
share price shall be based on the average of the
last sale prices of a share of common stock on the
relevant market for the 20 trading days immediately
preceding the date the milestone is achieved as
documented in Research Team minutes or (2) if
Phytera stock is not being publicly traded, the
per share price shall be based on the then-
prevailing market price of Phytera stock or the
price of issuance during Phytera's then most
recent private placement
______________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
Page 27
<PAGE>
or such other price as agreed upon by the
Parties in writing.
Milestone 2: [ ]*
[ ]*.
Milestone 3: [ ]*
[ ]*.
Milestone 4: [ ]*
[ ]*.
Milestone 5: [ ]*
[ ]*
Milestone 6: [ ]*
[ ]*.
Each milestone is independent, so that the achievement of any one milestone
with respect to a Research Compound or Product does not require payment of lower
numbered unachieved milestones with respect to that Compound or Product.
All milestone payments previously paid with respect to Research Compounds
or Products that later fail prior to First Commercial Sale in the United States,
Japan or Major Europe, whichever occurs first, shall be creditable against
future milestones payment(s) for the next Research Compound(s) or Product(s) to
trigger any milestone(s). "Failure" for purposes of this provision shall mean a
decision by Lilly to terminate further development of a Research Compound or
Product due to efficacy, safety or tolerance data or such other reasons that are
commercially reasonable, given the then current industry standards.
6.3 ROYALTIES.
____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
Page 28
<PAGE>
(a) Subject to the terms and conditions of this Agreement, in
consideration for the licenses provided hereunder, Lilly shall pay Phytera
royalties ("Royalty Payments") for each Product based upon [
]*, as follows:
Annual Net Sales Royalty Rate (on that
---------------- ---------------------
portion of net sales)*
----------------------
[
]*
*subject to a reduction equal to [ ]* % of any royalties payable to Third
Parties, provided that the royalty rate shall never fall below [ ]* %.
**MM - million U.S. Dollars
(b) For the purposes of this Article, the annual Net Sales of Product
figures set out above shall be in 1998 U.S. Dollars. Such numbers shall then be
adjusted upward on a Calendar Year basis commencing January 1,1999 (and on
January 1 of each year thereafter) using the Consumer Price Index (as calculated
by the Bureau of Labor Statistics for all U.S. urban consumers) to account for
inflation. Royalties shall be calculated on a Product by Product basis, and
sales of various Products shall not be aggregated for purposes of determining
the applicable royalty rate. For this purpose, all formulations of a Compound
shall be regarded as one Product. Royalty rates shall be applied only to that
portion of sales in a given Calendar Year that fall within the triggering sales
tier.
6.4 ROYALTY PAYMENTS. Royalty payments under this Agreement shall be made
to the receiving Party within seventy-five (75) days following the end of each
Calandar Quarter for which royalties are due. Royalties shall be payable on a
country-by-country and Product-by-Product basis from the date of First
Commercial Sale of each Product in a particular country until the expiration of
the last to expire Phytera Patent or Program Patent in such country having a
valid claim covering such Product. All payments shall be made in U.S. Dollars.
If at any time legal restrictions prevent the prompt remittance of any payments
with respect to any country where Products are sold, Lilly shall have the right
and option to make such payments by depositing the amount thereof in local
currency to Phytera's account in a bank or depository in such country.
6.5 SINGLE ROYALTY. Royalties payable under this Article will be payable
only once with respect to a particular unit of Product and will be paid only
once regardless of there being more than one Patent applicable to such Product.
6.6 SALES REPORTS.
(a) During the term of this Agreement and after the First Commercial Sale
of a Product, Lilly shall furnish or cause to be furnished to Phytera on a
quarterly basis a written report or reports covering each Calendar Quarter (each
such Calendar Quarter being sometimes referred to herein as a "reporting
period") showing (i) the Net Sales of
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
Page 29
<PAGE>
each Product in each country during the Royalty Term by Lilly or its Affiliates,
and; (ii) the royalties, which shall have accrued under Section 6.3 hereof in
respect of such sales and the basis for calculating those royalties. With
respect to sales of Products invoiced in U.S. Dollars calculated by using
Lilly's then-current standard procedures and methodology, the Net Sales amounts
and the amounts due to Phytera hereunder shall be expressed in Dollars. With
respect to sales of Products invoiced in a currency other than Dollars, the Net
Sales and amounts due to Phytera hereunder shall be expressed in the Dollar
equivalent of the amount payable to Phytera, calculated using Lilly's then
current standard exchange rate methodology for the translation of foreign
currency sales into Dollars. In each report, the exchange rate methodology will
be identical to that employed by Lilly in its external financial reporting, as
reviewed and approved by its independent auditors and will be in conformity with
generally accepted accounting principles consistently applied. Lilly will at
Phytera's reasonable request, but not more frequently than once a year, inform
Phytera as to the specific exchange rate translation methodology used for a
particular country or countries. Each quarterly report shall be due seventy-five
(75) days following the close of each reporting period. Lilly shall keep
accurate records in sufficient detail to enable the amounts due hereunder to be
determined and to be verified by the independent auditors described hereunder.
Lilly shall furnish annually to Phytera appropriate evidence of payment of any
tax or other amount required by applicable laws or regulations to be deducted
from any royalty payment, including any tax or withholding levied by a foreign
taxing authority in respect of the payment or accrual of any royalty.
(b) Amounts shown to have accrued by each sales report provided for under
Section 6.6(a) of this Agreement shall be due and payable on the date such sales
report is due.
(c) Upon written notice to Lilly, Phytera shall have the right at its own
expense using Lilly's independent certified public accountant, and not more than
annually in or in respect of any Calendar Year, to audit Lilly's books and
records during normal business hours as may be reasonably necessary to verify
the accuracy of the sales reports furnished by Lilly pursuant to Section 6.6(a),
in respect of any Calendar Year ending not more than one (1) year prior to the
date of such notice. Such audit shall be conducted by staff of Lilly's
independent public accountant other than those staff responsible for or involved
in ongoing general audit activities at Lilly. Phytera shall have the right to
have the audit work papers prepared by Lilly's independent public accountant
pursuant to this audit reviewed by Phytera's own independent certified public
accountant. Upon the expiration of two (2) years following the end of any
Calendar Year, the calculation of amounts payable with respect to such fiscal
year shall be binding and conclusive upon Phytera, and Lilly shall be released
from any liability or accountability with respect to payments for such year.
The report prepared by the independent public accountant, a copy of which shall
be sent or otherwise provided to Lilly by such independent public accountant at
the same time it is sent or otherwise provided to Phytera, shall contain the
conclusions of the independent public accountant regarding the audit and will
specify that the amounts paid to Phytera pursuant thereto were correct or, if
incorrect, the amount of any underpayment or overpayment. If the independent
public accountant's report shows any underpayment, Lilly shall remit to Phytera
within thirty (30) days after Lilly's receipt of such report, (i) the amount of
such underpayment and (ii) if such underpayment
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<PAGE>
exceeds ten percent (10%) of the total amount owed for the Calendar Year then
being audited, the reasonable and necessary fees and expenses of the independent
public accountant performing the audit, subject to reasonable substantiation
thereof. Any overpayments shall be refunded to Lilly by Phytera within thirty
(30) days of receipt of the audit report or may be creditable, at Lilly's
option, against amounts payable in subsequent payment periods. Phytera agrees
that all information subject to review under this Section 6.6(d) is Confidential
Information and that Phytera shall retain and cause the accountant to retain all
such information in confidence.
ARTICLE 7
INDEMNITY
SECTION 7.1
(a) CLAIMS. Each Party hereby agrees to indemnify, defend and hold
harmless the other Party and its Affiliates, and their respective officers,
directors, agents and employees from and against any and all suits, claims,
actions, demands, liabilities, expenses and/or losses, including reasonable
attorneys' fees and other costs of defense other than claims for infringement
(which shall be resolved pursuant to Sections 4.3 and 4.4) ("Claims"), (a)
resulting directly or indirectly from the manufacture, use, handling, storage,
sale or other disposition of Research Compounds or Product by the indemnifying
Party, its Affiliates, agents or sublicensees, but only to the extent such
Claims result from the negligence or intentional misconduct of the indemnifying
Party or its employees and agents and do not result from the negligence or
intentional misconduct of the Party seeking indemnification, or (b) resulting
directly from a breach of any representation or warranty of the indemnifying
Party contained in Article 8 of this Agreement.
(b) DEFENSE. Any entity entitled to indemnification under this Article
shall give prompt written notice to the indemnifying Party of any Claims with
respect to which it seeks indemnification, and the indemnifying Party shall have
the option to assume the defense of such Claims with counsel reasonably
satisfactory to the indemnified Party. If such defense is assumed by the
indemnifying Party with counsel so selected, the indemnifying Party will not be
obligated to pay the fees and expenses of any separate counsel retained by the
indemnified Party with respect to such Claims. Except with the prior consent of
the indemnified Party, which consent shall not be unreasonably withheld, the
indemnifying Party may not enter into any settlement of such litigation unless
such settlement includes an unqualified release of the indemnified Party.
(c) INSURANCE. Phytera and Lilly shall each have and maintain such type
and amounts of liability insurance covering the manufacture, supply, use and
sale of Research Compounds, Program Candidates, Rejected Candidates,
Discontinued Products and Products as is normal and customary in the
pharmaceutical industry generally for parties similarly situated, and will upon
request provide the other Party with a copy of relevant certificates of
insurance or self-insurance in that regard, along with any amendments and
revisions thereto.
Page 31
<PAGE>
ARTICLE 8
REPRESENTATIONS AND WARRANTIES
8.1 CORPORATE EXISTENCE AND POWER. Each of Phytera and Lilly represents
and warrants to the other that as of the Effective Date it (a) is a corporation
duly organized, validly existing and in good standing under the laws of the
state in which it is incorporated, and (b) has full corporate power and
authority and the legal right to own and operate its property and assets and to
carry on its business as it is now being conducted and is contemplated in this
Agreement, including the right to grant the licenses granted hereunder.
8.2 AUTHORITY. As of the Effective Date, each Party (i) has the corporate
power and authority and the legal right to enter into this Agreement and perform
its obligations hereunder, and (ii) has taken all necessary corporate action on
its part required to authorize the execution and delivery of the Agreement and
the performance of its obligations hereunder. The Agreement has been duly
executed and delivered on behalf of such Party, and constitutes a legal, valid,
binding obligation of such Party and is enforceable against it in accordance
with its terms subject to the effects of bankruptcy, insolvency or other laws of
general application affecting the enforcement of creditor rights and judicial
principles affecting the availability of specific performance and general
principles of equity whether enforceability is considered a proceeding at law or
equity.
8.3 ABSENCE OF LITIGATION. As of the Effective Date, each Party
represents and warrants to the other that it is not aware of any pending or
threatened litigation (and has not received any communication) which alleges
that such Party's activities related to this Agreement have violated, or that by
conducting the activities as contemplated herein such Party would violate, any
of the intellectual property rights of any other person. To the best of
Phytera's and Lilly's knowledge, there is no material unauthorized use,
infringement or misappropriation of any of its intellectual property rights
licensed hereunder.
8.4 NO APPROVALS OR CONSENTS. Except as otherwise described in this
Agreement each Party represents and warrants to the other that all necessary
consents, approvals and authorizations of all governmental authorities and other
persons or entities required to be obtained by such Party in connection with
this Agreement have been obtained.
8.5 PATENTS; PRIOR ART. Except as each Party has otherwise advised the
other Party in writing, each of Phytera and Lilly represents and warrants to the
other that as of the Effective Date, to the best of its knowledge, it has
sufficient legal and/or beneficial title and ownership under its intellectual
property rights necessary for it to fulfill its obligations under this Agreement
and that it is not aware of any communication alleging that it has violated or
by conducting its business as contemplated by this Agreement would violate any
of the intellectual property rights of any other person, and that to the best of
its knowledge there is no material unauthorized use, infringement or
misappropriation of any of its intellectual property rights relevant to this
Agreement. As used herein, "intellectual property rights" means all patent
rights, copyrights, trademarks, trade secret rights, chemical and biological
material rights and know-how rights necessary or useful to make, use or sell
Research Compounds and Products. Phytera further warrants and represents that
prior to the date of this Agreement, no license or covenant not to sue under any
Phytera Patent in the Field has been granted to any Third
Page 32
<PAGE>
Party.
8.6 NO CONFLICT. The execution and delivery of the Agreement and the
performance of each Party's obligations hereunder (i) do not conflict with or
violate any requirement of applicable law or regulation or any provision of
articles of incorporation or bylaws of such Party in any material way, and (ii)
do not conflict with, violate or breach or constitute a default or require any
consent under, any contractual obligation or court or administrative order by
which such Party is bound.
8.7 YEAR 2000 COMPLIANCE. Phytera represents and warrants that its
operations, including without limitation the provision of any services, products
and/or information to or on behalf of Lilly, will not be materially delayed,
interrupted or otherwise adversely affected to the detriment of Lilly due to the
failure of Phytera's business systems and/or computer systems to be "Year 2000
Compliant". For purposes of this paragraph, a system shall be considered "Year
2000 Compliant" only if (i) the occurrence in or use by that system of dates on
or after January 1, 2000 ("Millennial Dates") does not adversely affect that
system's performance, including without limitation performance with respect to
date-dependent data, computations, output, or other functions (including,
without limitation, calculating, comparing and sequencing), and (ii) that system
creates, stores, processes and outputs information (as applicable) related to or
including Millennial Dates without errors or omissions.
8.8 NO DEBARMENT. Each party represents and warrants to the other that it
will comply at all times with the provisions of the Generic Drug Enforcement Act
of 1992 and will upon request certify in writing to the other that none of it,
its employees, or any person providing services to such party in connection with
the collaboration contemplated by this Agreement have been debarred under the
provisions of such Act.
ARTICLE 9
GOVERNING LAW AND DISPUTE RESOLUTION
9.1 GOVERNING LAW. The Agreement shall be governed by the laws of the
State of Indiana, without regard to Indiana choice of law provisions.
9.2 DISPUTE RESOLUTION PROCESS. In the event of any dispute relating to
this Agreement, the Parties shall prior to instituting any lawsuit, arbitration
or other dispute resolution process on account of such dispute, follow the
procedures for dispute resolution set forth in Section 2.2(d) of this Agreement
if such dispute is within the jurisdiction of the Research Team, as contemplated
by Section 2.2(c). In the event of any dispute relating to or arising from this
Agreement which a Party does not believe is covered by Section 2.2(d), the
Parties shall attempt in good faith to settle such dispute first by negotiation
and consultation between themselves, including referral of such dispute to the
Chief Executive Officer of Phytera and the Vice President, Infectious Diseases
Research of Lilly. In the event said executives are unable to resolve such
dispute or agree upon a mechanism to resolve such dispute within sixty (60) days
of the first written request for dispute resolution under this Article 9, the
Parties shall then consider other forms of alternative dispute resolution as a
means of resolving any such dispute. Thereafter, either Party shall be free to
institute litigation and seek such remedies as may be available.
Notwithstanding anything in this Agreement to the contrary, either Party shall
be entitled to institute litigation immediately if the same shall
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<PAGE>
be necessary to prevent irreparable harm to either Party.
ARTICLE 10
TERM AND TERMINATION OF AGREEMENT
10.1 TERM. This Agreement shall become effective on the Effective Date and
shall continue in effect, unless terminated earlier as described hereunder or by
mutual written agreement of the Parties, until the later of either: (1) the
expiration of the last to expire Phytera Patent or Program Patent having a Valid
Claim Covering a Research Compound or Product; or (2) in the event that Lily is
developing a Research or marketing a product in accordance with the terms of
this Agreement but there is no issued Phytera Patent or Program Patent having a
valid claim Covering such Research Compound or Product, then ten (10) years from
the date of the First Commercial Sale with respect to the Product, if any. Upon
expiration of the Agreeement under Section 10.1, Lily shall and hereby does
assign all right, title and interest that Lilly has in Program Technology and
Program Patents, excluding its interest in Research Compounds and Closely
Related Derivatives ( and any claims or know-how Covering such Research
Compounds and Lilly's prior ownership interest) and Phytera shall grant and
hereby does grant to Lilly (with respect to Phytera's prior ownership interest)
a worldwide, non-exclusive, royalty-free license (with the right to sublicense)
to all Program Technology and Program Patents in accordance with Section 3.1(c).
10.2 TERMINATION FOR MATERIAL BREACH. Either Party shall have the right to
terminate this Agreement after ninety (90) days written notice to the other in
the event the other is in material breach of this Agreement, unless the other
Party cures the breach before the expiration of such period of time. Such
notice shall set forth in reasonable detail the specifics of the breach. In the
event of termination hereunder by Lilly, all licenses granted under this
Agreement to Lilly and its Affiliates shall not be affected and shall continue
in full force and effect, and Lilly and its Affiliates shall have the right to
exercise all licenses provided under this Agreement. All licenses granted under
this Agreement to Phytera and its Affiliates shall automatically terminate upon
such termination by Lilly. In the event of termination hereunder by Phytera,
all licenses granted under this Agreement to Phytera and its Affiliates shall
not be affected and shall continue in full force and effect, and Phytera and its
Affiliates shall have the right to exercise all licenses provided under this
Agreement. All licenses granted under this Agreement to Lilly and its
Affiliates shall automatically terminate upon such termination by Phytera.
Notwithstanding the foregoing, Lilly shall be permitted to make, have made, use,
have used, import, offer for sale, sell, and have sold, all supplies of Product
in its inventory at the time of termination until such supplies are exhausted.
For purposes of this Agreement, insolvency as set forth in Section 10.4 shall be
deemed a material breach.
10.3 LILLY VOLUNTARY TERMINATION. Any time after the second anniversary
of the Effective Date, Lilly may terminate this Agreement by giving Phytera
three (3) months
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written notice of its intent to terminate, which notice may be
provided prior to the second anniversary of the Effective Date. Upon
termination by Lilly under this Section 10.3 and subject to the terms set
forth herein, (i) the licenses granted under this Agreement shall terminate,
except as otherwise provided in Section 3.1(c); (ii) Lilly shall and hereby
does transfer to Phytera all right, title and interest in the Research
Compounds and Closely Related Derivatives except those Research Compounds or
Closely Related Derivatives which shall have been derived from the Lilly
Natural Products Library or the Lilly Compound Library; and (iii) Lilly shall
transfer and hereby does transfer all of its right, title and interest in
jointly owned Program Patents and jointly owned Program Technology, subject to
the retention by Lilly of a non-exclusive license in accordance with Section
3.1(c). In consideration for the transfer of rights from Lilly to Phytera to
occur pursuant to this Section 10.3, Phytera shall pay Lilly a [ ]* royalty
on the annual Net Sales of any Products sold by Phytera or its Affiliates or
any sublicensee thereof until Lilly has received an amount equal to its
payments to Phytera hereunder (including, but not limited to, Research Funds,
milestone payments and patent costs) and to any unaffiliated Third Party
contractors retained by it in connection herewith, plus interest on any unpaid
balances as set forth below. Until Lilly is fully reimbursed, any balance not
reimbursed shall accrue interest from that date commencing four years after the
Effective Date until paid, at the prime rate as quoted in The Wall Street
Journal plus two percent (2%) as determined on the date that interest first
accrues, compounded quarterly.
10.4 TERMINATION UPON INSOLVENCY. This Agreement may be terminated by
either Party upon notice to the other should the other Party:
(a) become insolvent; or
(b) file or consent to the filing of a petition under any bankruptcy
or insolvency law or have any such petition filed against it which has not been
stayed within 60 days of such filing.
10.5 TERMINATION DUE TO ISSUANCE OF BLOCKING PATENTS. Lilly shall have the
right to terminate this Agreement upon thirty (30) days written notice at any
time in the event that the execution of the Research Plan necessarily involves
working within the scope of a Third Party's patent.
10.6 ACCRUED RIGHTS, SURVIVING OBLIGATIONS. Upon the expiration or early
termination of this Agreement and except as provided herein to the contrary, all
rights and obligations of the Parties shall cease, except as follows:
(a) obligations to pay costs accruing hereunder up to the effective
date of termination;
(b) the right to complete the manufacture and sale of Products which
qualify as "work in process" under GAAP or which are in stock at the date of
termination, and the obligation to pay royalties on Net Sales of such Products;
(c) obligations to pay milestones and royalties with respect to
___________________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
Page 35
<PAGE>
Research Compounds, Closely Related Derivatives and/or Products;
(d) obligations of confidentiality and non-use;
(e) obligations for record-keeping and accounting reports for so long
as Products are sold, plus one (1) year. At such time after termination of this
Agreement when sales or other dispositions of Products have ceased, Lilly or
Phytera, as the case may be, shall render a final report along with any royalty
payment due;
(f) the Parties' right to inspect books and records;
(g) the obligations of defense and indemnity;
(h) any cause of action or claim of a Party accrued or to accrue
because of any breach or default by the other Party hereunder (subject to
applicable statutes of limitations); and
(i) in the event of expiration of this Agreement under Section 10.1,
Lilly shall have a fully paid-up, perpetual license to the rights granted
pursuant to Section 3.1(c); and
(j) all other terms, provisions, representations, rights and
obligations contained in this Agreement that by their sense and content are
intended to survive.
10.7 ADDITIONAL RIGHTS UPON TERMINATION FOR BREACH. If a Party (the "Non-
Breaching Party") terminates this Agreement under Section 10.2 hereof following
material breach by the other Party (the "Breaching Party"), (a) the Breaching
Party shall return to the Non-Breaching Party all Confidential Information and
materials received from the Non-Breaching Party during the Agreement, except
that the Breaching Party may keep a copy of all documents for record keeping
purposes only, (b) the Breaching Party shall cease all use of the Confidential
Information and materials received from the Non-Breaching Party for any purpose,
and (c) the Breaching Party shall deliver to the Non-Breaching Party all data
and information developed by the Breaching Party prior to such termination as a
result of the activities under this Agreement which can reasonably be viewed as
necessary or useful to obtain governmental regulatory approvals.
ARTICLE 11
----------
MISCELLANEOUS PROVISIONS
11.1 NOTICES. All notices required or permitted to be given under this
Agreement shall be in writing and shall be deemed given, upon receipt, if mailed
by registered or certified mail (return receipt requested), postage prepaid, or
sent by overnight delivery (receipt verified) to the address below, or given
personally or transmitted by facsimile to the number indicated below (with
confirmation).
If to Phytera: Phytera Inc.
377 Plantation Street
Worcester, MA 01605
Attn: Malcolm Morville, Ph.D.
President and CEO
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If to Lilly: Eli Lilly and Company
Lilly Corporate Center
Indianapolis, IN 46258
Attn: General Patent Counsel
Either Party may, by written notice to the others, designate a new address or
fax number to which notices to the Party giving the notice shall thereafter be
mailed or faxed.
11.2 FOREIGN EXCHANGE. Except as otherwise specified herein, sales and
expenses of the Parties under this Agreement which are in currencies other than
U.S. Dollars shall be translated into U.S. Dollars in accordance with GAAP,
consistently applied.
11.3 FORCE MAJEURE. If the performance of either Party under this
Agreement is affected by any extraordinary, unexpected and unavoidable event
such as acts of God, floods, fires, riots, war, accidents, or by reason of any
law, order, proclamation, regulation, ordinance, demand or requirement of the
relevant government or any sub-division, authority or representative thereof, or
by reason of any other cause whatsoever (provided that in all such cases the
Party claiming relief on account of such event can demonstrate that such event
was extraordinary, unexpected and unavoidable by the exercise of reasonable
care) ("Force Majeure") it shall as soon as reasonably practicable notify the
other Party of the nature and extent thereof and take all reasonable steps to
overcome the Force Majeure and to minimize the loss occasioned to that other
Party. Neither Party shall be deemed to be in breach of this Agreement or
otherwise be liable to the other Party by reason of any delay in performance or
nonperformance of any of its obligations hereunder to the extent that such delay
and nonperformance is due to any Force Majeure of which it has notified the
other Party and the time for performance of that obligation shall be extended
accordingly.
11.4 WITHHOLDING TAXES. If either Party is required by the United States
government or other authorities to withhold any tax on the amounts payable by
that Party to the other Party under this Agreement, that Party shall be allowed
to do so, and shall in such case remit payments to the other Party net of such
withheld amount, provided that the withholding Party furnishes the other Party
with reasonable evidence of such withholding payment in electronic or written
form as soon as practicable after such withholding in order that the other Party
may use the withholding tax paid as a tax credit.
11.5 ENTIRETY OF AGREEMENT. This Agreement, its appendices and the Stock
Purchase Agreement of even date herewith, set forth the entire Agreement and
understanding of the Parties relating to the subject matter contained herein and
merges all prior discussions and agreements between them. No Party shall be
bound by any representation other than as expressly stated in this Agreement, or
by a written amendment to this Agreement signed by authorized representatives of
both Parties.
11.6 NON-WAIVER. The failure of a Party in any one or more instances to
insist upon strict performance of any of the terms and conditions of this
Agreement shall not be construed as a waiver or relinquishment, to any extent,
of the right to assert or rely upon any such terms or conditions on any future
occasion.
11.7 DISCLAIMER OF AGENCY. This Agreement shall not constitute either
Party
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the legal representative or agent of the other, nor shall either Party have the
right or authority to assume, create, or incur any Third Party liability or
obligation of any kind, express or implied, against or in the name of or on
behalf of the other except as expressly set forth in this Agreement.
11.8 SEVERABILITY. If any term, covenant or condition of this Agreement or
the application thereof to either Party or circumstance shall, to any extent, be
held to be invalid or unenforceable, then (i) the remainder of this Agreement,
or the application of such term, covenant or condition to Parties or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby and each term, covenant or condition of this
Agreement shall be valid and be enforced to the fullest extent permitted by law;
and (ii) the Parties hereto covenant and agree to renegotiate any such term,
covenant or application thereof in good faith in order to provide a reasonably
acceptable alternative to the term, covenant or condition of this Agreement or
the application thereof that is invalid or unenforceable, it being the intent of
the Parties that the basic purposes of this Agreement are to be effectuated.
11.9 ASSIGNMENT. Either Party may discharge any obligations and exercise
any right hereunder through an Affiliate, although each Party shall remain
ultimately responsible for the proper discharge of all obligations hereunder
notwithstanding any assignment or delegation to any such Affiliate. References
to a Party shall include any Affiliate of a Party to whom such an assignment or
delegation has been made or ratified. Except as provided in this Section or
otherwise expressly provided in the Agreement, neither Lilly nor Phytera shall
delegate duties of performance, assign or transfer, in whole or in part, rights
or obligations under this Agreement without the prior written consent of the
other Party, not to be unreasonably withheld, and any attempted delegation,
assignment or transfer, without such written consent shall be of no force or
effect. Subject to the restrictions contained in the preceding sentence, this
Agreement shall be binding upon the successors and assigns of the Parties.
11.10 HEADINGS. The headings contained in this Agreement have been added
for convenience only and shall not be construed as limiting or defining the
content of said sections or paragraphs.
11.11 LIMITATION OF LIABILITY. No Party shall be liable to another for
indirect, incidental, consequential or special damages, including but not
limited to lost profits, arising from or relating to any breach of this
Agreement, regardless of any notice of the possibility of such damages. Nothing
in this Section is intended to limit or restrict the indemnification rights or
obligations of any Party.
11.12 INTERPRETATION. This Agreement has been jointly prepared by the
Parties and their respective legal counsel and shall not be strictly construed
against either Party.
11.13 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which shall
constitute together the same document.
11.14 COMPLIANCE WITH LAWS. Each Party shall, and shall cause its
respective Affiliates to, comply in all material respects with all federal,
state, local and foreign laws, statutes, rules and regulations applicable to the
Parties and their respective activities under this Agreement.
Page 38
<PAGE>
11.15 FURTHER ACTIONS. Each Party agrees to execute, acknowledge, and
deliver such further instruments, and to do all such other acts, as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.
11.16 PAYMENT IN U.S. DOLLARS. Unless otherwise provided in this
Agreement, all amounts due and payable hereunder shall be due and payable in
U.S. Dollars.
11.17 INTEREST ON LATE PAYMENTS. In case of any delay in a payment due by
a Party to the other Party, which delay is not occasioned by Force Majeure,
interest at the rate of one percent (1%) per month, assessed from the thirty-
first day after the due date of said payment, shall be due by the late paying
Party without any special notice.
IN WITNESS WHEREOF, the Parties have executed this Agreement, in duplicate
originals, by their respective officers thereunto duly authorized, the day and
year herein written.
ELI LILLY AND COMPANY PHYTERA, INC.
By: /s/ Dr. August M. Watanabe By: /s/ Malcolm Morville
-------------------------- --------------------
Dr. August M. Watanabe
Executive Vice President, Name: Dr. Malcolm Morville
--------------------
Science and Technology
Title: President
---------
Page 39
<PAGE>
Attachments:
- ------------
Appendix A - Research Plan
Appendix B - Lilly Patents
Appendix C - Phytera Patents
Appendix D - Key Personnel
Appendix E - Pre-Existing Antifungal Programs
Appendix F - Press Release
_____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
Page 40
<PAGE>
APPENDIX A
RESEARCH PLAN FOR PHYTERA, INC. & ELI LILLY
AND COMPANY ANTIFUNGAL RESEARCH COLLABORATION
OVERALL OBJECTIVE:
------------------
The overall objective of the collaboration is to exploit the enhanced
sensitivity to antifungal agents of MDR-knockout strains of fungal pathogens.
Using these hypersensitive screening tools to probe biodiversity unique to the
industry, we will discover novel compounds which have the potential to be
developed into broad-spectrum, oral and/or i.v. antifungal agents with
properties superior to those of the market standards.
APPROACH:
--------
[
]*
[
]*
_________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
Page 41
<PAGE>
[
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 42
<PAGE>
[
]*
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 43
<PAGE>
[
]*
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 44
<PAGE>
[
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 45
<PAGE>
[
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 46
<PAGE>
[
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 47
<PAGE>
[
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 48
<PAGE>
[
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 49
<PAGE>
[
]*
_________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 50
<PAGE>
[
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission
Page 51
<PAGE>
APPENDIX B
LILLY PATENTS
<TABLE>
<CAPTION>
DKT# SHORT TITLE INV NAME FILED APP# ISSUED PAT#
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
X11765 MULTIPLE DRUG RESIST SKATRUD PAUL LUTHER 23DEC97 08/996644 N/A N/A
ANCE GENE ATRC OF AS DE WAARD MAARTEN
PERGILLUS NIDULANS ANDRADE ALAN C
PEERY ROBERT BROWN
X11776 MULTIPLE DRUG RESIST SKATRUD PAUL LUTHER 23DEC97 08/996545 N/A N/A
ANCE GENE ATRD OF AS DE WAARD MAARTEN
PERGILLUS NIDULANS ANDRADE ALAN C
PEERY ROBERT BROWN
X9212 MULTIPLE DRUG RESIST PEERY ROBERT B 20APR94 08/232537 14MAY96 5516655
ANCE GENE OF AUREOBA SKATRUD PAUL L
SIDIUM PULLULANS
X9681 MULTIPLE DRUG RESIST PEERY ROBERT BROWN 08MAR96 08/612734 N/A N/A
ANCE GENE OF ASPERGI SKATRUD PAUL LUTHER
LLUS FUMIGATUS TOBIN MATTHEW BARRY
X9682 MULTIPLE DRUG RESIST PEERY ROBERT B 27FEB95 08/394880 06JAN98 5705352
ANCE GENE OF ASPERGI SKATRUD PAUL L
LLUS FUMIGATUS
X9683 MULTIPLE DRUG RESIST PEERY ROBERT B 27FEB95 08/395246 30JUN98 5773214
ANCE GENE OF ASPERGI SKATRUD PAUL L
LLUS FLAVUS
X9693 MULTIPLE DRUG RESIST PEERY ROBERT BROWN 08MAR96 08/612521 28JUL98 5786463
ANCE GENE OF CRYPTOC SKATRUD PAUL LUTHER
OCCUS NEOFORMANS THORNEWELL SUSAN JAN
</TABLE>
Page 52
<PAGE>
APPENDIX C
PHYTERA PATENTS
1. United States Patent Application Serial No. 08/724,540 titled "Identification
and Use of Mutant Multidrug-Resistant Cells" filed September 30, 19996.
2. PCT and CIP filed September 30, 1997.
3. US Application refiled December 22, 1997.
Page 53
<PAGE>
APPENDIX D
PHYTERA KEY PERSONNEL
1. Bruce Rogers, Senior Scientist
2. James Mc Alpine, Vice President, Natural Product Chemistry
Page 54
<PAGE>
APPENDIX E
PRE-EXISTING ANTIFUNGAL PROGRAMS
(1) [
]*
(2) [
]*
(3) [
]*
__________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
Page 55
<PAGE>
APPENDIX F
----------
Press Release
July 21, 1998
PHYTERA AND LILLY SIGN RESEARCH COLLABORATION AGREEMENT TO DISCOVER AND DEVELOP
INFECTIOUS DISEASE PRODUCTS
Phytera, Inc. and Eli Lilly and Company (NYSE:LLY) announced today that they
have entered into a research collaboration to discover novel agents for the
diagnosis, treatment and prevention of infectious fungal diseases. The alliance
encompasses human and animal veterinary diagnostics and therapeutics.
Phytera is contributing to the collaboration both novel antifungal screens based
on its genomics technologies as well as natural product extracts from its ExPAND
plant cell culture and uMARINE marine microbial libraries. Phytera will also
provide its natural product chemistry expertise for the bioassay-guided
fractionation, isolation and structural characterization of its proprietary
active extracts. Lilly will provide compounds for screening and will be
responsible for downstream profiling, lead optimization, development and
commercialization.
As part of the agreement, Phytera will receive an up-front equity investment and
funding for research activities, as well as future milestone payments and
royalties on sales of products discovered and developed through the
collaboration. Lilly, which will provide all funding for research and
development, receives worldwide rights to commercialize products emerging from
the collaboration.
"The agreement capitalizes on our capabilities in screening, molecular biology,
natural product chemistry, and marine and plant culture," said Malcolm Morville,
Ph.D., president and chief executive officer of Phytera. "We are particularly
excited to collaborate with Lilly to address the problem of increasing
resistance of fungal pathogens to currently available drugs. Lilly brings to
this program broad chemistry assets in addition to enormous experience and a
strong track record as an innovator in the discovery and development of
antifungal drugs."
"Phytera's unique natural product libraries and screening systems will reinforce
our capabilities and strong commitment towards the discovery and development of
novel antifungal drugs," said Gail H. Cassell, Ph.D., vice president of
infectious diseases discovery research and clinical investigation for Lilly.
"Worldwide sales of antifungal agents exceeded an estimated $3 billion in 1996
and continue to grow rapidly. Fungal infections have emerged in recent years as
a major cause of disease and mortality, in part as a consequence of the increase
in immunosuppressive diseases and the use of immune system suppressing drugs
such as chemotherapy. In addition, resistance to the relatively few current
therapies is becoming an important clinical issue."
Phytera's proprietary techniques enable the Company to "manipulate" plant cells
and marine microbes in culture in order to modulate genomic expression and
change metabolic pathways. The range of manipulations employed optimizes
chemical diversity and often results in the production of chemicals not found in
the originating species. In addition, Phytera has developed strong capabilities
in the design and implementation of high-throughput screening systems for
<PAGE>
infectious disease targets. Genetic and protein engineering technologies are
allied with bioinformatics and robotics to produce a portfolio of cellular and
molecular target-based screens.
Phytera, Inc. is a biotechnology company headquartered in Worcester,
Massachusetts with wholly owned subsidiaries in Sheffield, U.K, Copenhagen,
Denmark and Tastrup, Denmark. The company is focused on applying novel
technology platforms to the identification and optimization of new lead
structures and drug candidates for pharmaceutical application. Phytera has
allied its plant and marine microbial culture technologies with innovative high-
throughput screening and combinatorial chemistry capabilities to create an
integrated discovery platform. Infectious disease products from the program are
currently in preclinical development.
Lilly is a global research-based pharmaceutical corporation headquartered in
Indianapolis, Ind., that is dedicated to creating and delivering innovative
pharmaceutical-based health care solutions that enable people to live longer,
healthier and more active lives.
<PAGE>
EXHIBIT 10.21
COLLABORATION AGREEMENT
-----------------------
THIS AGREEMENT (reference number S930519C.L5) is made on the day of
of 1993
BETWEEN
(1) AMERSHAM INTERNATIONAL public limited company of Amersham Place, Little
Chalfont, Buckinghamshire HP7 9NA, England ("AMERSHAM");
(2) PHYTERA, INC (formerly PLANT PHARMACEUTICALS, INC) of One Innovation Drive,
Worcester, MA 01605, U.S.A.; and
(3) PHYTERA LIMITED (formerly PLANT SCIENCE LIMITED) of Firth Court, Western
Bank, Sheffield SL0 2TN, England (together called hereafter "PHYTERA")
WHEREAS
A) AMERSHAM is engaged inter alia in the business of carrying out research
development and manufacture of products in the Life Science market.
B) PHYTERA is engaged in screening plant extracts and materials for potential
therapeutics.
C) The parties wish to collaborate with a view primarily to identifying novel
proprietary peroxidases and second to be able to screen for novel alkaline
phosphatases.
1. DEFINITIONS
-----------
In this agreement the following expressions shall bear the following
meanings:
1.1 "Confidential Information" shall mean any information, knowledge or
material of a confidential or secret nature of or concerning a party
hereto or its associated companies (the "Discloser") provided to
another party hereto (the "Recipient") which shall include but not be
limited to information, knowledge or material:
(a) of a technical or scientific nature relating to or concerning
know-how, technical data, computer programs and systems, designs,
data bases, inventions, manufacturing or engineering techniques
or procedures, equipment, materials, product designs and
specifications, test and quality assurance procedures, research
and research projects, and plans for future development;
(b) of a business nature such as marketing plans, product plans,
business strategies, costs, profits, formulae, markets, sales,
lists of customers and suppliers, distributors, agents,
consultants, information concerning or relating to any of its
employees, training methods and the like; and
1
<PAGE>
(c) entrusted to the Discloser by third parties on a confidential
basis.
1.2 "Improvements" means all improvements in the Products made by AMERSHAM
whether patentable or otherwise;
1.3 "Net Sales Price" means the gross invoice price of any product which
incorporates any of the Technology as sold by Amersham or any of its
Subsidiaries in an arms length transaction exclusively for money after
deduction of:
1.3.1 the cost of Packaging, transport and insurance;
1.3.2 all taxes and duties (including but not limited to value added
tax);
1.3.3 trade discounts, commissions and allowances and credits for
defective goods.
1.4 "New Product" means any product sold by AMERSHAM which incorporates an
enzyme the subject of the programme of research set out in Schedule I
of this agreement.
1.5 "Old Product" means any product manufactured by AMERSHAM which
incorporates a peroxidase enzyme not the subject of the programme of
research set out in Schedule I of this agreement.
1.6 "Packaging" means the outer containers for transporting the New
Product or the Old Product excluding vial, vial box, kit box or
anything else associated with such product itself.
1.7 "Subsidiary" means
(a) any company of which either party is a member and controls the
composition of its board of directors or holds more than half in
nominal value of its equity share capital or
(b) any company which is a subsidiary of any company which is a
subsidiary of that party.
1.8 "Life Sciences" means use of new products in fundamental and applied
scientific research and development in universities, research
institutes and pharmaceutical and biotechnology companies world wide.
2
<PAGE>
2. PERIOD OF AGREEMENT
---------------------------
This Agreement shall commence on the date hereof and shall last for a period of
1 (one) year expiring without further notice unless otherwise agreed.
3. OBLIGATIONS OF AMERSHAM
---------------------------
3.1 AMERSHAM agrees to carry out its part of the programme of research set
out in schedule I of this agreement.
3.2 AMERSHAM agrees to pay PHYTERA, Inc the following sums:-
3.2.1 (Pounds) 23,000 (twenty three thousand pounds) on the date
of execution of this agreement.
3.2.2 (Pounds) 23,000 (twenty three thousand pounds) on
1 December 1993.
3.2.3 (Pounds) 23,000 (twenty three thousand pounds) on
1 April 1993.
3.2.4 (Pounds) 23,000 (twenty three thousand pounds) when Amersham
and Phytera, Inc. jointly agree that the program of research
set out in schedule I of this agreement has been completed.
3.2.5 [ ]*.
3.2.6 To pay the deferred consideration set out in clause 4 below.
4. DEFERRED CONSIDERATION
----------------------
4.1 Subject to the following provisions of this clause AMERSHAM agrees to
pay PHYTERA, Inc deferred consideration as follows:-
4.1.1 [ ]* of Net Sales Price of any New Product [ ]*
4.1.2 [ ]* of Net Sales Price of any New Product [ ]*.
____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been requested, has been filed separately with the
Securities and Exchange Commission.
3
<PAGE>
4.2 [ ]*.
AMERSHAM agrees during such period to pay PHYTERA, Inc deferred
consideration as follows:-
4.2.1 [ ]* of Net Sales Price of such New Product [ ]*.
4.2.2 [ ]* of New Sales Price of such New Product [ ]*.
4.3 [ ]* it agrees to pay PHYTERA, Inc deferred consideration as follows:-
4.3.1 [ ]*.
4.3.2 [ ]*.
4.4.1 [ ]*.
4.4.2 [ ]*.
4.5.1 [ ]*.
4.5.2 [ ]*.
____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been requested, has been filed separately with the
Securities and Exchange Commission.
4
<PAGE>
5. OBLIGATIONS OF PHYTERA
---------------------------
PHYTERA agrees to carry out its part of the programme of research set out
in schedule I of this agreement.
6. OWNERSHIP OF INTELLECTUAL PROPERTY
----------------------------------
All intellectual property including without limitation that involving or
relating to trade-names, trade-marks, patentable inventions, non-patentable
processes or know-how, computer software, designs or copyright arising out
of the programme of research set out in schedule I of this agreement shall
be the sole property of AMERSHAM. PHYTERA shall promptly execute any
document to secure such rights and to vest any such property legally in
AMERSHAM or its nominee and hereby appoints AMERSHAM as attorney in that
regard.
7. GRANT OF LICENCE TO PHYTERA, Inc
--------------------------------
AMERSHAM hereby grants PHYTERA, Inc an exclusive world wide royalty free
licence under any patents, patent applications or know-how which may arise
from the programme of research set out in schedule I of this agreement in
all fields other than that of LIFE SCIENCES, clinical diagnostics, forensic
testing and assays for microbiological contamination of food, water and the
environment.
8. GRANT OF LICENCES TO THIRD PARTIES
----------------------------------
8.1 AMERSHAM agrees to use its best efforts to grant licences under any
patents, patent applications or know-how which may arise from the
programme of research set out in schedule I of this agreement in the
field of clinical diagnostics on terms which are commercially
reasonable and agreed by Phytera, Inc but the parties agree that
Amersham may offer Eastman Kodak Ltd or its affiliates the right of
first refusal to an exclusive world wide licence on terms to be
agreed.
8.2 AMERSHAM agrees to pay PHYTERA, Inc half of any royalties it may
receive under the terms of any licence which AMERSHAM may grant under
the provisions of sub-clause 1 above of this clause.
9. CONFIDENTIALITY
---------------
9.1 The Recipient undertakes to treat any and all of such Confidential
Information as either may disclose to the other during the term of
this agreement as strictly confidential and not to divulge it to any
third party for any purpose whatsoever and not to make use of such
Confidential Information or any part thereof for any purpose other
than carrying out the terms of this agreement without the Discloser's
prior written consent.
9.2 In the event of the Recipient visiting any of the establishments of
the Discloser, the Recipient undertakes that any further Confidential
Information which may come to the Recipient's knowledge, as a result
of any such visit, shall be kept
5
<PAGE>
strictly confidential and that any such Confidential Information will
not be divulged to any third party and will not be made use of in any
way by the Recipient under any circumstances.
9.3 The undertakings in subclauses 1 and 2 shall not apply to:
(a) Confidential Information which at the time of disclosure is
published or otherwise generally available to the public.
(b) Confidential Information which after disclosure by the Discloser
is published or becomes generally available to the public,
otherwise than through any act or omission on the part of the
Recipient.
(c) Confidential Information which the Recipient can show by
reasonable written record was in its possession at the time of
disclosure and which was not acquired directly or indirectly from
the Discloser.
(d) Confidential Information rightfully acquired from a third party
who did not obtain it under pledge of secrecy to the Discloser or
another.
10. WARRANTIES
----------
Each party warrants and represents to the other that the Recitals of this
Agreement are true and that, by entering into and performing this
Agreement, it will not be in breach of any fiduciary or other contractual
duty to any third party, will not be creating any conflict of interest, has
the power to enter into this Agreement and has obtained all necessary
approvals to do so and that none of the results or products of the services
hereunder will infringe any third party's rights.
11. TERMINATION
-----------
11.1 Either party shall be entitled to terminate this Agreement:
11.1.1 upon giving 60 (sixty) days written notice to the other
specifying the nature of the breach in the event that the
other party commits a breach of a material term of this
Agreement and fails to remedy such breach (if capable of
being remedied) within the period of notice; or
11.1.2 immediately upon written notice in the event that the other
shall become insolvent or make any arrangement with its
creditors or has a receiver or administrator appointed to
the whole or any part of its assets or if an order
6
<PAGE>
shall be made or a resolution passed for its winding up
unless such order or resolution is part of a scheme for its
amalgamation or reconstruction.
12. FORCE MAJEURE
-------------
12.1 Neither party shall be liable for its failure to perform hereunder
(other than the obligation to make payments of amounts due) as a
result of any events of force majeure beyond the party's reasonable
control including, but not limited to, acts of God, fire, flood, wars,
sabotage, civil strife or demonstrations, accidents, strikes, lockouts
or other labour disputes, shortages, government actions, governmental
laws, rules or regulations, inability to obtain supplies, raw
materials or transportation. If either party's performance is
prevented in whole or part by any such event, such party shall be
excused any of its obligations hereunder during the period of delay of
performance resulting from such event.
12.2 Promptly following the date of commencement of any event of force
majeure, the party affected by such event shall advise the other party
in writing of such date and the nature of such event of force majeure.
The term of the Agreement shall then be suspended for a period of time
equal to the total period of said party's delay in performance. If the
period of suspension of the agreement shall last for a period of six
months either party may give one months' written notice to the other
terminating this Agreement.
13. NON ASSIGNMENT
--------------
Neither party shall assign, subcontract or otherwise dispose of the whole
or any part of its rights and obligations under this Agreement without the
consent of the other except that
(i) AMERSHAM may assign the benefit of this Agreement to any of its
Subsidiaries or to the purchaser of the entire part of its
business of which the New Product forms part and
(ii) PHYTERA, Inc may delegate its obligations hereunder to PHYTERA
LIMITED, and may assign its right to receive payment under
Sections 3 and 4 and its license under Section 7 to the purchaser
of substantially all of its assets.
14. INDEMNITY
---------
14.1 Each of PHYTERA, Inc and AMERSHAM (each an "Indemnitor") warrants to
the other that:
(i) such party's contribution to the programme of research set out in
Schedule 1,
(ii) in the case of PHYTERA, Inc any results of PHYTERA's contribution
to such programme of research which are incorporated into a New
Product, and
7
<PAGE>
(iii) in the case of AMERSHAM, any results of AMERSHAM's contribution
to such programme of research which are licensed to PHYTERA, Inc
hereunder,
do not and will not infringe any patent, registered design, trademark
or other intellectual property right of any third party and agrees to
indemnify the other (the "Indemnitee") in respect of any claims,
costs, losses, expenses or damages it may incur as a result of the
breach of this warranty.
14.2 The provisions of subclause 1 of this clause shall not apply in
respect of infringement arising as a result of an Indemnitor having
followed a design or instruction furnished by the Indemnitee or
arising out of the independent negligence of the Indemnitee.
14.3 In the event of PHYTERA, Inc as an Indemnitor is liable to AMERSHAM as
an Indemnitee under this clause 14, PHYTERA, Inc in addition to
discharging its indemnification obligations, shall use its best
efforts to either:
14.3.1 procure the right for AMERSHAM to continue to sell the
infringing new Product; or
14.3.2 replace aspect of the new Product which has been deemed to be
infringing with a suitable non-infringing aspect.
15. NOTICES
-------
All notices provided for in this Agreement shall be in writing and shall be
deemed validly sent when sent by first class post or air mail postage
prepaid, addressed to the respective parties as follows:
If to AMERSHAM:
Attention: Company Secretary
Amersham International plc
Amersham Place
Little Chalfont
Buckinghamshire
England HP7 9NA
If to PHYTERA:
Attention: President and CEO
PHYTERA, Inc
c/o MBRI
One Innovation Drive
Worcester, MA 01605
USA
8
<PAGE>
Notices under this Agreement shall also deemed be validly sent if sent by
telex or facsimile to the telex or facsimile number of the parties as each
last gave written notice of to the other. Telexed or facsimile notices
shall be confirmed by first class post or airmail postage prepaid, but
failure to do so shall not render any notice invalid. Notices may also be
sent by leaving the same at the above addresses of the parties. Notices
sent by registered airmail shall be deemed to have been delivered on the
fourth day after posting excluding Saturdays and Sundays and public
holidays in England and the United States of America.
16. ENTIRE AGREEMENT
----------------
This Agreement supersedes all prior agreements, arrangements and
undertakings relating to the subject matter hereof between the parties. No
addition to or modification of any provision of this Agreement shall be
binding upon the parties unless made by a written instrument signed by a
duly authorised representative of each of the parties.
17. SEVERABILITY
------------
17.1 If any provision of this Agreement or the application of any such
provision to any person or circumstance shall be invalid under the law
of any jurisdiction, the remainder of this Agreement or the
application of such provision to persons or circumstances other than
those as to which it is invalid shall not be affected thereby.
17.2 In the event a court of competent jurisdiction rules any provision of
this Agreement to be invalid, such ruling shall have no effect on the
remaining provisions of this Agreement and they shall continue in full
force and effect.
18. WAIVER
------
The failure of either party to enforce its rights under this Agreement at
any time for any period shall not be construed as a waiver of such rights.
19. CHANGES AND MODIFICATIONS TO AGREEMENT
--------------------------------------
No changes or modification are to be made to this Agreement unless
evidenced in writing and signed for and on behalf of both parties.
20. LAW AND JURISDICTION
--------------------
This Agreement shall be governed by and construed in accordance with
English law and the parties hereby submit to the exclusive jurisdiction of
the English courts.
21. HEADINGS
--------
The clause headings herein are for convenience only and shall not effect
the construction of interpretation of this Agreement.
9
<PAGE>
IN WITNESS WHEREOF the parties have set their hands the day and year first
before written.
Signed for and on behalf of Signed for and on behalf of
AMERSHAM INTERNATIONAL PLC PHYTERA, INC
Signature /s/ J. Brown Signature /s/ Malcolm Morville
------------------------ ---------------------------
Name (capitals) Dr. J. Brown Name (capitals) M. Morville
----------------------------- ----------------------
Position Head Business Development Position President
-------------------------- -----------------------------
Date 19/7/93 Date July 26, 1993
------------------------------ ---------------------------------
Signed for and on behalf of
PHYTERA LIMITED
Signature /s/ J. E. Eardley
-------------------------
Name (capitals) J. E. Eardley
-------------------
Position Chairman
--------------------------
Date 30/7/93
------------------------------
10
<PAGE>
AMERSHAM/PLS COLLABORATIVE PROGRAMME Schedule 1
As agreed 10.3.93 at Amersham Laboratories
[
]*
____________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
11
<PAGE>
[
]*
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
12
<PAGE>
EXHIBIT 10.22
CONFIDENTIALITY AGREEMENT "TWO WAY"
THIS AGREEMENT (reference number J930318E.E3) is made on the day of
19
BETWEEN
(1) AMERSHAM INTERNATIONAL public limited company of Amersham Place, Little
Chalfont, Buckinghamshire HP7 9NA, England ("AMERSHAM");
(2) PLANT PHARMACEUTICALS INC of One Innovation Drive, Worcester, MA 01605,
USA; and
(3) PLANT SCIENCE LIMITED of Firth Court, Western Bank, Sheffield S10 2TN,
England (together known as "PLANT")
WHEREAS
(a) AMERSHAM possesses or has access to valuable information, technical
knowledge, experience and data of a secret and confidential nature,
specified in the First Schedule, all of which are regarded by AMERSHAM as
commercial assets of considerable value;
(b) PLANT possesses valuable information, technical knowledge, experience and
data of a secret and confidential nature, specified in the Second Schedule,
all of which are regarded by PLANT as commercial assets of considerable
value;
(c) Each party is willing to consider disclosing its information as
respectively set out in the First and Second Schedules (the "CONFIDENTIAL
INFORMATION") to the other on the condition that the Recipient does not
disclose the same to any third party nor make use thereof in any manner
except as set out below.
In consideration of either party ("the DISCLOSER") disclosing any information of
which it is the possessor to the other party ("the RECIPIENT"), IT IS AGREED as
follows:
1. The RECIPIENT undertakes to treat any and all of such CONFIDENTIAL
INFORMATION as strictly confidential and not to divulge it to any third
party for any purpose whatsoever and not to make use of such CONFIDENTIAL
INFORMATION or any part thereof for any purpose other than that specified
in the Third Schedule without the DISCLOSER's prior written consent. For
the avoidance of doubt, the RECIPIENT has no right to use any part of the
CONFIDENTIAL INFORMATION to develop its own technology or seek patent
protection therefor.
2. In the event of the RECIPIENT visiting any of the establishments of the
DISCLOSER, the RECIPIENT undertakes that any further information of a
confidential nature which may come to the RECIPIENT's knowledge, as a
result of any such visit, shall deemed to be CONFIDENTIAL INFORMATION and
shall be kept strictly confidential and will not
13
<PAGE>
be divulged to any third party or made use of in any way by the RECIPIENT
under any circumstances.
3. The undertakings in Clauses 1 and 2 shall not apply to:
(a) information which at the time of disclosure is published or otherwise
generally available to the public; or
(b) information which after disclosure by the DISCLOSER is published or
becomes generally available to the public otherwise than through any
act or omission on the part of the RECIPIENT; or
(c) information which the RECIPIENT can show by reasonable written record
was in its possession at the time of disclosure and which was not
acquired directly or indirectly from the DISCLOSER; or
(d) information rightfully acquired from a third party who did not obtain
it under pledge of secrecy to the DISCLOSER or another.
4. This Agreement shall be governed by and construed in accordance with
English law and the parties hereby submit to the non-exclusive jurisdiction
of the English courts.
THE FIRST SCHEDULE
(CONFIDENTIAL INFORMATION disclosed by AMERSHAM
referred to in recital (a))
[
]*
THE SECOND SCHEDULE
(CONFIDENTIAL INFORMATION disclosed by PLANT
referred to in recital (b))
[
]*
___________________
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
14
<PAGE>
THE THIRD SCHEDULE
(Purpose of Use referred to in Clause 1)
The RECIPIENT is permitted to use the CONFIDENTIAL INFORMATION for the
purpose only of research into the discovery of peroxidase enzymes which may
be of use in the techniques described in the first schedule and for
discussions with the DISCLOSER concerning possible future research
collaboration.
Signed for and on behalf of Signed for and on behalf of
AMERSHAM INTERNATIONAL PLC PHYTERA, INC
Signature /s/ M. H. Barnes Signature /s/ Malcolm Morville
--------------------------- ---------------------------
Name (capitals) M. H. Barnes Name (capitals) M. Morville
-------------------------------- ----------------------
Position Head LS Business Development Position President
----------------------------- -----------------------------
Date 1 April 1993 Date 12 April 1993
--------------------------------- ---------------------------------
Signed for and on behalf of
PHYTERA LIMITED
Signature /s/ J. E. Eardley
----------------------------
Name (capitals) J. E. Eardley
----------------------
Position Director
-----------------------------
Date 21 April 1993
---------------------------------
15
<PAGE>
EXHIBIT 10.23
LICENSE AGREEMENT
-----------------
This Agreement made as of the -- day of ______, 1998 (the "Effective
Date") by and between the University System of Maryland, an agency of the State
of Maryland, acting through its constituent institution, University of Maryland,
Baltimore, having an address at 515 West Lombard Street, Baltimore, Maryland
21201-1602 (hereinafter "UM"), and Phytera, Inc., a corporation of the State of
Delaware, U.S.A., with its principal place of business at 377 Plantation Street,
Worcester, MA 06105 (hereinafter "Phytera"),
WITNESSETH:
WHEREAS, as a public research and education institution, UM is
interested in licensing Patent Rights (as hereinafter defined) in a manner that
will benefit the public by facilitating the distribution of useful products and
the utilization of new methods, and lacks capacity to commercially develop,
manufacture, and distribute such products or methods; and
WHEREAS, valuable inventions, comprised of Patent Rights, for the use
and development of human and animal veterinary therapeutics and agrochemicals
have been jointly developed at UM by UM employee Kim Lewis, Ph.D., and by
Phytera employee Scott A. Siegel, Ph.D. (the "Inventors `); and
WHEREAS, under UM policy UM owns all rights, title, and interest in and
to its joint interest in the inventions, which has been confirmed by the
execution of an assignment from Dr. Lewis to UM; and
WHEREAS, Phytera desires to obtain a worldwide, exclusive,
royalty-bearing license, with right to sublicense, to UM's joint interest in the
aforementioned inventions, to make, use, sell, have made, and have used products
produced through the use of the inventions.
NOW, THEREFORE, in consideration of the foregoing premises and the
following mutual agreements, and other good and valuable consideration, the
parties hereto agree as follows:
Article 1
DEFINITIONS
For the purpose of this Agreement, the following words and phrases
shall have the following meanings:
1.01 "Affiliate" means (a) any business entity which controls at least
fifty percent (50%) of the equity or voting stock of Phytera or (b) any business
entity fifty percent (50%) of whose equity or voting stock is owned or
controlled by Phytera or any entity defined in (a).
1.02 "Confidential Information" means information relating to the
subject matter of the Patent Rights and which is not generally known in the
industry and includes, without limitation, any documents, drawings, sketches,
models, designs, data, memoranda, tapes, records, formulae and algorithms which
Phytera receives from UM or UM receives from Phytera.
<PAGE>
1.03 "Equity Transaction(s)" means the transfer of Phytera's stock to
a Partner (as defined in Section 1.09) in exchange for cash.
1.04 "FDA" means the United States Food and Drug Administration.
1.05 "First Commercial Sale" means the initial transfer of Identified
Products for compensation by Phytera, a Sublicensee, or a Partner to any Third
Party for the purpose of commercial use or resale and not for research,
development or testing purposes. Transfer of Identified Product for beta and
field testing occurring prior to the issuance of any required regulatory
approval for sale shall not constitute the First Commercial Sale.
1.06 "Identified Product" means any product or derivative thereof
sold, used, manufactured or distributed by Phytera or a Sublicensee or Partner
which product or derivative was identified, selected, or determined to have
utility in whole or in part through the use of Patent Rights.
1.07 "Licensed Field" means assays for the identification of human and
animal veterinary therapeutics and agrochemicals.
1.08 "Net Sales" means the gross sales revenues and fees billed by
Phytera or a Sublicensee or Partner for the sale of any Identified Products,
less the sum of the following:
(a) customary trade, quantity and cash discounts actually
allowed and taken;
(b) sales or use taxes, excise taxes and customs duties included
in the invoiced amount;
(c) outbound transportation prepared or allowed if separately
itemized on the invoice to the customer; and
(d) amounts actually allowed or credited on returns of
Identified Products.
"Net Sales" does not include any further downstream sales of an Identified
Product after the first sale thereof by Phytera or a Sublicensee or Partner to a
Third Party purchaser. No deductions will be made for commissions paid to
individuals, whether they be with independent sales agencies or regularly
employed by Phytera and on its payroll, or for cost of collections. Identified
Products will be considered sold when billed out or invoiced, whichever is
first.
1.09 "Partner" means a person or entity that executes a contract with
Phytera to work with Phytera to commercially exploit the technologies covered by
Patent Rights or compounds discovered by Phytera or by Phytera and the Partner
using the Patent Rights.
1.10 "Partnership Contract" means a written agreement between Phytera
and a Partner, involving Patent Rights or an Identified Product, which
explicitly sets forth, among other details, Phytera's proprietary drug discovery
technologies and capabilities to which the Partner is gaining access and the
consideration paid by the Partner for access to the technologies and
capabilities.
2
<PAGE>
1.11 "Patent Rights" means the United States Patent Application Serial
No. 08/724,540, titled "Identification and Use of Mutant Multidrug-Resistant
Cells" (Attachment A), which was filed on September 30, 1996; all corresponding
foreign patents and patent applications and Letters Patent issuing from any of
the above; and all continuations, continuations-in-part, divisionals, reissues,
reexaminations, and extensions of the foregoing.
1.12 "Sublicensee" means a sublicensee, including an Affiliate, of all
or some of the Patent Rights through a sublicense from Phytera.
1.13 "Third Party" means any entity or person other than Phytera, UM, a
Sublicensee, or a Partner.
Article 2
GRANT OF LICENSE AND TECHNOLOGY TRANSFER
2.01 Subject to the rights of the United States under its earlier grant
to UM and pursuant to 35 U.S.C. (S)2.01 et seq. and all implementing
-------
regulations, UM grants to Phytera, and Phytera accepts, a sole and exclusive
worldwide license under Patent Rights to make and use for internal research and
product identification and development purposes only, but not sell or otherwise
transfer except as specified below, Patent Rights within the Licensed Field.
This grant is royalty- free, subject to the payment by Phytera to UM of all
consideration as provided in this Agreement. Phytera may not sell Patent Rights,
but may make, use, have made and have used Identified Products, subject to
payment of the consideration set forth in Paragraphs 4.01 through 4.06. The
parties mutually agree that the form of consideration set forth in Paragraphs
4.01 through 4.06 is for convenience of accounting and expressly acknowledge
that such consideration is not to be deemed royalties payable for the Patent
Rights but is for access to and use of Patent Rights for purposes of research,
drug discovery, development, identification, testing, and marketing and to make,
use, have made and have used Identified Products within the Licensed Field.
2.02 UM specifically reserves the right:
(a) to practice under the Patent Rights to make and use the
Identified Products on a royalty-free basis solely for research and education;
(b) to license the Patent Rights to universities, colleges and
other research or educational institutions, but only for research and
educational purposes and uses and not for any commercial purposes or uses; and
(c) to publish the general scientific findings from research
related to Patent Rights, provided that Phytera has had the opportunity to
review copies of all drafts prior to submission for publication in accordance
with and subject to the other conditions in Section 5.05 below.
2.03 Phytera may sublicense to an Affiliate only if such Affiliate
consents to be bound by this Agreement to the same extent as Phytera.
3
<PAGE>
2.04 Phytera may grant sublicenses consistent with this Agreement or
enter into Partnership Contracts consistent with this Agreement, provided
Phytera shall be responsible for the operation of its Sublicensees and Partners
relevant to this Agreement as if such operations were carried out by Phytera,
including all required payments, whether or not paid to Phytera by a Sublicensee
or Partner.
2.05 Phytera agrees to identify its Sublicensees hereunder to UM by
name, address and field of sublicense (both as to geography and subject matter),
and further agrees to forward to UM a copy of each report received by Phytera
from a Sublicensee in accordance with Sections 7.01 and 7.02 promptly upon
receipt of such report. In no event will Sublicensee reports be due to Phytera
less often than quarterly.
2.06 Phytera agrees to identify its Partners to UM by name, address
and scope of responsibility and to provide UM a copy of any Partnership Contract
within 30 days after its execution.
2.07 The license granted hereunder shall not be construed to confer
any rights upon Phytera by implication, estoppel, or otherwise as to any
technology not specifically encompassed by the term "Patent Rights."
2.08 Phytera shall not receive from Sublicensees or Partners anything
of value in lieu of cash payments for any sublicense or Partnership Contract
under this Agreement, unless such is with the prior written permission of UM. UM
shall not withhold permission if Phytera proposes, in consideration for the
permission, a reasonable payment to UM in lieu of the royalty it would receive
were the transaction in question one involving a cash payment to Phytera.
Article 3
DUE DILIGENCE
3.01 Phytera must use commercially reasonable efforts to bring one or
more Identified Products to market in each country in which Patent Rights are
licensed hereunder through a thorough, vigorous and diligent program for
exploitation of the Patent Rights. In addition, Phytera must deliver to UM on or
before one hundred eighty (180) days after the Effective Date of this Agreement
a detailed business plan (the "Plan"), showing its plans to conduct a thorough
and diligent program to exploit Patent Rights. Further, Phytera shall provide
annual written reports to UM on progress against the Plan and must notify UM of
any changes in the Plan within one month after the occurrence of or recognition
of the need for such changes.
Article 4
PAYMENTS AND ROYALTIES
In consideration of rights regarding Patent Rights granted by UM to
Phytera under this Agreement, Phytera agrees to pay UM the following:
4.01 Milestone Payments
Phytera agrees to make milestone payments as described in this Section
4.01:
4
<PAGE>
(a) [
]*
(b) [
]*
(c) [
]*
(d) [
]*
(e) [
]*
4.02 Phytera will pay UM [
]*. Running royalty payments hereunder
must be made within 60 days after the close of each calendar quarter, along with
a statement as set forth in Paragraph 7.02 hereof. If no royalties are due for
any quarter, Phytera must send a statement to such effect to UM.
4.03 Phytera will pay UM [
]*.
4.04 Phytera will pay UM [
]*. The following examples are
intended to illustrate how payments will be calculated under this section:
- ------------------------
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
5
<PAGE>
(a) Phytera signs a Partnership Contract whereby Phytera
screens the Partner's chemistry library for antibacterial activity using the
Patent Rights. Worldwide rights to drugs discovered by this collaboration rest
with the Partner. [
]* are payable to UM.
(b) Phytera signs a Partnership Contract whereby Phytera
screens its ExPAND(R) and uMARINE(R) extract libraries and the Partner's
extract and chemistry libraries for antifungal activity using the Patent Rights.
Phytera is responsible for carrying out natural product chemistry work on some
or all of the extracts to identify lead compounds. The Partner has worldwide
rights to drugs discovered by the collaboration. [
] * are payable to UM.
(c) Phytera signs a partnership contract whereby Phytera
screens its ExPAND(R) extract libraries for antibacterial activity using the
Patent Rights. Phytera is responsible for carrying out natural product chemistry
work on the extracts to identify lead compounds. Lead compounds are to be
optimized using Phytera's combinatorial chemistry technology to produce
candidates. Phytera retains North American marketing rights for the products and
the Partner markets in the rest of the world. [
] * are payable to UM.
In addition, UM will receive [
] *.
4.05 For Equity Transactions between Phytera and a Partner arising out
of a Partnership Contract involving Patent Rights or any Identified Product, UM
will receive [
] *. As used in this Section
4.05, "market price" is defined as the last recorded private transaction of
Phytera's preferred stock, or if Phytera is public, the average closing price of
Phytera' s stock over the last thirty (30) trading days on any securities
exchange prior to the date of the equity transaction being closed. The following
examples are intended to illustrate how payments are to be calculated under this
Section:
(a) Phytera signs a Partnership Contract whereby Phytera
screens the Partner's chemistry library for antifungal activity using the Patent
Rights. Rights to drugs discovered by this collaboration rest with the Partner.
In connection with the signing of the
- ------------------------
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
6
<PAGE>
Partnership, the Partner purchases equity in Phytera at a fifty percent (50%)
premium to the "market price" for Phytera's stock. [
]* is payable to UM.
(b) Phytera signs a Partnership Contract whereby Phytera screens
its ExPAND(R) and uMARINE(R) extract libraries for antifungal activity using the
Patent Rights. Phytera is responsible for carrying out natural product chemistry
work on some or all of the extracts to identify lead compounds. The partner has
worldwide right to drugs discovered by the collaboration. In connection with the
signing of this Partnership, two Equity Transactions are agreed:
(i) At signing the Partner purchases equity in Phytera at
the price of the last recorded private transaction involving
purchase of Phytera's preferred stock (the "market price").
(ii) On the attainment of a certain future milestone, the
Partner will purchase equity in Phytera at the
"market price."
[
] *.
[
] *.
(c) Phytera signs a Partnership contract whereby Phytera
screens its ExPAND(R) extract libraries for antibacterial activity using the
Patent Rights. Phytera is responsible for carrying out natural product chemistry
work on extracts to identify lead compounds. Lead compounds are to be optimized
using Phytera's combinatorial chemistry technology to produce drug candidates.
Phytera retains North American rights and the Partner markets in the rest of the
world. In connection with the signing of this Partnership, two Equity
Transactions are agreed:
(i) At signing the Partner purchases equity in Phytera at
a fifty percent (50%) premium to the price of the last
recorded private transaction involving purchase of Phytera's
preferred stock (the "market price").
(ii) On the attainment of a certain future milestone, the
Partner will purchase equity in Phytera at either a twenty-
five percent (25%) premium to the last recorded private
transaction price, or if Phytera's stock is publicly listed
at that time, at a ten percent (10%) premium to the thirty
- ----------------------------
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
7
<PAGE>
(30) day average trading closing price.
[
]*.
4.06 Phytera will pay UM [
] *
- --------------------------------------------------------------------------------
[ ] * [ ] *
- --------------------------------------------------------------------------------
[ ] * [ ] *
- --------------------------------------------------------------------------------
[ ] * [ ] *
- --------------------------------------------------------------------------------
[ ] * [ ] *
- --------------------------------------------------------------------------------
[ ] * [ ] *
- --------------------------------------------------------------------------------
If applicable, Phytera will pay [ ]* within 100 days
after the end of each year. The amount payable by Phytera to UM under this
Section 4.06 [
] *.
4.07 (a) Royalties are payable from the country in which they are
earned and are subject to foreign exchange regulations then prevailing in such
country. Royalty payments must be paid to UM in United States Dollars by check
or checks drawn to the order of UM or by electronic funds transfers to an
account designated by UM. To the extent sales may have been made by Phytera in a
foreign country, royalties will be first determined in the currency of the
country in which the royalties are earned and then converted to their equivalent
in United States Dollars. To determine the conversion, the buying rates of
exchange quoted by the Morgan Guaranty Trust of New York, New York, averaged on
the last business day of each of three (3) consecutive calendar months
constituting the calendar quarter in which the royalties were earned, will be
used.
(b) To the extent that statutes, laws, codes, or government
regulations (including currency exchange regulations) prevent or limit royalty
payments by Phytera, Phytera
- -----------------------------
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
8
<PAGE>
will render to UM annual reports of sales of the Identified Product in such
country. All monies due and owing UM as provided in the annual reports at UM's
option (1) may promptly be deposited by Phytera, or its Sublicensees, or
Partners, as the case may be, in a local bank in such country in an account to
be designated by UM in writing or (2) may promptly be paid to UM or deposited in
its account, as directed in writing by UM in any other country where the payment
or deposit is lawful under the currency restrictions.
4.08 Interest will be due on any payments to UM required by any
Section of this Agreement that are more than thirty (30) days late. The interest
rate is ten percent (10%) simple interest per annum.
Article 5
PATENT PROSECUTION AND PUBLICATIONS
5.01 Phytera is responsible for the prosecution and maintenance of the
Patent Rights, including all costs associated with the preparation, filing,
prosecution, issuance, reissuance, reexamination, interference, and maintenance
of all United States applications, patents, divisionals, etc., included in
Patent Rights and those corresponding foreign applications and patents filed in
countries designated by Phytera as set forth below. Phytera shall designate
foreign countries in which patent applications are to be filed. These filings
will be made by Phytera and Phytera's choice of patent counsel, which must be
reasonably acceptable to UM. Phytera will bear all costs of filings and fees and
expenses of counsel. If UM desires to file at its own expense applications in
foreign countries not designated by Phytera, UM will give Phytera sixty (60)
days prior written notice of its intention to make any such filing. Within such
sixty (60) day period, Phytera may elect to file patent applications pursuant to
this Section 5.01 in any countries identified in UM's notice. If Phytera
indicates in writing that it does not intend to file patent applications in one
or more countries identified in UM's notice, or if the sixty (60) day period
expires without a response from Phytera, then UM may file patent applications in
those foreign countries where Phytera elects not to file, or where it fails to
elect to file, and Phytera's exclusive license of UM's Patent Rights shall not
extend to such countries unless agreed to separately. In any event, Phytera
shall retain non-exclusive Patent Rights under its joint ownership of the Patent
Rights.
5.02 Phytera and UM will cooperate to limit the expenditures described
in Section 5.01 while ensuring that the Patent Rights cover all items of
commercial interest and importance. Both Parties will use reasonable efforts to
ensure that the Inventors employed by the respective parties fully cooperate
with Phytera's prosecution and maintenance of the Patent Rights; provided,
however, that each party acknowledges that the other party cannot guarantee such
cooperation. Phytera is solely responsible for making decisions regarding scope,
content, and prosecution of applications to be filed under Patent Rights. UM
will cooperate with Phytera in the prosecution, filing, and maintenance of
patent applications and will have a reasonable
9
<PAGE>
opportunity to advise Phytera regarding the scope of patent coverage within
Patent Rights. Phytera will reasonably consider UM's advice. UM may, from time
to time, reasonably request opinions and other documents from Phytera's patent
counsel, which material will be supplied to UM without cost to UM. Phytera will
promptly advise UM as to all developments with respect to such applications and
prosecution and copies of all papers received and filed in connection with the
prosecution will be provided promptly to enable UM to advise Phytera thereon.
5.03 In no event may the scope of patent coverage within Patent Rights
be significantly modified by Phytera without prior review by UM. Any such
modification will not, however, require the approval of UM, and UM will not
control the prosecution of Patent Rights. If Phytera wishes to relieve itself of
any obligation to pay for the future expenses of preparation, filing,
prosecution, issuance, reissuance, reexamination, interferences, or maintenance
of any Patent Rights in any country, Phytera may notify UM and UM may assume the
future costs. If UM assumes the future costs, Phytera's exclusive license will
terminate with respect to those Patent Rights in each country which Phytera has
elected not to support. Phytera is responsible for all expenses incurred prior
to, or as a result of irrevocable action taken prior to, its notification to UM.
5.04 All patent applications filed under Patent Rights and all patents
granted thereon will be owned jointly by Phytera and UM, subject to the license
herein granted to Phytera.
5.05 In order to safeguard Patent Rights, UM will not publish any
results or otherwise publicly disclose the results of its research relating to
the Patent Rights unless any materials containing such results are first
submitted to Phytera for review, comment, and consideration of appropriate
patent action. UM will submit such materials relating to a planned written
publication or other public disclosure to Phytera for review at least sixty (60)
days prior to the date of the planned submission for written publication.
Phytera will notify UM within thirty (30) days of receipt of the materials
whether it appears that any patent applications may need to be filed in
connection with obtaining or maintaining Patent Rights. Written publication or
public disclosure by UM will be deferred to permit Phytera to file any necessary
patent applications, but the deferral must not exceed ninety (90) days from the
date of receipt by Phytera of the materials.
5.06 Except as provided in Section 9.01, if a claim of any patent
comprising the Patent Rights is invalidated by a court of competent jurisdiction
from which no appeal is taken, or from which no further appeal can be taken,
notwithstanding any other provisions of this Agreement to the contrary, Phytera
may not terminate this Agreement, but may terminate all future obligations of
Phytera under Article 4 to pay royalties to UM with respect to the Identified
Product identified, selected, or determined to have utility in whole or in part,
through use of the invalidated claim(s) and without reference to other claims of
the Patent Rights.
Article 6
Confidentiality
6.01 (a) It is contemplated that it may be necessary for either party
to disclose to the other certain Confidential Information. Confidential
Information may be disclosed subject to the following provisions:
10
<PAGE>
Except as specifically authorized in writing by the other party hereto,
a party shall not, for a period of [ ]* from the date of receipt of
Confidential Information, disclose or use such Confidential Information. These
obligations of non-disclosure and nonuse shall not apply to any Confidential
Information which is:
(i) in the possession of the receiving party prior to receipt
thereof from the disclosing party, as shown by the receiving
party's written records, other than pursuant to a confidential
disclosure agreement with the disclosing party;
(ii) already available, or becomes available, to the public
through no fault of the receiving party;
(iii) received by or for the receiving party from a third party
having a right to disclose it; or
(iv) developed by or for the receiving party independent of any
disclosure hereunder, as shown by the receiving party's business
records.
(b) Each party will use that level of care to prevent the use or
disclosure of the other party's Confidential Information as it exercises in
protecting its own Confidential Information.
(c) All Confidential Information must be clearly marked as
confidential by the disclosing party and if not in written or tangible form when
disclosed, must be summarized in writing and so marked within thirty (30) days
of disclosure to the receiving party.
(d) Notwithstanding the foregoing, Phytera, Sublicensees, and
Partners are permitted to disclose and use such Confidential Information to the
extent reasonably necessary to exercise Phytera's license and/or sublicenses
and/or Partnership Contracts hereunder, provided that any disclosure is made
subject to confidentiality restrictions consistent with those accepted by
Phytera in this Agreement.
(e) Phytera recognizes that UM is an educational institution with
standards and practices for protection of Confidential Information which differ
from Phytera's commercial standards and practices. By this agreement UM
undertakes to use reasonable efforts to protect the confidentiality of Phytera's
Confidential Information. Phytera agrees that, provided such efforts are made,
it will not seek to hold UM or its personnel liable in the event of inadvertent
disclosure of Phytera's Confidential Information notwithstanding reasonable
efforts to prevent such occurrences.
(f) Phytera recognizes that the records of UM are subject to the
Maryland Access to Public Records Law. Phytera asserts that any Confidential
Information of Phytera and any annual reports of sales provided to UM under this
Agreement are confidential, proprietary,
- -----------------------------
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
11
<PAGE>
and trade secret information, not subject to disclosure under Maryland's Access
to Public Records Law. UM agrees to assert this position in response to any
request for public information applicable to such materials, and to promptly
notify Phytera upon receipt of any such request. The Maryland Access to Public
Records Law is at Title 10, Subtitle 6, Part II, State Government Article,
Annotated Code of Maryland.
(g) Upon termination of this Agreement for any reason other
than a material breach by UM, Phytera shall return to UM all material provided
to Phytera which is Confidential Information, together with all copies and other
forms of reproduction, except that a single archive copy may be kept in the
Phytera's legal files.
(h) Upon termination of this Agreement for any reason other
than a material breach by Phytera, UM shall return to Phytera all material
provided to UM which is Confidential Information, together with all copies and
other forms of reproduction, except that a single archive copy may be kept in
the UM's legal files.
(i) Each party agrees that a termination of this Agreement
shall not alter the five (5) year obligation of confidentiality set forth in
Paragraph 6.0 1(a).
Article 7
REPORTS AND ACCOUNTING
7.01 During the term of this Agreement and for five (5) years
thereafter, Phytera must keep, and require each Sublicensee or Partner to keep,
complete, true, and accurate records containing all the particulars that may be
necessary to enable royalties payable to Phytera and thereby to UM under the
Agreement to be determined. Phytera shall permit its relevant records to be
inspected at any time during regular business hours, upon reasonable notice, no
more frequently than once per calendar year by an independent auditor appointed
by UM for this purpose and acceptable to Phytera, who shall report to UM only
the amount of royalty payable hereunder. This audit will be at UM's expense
unless the audit shows an underpayment in amounts due to UM in relation to
amounts paid to UM by 5% or more for any three-month royalty period in the
periods subject to audit, in which case the audit expense will be borne by
Phytera.
Phytera must further require that each Sublicensee or Partner permit
its relevant records to be inspected by an independent auditor appointed by
Phytera as may be necessary to verify the accuracy and adequacy of said records
for purposes of calculating royalty amounts payable to Phytera and thereby to
UM. If UM requests that Phytera conduct such an audit (a joint audit), then
Phytera will select an auditor mutually acceptable to both UM and Phytera, who
will conduct the audit during normal business hours and upon reasonable notice
to the Sublicensee or Partner. The auditor will be required to report to UM only
the royalty amounts payable to UM and the audit will be at UM's expense, unless
the audit shows an underpayment in amounts due to UM in relation to amounts paid
to UM of 5% or more for any three-month royalty period in periods subject to
audit, in which case the audit expense will be borne by Phytera. A maximum audit
frequency of one Phytera-initiated or one jointly-initiated (UM/Phytera) audit
per calendar year will be allowed.
7.02 Beginning with the First Commercial Sale of an Identified
Product, within 60 days from each March 31, June 30, September 30 and December
31, Phytera must deliver to UM
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a true and accurate report, giving such particulars of the business conducted by
Phytera, Sublicensees, and Partners, if any, in the preceding three-month period
as are pertinent to any accounting for royalty payments hereunder. Such reports
will include at least the following information for the three- month royalty
period:
(a) number of each Identified Product manufactured and sold by
Phytera and by each Sublicensee or Partner;
(b) total billings for each Identified Product sold by Phytera
and by each Sublicensee or Partner;
(c) accounting for each Identified Product used or sold;
(d) deductions applicable as provided in paragraph 1.08; and
(e) names and addresses of all Sublicensees or Partners of
Phytera.
7.03 With each report submitted, Phytera will pay to UM the amounts
due and payable under this Agreement for the royalty period covered by the
report. If no amounts are due, Phytera will so report.
7.04 Any tax required to be withheld on royalties payable to UM by
Phytera or its Sublicensees or Partners under the laws of any country under this
Agreement will be promptly paid by Phytera or its Sublicensees or Partners for
and on behalf of UM to the appropriate governmental authority, and Phytera will
furnish UM with proof of payment of such tax together with official or other
appropriate evidence issued by the competent governmental authority sufficient
to enable UM to support a claim for tax credit with respect to any sum so
withheld. Any tax required to be withheld on payments by Phytera to UM shall be
an expense of and be borne solely by UM, and Phytera's royalty payment(s) to UM
following the withholding of such tax shall be decreased by the amount of such
tax withholding. Phytera will cooperate with UM in the event UM elects to
assert, at its own expense, exemption from any such tax.
7.05 During the product development phase described in Section 3.01,
Phytera will furnish to UM, upon UM's written request, copies of all of
Phytera's correspondence relating to an Identified Product to and from the FDA,
any other U.S. regulatory agency involved in the product development phase, and
any foreign equivalent promptly upon receipt thereof.
7.06 Upon the request of UM but not more than once per calendar year,
Phytera will deliver to UM a written report as to Phytera' s efforts and
accomplishments during the preceding year in the identification, selection, or
testing of agents through the use of Patent Rights in various parts of the world
and its commercialization plans for any Identified Products for the upcoming
year. This report will include (a) the approximate number of agents tested using
Patent Rights during the preceding year; (b) the approximate numbers of
compounds identified, selected or found to have utility through the application
of Patent Rights during the preceding year; and (c) whether an application to
market or investigate a compound or to obtain a patent or other marketing or
distribution exclusivity has been submitted to an appropriate agency.
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Article 8
ABATEMENT OF INFRINGEMENT
8.01 Phytera will enforce any patent within Patent Rights against any
infringement or alleged infringement, and will at all times keep UM informed as
to the status thereof. Phytera may, in its sole judgment and at its own expense,
institute suit against any infringer or alleged infringer and control, settle,
and defend the suit in a manner consistent with the terms and provisions of this
Agreement and recover any damages, awards, or settlements resulting from the
suit, subject to Section 8.03. This right to sue for infringement will not be
used in an arbitrary or capricious manner. UM will reasonably cooperate in an
infringement suit, at Phytera's expense.
8.02 Phytera will advise UM of any patent infringement of which it is
aware. If within ninety (90) days after providing such notice to UM Phytera does
not commence to enforce the patent within Patent Rights, UM in its sole judgment
and at its own expense may do so, and may control, settle, and defend the suit
in a manner consistent with the terms and provisions of this Agreement and
recover, for its own account, any damages, awards, or settlements resulting from
the suit. But, UM agrees to inform Phytera of the terms of any proposed
settlement prior to entering into the settlement. Phytera will reasonably
cooperate in the infringement suit.
8.03 [
]*.
8.04 Phytera will defend, indemnify and hold harmless UM with respect
to costs of defense and any and all liabilities resulting from any suits,
countersuits, or legal actions of any nature that may be asserted against UM in
response to or as a result of the filing of an action by Phytera in accordance
with Section 8.01.
Article 9
TERM AND TERMINATION
9.01 The term of this Agreement will extend to ten (10) years after the
date of the First Commercial Sale of any Identified Product. The parties
expressly agree that the term is not an extension of Patent Rights beyond their
term, but represents the parties' desire to compensate UM from revenues Phytera
may have in the future derived indirectly from Patent Rights and for convenience
of accounting.
- --------------------
* This portion of the Exhibit has been omitted pursuant to a Request for
Confidential Treatment under Rule 406 of the Securities Act of 1933, as amended.
The complete Exhibit, including the portions for which confidential treatment
has been requested, has been filed separately with the Securities and Exchange
Commission.
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<PAGE>
9.02 Except as otherwise set forth herein, if Phytera fails to pay UM
any undisputed sum due and payable hereunder, UM has the right to terminate this
Agreement on ninety (90) days written notice, unless Phytera pays UM within the
ninety (90) day period all delinquent sums together with interest determined as
provided in Section 4.08. Upon expiration of the ninety (90) day period, if
Phytera has not paid all undisputed sums and interest due and payable, the
rights, privileges, and license granted under this Agreement will terminate.
Notwithstanding the foregoing, if Phytera's failure to pay UM any sum payable
hereunder arises from the failure of any Sublicensee or Partner to make payments
required pursuant to the terms of its Sublicense or Partnership Agreement
from/with Phytera, UM shall not be entitled to terminate the rights, privileges
and license granted to Phytera under this Agreement, or any rights, privileges
or licenses granted to other Sublicensees/Partners not in breach. Instead, UM
may require Phytera to notify the breaching Sublicensee/Partner that unless such
beach is cured within forty-five (45) days the Sublicense/Partnership Agreement
from Phytera to the breaching Sublicensee/Partner shall be terminated. Upon
expiration of such forty-five (45) day period, if the breaching
Sublicensee/Partner has not paid all sums due and payable under the terms of its
Sublicense/Partnership Agreement, thereby enabling Phytera to pay all sums due
and payable to UM pursuant to this Agreement, Phytera shall immediately
terminate the Sublicense/Partnership Agreement to the breaching
Sublicensee/Partner.
9.03 Prior to the First Commercial Sale of an Identified Product to a
Third Party, Phytera will be considered diligent with regard to development of
the Identified Product so long as Phytera updates and reports progress against
the Plan described in Section 3.01 and so long as Phytera:
(a) Continues to provide the necessary financial and other
resources required to maintain progress in accomplishing the Plan, as it relates
to Identified Products; and,
(b) Conducts or enables others to conduct the activities required
to maintain scheduled progress in accomplishing the Plan, as it relates to
Identified Products.
9.04 For the first five years after the First Commercial Sale of an
Identified Product to a Third Party, Phytera will be considered diligent so long
as sufficient numbers of Identified Products are sold so that earned royalties
meet or exceed the applicable minimum payment set forth in Section 4.06. If
Phytera fails to meet this requirement, then UM may declare Phytera not
diligent.
9.05 If UM declares that Phytera is not diligent in development or
sales of and Identified Product based upon the criteria set forth in Sections
9.03 and 9.04 for any reason other than the withholding by a regulatory agency
of marketing approval in spite of Phytera's diligent effort to obtain such
approval, then UM may terminate this Agreement in accordance with Section 9.06;
provided, however, that any existing Sublicenses/Partnerships shall be subject
to continuation pursuant to Section 9.08 below.
9.06 Except as set forth in Section 9.02, and as qualified by Section
9.08, if any provision of this Agreement is breached by Phytera, UM, upon ninety
(90) days written notice to Phytera, may terminate this Agreement. But, if the
breach is corrected within the ninety (90) day period and UM is reimbursed for
all damages directly resulting from the breach, the Agreement and sublicenses
will continue in full force and effect and UM will so notify Phytera in writing.
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<PAGE>
Phytera may terminate this Agreement at any time by giving UM ninety (90) days
written notice of termination and by paying UM all amounts owed through the
effective date of the termination.
9.07 Termination does not relieve either party of any obligation which
arises hereunder before termination including obligations under ARTICLE 4,
ARTICLE 5, ARTICLE 6, ARTICLE 7, ARTICLE 8, and ARTICLE 14. If this Agreement is
terminated at a time of the year other than the anniversary date, these
obligations are deemed to arise before termination and any payment obligations
must be paid upon termination in the amounts set forth in this Agreement.
9.08 In the event that any Sublicensee/Partner shall default on any
material term of its Sublicense/Partnership Agreement or engage in conduct that
would constitute a material breach under the terms of this Agreement, Phytera
shall notify such Sublicensee/Partner in writing of such breach and, if the
Sublicensee/Partner fails to cure such breach within forty-five (45) days after
receipt of written notice from Phytera, Phytera shall terminate the
Sublicensee/Partnership Agreement. Notwithstanding any other provisions of this
Article 9, in the event of any termination of this Agreement by UM, including
without limitation a termination due to breach by Phytera pursuant to Section
9.06, UM shall immediately furnish written notice of such termination to each
Sublicensee/Partner. Each Sublicensee/Partner shall have the right to elect to
continue the terms of its Sublicense/Partnership Agreement directly with UM.
Each Sublicensee/Partner may exercise such right by advising UM in writing,
within ninety (90) days after such Sublicensee's/Partner's receipt of UM's
termination notice, of such election and of its agreement to assume with respect
to UM all of the obligations (including all payment obligations) contained in
its Sublicense/Partnership Agreement with Phytera.
Article 10
ASSIGNABILITY
10.01 This Agreement cannot be assigned or transferred, in whole or in
part by Phytera without the prior written consent of UM, which will not be
unreasonably withheld.
10.02 This Agreement cannot be assigned or transferred in whole or in
part by UM without the prior written consent of Phytera, which will not be
unreasonably withheld.
Article 11
APPLICABLE LAW; SEVERABILITY
11.01 This Agreement is made and construed in accordance with the laws
of the State of Maryland without regard to choice of law issues, except that all
questions concerning the construction or effect of patents will be decided in
accordance with the laws of the country in which the particular patent was
granted.
11.02 Phytera submits itself to the jurisdiction of the State courts of
the State of Maryland and Federal courts within the State of Maryland for
purposes of any suit relating to this Agreement and agrees that the State and
Federal courts located in Baltimore City, Maryland provide a proper venue for
determining any legal action relating to this Agreement.
11.03 In the event that any condition or provision in any Article of
this Agreement shall be held by a court of competent jurisdiction from which
there is no appeal to be invalid or illegal
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or contrary to public policy, this Agreement shall be construed as though such
provision or condition did not appear therein and the remaining provisions of
this Agreement shall continue in full force and effect.
Article 12
INTEGRATION
12.01 This Agreement embodies the entire understanding between Phytera
and UM. There are no contracts, understandings, conditions, warranties or
representations, oral or written, express or implied, with reference to the
subject matter hereof which are not merged herein. Except as otherwise
specifically stated, no modification hereto shall be of any force or effect
unless (1) reduced to writing and signed by both parties hereto, and (2)
expressly referred to as being a modification of this Agreement.
Article 13
WARRANTY
13.01 UM hereby warrants and represents that to the best of its
knowledge, as of the Effective Date, (a) it has full right, title, and interest
in and to its joint interest in the Patent Rights (subject to the rights of the
United States under its earlier contract with UM and pursuant to 35 U.S.C.
(S)2.0 1 et seq. and all implementing regulations; (b) that the Patent Rights do
------
not constitute the subject matter of any currently pending litigation and UM is
not aware, as of the execution of this Agreement, of any related litigation
contemplated either by UM or any third party; and (c) UM is empowered to enter
into this Agreement without burdens, encumbrances, restraints, or limitations of
any kind which could adversely affect the rights of Phytera under this
Agreement.
UM EXPRESSLY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY. FITNESS FOR A PARTICULAR
PURPOSE, NON-INFRINGEMENT, AND PATENT VALIDITY.
13.02 Phytera represents and warrants to UM that: (a) Phytera has full
legal right, power and authority to execute, deliver and perform its obligations
under this Agreement; (b) the execution, delivery and performance by Phytera of
this Agreement do not contravene or constitute a default under any provision of
applicable law or of any agreement, judgment, injunction, order, decree, or
other instrument binding upon Phytera.
Article 14
INDEMNIFICATION
14.01 Phytera will indemnify, defend and hold harmless UM, the
University System of Maryland, the State of Maryland, and the officers, agents,
servants and employees of the foregoing (collectively, the "Indemnitees")
against any and all claims of or liabilities to Sublicensees, Partners or Third
Parties, including expenses and costs of claims and suits for any such
Sublicensee's, Partner's or Third Party's loss, damage, injury, or loss of life,
if such claims
17
<PAGE>
or liabilities (a) arise from the testing or commercial sale or other
distribution by Phytera, of any Identified Products manufactured by Phytera or
through a license or sublicense from Phytera; (b) arise from actions of Phytera
or its officers, servants or agents, or Sublicensees, Partners or Third Parties
acting on behalf of or under authorization from Phytera in the performance of
this Agreement; or (c) arise out of use by Phytera or its officers, servants or
agents or by any Sublicensee, Partner or Third Party acting on behalf of or
under authorization from Phytera of products or processes licensed under the
Patent Rights or developed or made by Phytera as a result of information or
materials received from UM.
14.02 UM will promptly notify Phytera in writing upon UM's receipt or
notification of any claims or liabilities described herein and will cooperate
fully with Phytera, at Phytera's expense, in the defense of such claims. In
defending the Indemnitees, Phytera may assert on behalf of the Indemnitees any
and all defenses available to such Indemnitees, including the defenses of
governmental, sovereign, and statutory immunity. Phytera will consult with UM
and the Office of the Maryland Attorney General prior to raising any such
defenses.
14.03 Paragraph 14.01 does not apply to: (i) claims or liabilities that
are attributable to the fault or negligence of UM or another Indemnitee; or (ii)
claims or liabilities arising from the use of Patent Rights or Technology Rights
by a licensee of UM pursuant to a license reserved by and permitted under
Section 2.03 above.
14.04 In no event, however, will Phytera be liable for damages caused
by UM's failure to perform UM's responsibilities under this Agreement unless
such failure is caused by Phytera.
Article 15
CONSENT FOR ADVERTISING
15.01 Neither Phytera nor UM will use the name of the other or any of
its employees, or any adaptation thereof, in any advertising, promotional, or
sales literature without prior written consent obtained from the other party in
each such case, except that either party may publicize the fact that the parties
have made this Agreement and the general nature of the project work. Any such
publicity by either party will be subject to the review and consent of the other
party, such consent not to be unreasonably withheld.
Article 16
TECHNOLOGY GRANTBACK
16.01 Phytera grants to UM a royalty-free, non-exclusive, worldwide
license to practice any invention or discovery of Phytera which constitutes an
improvement of the Patent Rights solely for research and educational purposes.
An improvement means any composition, reagent, device or method which practices,
is practiced with or modifies any invention or discovery covered by Patent
Rights, provided the improvement is both conceived and reduced to practice after
the Effective Date of this Agreement.
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Article 17
MISCELLANEOUS
17.01 The use and disclosure of technical information acquired pursuant
to this Agreement and the exercise of Patent Rights granted by this Agreement
are subject to the export, assets, and financial control regulations of the
United States of America, including, but without limitation, restrictions under
regulations of the United States that may be applicable to direct or indirect
reexportation of the technical information or of equipment, products, or
services directly produced by use of the technical information. Phytera is
responsible for taking any steps necessary to comply with such regulations.
17.02 No license or right is granted by implication or otherwise with
respect to any patent application or patent owned by either party except as
specifically set forth in this Agreement.
17.03 Phytera will not employ or compensate, directly or indirectly,
any person working in the Licensed Field while the person is employed by UM or
for two (2) years thereafter, unless UM provides Phytera with prior written
consent of the UM President to the employment or compensation by Phytera.
Compensation includes but is not limited to: stock option or stock purchase
agreements, consulting agreements, or any other form of agreement executed
between a UM employee and Phytera, and cash payments. Any approvals are subject
to the Maryland Public/Private Partnership Act.
17.04 Phytera will provide written notice to UM at least ninety (90)
days prior to the filing of a petition in bankruptcy of Phytera's intention to
file a voluntary petition in bankruptcy or, if known by Phytera through
statements or letters from a creditor or otherwise, of a Third Party's intention
to file an involuntary petition in bankruptcy against Phytera. Phytera's failure
to perform this obligation is deemed to be a material pre-petition incurable
default and breach under this Agreement.
17.05 Neither party is liable for failure or delay in performing any of
its obligations under this Agreement if the failure or delay is required in
order to comply with any governmental regulation, request or order, or
necessitated by other circumstances beyond the reasonable control of the party
so failing or delaying, including but not limited to Acts of God, war (declared
or undeclared), insurrection, fire, flood, accident, labor strikes, work
stoppage or slowdown (whether or not the labor event is within the reasonable
control of the parties), or inability to obtain raw materials, supplies, power
or equipment necessary to enable the party to perform its obligations hereunder.
Each party will: (a) promptly notify the other party in writing of any event of
force majeure, the expected duration and its anticipated effect on the ability
of the party to perform its obligations; and (b) make reasonable efforts to
remedy any event of force majeure.
17.06 All notices, consents and other communications required or which
may be given under this Agreement must be in writing and are effective upon
receipt: (a) when delivered by hand; or (b) when received by the addressee after
being mailed by registered or certified mail (air mail if mailed overseas),
return receipt requested; or (c) when received by the addressee from an express
delivery service (return receipt requested). The notice, consent, or other
communication
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will be addressed to the party at its address set forth below (or to another
address as the designates by notice to the other party hereto):
If to UM: Associate Vice President, Research and Development
University of Maryland, Baltimore
515 West Lombard Street, Fifth Floor
Baltimore, Maryland 21201-1691
Copy to: University Counsel
University of Maryland, Baltimore
520 West Lombard Street, Second Floor
Baltimore, Maryland 21201-1627
If to Phytera: Malcolm Morville. Ph.D. or Company President
Phytera, Inc.
377 Plantation Street
Worcester, Massachusetts .01605
Copy to: Lynnette Fallon, Esq.
Palmer & Dodge
One Beacon Street
Boston, Massachusetts 02108
17.07 This Agreement may not be amended or modified, nor may any right
or remedy of either party be waived, unless the amendment, modification or
waiver is in writing and signed by a duly authorized representative of each
party. A waiver of the breach of any term or provision of this Agreement is not
a waiver of any other or subsequent breach.
17.08 No failure or delay by a party in exercising any of its rights or
remedies under this Agreement will operate as a waiver, nor will any single or
partial exercise of a right or remedy preclude any other or further exercise
thereof or the exercise of any other right or remedy. The rights and remedies of
the parties provided in this Agreement are cumulative and not exclusive of any
rights or remedies provided by law.
17.09 UM and Phytera are not (and nothing in this Agreement may be
construed to constitute them as) partners, joint venturers, agents,
representatives or employees of the other, nor is there any status or
relationship between them other than that of independent contractors. Neither
party has any responsibility or liability for the actions of the other party
except as specifically provided in this Agreement. Neither party has any right
or authority to bind or obligate the other party in any manner or make any
representation or warranty on behalf of the other party.
17.10 Unless otherwise provided, all costs and expenses incurred in
connection with this Agreement will be paid by the party incurring the cost or
expense, and the other party has no liability relating thereto.
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17.11 This Agreement is signed in duplicate originals. The headings
used in this Agreement are for convenience of reference only and do not affect
the meaning or construction of this Agreement.
17.12 The parties recognize that a bona fide dispute as to certain
matters may arise from time to time during the term of this Agreement which
relates to either party's rights or obligations hereunder. If a dispute occurs,
either party may, by notice to the other party, attempt to resolve the dispute
by good faith negotiations between the parties' respective officers designated
below or their successors within thirty (30) days after the notice is received.
The designated officers are as follows:
For Phytera: President, Phytera, Inc.
For UM: Vice President, Academic Affairs
If the designated officers are not able to resolve the dispute within the thirty
(30) day period, or any agreed upon extension, then each of the parties is free
to exercise any potential remedies for the resolution of the dispute as the
party deems appropriate.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the date set forth
above.
University of Maryland Baltimore Phytera, Inc.
By: /s/ David J. Ramsay By: /s/ Malcolm Morville
---------------------------------- ---------------------------------
David J. Ramsay, D.M., D.Phil. Malcolm Morville, Ph.D.
President President
Date: 6/19/98 Date: July 1, 1998
-------------------------------- -------------------------------
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Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 8, 1999
