<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1997
REGISTRATION NO. 333-32593
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MEGABIOS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8731 94-3156660
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
----------------
863A MITTEN ROAD
BURLINGAME, CA 94010
(650) 697-1900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
PATRICK G. ENRIGHT
CHIEF FINANCIAL OFFICER AND VICE PRESIDENT
MEGABIOS CORP.
863A MITTEN ROAD
BURLINGAME, CA 94010
(650) 697-1900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
ALAN C. MENDELSON, ESQ. ROBERT V. GUNDERSON, JR., ESQ.
PATRICK A. POHLEN, ESQ. DAVID T. YOUNG, ESQ.
COOLEY GODWARD LLP GUNDERSON DETTMER STOUGH VILLENEUVE
FIVE PALO ALTO SQUARE FRANKLIN & HACHIGIAN, LLP
3000 EL CAMINO REAL 155 CONSTITUTION DRIVE
PALO ALTO, CA 94306-2155 MENLO PARK, CA 94025
(650) 843-5000 (650) 321-2400
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
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 THAT 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 SAID SECTION
8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 1997
2,500,000 SHARES
[LOGO OF MEGABIOS]
COMMON STOCK
All of the 2,500,000 shares of Common Stock offered hereby are being sold by
Megabios Corp. ("Megabios" or the "Company"). Prior to this offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price for the Common Stock will be
between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "MEGA."
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN PURCHASING THE SHARES OF
COMMON STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total (3).................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 375,000 shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
Price to Public will total $ , the Underwriting Discount will total
$ and the Proceeds to the Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1997.
-----------
MONTGOMERY SECURITIES HAMBRECHT & QUIST
, 1997
<PAGE>
DESCRIPTION OF GRAPHIC
This page will feature an hourglass-like image. The "hourglass" will contain
three blocks of language extracted from the prospectus which relate to (i) the
opportunity created by the field of genomics for gene-based therapeutics, (ii)
the limitations of gene delivery technology and (iii) the Company's
commercialization strategy and corporate partnerships to date.
TITLE: (Centered)
"Megabios Business Opportunity"
A. GENES AS POTENTIAL THERAPEUTIC PRODUCTS
. 100,000 genes in the human genome.
. At least 5,000 genes of known function.
. Many genes have been identified as potential therapeutic genes.
. Certain therapeutic genes may be attractive product candidates.
B. MEGABIOS' PROPRIETARY GENE DELIVERY SYSTEMS
. Lack of safe, effective gene delivery technology has limited the
development of gene-based therapeutics.
. Megabios develops proprietary gene delivery technology and provides
preclinical development expertise.
. Megabios' in vivo, non-viral gene delivery technology is designed to
avoid the limitations of other gene delivery systems.
C. PORTFOLIO OF PRODUCT CANDIDATES SPONSORED BY CORPORATE PARTNERS
. Megabios' goal is to create a portfolio of funded product development
programs.
. Clinical programs are expected to be sponsored through corporate
partnerships.
. Such collaborations are structured to provide research and development
funding, milestone payments and royalties.
. Megabios' three corporate partners are: Glaxo Wellcome plc for the
treatment of cystic fibrosis, Pfizer Inc for the treatment of cancer via
angiogenesis inhibition, and Eli Lilly and Company for the treatment of
cancer using BRCA-1.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN ACTIVITIES THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. THESE TRANSACTIONS MAY BE EFFECTED ON
NASDAQ OR OTHERWISE AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company was incorporated in California in April 1992 and will be
reincorporated in Delaware prior to effectiveness of this offering. The
Company's executive offices are located at 863A Mitten Road, Burlingame,
California 94010, and its telephone number is (650) 697-1900.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, all information in this
Prospectus assumes: (i) a 1-for-3 reverse split of the Company's outstanding
Common Stock and Preferred Stock to be effected prior to effectiveness of this
offering; (ii) the reincorporation of the Company in the State of Delaware to
be effected prior to effectiveness of this offering; (iii) the conversion of
all outstanding shares of Preferred Stock into shares of Common Stock to be
effected upon the closing of this offering; and (iv) no exercise of the
Underwriters' over-allotment option. Except for the historical information
contained herein, the discussion in this Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as those discussed
elsewhere in this Prospectus.
THE COMPANY
Megabios develops proprietary gene delivery systems and provides preclinical
development expertise to create gene-based therapeutics designed for the
treatment or prevention of genetic and acquired diseases. The Company has
developed several in vivo, non-viral gene delivery systems to address a number
of potential therapeutic applications using a variety of therapeutic genes. The
Company's clinical development and commercialization strategy is to enter into
collaborative research and development agreements or "corporate partnerships"
with pharmaceutical and biotechnology companies. To date, the Company has
established corporate partnerships with Glaxo Wellcome plc ("Glaxo Wellcome")
to develop a treatment for cystic fibrosis using the CFTR gene, Pfizer Inc
("Pfizer") to develop a treatment for solid tumors through angiogenesis
inhibition and Eli Lilly and Company ("Lilly") to develop treatments for breast
and ovarian cancer using the BRCA1 gene.
Gene-based therapy is an approach to the treatment or prevention of certain
diseases in which therapeutic genes are introduced into target cells to cause
the production of specific proteins needed to bring about a therapeutic effect.
To date, a limiting factor in gene-based therapy has been the lack of safe,
effective gene delivery systems. The Company's in vivo, non-viral gene delivery
systems are designed to avoid the significant limitations of ex vivo (whether
viral or non-viral) and in vivo, viral gene delivery. Furthermore, the Company
believes it has made progress in overcoming the limitations often associated
with in vivo, non-viral gene delivery approaches. The Company believes that its
proprietary, non-viral gene delivery systems may have the following benefits:
(i) therapeutically relevant gene expression; (ii) tissue-specific gene
delivery and expression; (iii) ease of handling and administration, stability
and scalable manufacturing methods and (iv) an improved safety profile. The
Company's portfolio of gene delivery systems is classified by series based on
the mode of administration and the cell type to which the gene-based
therapeutic is delivered, with each formulation within a series having distinct
specifications and potential applications. The Company intends to enter into
corporate partnerships using each of its gene delivery systems for multiple
potential applications.
Megabios' emphasis on entering into corporate partnerships is intended to
enable the Company to extend and leverage its technology platform, focus on
preclinical development of gene-based therapeutics and create a portfolio of
product development programs sponsored by its corporate partners. This strategy
limits the Company's exposure to capital-intensive activities such as large-
scale clinical trials, commercial manufacturing and sales and marketing, while
providing the opportunity to receive a substantial economic interest in the
products which it develops in conjunction with corporate partners, primarily
through the receipt of royalties on product sales. In addition, the Company
believes that creating a portfolio of product development programs will reduce
the Company's dependence on any particular product development program.
3
<PAGE>
In April 1994, the Company entered into a corporate partnership with Glaxo
Wellcome to develop a gene-based therapeutic for the treatment of cystic
fibrosis. Cystic fibrosis is caused by a defect in the CFTR gene and is
believed to afflict approximately 55,000 patients in the United States and
Europe. The Company has conducted preclinical testing of a gene delivery system
in the MB100 Series as a carrier for the CFTR gene. These studies include
primate inhalation studies which have demonstrated expression of the human form
of the CFTR gene in the correct cell type and at levels believed to be
potentially therapeutic, with no evidence of inflammation, a common problem
associated with non-viral gene-based therapeutics. In June 1997, Glaxo Wellcome
commenced a Phase I/II clinical trial in cystic fibrosis patients using a gene
delivery system in the MB100 Series as a carrier for the CFTR gene.
In May 1996, the Company entered into a corporate partnership with Pfizer to
develop a gene-based therapeutic for the treatment of solid tumors using gene
delivery systems in the MB200 Series which are designed to deliver genes that
inhibit angiogenesis. Angiogenesis is the formation of new blood vessels needed
for solid tumors to survive and multiply. The initial disease targeted by this
corporate partnership is non-small cell lung cancer, which affects over 300,000
patients annually in the United States and Europe. Gene delivery systems in the
MB200 Series have been shown in animal models to achieve gene expression
selectively in the vascular endothelial cells of the lung and other tissues
following intravenous administration.
In May 1997, the Company entered into a corporate partnership with Lilly to
develop a gene-based therapeutic to treat breast and ovarian cancer using
BRCA1, a gene which has been identified as a putative tumor suppressor. There
are over 180,000 new cases of breast cancer and over 26,000 new cases of
ovarian cancer reported each year in the United States. When a tumor suppressor
gene, such as BRCA1, is missing or defective, a cell may begin to replicate
uncontrollably resulting in the formation of a tumor. Increased expression of
the BRCA1 gene in diseased tissue may inhibit or prevent the uncontrolled cell
growth associated with cancer, without causing any adverse effect in normal
cells. BRCA1 will be developed as a gene-based therapeutic initially using gene
delivery systems in the MB300 Series, which are administered via direct
injection, and gene delivery systems in the MB700 Series, which are
administered into the intraperitoneal cavity.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 2,500,000 shares
Common Stock to be outstanding after
the offering......................... 12,225,939 shares(1)
Use of proceeds....................... For research and development activities,
leasehold improvements, the purchase of
capital equipment, working capital and
general corporate purposes.
Proposed Nasdaq National Market
symbol............................... MEGA
</TABLE>
- --------
(1) Based on 9,725,939 shares outstanding as of July 15, 1997. Excludes
(i) 476,189 shares of Common Stock issuable upon exercise of outstanding
stock options as of July 15, 1997 at a weighted average exercise price of
$1.22 per share, (ii) 84,008 shares of Common Stock issuable upon exercise
of warrants outstanding at July 15, 1997 at an exercise price of $3.88 per
share, (iii) an additional 781,699 shares of Common Stock reserved for
future grants pursuant to the Company's 1997 Equity Incentive Plan and (iv)
200,000 shares of Common Stock reserved for purchase pursuant to the
Company's 1997 Employee Stock Purchase Plan.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 23, 1992
(INCEPTION) TO YEAR ENDED JUNE 30,
JUNE 30, ----------------------------------
1993(1) 1994 1995 1996 1997
-------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Collaborative research and
development revenue....... $ -- $ 500 $ 1,157 $ 1,890 $ 5,793
Operating expenses:
Research and development.. 593 1,922 4,691 6,487 8,598
General and
administrative........... 165 796 1,811 2,169 2,417
------ ------- ------- ------- -------
Total operating
expenses............... 758 2,718 6,502 8,656 11,015
------ ------- ------- ------- -------
Loss from operations....... (758) (2,218) (5,345) (6,766) (5,222)
Interest income (expense),
net....................... (20) 65 (84) (135) 275
------ ------- ------- ------- -------
Net loss................... $ (778) $(2,153) $(5,429) $(6,901) $(4,947)
====== ======= ======= ======= =======
Net loss per share(2)...... $(0.23) $ (0.60) $ (1.49) $ (1.81) $ (1.11)
====== ======= ======= ======= =======
Shares used in computing
net loss per share(2)..... 3,433 3,603 3,638 3,812 4,438
====== ======= ======= ======= =======
Pro forma net loss per
share(2).................. $ (0.50)
=======
Shares used in computing
pro forma net loss per
share(2).................. 9,926
=======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $ 24,269 $ 51,569
Working capital....................................... 21,629 48,929
Total assets.......................................... 29,978 57,278
Long-term debt........................................ 1,487 1,487
Accumulated deficit................................... (20,208) (20,208)
Total stockholders' equity............................ 25,223 52,523
</TABLE>
- --------
(1) The Company's financial data for fiscal 1992 and 1993 is not presented
separately as the Company's operations from April 23, 1992 to June 30, 1992
were immaterial.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
computation of net loss and pro forma net loss per share.
(3) Adjusted to give effect to the receipt of the estimated net proceeds from
the sale of 2,500,000 shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $12.00 per share. See "Use
of Proceeds."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Accordingly, prospective investors should consider carefully
the following factors, together with the other information contained in this
Prospectus, in evaluating the Company and its business before purchasing the
shares of Common Stock offered hereby. This Prospectus contains forward-
looking statements that involve risk and uncertainty. Actual results and the
timing of certain events could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below and
other factors discussed elsewhere in this Prospectus. See "Special Note
Regarding Forward-Looking Statements."
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY
Since its inception, the Company has been engaged in research and
development activities, has generated minimal revenues from operations and has
experienced significant operating losses. As of June 30, 1997, the Company had
an accumulated deficit of approximately $20.2 million. The process of
developing the Company's gene delivery systems will require significant
additional research and development, preclinical testing, clinical trials and
regulatory approvals. These activities, together with the Company's general
and administrative expenses, are expected to result in operating losses for
the foreseeable future. There can be no assurance that the Company will
generate revenues or achieve and sustain profitability in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT
The Company is at an early stage of development and must be evaluated in
light of the uncertainties and complications present in an early stage
biotechnology company. Since the Company's inception in 1992, substantially
all of the Company's resources have been dedicated to the research and
development of gene delivery systems, and no revenues have been generated from
product sales. Because substantially all of the products under development by
the Company are in research or preclinical development, revenues from the sale
of any such products will not be realized for at least the next several years,
if at all. There can be no assurance that any of the Company's product
development efforts will be successfully completed, that any of the Company's
products will be proven to be safe and effective, that regulatory approvals
will be obtained at all or be as broad as sought, that the Company's products
will be capable of being produced in commercial quantities at reasonable cost
or that any products, if introduced, will achieve market acceptance.
DEPENDENCE ON CORPORATE PARTNERS; NEED FOR ADDITIONAL CORPORATE PARTNERSHIPS
The Company is highly dependent upon its separate corporate partnerships
with Glaxo Wellcome, Pfizer and Lilly. In connection with these corporate
partnerships, the Company has entered into agreements with Glaxo Wellcome (the
"Glaxo Wellcome Agreement"), Pfizer (the "Pfizer Agreement") and Lilly (the
"Lilly Agreement"). Under these agreements, each of Glaxo Wellcome, Pfizer and
Lilly were or are required to undertake certain collaborative activities with
the Company, fund research and development activities with the Company, make
certain payments to the Company upon achievement of related milestone events
and pay royalties to the Company if and when a product is commercialized by
its corporate partners. There can be no assurance that Glaxo Wellcome, Pfizer
or Lilly will devote sufficient resources to the Company's research programs
or product development efforts on a timely basis, and such resources could
vary and have varied due to factors unrelated to the Company's product
development efforts. If such corporate partners fail to conduct these
collaborative activities in a timely manner or at all, the preclinical or
clinical development or commercialization of the Company's gene delivery
systems will be delayed or terminated.
The Pfizer Agreement permits Pfizer to cancel the Company's research and
development program with Pfizer, for any reason, including reasons unrelated
to such program, after June 1998 upon six months prior notice. In order to
extend the program beyond June 1998, Pfizer is required prior to January 1998
to commit to purchase $10.0 million of the Company's Common Stock at a premium
to the then current market value, subject to certain adjustments. The Company
is uncertain whether Pfizer will exercise its option to extend the Pfizer
Agreement
6
<PAGE>
and make the corresponding equity investment in the Company. Even if Pfizer
exercises its option, there can be no assurance that research funds or
milestone payments under the Pfizer Agreement will be received. The Lilly
Agreement permits Lilly to cancel the Company's research and development
program, for any reason, including reasons unrelated to such program, after
May 1999 upon three months prior notice. There can be no assurance that the
Lilly Agreement will be extended or that research funds or milestone payments
under the Lilly Agreement will be received. Megabios' research obligations and
Glaxo Wellcome's funding obligations under the Company's research program with
Glaxo Wellcome have been completed, and the Company will only receive future
payments, if any, under the Glaxo Wellcome Agreement through the achievement
of a certain milestone and the payment of royalties. There can be no assurance
that any of these corporate partnerships will result in successfully
commercialized products and the receipt by the Company of related royalty
revenues. Should the Company fail to receive research funds or should
milestones set forth in any or all of the Glaxo Wellcome Agreement, the Pfizer
Agreement or the Lilly Agreement not be achieved, or should Glaxo Wellcome,
Pfizer or Lilly breach or terminate their respective agreements, either prior
to scheduled termination or on a termination date, the Company's business,
financial condition and results of operations will be materially adversely
affected. See "Business--Corporate Partners."
The Company will need to enter into additional agreements with corporate
partners or otherwise raise substantial additional funds to conduct the
research and development, preclinical studies, clinical trials, manufacturing,
marketing and sales necessary to commercialize its gene delivery systems. The
Company expects that future revenues from corporate partnerships, if any, will
be dervied primarily from royalties on product sales. There can be no
assurance that the Company will be able to establish such additional corporate
partnerships on favorable terms, or at all, or that its current or future
corporate partnerships will be successful. In addition, there can be no
assurance that existing or future corporate partners will not pursue
alternative technologies or develop alternative products either on their own
or in collaboration with others, including the Company's competitors. There
also can be no assurance that disputes will not arise in the future with
respect to the ownership of rights to any technology developed with corporate
partners. Disagreements between corporate partners and the Company could lead
to delays or termination in the research, development or commercialization of
certain product candidates or result in litigation or arbitration, which would
be time consuming and expensive. Should any corporate partner fail to develop
or commercialize successfully any product to which it has obtained rights from
the Company, the Company's business, financial condition and results of
operations may be materially adversely affected. See "Business--Corporate
Partners."
UNCERTAINTY OF PRODUCT DEVELOPMENT AND GENE-BASED THERAPEUTICS
Before the Company or its corporate partners can obtain regulatory approval
for the commercial sale of any of its products, the Company or its corporate
partner must demonstrate, through preclinical studies and clinical trials,
that a potential product is safe and efficacious for use in each target
indication. There can be no assurance that the Company or its corporate
partners will be permitted to undertake clinical testing of the Company's
products, or, if permitted, that such products will receive other necessary
regulatory approvals. The Company or its corporate partners may also
experience delays in commencing clinical trials due to a variety of factors
including unfavorable or delayed preclinical study results, inability to
manufacture sufficient quantities of materials used for clinical trials,
delays or difficulties in patient enrollment, delays in regulatory approvals
and other factors. While the Company has demonstrated some evidence of the
utility of its gene delivery systems in preclinical animal studies, these
results do not predict safety or efficacy in humans, when, and if, clinical
trials are conducted. The Company's products may prove to have undesirable and
unintended side effects or other characteristics in preclinical development or
clinical trials that may prevent or limit their use. In addition, there can be
no assurance that any of the Company's products will ultimately obtain United
States Food and Drug Administration ("FDA") or other regulatory or foreign
marketing approval for any indication. See "Business--Corporate Partners" and
"--Government Regulation."
In addition to risks particular to the development of the Company's
products, the Company's products are also subject to risks particular to the
development of gene-based therapeutics. Gene-based therapy is a new and
rapidly evolving technology and is expected to undergo significant
technological changes in the future. While
7
<PAGE>
many companies are seeking to identify therapeutic genes and understand their
function in the development and progression of various diseases, there is
limited clinical data available regarding the safety and efficacy of gene-
based therapeutics. The Company is not aware of any gene-based therapeutics
that have received marketing approval from the FDA or the regulatory bodies of
other countries. As a result of the limited data available or other factors,
clinical trials relating to gene-based therapeutics may take longer to
complete than clinical trials involving more traditional pharmaceuticals.
There can be no assurance that any gene-based therapeutics will be
demonstrated to be safe or effective or that the Company or its corporate
partners will be able to manufacture such gene-based therapeutics on a
commercial scale or in an economical manner.
UNCERTAINTY OF PATENT POSITION AND PROPRIETARY RIGHTS
The patent positions of biotechnology and pharmaceutical companies are often
uncertain and involve complex legal and factual questions, and the breadth of
claims allowed in biotechnology and pharmaceutical patents cannot be
predicted. In addition, there is a substantial backlog of biotechnology patent
applications at the U.S. Patent and Trademark Office (the "PTO") that may
delay the review and the potential issuance of patents. The Company's success
will depend to a significant degree on its ability to obtain patents and
licenses to patent rights, to maintain trade secrets and to operate without
infringing on the proprietary rights of others, both in the United States and
in other countries.
To date, the Company has filed a number of patent applications in the United
States and other countries and has participated as a licensee in the filing of
a number of patent applications in the United States and other countries. The
Company intends to continue to file applications as appropriate for patents
covering both its products and processes. There can be no assurance that
patents will issue from any of these applications, that any patent will issue
on technology arising from additional research or that patents that may issue
from such applications will be sufficient to protect the Company's technology.
Patent applications in the United States are maintained in secrecy until a
patent issues, and the Company cannot be certain that others have not filed
patent applications for technology covered by the Company's pending
applications or that the Company was the first to invent the technology that
is the subject of such patent applications. Competitors may have filed
applications for, or may have received patents and may obtain additional
patents and proprietary rights relating to, compounds, products or processes
that block or compete with those of the Company. The Company is aware of
patent applications filed and patents issued to third parties relating to gene
delivery technologies. The Company's development efforts are at an early
stage, however, and the Company currently is unable to verify that any such
patent applications or patents will have any effect on its products in
development. Should any of its competitors have filed patent applications in
the United States that claim technology also invented by the Company, the
Company may have to participate in interference proceedings declared by the
PTO in order to determine priority of invention and, thus, the right to a
patent for the technology in the United States, all of which could result in
substantial cost to the Company. In addition, litigation, which could result
in substantial cost to the Company, may be necessary to enforce any patents
issued to the Company or to determine the scope and validity of the
proprietary rights of third parties. There can be no assurance that any
patents issued to the Company or to licensors from whom the Company has
licensed rights will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide proprietary protection or
commercial advantage to the Company.
The commercial success of the Company depends significantly on its ability
to operate without infringing upon the patents and other proprietary rights of
third parties. There can be no assurance that the Company's technologies do
not and will not infringe upon the patents or other proprietary rights of
third parties. In the event of such infringement, the Company and its
corporate partners may be enjoined from pursuing research, development or
commercialization of their products or may be required to obtain licenses to
these patents or other proprietary rights or to develop or obtain alternative
technologies. There can be no assurance that the Company or its corporate
partners will be able to obtain alternative technologies or any required
license on commercially reasonable terms, if at all. If such licenses or
alternative technologies are not obtained, the Company may be delayed or
prevented from pursuing the development of certain of its potential products
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
8
<PAGE>
The Company also relies on proprietary information and trade secrets,
including its proprietary database of preclinical in vivo experiments, to
develop and maintain its competitive position. There can be no assurance that
third parties will not independently develop equivalent proprietary
information or techniques, will not gain access to the Company's trade secrets
or disclose such technology to the public, or that the Company can maintain
and protect unpatented proprietary technology. The Company typically requires
its employees, consultants, collaborators, advisors and corporate partners to
execute confidentiality agreements upon commencement of employment or other
relationships with the Company. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company's technology in the event of unauthorized use or disclosure of such
information, that the parties to such agreements will not breach such
agreements or that the Company's trade secrets will not otherwise become known
or be discovered independently by its competitors. See "Business--Patents and
Proprietary Technology."
NEED TO OBTAIN RIGHTS TO PROPRIETARY GENES AND TECHNOLOGY
A number of the gene sequences that the Company and its corporate partners
are investigating or may use in its products are or may become patented by
others. As a result, the Company or its corporate partners may be required to
obtain licenses to such gene sequences or other technology in order to use or
market such products. In addition, some of the products based on the Company's
gene delivery systems may require the use of multiple proprietary
technologies. Consequently, the Company or its corporate partners may be
required to make cumulative royalty payments to several third parties. Such
cumulative royalties could reduce amounts paid to the Company or be
commercially prohibitive. In connection with the Company's efforts to obtain
rights to such gene sequences or other proprietary technology, the Company may
find it necessary to convey rights to its technology to others. There can be
no assurance that the Company or its corporate partners will be able to obtain
any required licenses on commercially reasonable terms or at all. Failure by
the Company or a corporate partner to obtain a license to any technology
required to commercialize its products could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Patents and Proprietary Technology."
NEED FOR ADDITIONAL FUTURE CAPITAL; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require additional funding after this offering in order to
continue its research and development activities. The Company has financed its
operations primarily through the sale of equity securities and through
corporate partnerships. The Company has generated no royalty revenues from
product sales, and no such revenues are expected for the foreseeable future,
if ever. The Company anticipates that its existing resources, including the
net proceeds of this offering, committed funding from existing corporate
partnerships and projected interest income, will enable the Company to
maintain its current and planned operations through fiscal 1999. However,
there can be no assurance that the Company will not require additional funding
prior to such time. The Company's future capital requirements will depend on
many factors, including scientific progress in its research and development
programs, the size and complexity of such programs, the scope and results of
preclinical studies and clinical trials, the ability of the Company to
establish and maintain corporate partnerships, the time and costs involved in
obtaining regulatory approvals, the time and costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the cost of manufacturing preclinical and clinical material and
other factors not within the Company's control. There can be no assurance that
such additional financing to meet the Company's funding requirements will be
available on acceptable terms or at all. If additional funds are raised by
issuing equity securities, substantial dilution to existing stockholders may
result. Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its research or development programs or to relinquish
greater or all rights to products at an earlier stage of development or on
less favorable terms than the Company would otherwise seek to obtain. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SIGNIFICANT GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
The production and marketing of the Company's products and its ongoing
research and development activities are subject to extensive regulation by
governmental authorities in the United States and other countries.
9
<PAGE>
The Company believes that the commercial uses of its products will be
regulated as biologics by the FDA and comparable regulatory bodies of other
countries. Gene-based therapy is, however, a relatively new technology, and
the regulatory requirements governing gene-based therapeutics are uncertain.
This uncertainty may result in excessive costs or extensive delays in the
regulatory approval process, adding to the already lengthy review process for
human therapeutic products in general. The Company is not aware of any gene-
based therapeutics that have received marketing approval from the FDA or any
comparable regulatory body of other countries. The regulation of the Company's
products and its ongoing research is subject to change, and future legislative
or administrative acts in the United States or other countries could have a
material adverse effect on the Company's business, financial condition and
results of operations. Regulatory requirements ultimately imposed could
adversely affect the ability of the Company's corporate partners to clinically
test, manufacture or market products, and could significantly delay or reduce
the milestone or royalty payments payable to the Company.
Currently, the Company is conducting preclinical studies and a corporate
partner is conducting a clinical trial of one of the Company's gene delivery
systems. Prior to marketing in the United States, any drug, including any
biological product, developed by the Company or its corporate partners must
undergo rigorous preclinical studies, clinical trials and an extensive
regulatory approval process implemented by the FDA under the federal Food,
Drug and Cosmetic Act and, for biologics, the Public Health Service Act.
Satisfaction of such regulatory requirements, which includes satisfying the
FDA that the product is both safe and efficacious, typically takes several
years or more depending on the type, complexity and novelty of the product,
and requires a substantial commitment of resources. In addition, academic
institutions and companies conducting research in the gene-based therapy field
are using a variety of approaches and technologies. Any adverse results
generated by such academic institutions or companies in preclinical studies or
clinical trials could adversely affect the regulatory environment for gene-
based therapeutics generally, possibly leading to delays in the approval
process for the Company's products or preventing approval altogether.
Preclinical studies must be conducted in conformance with the FDA's Good
Laboratory Practice regulations. Before clinical trials may be commenced, an
Investigational New Drug Application ("IND") for each planned trial must be
filed with and cleared by the FDA. There can be no assurance that submission
of an IND will result in regulatory authorization to commence clinical trials.
The sponsors of any clinical trials of the Company's products will be
responsible for initiating and overseeing the clinical trials to demonstrate
the safety and efficacy that are necessary to obtain FDA marketing approval of
such products.
Clinical trials must meet FDA regulatory requirements for Institutional
Review Board ("IRB") oversight, informed consent and Good Clinical Practices.
The Company has limited experience in conducting preclinical studies and
clinical trials. The Company will rely primarily on its corporate partners to
conduct the clinical trials necessary to obtain regulatory approval, but it
may conduct initial clinical trials to attract corporate partners. There can
be no assurance that those clinical trials can be conducted at preferred
sites, sufficient test subjects can be recruited or clinical trials will be
started or completed successfully in a timely manner, or at all. Furthermore,
the FDA may suspend clinical trials at any time if it believes the subjects
participating in such trials are being exposed to unacceptable health risks or
if it finds deficiencies in the IND or the conduct of the trial. There can be
no assurance that the Company or its corporate partners will not encounter
problems in clinical trials that cause the Company or its corporate partners
or the FDA to delay, suspend or terminate such trials.
Manufacturing facilities in the United States are subject to periodic
inspection by the FDA and state authorities, and must comply with the FDA's
Good Manufacturing Practice ("GMP") regulations. Manufacturers of biologics
also must comply with the FDA's general biological product standards and also
may be subject to state regulation. Failure to comply with GMP or other
applicable regulatory requirements may result in withdrawal of marketing
approval, criminal prosecution, civil penalties, recall or seizure of
products, warning letters, total or partial suspension of production, FDA
refusal to review pending marketing approval applications or supplements to
approved applications, or injunctions, as well as other legal or regulatory
action against the Company or its corporate partners.
There can be no assurance that any product developed by the Company and its
corporate partners will prove safe and effective in clinical trials or will
meet all the applicable regulatory requirements necessary to receive
10
<PAGE>
marketing approval from the FDA or any appropriate regulatory body in other
countries. Data obtained from preclinical studies and clinical trials are
susceptible to varying interpretations that could delay, limit or prevent
regulatory approvals. If regulatory approval is granted for a product, such
approval will be limited to only those disease states and conditions for which
the product is safe and effective, as demonstrated through clinical trials.
Furthermore, approval may require ongoing post-marketing studies. After a
product is approved for marketing, the product, its manufacturer and its
manufacturing facilities are subject to continued regulatory review oversight
and periodic FDA inspections. Discovery of previously unknown problems with a
product, manufacturer or facility may result in penalties such as restrictions
on such product, manufacturer or facility, including withdrawal of the product
from the market.
In order to market its products outside of the United States, the Company
and its corporate partners must also comply with numerous and varying
regulatory requirements of other countries implemented by authorities of such
other countries governing the design and conduct of clinical trials and
marketing approval. The approval procedures vary among countries and can
involve additional testing. The time required to obtain approval in other
countries may differ from that required to obtain FDA approval. The regulatory
approval process in other countries includes all of the risks associated with
obtaining FDA approval set forth above, and approval by the FDA does not
ensure approval by the regulatory authorities of any other country. See
"Business--Government Regulation."
INTENSE COMPETITION
The pharmaceutical and biotechnology industries are highly competitive. The
Company is aware of several pharmaceutical and biotechnology companies which
are exploring the field of gene-based therapy, are actively engaged in
research and development in areas related to gene-based therapy, or have
commenced clinical trials of gene-based therapeutics. Many of these companies
are addressing diseases which have been targeted by the Company or its
corporate partners. Megabios also may experience competition from companies
that have acquired or may acquire gene-based technology from universities and
other research institutions. As competitors develop their technologies, they
may develop proprietary positions in certain aspects of gene delivery and
gene-based therapeutics that may have a material adverse effect on the
Company's business, financial condition or results of operation. The Company
faces and will continue to face intense competition from other companies for
corporate partnerships with pharmaceutical and biotechnology companies, for
establishing relationships with academic and research institutions, and for
licenses to proprietary technology, including intellectual property related to
gene delivery systems. Corporate partners may also elect to internally develop
gene-based therapeutics which compete with the Company's products. In
addition, many other companies are developing non-gene-based therapies to
treat these same diseases.
Most of the Company's competitors and potential competitors have
substantially greater product development capabilities and financial,
scientific, manufacturing, managerial and human resources than the Company.
There can be no assurance that research and development by others will not
render the Company's delivery systems or the products developed by corporate
partners using the Company's delivery systems obsolete or non-competitive or
that any product developed by the Company or its corporate partners will be
preferred to any existing or newly developed technologies. In addition, there
can be no assurance that the Company's competitors will not develop safer,
more effective or less costly gene delivery systems, gene-based therapeutics
or non-gene-based therapies, achieve superior patent protection or obtain
regulatory approval or product commercialization earlier than the Company, any
of which could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND
CONSULTANTS
The Company is highly dependent on its executive officers and scientific
staff. In addition, the Company relies on consultants and advisors to assist
the Company in formulating its research and development strategy. The loss of
any of these persons could have a material adverse effect on the Company's
corporate partnerships, business, financial condition and results of
operations. The Company does not maintain key man life insurance on any of
such individuals.
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<PAGE>
In order to pursue its research and product development plans, the Company
is and will be required to attract and retain additional qualified scientific
and other personnel. There can be no assurance that the Company will be
successful in attracting and retaining these skilled persons who generally are
in high demand by pharmaceutical and biotechnology companies and by
universities and other research institutions. The failure to successfully
attract and retain qualified personnel, consultants and advisors may impede
the achievement of the Company's objectives and have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Scientific Advisory Board" and "Management."
LIMITED MANUFACTURING EXPERIENCE
The Company has limited experience in manufacturing and currently lacks the
resources or capability to manufacture any of its products on a commercial
scale. While the Company has a pilot manufacturing facility, successful large-
scale manufacturing of the Company's gene delivery systems or its products has
not been demonstrated by the Company or any third parties. The Company will be
dependent initially on corporate partners, licensees or other third parties
for commercial-scale manufacturing of its products. Successful large-scale
manufacturing of gene-based therapeutics has not been demonstrated by any
third parties. There can be no assurance that the Company will be able to
reach satisfactory agreements with its corporate partners, licensees or other
third parties or that these parties will be able to develop adequate
manufacturing capabilities for commercial-scale quantities of gene-based
therapeutic products. See "Business--Manufacturing and Commercialization."
UNCERTAINTY OF COMMERCIAL ACCEPTANCE
The Company's success is dependent on commercial acceptance of its products.
The Company believes that recommendations by physicians and health care payors
will be essential for commercial acceptance of its products. Concerns have
arisen regarding the potential safety and efficacy of gene-based therapeutics
using viral delivery systems. While the Company's gene delivery systems are
lipid-based and do not contain viruses, there can be no assurance that
physicians' and health care payors' evaluations of the Company's products will
not be unfavorably effected by concerns over viral gene-based therapies or
that they will conclude that the Company's products or technology are safe and
effective. There can be no assurance that products developed by the Company
and its corporate partners will achieve commercial acceptance among patients,
physicians or third-party payors. Failure to achieve commercial acceptance
would have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY OF PRODUCT PRICING AND REIMBURSEMENT
The ability of Megabios' corporate partners to manufacture and sell its
products successfully will depend in part on the extent to which reimbursement
for the cost of such products and related treatments will be available from
government health administration authorities, private health insurers and
other organizations. Third-party payors are increasingly challenging the price
of medical products and services. Significant uncertainty exists as to the
reimbursement status of newly-approved health care products, and if the
Company and its corporate partners succeed in bringing any products to market,
there can be no assurance that these products will be considered cost
effective, that reimbursement will be available, or if available, that the
payors' reimbursement policies will not adversely affect the corporate
partner's ability to sell such products on a profitable basis, and thus the
Company's ability to derive revenue through royalties on sales of such
products.
PRODUCT LIABILITY EXPOSURE; AVAILABILITY OF INSURANCE
The manufacture and sale of therapeutic products involve an inherent risk of
product liability claims and associated adverse publicity. The Company
currently has only limited product liability insurance. The policy provides
for $5.0 million of coverage with a deductible of $2,500 per person and
$25,000 in the aggregate. There can be no assurance that the Company will be
able to maintain existing or obtain additional product liability insurance on
acceptable terms, if at all, or that it will provide adequate coverage against
potential liabilities. An
12
<PAGE>
inability to obtain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of the Company's products. A successful product
liability claim brought against the Company in excess of its insurance
coverage, if any, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Product Liability Insurance."
HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS
The Company's research and development processes involve the controlled use
of hazardous materials, chemicals and radioactive materials and produce waste
products. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and waste products. There can be no assurance that
contamination or injury from these materials will not occur. In such event,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company. There can be no assurance
that the Company will not be required to incur significant costs to comply
with environmental laws and regulations, or that the Company's business,
financial condition or results of operations will not be materially adversely
affected by current or future environmental laws or regulations. See
"Business--Government Regulation."
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Common Stock,
and there can be no assurance that an active market will develop or be
maintained. The initial public offering price will be negotiated between the
Company and the representatives of the Underwriters and may not be indicative
of future market prices. See "Underwriting" for information related to the
method of determining the initial public offering price. The market price of
the shares of Common Stock, like that of the common stock of many other
biotechnology companies, is likely to be highly volatile. Factors such as the
Company's operating results, developments in the Company's relationships with
corporate partners, developments affecting the Company's corporate partners,
announcements of results of preclinical studies and clinical trials by the
Company, its corporate partners, its competitors or their products, regulatory
action or regulatory approval with respect to the Company, its corporate
partners, its competitors or their products, announcements of new products by
the Company or its competitors, developments related to patent or other
proprietary rights by the Company or its competitors, changes in the
recommendation of securities analysts with respect to the Common Stock, and
market conditions for biotechnology stocks in general may cause the market
price of the Common Stock to fluctuate, perhaps substantially. The Company
expects that operating results will fluctuate from quarter to quarter and that
such fluctuations may be substantial. In addition, in recent years the stock
market in general, and the shares of biotechnology and healthcare companies in
particular, have experienced extreme price fluctuations. These broad market
and industry fluctuations may have a material adverse effect on the market
price of the Common Stock. In the future, the Company's operating results may
be below the expectations of public market analysts and investors, and, as a
result, the price of the Common Stock would likely be materially adversely
affected.
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER
PROVISIONS AND DELAWARE LAW
After this offering, the Company's named executive officers, directors and
principal stockholders will beneficially own approximately 5,504,254 or 44.5%
of the outstanding shares of Common Stock (43.2% if the underwriters'
overallotment option is exercised in full). As a result, such persons may have
the ability to effectively control the Company and direct its affairs and
business. Such concentration of ownership may also have the effect of
delaying, deferring or preventing a change in control of the Company. In
addition, the Company's Board of Directors will have the authority to issue up
to 10,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action
by the stockholders. The rights of the holders of Common Stock will be subject
to, and may be materially adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company.
Furthermore, certain provisions of the Company's Restated Certificate
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<PAGE>
of Incorporation, including the provision for a staggered Board of Directors,
may have the effect of delaying or preventing changes in control or management
of the Company, which could adversely affect the market price of the Company's
Common Stock. In addition, the Company will be subject to the provisions of
Section 203 of the Delaware General Corporation Law (the "Delaware Law"), an
anti-takeover law. See "Principal Stockholders" and "Description of Capital
Stock."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the
Company's Common Stock. The number of shares of Common Stock available for
sale in the public market is limited by restrictions under the Securities Act
of 1933, as amended (the "Securities Act"), and lock-up agreements pursuant to
which all directors and executive officers and certain other stockholders of
the Company have agreed not to sell or otherwise dispose of any of their
shares without the prior written consent of the Company or Montgomery
Securities. However, Montgomery Securities or the Company, as applicable, may
at any time without notice, release all or any portion of the securities
subject to lock-up agreements. The Company has agreed with Montgomery
Securities not to release any stockholder from such lock-up agreement between
the stockholder and the Company without the consent of Montgomery Securities.
As a result of such restrictions and based upon the number of shares
outstanding on July 15, 1997, on the date of this Prospectus approximately
22,645 shares, other than the 2,500,000 shares offered hereby, will be
eligible for sale pursuant to subsection (k) of Rule 144 promulgated under the
Securities Act. An additional 8,045,052 shares and 96,709 shares issuable upon
exercise of outstanding vested options will be eligible for sale 180 days
after the date of this Prospectus upon expiration of the lock-up agreements
and in compliance with certain limitations set forth in the Securities Act. An
additional 1,385,706 shares held by existing stockholders will become eligible
for sale at various times over a period of less than one year. The remaining
272,536 shares currently held by existing stockholders will be subject to
rights of repurchase in favor of the Company that expire at various dates
through May 2001 pursuant to monthly vesting. After this offering, the holders
of approximately 8,154,779 shares of Common Stock will be entitled to certain
demand and piggyback registration rights with respect to registration of such
shares under the Securities Act. If such holders, by exercising their demand
or piggyback registration rights, cause a large number of securities to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
to include in a Company-initiated registration shares held by such holders
pursuant to the exercise of their piggyback registration rights, such sales
may have an adverse effect on the Company's ability to raise needed capital.
See "Shares Eligible For Future Sale" and "Description of Capital Stock--
Registration Rights."
DILUTION; ABSENCE OF DIVIDENDS
The initial public offering price will be substantially higher than the book
value per share of Common Stock. Assuming an initial public offering price of
$12.00 per share, investors purchasing shares of Common Stock in this offering
will incur immediate, substantial dilution of $7.70 per share in the net
tangible book value of Common Stock. Additional dilution will occur upon the
exercise of outstanding options and warrants. See "Dilution." The Company has
never declared or paid any cash dividends and does not anticipate paying cash
dividends in the foreseeable future. See "Dividend Policy."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Megabios, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others: the early stage of development of the Company and its products;
dependence on corporate partnerships and need for additional corporate
partnerships; uncertainty of product development and gene-based therapeutics;
dependence on proprietary technology and uncertainty of patent protection;
existing government regulation and changes in, or the failure to comply with,
government regulation; intense competition; history of operating losses; the
Company's need for additional financing; dependence on key personnel; limited
manufacturing experience; uncertainty of commercial acceptance of its products
and other factors referenced in this Prospectus. Certain of these factors are
discussed in more detail elsewhere in this Prospectus, including, without
limitation, under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Given these uncertainties, prospective investors
are cautioned not to place undue reliance on such forward-looking statements.
Megabios disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be $27,300,000 ($31,485,000 if the over-
allotment option is exercised in full) at an assumed initial public offering
price of $12.00 per share after deducting underwriting discounts and estimated
offering expenses payable by the Company.
The Company intends to use approximately $15.0 million of the net proceeds
of the offering to fund research and development activities, including the
development of existing and future gene delivery systems. Approximately $4.0
million of the net proceeds will be used for leasehold improvements to the
Company's facilities and approximately $4.0 million of the net proceeds will
be used for the purchase of certain capital equipment to be used primarily in
the Company's pilot manufacturing facility. The balance of the net proceeds of
the offering are expected to be used for working capital and general corporate
purposes. These corporate purposes may include the purchase of technology
assets and licenses. The Company has no present understandings, commitments or
arrangements with respect to the purchase of any technology assets or
licenses, and the amount and timing of these expenditures will depend on
numerous factors, including the progress of the Company's research programs
and its ability to attract additional corporate partners. Pending application
of the net proceeds of the offering as described above, the Company intends to
invest such proceeds in short-term, investment-grade, interest-bearing
financial instruments.
The Company anticipates that its existing resources, including the net
proceeds of this offering, committed funding from existing corporate
partnerships and projected interest income, will enable the Company to
maintain its current and planned operations through fiscal 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. The Company's term loan
with a commercial bank, which expires in August 1998, prohibits the payment of
dividends.
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CAPITALIZATION
The following table sets forth as of June 30, 1997, (i) the pro forma
capitalization of the Company giving effect to the conversion of all
outstanding shares of Preferred Stock into Common Stock and the
reincorporation of the Company into Delaware and (ii) the pro forma
capitalization as adjusted to give effect to the receipt by the Company of the
estimated net proceeds from the sale of the shares of Common Stock offered
hereby at an assumed initial public offering price of $12.00 per share, after
deducting the underwriting discounts and estimated offering expenses payable
by the Company. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................ $ 1,233 $ 1,233
Long-term debt........................................... 1,487 1,487
Stockholders' equity(1):
Preferred stock, $.001 par value; 10,000,000 shares
authorized; no shares issued and outstanding, pro forma
and as adjusted........................................ -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 9,722,506 shares issued and outstanding,
pro forma; 12,222,506 shares issued and outstanding, as
adjusted, at amounts paid-in........................... 46,110 73,410
Deferred compensation, net of amortization............... (679) (679)
Accumulated deficit...................................... (20,208) (20,208)
-------- --------
Total stockholders' equity............................ 25,223 52,523
-------- --------
Total capitalization................................. $ 27,943 $ 55,243
======== ========
</TABLE>
- --------
(1) Based on 9,722,506 shares outstanding as of June 30, 1997. Excludes (i)
479,622 shares of Common Stock issuable upon exercise of outstanding stock
options as of June 30, 1997 at a weighted average exercise price of $1.22
per share, (ii) 84,008 shares of Common Stock issuable upon exercise of
warrants outstanding at June 30, 1997 at an exercise price of $3.88 per
share, (iii) an additional 781,699 shares of Common Stock reserved for
future grants pursuant to the Company's 1997 Equity Incentive Plan and
(iv) 200,000 shares of Common Stock reserved for purchase pursuant to the
Company's 1997 Employee Stock Purchase Plan.
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DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997 was
approximately $25.2 million, or $2.59 per share of Common Stock. Pro forma net
tangible book value per share is determined by dividing the net tangible book
value (tangible assets less total liabilities) of the Company by the number of
shares of Common Stock outstanding at that date, including shares of Common
Stock from the conversion of the Preferred Stock immediately prior to the
consummation of the Offering. Without taking into account any other changes in
the net tangible book value after June 30, 1997, other than to give effect to
the receipt by the Company of the estimated net proceeds from the sale of
2,500,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $12.00 per share, the pro forma net tangible
book value of the Company as of June 30, 1997, would have been $52.5 million,
or $4.30 per share. This represents an immediate increase in the pro forma net
tangible book value of $1.71 per share to existing stockholders and an
immediate dilution of $7.70 per share to new public investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................... $12.00
Pro forma net tangible book value before offering.............. $2.59
Increase attributable to new public investors(1)............... 1.71
-----
Pro forma net tangible book value after offering................ 4.30
------
Dilution to new public investors................................ $ 7.70
======
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1997,
the difference between existing stockholders and purchasers of shares in the
offering (at an assumed initial public offering price of $12.00 per share and
before deducting underwriting discounts and estimated offering expenses
payable by the Company) with respect to the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 9,722,506 79.5% $45,534,000 60.3% $4.68
New public investors... 2,500,000 20.5 30,000,000 39.7 12.00
------------ ------- ----------- -----
Total................ 12,222,506 100.0% $75,534,000 100.0%
============ ======= =========== =====
</TABLE>
- --------
(1) The foregoing computations exclude (i) 479,622 shares of Common Stock
issuable upon exercise of stock options outstanding as of June 30, 1997,
at a weighted average exercise price of $1.22 per share, (ii) 84,008
shares of Common Stock issuable upon exercise of warrants outstanding at
June 30, 1997, at an exercise price of $3.88 per share, (iii) an
additional 781,699 shares of Common Stock reserved for future grants
pursuant to the Company's 1997 Equity Incentive Plan and (iv) 200,000
shares of Common Stock reserved for purchase pursuant to the Company's
1997 Employee Stock Purchase Plan. To the extent that options or warrants
are exercised and shares of Common Stock are issued, there will be further
dilution to new investors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Management--Stock Plans" and "Description of Capital Stock."
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended June 30,
1995, 1996 and 1997 and the balance sheet data as of June 30, 1996 and 1997
are derived from the financial statements of the Company included elsewhere in
this Prospectus which have been audited by Ernst & Young LLP, independent
auditors. The Statements of Operations Data for the period from April 23, 1992
(Inception) to June 30, 1993 and for the year ended June 30, 1994 and the
balance sheet data as of June 30, 1993, 1994 and 1995 are derived from
financial statements audited by Ernst & Young LLP not included in this
Prospectus. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the Notes thereto included elsewhere in this
Prospectus. The Company has not paid any cash dividends.
<TABLE>
<CAPTION>
APRIL 23,
1992
(INCEPTION) TO YEAR ENDED JUNE 30,
JUNE 30, ----------------------------------
1993(1) 1994 1995 1996 1997
-------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Collaborative research and
development revenue....... $ -- $ 500 $ 1,157 $ 1,890 $ 5,793
Operating expenses:
Research and development.. 593 1,922 4,691 6,487 8,598
General and
administrative........... 165 796 1,811 2,169 2,417
------ ------- ------- ------- -------
Total operating
expenses............... 758 2,718 6,502 8,656 11,015
------ ------- ------- ------- -------
Loss from operations....... (758) (2,218) (5,345) (6,766) (5,222)
Interest income (expense),
net....................... (20) 65 (84) (135) 275
------ ------- ------- ------- -------
Net loss................... $ (778) $(2,153) $(5,429) $(6,901) $(4,947)
====== ======= ======= ======= =======
Net loss per share(2)...... $(0.23) $ (0.60) $ (1.49) $ (1.81) $ (1.11)
====== ======= ======= ======= =======
Shares used in computing
net loss per share(2)..... 3,433 3,603 3,638 3,812 4,438
====== ======= ======= ======= =======
Pro forma net loss per
share(2).................. $ (0.50)
=======
Shares used in computing
pro forma net loss per
share(2).................. 9,926
=======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------
1993 1994 1995 1996 1997
----- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments(3)............. $ 374 $ 1,886 $ 282 $ 5,253 $ 24,269
Working capital(3)............... (702) 758 (873) 3,568 21,629
Total assets(3).................. 430 4,344 4,969 9,956 29,978
Long-term debt................... -- 412 1,305 1,894 1,487
Accumulated deficit.............. (778) (2,931) (8,360) (15,261) (20,208)
Total stockholders' equity(3).... (701) 2,436 2,219 6,086 25,223
</TABLE>
- --------
(1) The Company's financial data for fiscal 1992 and 1993 is not presented
separately as the Company's operations from April 23, 1992 to June 30,
1992 were immaterial.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
computation of net loss and pro forma net loss per share.
(3) The increase from June 30, 1996 to June 30, 1997 reflects the receipt of
approximately $24.0 million in net proceeds from the issuance of Series E
and Series F Preferred Stock in fiscal 1997.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion below contains certain forward-looking statements that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
Company's future results, performance or achievements could differ materially
from those expressed in, or implied by, any such forward-looking statements.
See "Risk Factors" for a discussion of factors that could cause or contribute
to such material differences. The following presentation of Management's
Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with the Company's Financial Statements and
Notes thereto and other financial information included therein.
OVERVIEW
Megabios, incorporated in 1992, develops proprietary gene delivery systems
and provides preclinical development expertise to create gene-based
therapeutics designed for the treatment or prevention of genetic and acquired
diseases. The Company has developed several in vivo, non-viral gene delivery
systems to address a number of potential therapeutic applications using a
variety of therapeutic genes. The Company's clinical development and
commercialization strategy is to enter into corporate partnerships with
pharmaceutical and biotechnology companies. The Company has established
corporate partnerships with Glaxo Wellcome, Pfizer and Lilly. To date,
substantially all revenue has been generated by collaborative research and
development revenue from corporate partners, and no revenue has been generated
from product sales. Under its corporate partnerships the Company receives
research and development funding on a quarterly basis in advance of payment of
associated research and development costs. The Company expects that future
revenue will be derived in the short-term from research and development
revenue and milestone payments and in the long-term from royalties on product
sales.
A substantial portion of the Company's revenues to date have been from
payments under the Glaxo Wellcome Agreement and Pfizer Agreement, totaling
approximately $4.8 million and $3.6 million, respectively, through June 30,
1997.
In April 1994, the Company entered into a corporate partnership with Glaxo
Wellcome to develop a gene-based therapeutic for the treatment of cystic
fibrosis. The terms of the Glaxo Wellcome Agreement provide Glaxo Wellcome
with the exclusive rights to manufacture, market and sell gene-based
therapeutics incorporating the Company's gene delivery systems for the
treatment of cystic fibrosis. In addition to having received $5.0 million in
research funding, the Company is entitled to receive a milestone payment from
Glaxo Wellcome upon the commencement of a Phase III clinical trial, a portion
of which will be credited against future royalties, as well as royalties on
the sale of products resulting from the corporate partnership, if any. The
research and development funding portion of the Glaxo Wellcome Agreement
terminated in April 1997. The Company has completed all of its obligations
under the Glaxo Wellcome Agreement and will receive future payments, if any,
under the Glaxo Wellcome Agreement only through the achievement of a certain
milestone and the payment of royalties. See "Business--Corporate Partners."
In May 1996 the Company entered into a corporate partnership with Pfizer to
develop a gene-based therapeutic for the treatment of solid tumors. Under the
Pfizer Agreement, the Company is responsible for performing research and
preclinical development activities for a period of up to four years. The
Pfizer Agreement provides that Pfizer receive the exclusive rights to develop,
make, use and sell gene-based therapeutics resulting from the corporate
partnership. The Company will be entitled to receive up to $16.4 million in
research and development funding if the agreement continues for four years, as
well as up to $20.0 million in payments upon the achievement of certain
clinical milestones, which milestone payments will be credited against future
royalties, if any. In addition, if a product receives marketing approval from
the FDA or an equivalent agency in another country, the Company is entitled to
receive royalties on sales of products resulting from the corporate
partnership. The Pfizer Agreement permits Pfizer to terminate the program for
any reason after June 1998 upon six months of prior notice. If Pfizer elects
to extend the research term beyond two years, it will be required, prior to
January 1998, to commit to purchase within 60 days $10.0 million of the
Company's Common Stock at a premium to the then current market value, subject
to certain adjustments. See "Business--Corporate Partners."
20
<PAGE>
In May 1997, the Company entered into a corporate partnership with Lilly to
develop a gene-based therapeutic using BRCA1. Under the Lilly Agreement, the
Company is responsible for performing research and preclinical development
activities for a period of up to four years. The Lilly Agreement provides that
Lilly receive the exclusive rights to develop, make, use and sell gene-based
therapeutics using BRCA1 resulting from the corporate partnership. The Company
will be entitled to receive at least $7.0 million in research and development
funding during the first two years of the agreement, which may be extended for
up to two additional years provided that the Company and Lilly agree on an
appropriate level of research and development funding for such extension
period. In addition, the Company may receive up to $27.5 million in payments
upon the achievement of certain preclinical and clinical milestones, and if a
product receives marketing approval from the FDA or an equivalent agency in
another country, the Company is entitled to receive royalties on sales of
products resulting from the corporate partnership. The Lilly Agreement permits
Lilly to terminate the program for any reason after May 1999 upon three months
prior notice. See "Business--Corporate Partners."
The Company has incurred significant losses since inception and expects to
incur substantial losses for the foreseeable future, primarily due to the
expansion of its research and development programs and because the Company
does not expect to generate revenues from the sale of products in the
foreseeable future, if at all. The Company expects that operating results will
fluctuate from quarter to quarter and that such fluctuations may be
substantial. As of June 30, 1997, the Company's accumulated deficit was
approximately $20.2 million.
The Company's business is subject to significant risks, including the risks
inherent in its research and development efforts, reliance on corporate
partners, uncertainties associated with obtaining and enforcing patents, the
lengthy, expensive and uncertain regulatory approval process, competition from
other companies' products, and the need for additional capital. See "Risk
Factors."
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
Revenue. Revenue from corporate partnerships totaled approximately $5.8
million, $1.9 million, and $1.2 million for the years ended June 30, 1997,
1996 and 1995, respectively. The 1997 revenue was attributable solely to
amounts earned for research performed under the Company's corporate
partnerships with Glaxo Wellcome, Pfizer and Lilly, of approximately $2.0
million, $3.4 million and $270,000, respectively. The 1996 revenue was
attributable to amounts earned for research performed under the Company's
corporate partnerships with Glaxo Wellcome and Pfizer of approximately $1.63
million and $265,000, respectively and the 1995 revenue resulted entirely from
research payments under the Glaxo Wellcome corporate partnership. No revenues
from milestones have been earned under any corporate partnerships to date.
Research and Development Expenses. Research and development expenses
increased to $8.6 million in 1997 from $6.5 million in 1996 and $4.7 million
in 1995. The increases in each period were primarily attributable to increased
payroll and personnel expenses as the Company hired additional research and
development personnel to support its independent research and collaborative
programs, increased purchases of laboratory supplies, increased equipment and
leasehold improvement depreciation, increased facilities expenses in
connection with the build-out of the present facility and an increased use of
consultants and analytical lab services. The Company expects to expand its
independent research and collaborative programs in future periods, which will
result in increased research and development expenses in absolute dollars.
General and Administrative Expenses. General and administrative expenses
increased to $2.4 million in 1997 from $2.2 million in 1996 and $1.8 million
in 1995. The increases in each period were primarily attributable to increased
payroll and personnel expenses as the Company hired additional management, and
to increased consulting, legal, professional, travel and other fees and
expenses associated with an increase in business development activities.
General and administrative expenses are expected to increase in absolute
dollars in the future to support the Company's expanding business activities
and the increased costs expected to be incurred as a publicly-traded company.
Interest Income (Expense), Net. Interest income (expense), net increased to
$275,000 in 1997 compared with interest income (expense), net from ($135,000)
in 1996 and ($84,000) in 1995. Interest income increased to $656,000 in 1997
from $230,000 in 1996 and $56,000 in 1995. Increases in interest income
resulted from the
21
<PAGE>
change in average cash and investment balances as a result of sales of equity
securities of the Company. Interest expense increased to $381,000 in 1997 from
$365,000 in 1996 and $140,000 in 1995. The increase in interest expense in
1997 was due to the higher average outstanding balance on an equipment
financing line of credit. The increase in interest expense in 1996 was
attributable to amounts due under a term loan executed in early 1996 and to
the increased utilization of an equipment financing line of credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the sale of equity securities, funds provided under corporate partnerships and
equipment and leasehold improvement financing. As of June 30, 1997, the
Company had received approximately $45.4 million in net proceeds from the sale
of equity securities and approximately $10.2 million for license fees and
research support payments under corporate partnerships.
Cash, cash equivalents and short-term investments at June 30, 1997 were
$24.3 million compared to $5.3 million at June 30, 1996. The increase was due
primarily to the proceeds received from the sale of equity securities and
research payments received under corporate partnerships, offset by net cash
used in operations.
Net cash used in the Company's operations decreased to $2.8 million for 1997
from $5.5 million for 1996. The decrease was primarily due to the increased
research and development funding from corporate partnerships. The Company's
capital expenditures for 1997 and 1996 were $1.9 million and $1.1 million,
respectively.
In May 1996, the Company entered into an equipment financing agreement for
up to $2.7 million. As of June 30, 1997, the Company had borrowed
approximately $1.6 million under this agreement for equipment purchases
structured as loans. These loans are being repaid over 48 months at interest
ranging from 15.2% to 16.2% per annum. In connection with this agreement, the
Company issued to the lender a warrant to purchase 38,238 shares of the
Company's Series C Preferred Stock at an exercise price of $3.88 per share.
The warrant expires at the earlier of April 30, 2006 or five years after the
closing of this offering.
In June 1995, the Company obtained a $1.5 million line of credit from a
commercial bank. In August 1995, the Company converted this line of credit
into a $1.5 million term loan bearing interest at the prime rate plus 2%. The
loan is payable in 36 equal monthly installments beginning August 31, 1995. In
connection with the term loan, the Company issued to the lender a warrant to
purchase 24,140 shares of Series C Preferred Stock at an exercise price of
$3.88 per share. The warrant expires on the earlier of June 1, 2000, or a
merger or sale of substantially all of the Company's assets.
In December 1993, the Company entered into a financing agreement for up to
$2.3 million with another financing company. As of June 30, 1997, the Company
had borrowed $1.9 million under the agreement for equipment purchases and
tenant improvements structured as loans. These loans are being repaid over 42
months at interest rates ranging from 13.8% to 16.2% per annum. In connection
with this agreement, the Company issued a warrant to purchase 21,630 shares of
the Company's Series B Preferred Stock at an exercise price of $3.88 per
share. The warrant expires on the earliest of May 13, 2000, or the day prior
to the effectiveness of a registration statement covering an underwritten
offering of the Company's securities with aggregate gross proceeds of at least
$7.5 million, or a merger or sale of substantially all of the Company's
assets.
The Company anticipates that its existing resources, including the net
proceeds of this offering, committed funding from existing corporate
partnerships and projected interest income, will enable the Company to
maintain its current and planned operations through fiscal 1999. However,
there can be no assurance that the Company will not require additional funding
prior to such time. The Company's future capital requirements will depend on
many factors, including scientific progress in its research and development
programs, the size and complexity of such programs, the scope and results of
preclinical studies and clinical trials, the ability of the Company to
establish and maintain corporate partnerships, the time and costs involved in
obtaining regulatory approvals, the time and costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the cost of manufacturing preclinical and clinical materials and
other factors not within the
22
<PAGE>
Company's control. There can be no assurance that additional financing to meet
the Company's funding requirements will be available on acceptable terms or at
all. If additional funds are raised by issuing equity securities, substantial
dilution to existing stockholders may result. Insufficient funds may require
the Company to delay, scale back, or eliminate some or all of its research or
development programs or to relinquish greater or all rights to products at an
earlier stage of development or on less favorable terms than the Company would
otherwise seek to obtain.
The Company recorded deferred compensation representing the difference
between the exercise price of options granted and the deemed fair market value
of its Common Stock at the time of grant. Deferred compensation of
approximately $750,000 was recorded through June 30, 1997, and an additional
$390,000 is expected to be recorded for options granted subsequent to June 30,
1997. Deferred compensation will be recognized as an expense over the related
vesting term of the options, generally four years.
The Company has not generated significant taxable income to date. At June
30, 1997, the net operating losses available to offset future taxable income
for federal income tax purposes were approximately $15.6 million. Because the
Company has experienced ownership changes, future utilization of the
carryforwards may be limited in any one fiscal year pursuant to Internal
Revenue Code regulations. The carryforwards expire at various dates beginning
in 2008 through 2012 if not utilized. As a result of the annual limitation, a
portion of these carryforwards may expire before becoming available to reduce
the Company's federal income tax liabilities.
23
<PAGE>
BUSINESS
Megabios develops proprietary gene delivery systems and provides preclinical
development expertise to create gene-based therapeutics designed for the
treatment or prevention of genetic and acquired diseases. The Company has
developed several in vivo, non-viral gene delivery systems to address a number
of potential therapeutic applications using a variety of therapeutic genes.
The Company's clinical development and commercialization strategy is to enter
into collaborative research and development agreements or "corporate
partnerships" with pharmaceutical and biotechnology companies. To date, the
Company has established corporate partnerships with Glaxo Wellcome to develop
a treatment for cystic fibrosis using the CFTR gene, Pfizer to develop a
treatment for solid tumors through angiogenesis inhibition and Lilly to
develop treatments for breast and ovarian cancer using the BRCA1 gene.
BACKGROUND
Genes and Gene-based Therapeutics
Genes provide the "code" for proteins, which determine the nature and
function of cells and tissues in all living organisms. The study of genes and
their function ("genomics") provides the fundamental basis for understanding
human health and disease and has led to the identification of many genes with
potential therapeutic utility ("therapeutic genes").
The entire genetic content of an organism is known as its genome. In humans,
the genome is believed to contain approximately 100,000 genes, each of which
is composed of a unique sequence of DNA molecules that encode genetic
instructions. These genetic instructions enable cells to carry out their
normal biological functions. The process by which an organism utilizes genetic
instructions and produces proteins is known as gene expression. The expression
of a defective gene, or the over- or under-expression of a normal gene, is
responsible for certain disease conditions. For example, the expression of a
single defective gene is known to cause cystic fibrosis and sickle cell
anemia, and the defective expression of multiple genes is believed to be
involved in the progression of diseases such as cancer and diabetes, as well
as cardiovascular, neurological and other diseases.
The worldwide effort to decipher the human genome and to understand the
function of its constituent genes is yielding important insights into the
roles that genes play in disease conditions, as well as how genes may be
useful in the treatment of such diseases. It is estimated that there are at
least 5,000 genes of known function, many of which have been identified as
potential therapeutic genes. Various companies and academic institutions are
investing substantial financial and human resources to identify additional
therapeutic genes, and the Company believes that this process will create
opportunities for gene-based therapeutics.
Gene-based therapy is an approach to the treatment or prevention of certain
diseases in which therapeutic genes are introduced into target cells to cause
the production of specific proteins needed to bring about a therapeutic
effect. For gene-based therapy to be effective, the therapeutic gene must be
delivered to the target cell, transported across the outer membrane and into
the cell, where it can be expressed. The expressed protein may remain within
the cell for an intracellular effect, be transported to the cell membrane to
exert a cell surface effect or be secreted into the bloodstream to have a
systemic effect. Most gene-based therapies utilize a delivery system, or
vector, into which the therapeutic gene is incorporated to facilitate its
delivery to, and uptake by, the target cell.
24
<PAGE>
EXPRESSION OF A THERAPEUTIC GENE IN A TARGET CELL
[ARTWORK APPEARS HERE]
Gene Delivery Approaches
To date, a limiting factor in gene-based therapy has been the lack of safe,
effective gene delivery systems. A number of gene delivery approaches are
being developed, each of which has exhibited certain limitations. These
approaches may be categorized by their mode of administration, ex vivo
(outside the body) or in vivo (inside the body), and by the nature of the gene
delivery system (viral or non-viral).
Many clinical trials of potential gene-based therapeutics have used ex vivo,
viral gene delivery. Ex vivo gene-based therapies involve procedures in which
selected cells are removed from the patient, transduced with the therapeutic
gene, expanded in number, cleansed of contaminants and then reintroduced into
the same patient. This lengthy and labor-intensive process significantly
differs from traditional pharmaceutical administration and may result in a
complex, high-cost procedure.
In an effort to overcome these limitations, certain companies are developing
in vivo gene delivery systems that employ viruses to deliver the therapeutic
gene into target cells. Although in vivo, viral gene delivery approaches may
be suitable for certain applications, the Company believes that several issues
resulting from the use of viruses may limit their broad application. Certain
types of viral gene delivery systems permanently alter the DNA of the target
cell due to integration of the virus carrying the therapeutic gene into the
DNA of the cell. This permanent and potentially random integration may result
in the inability to regulate the gene-based therapeutic, the inactivation of a
beneficial gene or the unintended activation of a harmful gene. In addition,
certain viral gene delivery systems have been shown to cause immune reactions,
limiting their use for chronic diseases that may require repeat dosing. Viral
gene delivery systems may also have limitations as to the size of the
therapeutic gene that can be delivered. Furthermore, the Company believes that
it may be difficult and expensive to manufacture and purify the desired viral
strain due to the risks associated with handling viruses.
To overcome the concerns associated with the use of viruses, in vivo, non-
viral gene delivery methods are being developed. Such methods typically
include the insertion of a therapeutic gene into a circular segment of DNA
known as a DNA plasmid, which is designed to control expression of the
therapeutic gene in the cell. The plasmid is packaged with a carrier, often a
lipid-based formulation, and delivered into the target cell by various modes
of administration, including inhalation, intravenous administration, direct
injection and intraperitoneal administration. These traditional modes of
administration are familiar to physicians and may be more convenient and cost
effective than ex vivo approaches. In addition, DNA plasmids degrade over time
and do not integrate into the host genome. Therefore, plasmid-based systems
avoid the potentially random integration associated with some viral approaches
and allow for more flexible treatment since the gene is not permanently
expressed. In
25
<PAGE>
spite of the advantages of in vivo, non-viral delivery approaches, their
development has been limited by a number of considerations, including low
levels and short duration of gene expression, non-specific cell targeting,
inflammation or other adverse effects and manufacturing difficulties.
MEGABIOS' IN VIVO, NON-VIRAL GENE DELIVERY APPROACH
The Company's in vivo, non-viral gene delivery systems are designed to avoid
the significant limitations of ex vivo (whether viral or non-viral) and in
vivo, viral gene delivery. Furthermore, the Company believes it has made
progress in overcoming the limitations often associated with in vivo, non-viral
gene delivery approaches. The Company's proprietary gene delivery systems
consist primarily of two components: (i) DNA plasmids containing a therapeutic
gene that controls its proper expression; and (ii) lipids and other agents that
facilitate the delivery of the DNA plasmids into the target cell. In most of
its gene delivery systems, the Company combines negatively charged DNA with
novel, positively charged lipids and neutral lipids to form DNA:lipid
complexes. These complexes are the active ingredient in the Company's gene
delivery systems. Certain of the Company's other gene delivery systems utilize
polymers and peptides instead of lipids to facilitate the delivery of DNA
plasmids.
MEGABIOS' NON-VIRAL, LIPID-BASED GENE DELIVERY SYSTEMS
[ARTWORK APPEARS HERE]
The Company's portfolio of gene delivery systems is classified by series
based on the mode of administration and the cell type to which the gene-based
therapeutic is delivered, with each formulation within a series having distinct
specifications and potential applications. For example, different gene delivery
systems within the MB200 Series result in different patterns of expression
following intravenous administration. To date, the Company has developed seven
series of gene delivery systems and expects to design additional series of gene
delivery systems, expanding the scope of its commercial opportunities. The
Company believes its proprietary, non-viral gene delivery systems may have the
following benefits:
Therapeutically Relevant Gene Expression. Megabios has developed DNA
plasmids that, following their formulation with lipids and their
administration to animals, produce therapeutically relevant protein levels
that persist for up to two months. Following intravenous administration to
mice of the gene for a commercially available cytokine, the cytokine was
detected in the blood at levels consistent with those required for
therapeutic effect. Similarly, following aerosol administration to primates
of the therapeutic gene to treat cystic fibrosis, the resulting human
protein was produced in the correct cell type (lung epithelial cells) and
at levels believed to be potentially therapeutic.
Tissue-specific Gene Delivery and Expression. The Company believes that its
gene delivery systems result in specific targeting to certain tissues and a
number of cell types. In preclinical studies, the Company has demonstrated
that various formulations are taken up selectively by (i) ciliated
epithelial cells lining the airways of the lungs following aerosol
administration, (ii) vascular endothelial cells lining the blood vessels of
several tissues, including lung, heart, spleen and lymphatic tissues,
following intravenous administration, (iii) solid tumors following direct
administration either into the tumor or other local tissues, (iv) antigen
26
<PAGE>
presenting cells following intramuscular, intradermal, subcutaneous or
intravenous injection, (v) circulating macrophages following intravenous
administration and (vi) cells in the central nervous system following
direct injection. For example, in a preclinical study to test the pattern
of uptake of two intravenous formulations, one formulation resulted in over
90% of observable gene expression in the vascular endothelial cells of the
lungs, while the other formulation resulted in over 90% of observable gene
expression in the spleen. In addition, following direct injection in
animals, the Company's formulations have been demonstrated to result in
transfection of solid tumors and muscle and brain tissue.
Ease of Handling and Administration, Stability and Scalable Manufacturing
Methods. The Company's gene delivery systems are designed to be handled and
administered like traditional pharmaceuticals. These gene delivery systems
are also designed to be stable when refrigerated and are intended to be
distributed like other pharmaceuticals. Megabios has demonstrated that it
can produce clinical-grade DNA plasmids, DNA:lipid complexes and
formulations under controlled conditions without the expense and handling
requirements associated with viral gene delivery systems. In addition,
Megabios has developed manufacturing and production methods designed to be
scaled to meet commercial requirements and has produced DNA plasmids at a
contract manufacturer at the 1,000 liter scale.
Improved Safety Profile. Megabios has tested its gene delivery systems in
hundreds of in vivo, preclinical experiments. In animal models, the
Company's aerosol gene delivery systems do not appear to cause serious
adverse effects, such as inflammation, which has been seen following the
aerosol administration of lipid-based gene delivery systems under
development by other companies. Megabios believes that its gene delivery
systems may allow for repeat administration of gene-based therapeutics for
the treatment of chronic diseases, such as asthma and other inflammatory
conditions.
The Company has also developed techniques that allow it to screen genes for
potential therapeutic utility. Because the Company believes that in vitro gene
expression experiments do not correlate well with in vivo results, Megabios
has focused on testing its gene delivery systems in animals. The Company has
developed a methodology to test therapeutic genes in vivo in rapid succession.
For example, in a matter of weeks, the Company can prepare plasmids containing
different therapeutic genes, formulate them in an appropriate lipid-based
delivery system and administer the formulations to animals. After testing
several different genes, the Company can demonstrate the potential clinical
utility of a panel of therapeutic genes, facilitating selection of the gene-
based therapeutic to be developed. In addition, Megabios has expertise in the
selection of appropriate animal models, as well as in the development of
various assays and analytical techniques, to assess the performance of
formulations containing various genes. While the results of preclinical animal
studies do not predict safety or efficacy in humans, when, and if, further
clinical trials are conducted, the Company believes that its gene screening
capability and its experience in preclinical development will enable it to
accelerate the development of gene-based therapeutics and thereby attract
corporate partners.
COMMERCIALIZATION STRATEGY
The Company provides technology and preclinical development expertise that
it believes will be critical to the successful commercialization of many
therapeutic genes. The Company's commercialization strategy is to enter into
corporate partnerships with pharmaceutical and biotechnology companies to
develop gene-based therapeutics. Megabios corporate partnerships' are
structured to provide the Company with funding for research and development,
milestone payments and, upon commercialization, product royalties. This
strategy is intended to enable Megabios to extend and leverage its technology
platform, focus on preclinical development of gene-based therapeutics and
create a portfolio of product development programs sponsored by its corporate
partners. The key components of the Company's commercialization strategy are
to:
Exploit Broad Technology Platform. The Company believes that its gene
delivery systems can be used for multiple therapeutic applications. The
Company's goal is to establish several corporate partnerships for each
series of gene delivery systems that it has developed, since the plasmid
component of its formulations may contain any of several genes. For
example, the Company has entered into a corporate partnership with Glaxo
Wellcome to develop a gene-based therapeutic to treat cystic fibrosis using
the Company's aerosol gene
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delivery technology, referred to as the MB100 Series. Gene delivery systems
in the MB100 Series may also be useful with different therapeutic genes to
treat other pulmonary diseases, such as asthma. Therefore, once a
particular gene delivery technology has been developed, it may be
commercialized with several partners for several different diseases. The
Company intends to expand its technology platform to include additional
non-viral gene delivery systems which target additional tissues and cell
types, creating an even broader portfolio of potential commercial
applications.
Focus Resources on Conversion of Genes into Drug Candidates. The Company
intends to focus on (i) DNA plasmid development to optimize expression of
the therapeutic gene, (ii) formulation development to achieve appropriate
targeting of the therapeutic gene to various cell types, (iii) gene
screening to validate the potential utility of a therapeutic gene, (iv)
preclinical studies, including animal models of disease, toxicology and
pharmacological testing, (v) assay development in support of preclinical
studies and clinical trials and (vi) supply of material for preclinical
studies and early clinical trials. Under certain circumstances, the Company
may sponsor early clinical testing of a potential gene-based therapeutic to
attract prospective corporate partners. In most cases, however, the
Company's corporate partners will be responsible for clinical trials,
sales, marketing, and large-scale clinical and commercial manufacturing. By
limiting its role primarily to research and preclinical development of gene
delivery systems, the Company believes it will be able to build and
maintain its expertise in the area of in vivo, non-viral gene delivery.
Diversify Through Multiple Projects and Corporate Partners. The Company's
strategy is to structure its corporate partnerships so that its research
and development activities on behalf of corporate partners will be fully
subsidized. Other potential payments that may be received by the Company
from corporate partners, including licensing fees, equity investments and
milestone payments, will be used to fund the further development of the
Company's core technology. The Company believes this will limit financial
risk by eliminating its exposure to capital-intensive activities such as
large-scale clinical trials, commercial manufacturing and sales and
marketing, while enabling the Company to continue to advance its core
technology. In addition, the Company believes that creating a portfolio of
product development programs will reduce the Company's dependence on any
particular product development program.
CORPORATE PARTNERS
The Company has entered into three collaborative research and development
agreements or "corporate partnerships" and is actively seeking additional
partnerships with pharmaceutical and biotechnology companies. Many of these
companies have identified therapeutic genes, but Megabios believes many such
companies do not possess the technology or the know-how to develop gene-based
therapeutics. Megabios seeks license fees, equity investments, funding for
research and development, milestone payments and royalties on product sales in
exchange for commercial licenses to the Company's gene delivery technologies
and access to its preclinical development expertise.
Glaxo Wellcome
In April 1994, the Company entered into a corporate partnership with Glaxo
Wellcome to develop a gene-based therapeutic for the treatment of cystic
fibrosis. Cystic fibrosis is the most common lethal genetic disease in
Caucasians, occurring in about 1 in 3,000 live births. The disease is believed
to afflict approximately 55,000 patients in the United States and Europe.
Cystic fibrosis is caused by a defect in the CFTR gene. This defect results in
production of defective CFTR protein, leading to the build-up of mucus in the
lungs that often results in multiple infections, loss of lung function and
premature death. The median life expectancy of a patient with cystic fibrosis
is approximately 30 years. Patients with cystic fibrosis typically incur
annual medical costs ranging from $15,000 to $55,000. The Company believes
that a gene-based therapeutic which results in increased levels of normal CFTR
protein on the surface of ciliated epithelial cells may slow or halt the
progression of this disease while reducing the total cost of patient care.
The Company has conducted preclinical testing of a gene delivery system in
the MB100 Series as a carrier for the CFTR gene. Data from these studies,
including the administration of the gene to primates via inhalation,
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have demonstrated expression of the human form of the CFTR gene in the correct
location in the appropriate cell type with no evidence of inflammation, a
common problem associated with non-viral gene-based therapeutics. In addition,
approximately 20% of the target cells were shown to produce CFTR protein six
weeks after a single administration, which exceeds the level believed to be
the threshold for achieving a therapeutic effect. The Company believes that
these results suggest that this product may be useful in the treatment of
cystic fibrosis. In June 1997, Glaxo Wellcome commenced a Phase I/II clinical
trial in cystic fibrosis patients with cystic fibrosis using a gene delivery
system in the MB100 Series as a carrier for the CFTR gene.
Under the Glaxo Wellcome Agreement, the Company conducted research and
preclinical development activities for a three-year period ended April 1997.
The terms of the Glaxo Wellcome Agreement provide Glaxo Wellcome with the
exclusive rights to manufacture, market and sell gene-based therapeutics
incorporating the Company's gene delivery systems for the treatment of cystic
fibrosis. Glaxo Wellcome will be responsible for clinical trials, large-scale
clinical and commercial manufacturing, and sales and marketing of any
potential gene-based therapeutics resulting from the corporate partnership. In
addition to having received $5.0 million in research funding, the Company is
entitled to receive a milestone payment from Glaxo Wellcome upon the
commencement of a Phase III clinical trial, a portion of which will be
credited against future royalties, as well as royalties on the sales of
products resulting from the corporate partnership. The Company has completed
all of its obligations under the Glaxo Wellcome Agreement and will receive
future payments, if any, only through the achievement of a certain milestone
and the payment of royalties.
Pfizer
In May 1996, the Company entered into a corporate partnership with Pfizer to
develop a gene-based therapeutic for the treatment of solid tumors using gene
delivery systems in the MB200 Series which are designed to deliver genes that
inhibit angiogenesis. In order to survive and multiply, clusters of cancer
cells, referred to as solid tumors, require oxygen and other nutrients that
are delivered via the bloodstream. To access this blood supply, cancer cells
initiate a biochemical process that stimulates angiogenesis (the process by
which new blood vessels are formed), creating a new network of blood vessels
that nourish the tumor and remove waste products. As cancer cells grow and
metastasize (spread from primary sites to secondary sites), they stimulate
angiogenesis to form and nourish new tumors. Angiogenesis inhibitors have been
shown to slow or stop the formation of new blood vessels and therefore the
growth and spread of solid tumors.
The Company's gene-based therapeutic under development with Pfizer is
intended to inhibit angiogenesis associated with the formation and growth of
solid tumors. Gene delivery systems in the MB200 Series have been shown in
animal models to achieve gene expression selectively in vascular endothelial
cells of the lungs and other tissues. The initial disease targeted in the
Pfizer collaboration is non-small cell lung cancer ("NSCLC"). It is estimated
that there are approximately 300,000 new cases of NSCLC each year in the
United States and Europe. The Company believes there is no adequate treatment
for NSCLC. The median survival for patients with advanced forms of the disease
is approximately six months after diagnosis. The Company believes that a
therapy which is useful for the treatment of NSCLC also may be useful for
other solid tumors, such as cancer of the breast, prostate and ovaries.
The Pfizer Agreement provides that Pfizer receive the exclusive rights to
develop, make, use and sell gene-based therapeutics resulting from the
corporate partnership. Under the Pfizer Agreement, the Company is conducting
research and preclinical development activities and will receive funding for
such activities through at least June 1998. Pfizer will be responsible for
clinical trials, large-scale clinical and commercial manufacturing, and sales
and marketing of any potential gene-based therapeutics resulting from the
corporate partnership. The Company will be entitled to receive up to $16.4
million in research and development funding if the agreement continues for
four years, as well as up to $20.0 million in payments upon the achievement of
certain clinical milestones, which milestone payments will be credited against
future royalties, if any. In addition, if a product receives marketing
approval from the FDA or an equivalent agency in another country, the Company
is entitled to receive royalties on sales of products resulting from the
corporate partnership. In connection with the execution of the Pfizer
Agreement, Pfizer purchased 484,697 shares of Series D Preferred Stock for
$3.5 million. Such shares convert into 484,697 shares of Common Stock upon the
offering, representing approximately 4.0%
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<PAGE>
of the Company's outstanding Common Stock (assuming 12,225,939 shares of
Common Stock outstanding after the offering). The Pfizer Agreement permits
Pfizer to terminate the program for any reason, including reasons unrelated to
such program, after June 1998 upon six months prior notice. If Pfizer elects
to extend the research term beyond two years, it will be required, prior to
January 1998, to commit to purchase within 60 days $10.0 million of the
Company's Common Stock at a premium to the then current market value, subject
to certain adjustments. The Company is uncertain whether Pfizer will exercise
its option to extend the Pfizer Agreement and make the corresponding equity
investment in the Company. Under the terms of the Pfizer Agreement, Pfizer's
aggregate ownership in the Company may not exceed 19.99% of the Company's
outstanding capital stock.
Under the Pfizer Agreement, the Company is responsible for performing
research and preclinical development activities for a period of up to four
years. The Company's responsibilities include DNA plasmid development,
formulation development, assay development, preclinical studies including
toxicology and pharmacological testing and supply of material for preclinical
studies. In addition, the Company is conducting gene screening using gene
delivery systems in the MB200 Series using intravenous administration to
determine the relative utility of various therapeutic genes believed to
inhibit angiogenesis.
Lilly
In May 1997, the Company entered into a corporate partnership with Lilly to
develop gene-based therapeutics using BRCA1, a gene which has been identified
as a putative tumor suppressor. In normal cells, tumor suppressor genes act to
inhibit cell division. When a tumor suppressor gene, such as BRCA1, is missing
or defective, a cell may begin to replicate uncontrollably, resulting in the
formation of a tumor. Various scientific publications have associated defects
in BRCA1 with breast, ovarian and prostate cancers. Increased expression of
the BRCA1 gene in diseased tissue may inhibit or prevent the uncontrolled cell
growth associated with cancer, without causing any adverse effect in normal
cells. BRCA1 will be developed as a gene-based therapeutic initially using
gene delivery systems in the MB300 Series, which are administered via direct
injection, and gene delivery systems in the MB700 Series, which are
administered into the intraperitoneal cavity.
The Company's gene-based therapeutic under development with Lilly is
initially focused on the delivery and expression of BRCA1 in diseased cells in
breast and ovarian tissue. Preliminary studies of Megabios' gene delivery
systems indicate that gene delivery systems in the MB300 Series may be useful
in the targeting of genes to ovarian and breast tissues. There are over
180,000 new cases of breast cancer and over 26,000 new cases of ovarian cancer
reported each year in the United States. In addition, other gene delivery
systems will be tested and potentially developed for the purpose of delivering
BRCA1 to various tissues using other modes of administration, including
intraperitoneal and intravenous administration.
Under the Lilly Agreement, the Company is responsible for performing
research and preclinical development activities for a period of up to four
years. The Lilly Agreement provides that Lilly receive the exclusive rights to
develop, make, use and sell gene-based therapeutics incorporating BRCA1
resulting from the corporate partnership. Under the Lilly Agreement, the
Company will conduct research and preclinical development activities and will
receive funding for a minimum of two years. Lilly will be responsible for
clinical trials, large-scale clinical and commercial manufacturing, and sales
and marketing of any gene-based therapeutics resulting from the corporate
partnership. The Company will be entitled to receive at least $7.0 million in
research and development funding during the first two years of the agreement,
which may be extended for up to two additional years provided that Lilly and
the Company agree on an appropriate level of research and development funding
for such extension period. In addition, the Company may receive up to $27.5
million in payments upon the achievement of certain preclinical and clinical
milestones and, if a product receives marketing approval from the FDA or an
equivalent foreign agency, the Company is entitled to receive royalties on
sales of products resulting from the corporate partnership. In connection with
the execution of the Lilly Agreement, Lilly purchased 285,714 shares of the
Company's Series F Preferred Stock for $3.0 million. Such shares convert into
285,714 shares of Common Stock upon the offering, representing approximately
2.34% of the Company's outstanding Common Stock (assuming 12,225,939 shares of
Common Stock outstanding after the offering). The Lilly Agreement permits
Lilly to terminate the program for any reason, including reasons unrelated to
such program, after May 1999 upon three months prior notice.
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The Company is highly dependent upon its corporate partnerships with Glaxo
Wellcome, Pfizer and Lilly. There can be no assurance that either, or both of,
the Pfizer Agreement or the Lilly Agreement will be extended, that research
funds under the Pfizer Agreement or the Lilly Agreement or milestone payments
contemplated by any of the Company's corporate partnerships will be received,
that the equity investment contemplated by the Pfizer Agreement will be
consummated, or that any of these corporate partnerships will result in
successfully commercialized products and the receipt by the Company of related
royalty revenues. Should the Company fail to receive research funds or should
milestones set forth in any or all of the Glaxo Wellcome Agreement, the Pfizer
Agreement or the Lilly Agreement not be achieved, or should Glaxo Wellcome,
Pfizer or Lilly breach or terminate their respective agreements, either prior
to scheduled termination or on the termination date, the Company's business,
financial condition and results of operations will be materially adversely
affected. The Company will also need to enter into additional corporate
partnerships, and there can be no assurance that the Company will be able to
do so on favorable terms, or at all. Should any corporate partner fail to
develop or commercialize successfully any product to which it has obtained
rights from the Company, the Company's business, financial condition and
results of operations may be materially adversely affected.
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MEGABIOS' GENE DELIVERY SYSTEMS
The Company has developed several gene delivery systems and has identified a
number of potential therapeutic applications for each of these systems using a
variety of therapeutic genes. The Company's portfolio of gene delivery systems
are classified by series based on the mode of administration and the cell type
to which the gene-based therapeutic is delivered, with each formulation within
a series having distinct specifications and potential applications. For
example, one gene delivery system in the MB100 Series has been optimized for
the aerosol delivery of the CFTR gene to ciliated epithelial cells in the
lungs, while a different aerosol gene delivery system in the same series is
under development to deliver genes for the treatment of asthma. The table
below summarizes the Company's gene delivery systems, potential applications
and agreements with corporate partners:
<TABLE>
<CAPTION>
DELIVERY SYSTEM
(MODE OF ADMINISTRATION) CELL TYPE(S) TRANSFECTED POTENTIAL APPLICATIONS STATUS(1)
------------------------ ------------------------ ------------------------------------ ---------------------
<S> <C> <C> <C>
MB100 Series Ciliated Cystic fibrosis Phase I/II with Glaxo
(Inhalation) epithelial cells Asthma Wellcome
in the lungs and Inflammation of the lungs Preclinical
respiratory tract Mucosal immunization Research
Infectious diseases of the lungs Research
Research
MB200 Series Vascular Angiogenesis inhibition (cancer) Preclinical with
(Intravenous injection) endothelial cells Angiogenesis inhibition (non-cancer) Pfizer
in the lungs, Protein replacement therapy Preclinical
heart, spleen and Cardiovascular diseases Preclinical
lymph nodes Inflammatory diseases Preclinical
Research
MB300 Series Solid tumor cells Cancer (using BRCA1) Preclinical with
(Direct injection) Cancer (other genes) Lilly
Preclinical
MB400 Series Various cells Preventive vaccines Research
(Intramuscular, involved in Therapeutic vaccines Research
intradermal, antigen Immunotherapy (cancer, infectious Research
subcutaneous and presentation diseases, autoimmune diseases)
intravenous injection)
MB500 Series Circulating Infectious diseases Research
(Intravenous injection) macrophages Hyperlipidemia Research
MB600 Series Cells in the Neurodegenerative diseases Research
(Direct injection) central nervous Cancer Research
system
MB700 Series Solid tumor cells Cancer (using BRCA1) Preclinical with
(Intraperitoneal Cancer (other genes) Lilly
injection) Research
</TABLE>
- --------
(1) "Phase I/II" indicates that the compound is being tested in humans for
safety and preliminary indications of biological activity in a limited
patient population.
"Preclinical" indicates that Megabios is conducting efficacy, pharmacology
and/or toxicology testing of a gene delivery system in animal models or
biochemical or cell culture assays.
"Research" includes the development of animal models and assay systems,
discovery of prototype gene delivery systems and evaluation and refinement
of prototype gene delivery systems in in vitro and in vivo testing.
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MB100 Series
The Company has developed a class of gene delivery systems, the MB100
Series, which, following aerosol administration to animals, results in genes
being taken up and expressed primarily by ciliated epithelial cells in the
lungs and respiratory tract. The Company believes that the MB100 Series may be
useful in the delivery of therapeutic genes for a variety of purposes,
including treatment of cystic fibrosis, asthma, inflammatory conditions and
infectious diseases of the lungs, as well as for mucosal immunization. One of
these gene delivery systems is the subject of the Company's corporate
partnership with Glaxo Wellcome to develop a gene-based therapeutic for the
treatment of cystic fibrosis. See "--Corporate Partners--Glaxo Wellcome."
The Company intends to enter into a corporate partnership to develop the
MB100 Series for the treatment of asthma. Asthma, characterized by obstruction
of airways in the lung, is estimated to affect 5% of the population in the
United States, or approximately 13 million people. Certain genes believed to
be associated with the onset and progression of asthma have been identified,
and various companies are investing heavily in further understanding the
genetic cause of asthma. The Company believes that the MB100 Series may be
useful for the delivery of therapeutic genes to treat asthma as well as other
therapeutic genes to treat other inflammatory diseases in the lungs.
The Company also intends to conduct studies using the MB100 Series together
with certain therapeutic genes to achieve mucosal immunity. Mucosal immunity
is a form of immunization resulting from the introduction of an antigen to the
mucosal cells lining the airways of the lungs, oral cavity or nasal passages.
The Company believes that the MB100 Series may be useful to deliver
therapeutic genes that result in mucosal immunity in diseases, such as
tuberculosis and pneumonia. The Company believes that the MB100 Series also
may be useful to deliver therapeutic genes for the treatment of other
pulmonary disorders, such as infectious diseases.
MB200 Series
Megabios has developed a class of gene delivery systems, the MB200 Series,
which, following intravenous administration, are taken up preferentially by
vascular endothelial cells in the lungs and other tissues. The Company
believes that gene delivery systems in the MB200 Series, in combination with
various genes, may be useful in the treatment of several diseases that are
associated with angiogenesis, including cancer, macular degeneration, diabetic
retinopathy, rheumatoid arthritis and psoriasis. In addition, Megabios
believes that gene delivery systems in the MB200 Series may be useful for
protein replacement therapy and to treat other medical disorders such as
cardiovascular and inflammatory diseases. Megabios has entered into a
corporate partnership with Pfizer to develop a gene-based therapeutic to treat
solid tumors using gene delivery systems in the MB200 Series which are
designed to deliver genes that inhibit angiogenesis. See "--Corporate
Partners--Pfizer."
In preclinical studies, administration of a gene delivery system in the
MB200 Series has resulted in expression levels of a therapeutic protein
consistent with those required for a therapeutic effect. These preclinical
studies suggest that a gene delivery system in the MB200 Series could be used
for protein replacement therapy, in which the gene coding for a therapeutic
protein is administered rather than the protein itself. The Company believes
that the use of gene-based therapeutics in this manner may be a viable
alternative when therapeutic levels of a protein are difficult to sustain or
when the therapeutic protein is difficult or expensive to manufacture.
In addition, the Company believes that the ability to target certain cell
types with gene delivery systems in the MB200 Series may be useful in
developing gene-based therapeutics for a number of other medical disorders.
For example, Megabios believes that the administration of gene delivery
systems in the MB200 Series combined with certain therapeutic genes that
stimulate angiogenesis may be useful to treat certain cardiovascular diseases,
such as peripheral vascular disease and atherosclerosis, both of which may
result in the blockage of blood vessels, leading to heart attacks and strokes.
In addition, the use of gene delivery systems in the MB200 Series to deliver
therapeutic genes coding for anti-inflammatory agents may be useful to treat
inflammatory diseases following intravenous administration.
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MB300 Series
Megabios has developed a class of gene delivery systems, the MB300 Series,
which, following direct injection in animals, are taken up by cancer cells and
may be useful for the treatment of certain solid tumors. In preclinical
studies involving a canine model of spontaneously occurring oral melanoma, a
gene delivery system in the MB300 Series was used to deliver two therapeutic
genes. The data from this study indicated that a majority of the dogs that
received the treatment regimen exceeded their expected median survival period.
These dogs also had a higher number of activated white blood cells compared to
untreated animals, which suggests that the therapeutic genes augmented the
immune response to the tumor cells resulting in an increased survival rate for
these animals. The Company believes that these results support the potential
utility of the gene delivery systems in the MB300 Series to facilitate
immunotherapy approaches for the treatment of multiple forms of cancer.
Other gene delivery systems in the MB300 Series have been tested by the
Company to facilitate the treatment of multiple forms of cancer using
different approaches, such as through the delivery of suicide genes or tumor
suppressor genes. Megabios has entered into a corporate partnership with Lilly
to develop gene-based therapeutics using the MB300 Series as well as other
gene delivery systems, to deliver the BRCA1 gene to treat breast cancer and
ovarian cancer. See "--Corporate Partners--Lilly." The Company intends to
pursue additional corporate partnerships to develop gene-based therapeutics to
treat cancer using other (non-BRCA1) therapeutic genes.
MB400 Series
The Company is developing a class of gene delivery systems, the MB400
Series, designed to administer genetic vaccines following various modes of
administration, including intramuscular, intradermal, subcutaneous or
intravenous injection. To date, the use of DNA for vaccination purposes has
been limited by inadequate levels of expression of the vaccine antigen in the
appropriate cell type. The Company has designed and screened many delivery
systems, some of which may have improved targeting and expression
characteristics. If successful, these efforts could result in novel
formulations that may allow the treatment or prevention of certain diseases,
including infections and autoimmune diseases, as well as certain forms of
cancer, through a genetic vaccine approach.
Other Gene Delivery Systems
The Company is developing other classes of gene delivery systems for
additional therapeutic applications. For example, the Company believes that
the MB500 Series, which is designed to deliver genes to circulating
macrophages, has potential utility in various infectious diseases and
hyperlipidemia. The MB600 Series is designed to deliver genes to cells in the
central nervous system, which is an important target for the potential
treatment of neurodegenerative diseases, including Parkinson's and Alzheimer's
disease, as well as for the treatment of certain cancers. The MB700 Series is
designed to result in the delivery of genes to solid tumor cells following
intraperitoneal administration.
There can be no assurance that any of the Company's gene delivery systems
will have the performance attributes to justify their further development or
to attract corporate partners. While the Company has demonstrated some
evidence of the utility of its gene delivery systems in preclinical animal
studies, these results do not predict safety or efficacy in humans, when, and
if, further clinical trials are conducted. The Company's products may prove to
have undesirable and unintended side effects or other characteristics that may
prevent or limit their use. There can be no assurance that any of the
Company's products will ultimately obtain FDA or other regulatory or foreign
marketing approval for any indication. The Company's products are also subject
to risks particular to the development of gene-based therapeutics. Gene-based
therapy is a new and rapidly evolving technology and is expected to undergo
significant technological changes in the future. As a result of the limited
clinical data available regarding the safety and efficacy of gene-based
therapeutics and other factors, clinical trials relating to gene-based
therapeutics may take longer to complete than clinical trials involving more
traditional pharmaceuticals. There can be no assurance that any gene-based
therapeutics will be demonstrated to be safe or effective or that the Company
or its corporate partners will be able to manufacture such gene-based
therapeutics on a commercial scale or in an economical manner.
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TECHNOLOGY LICENSES
Megabios actively reviews technologies under development at academic and
other research institutions. The Company believes that such institutions are
an important source of breakthrough technologies and has entered into and
intends to enter into additional licensing arrangements to expand its core
technology.
The Company has an exclusive license to certain patent applications held by
The Regents of the University of California ("The Regents") related to in
vivo, non-viral delivery of genes using positively charged lipids, including
delivery by various modes of administration and for use in the treatment of
cystic fibrosis. One patent has issued in the United States and one Notice of
Allowance has been received in the United States with respect to two patent
applications and two equivalent notices have been received in a foreign
country. Under the terms of the agreement, the Company has paid a license fee
and is obligated to make payments upon the achievement of certain clinical
milestones and royalty payments on sales of products, if any. The Company has
certain obligations regarding the process and timing of clinical activities
and seeking FDA approval in the pursuit of development, manufacture and sale
of products based on the claims contained in such patent applications. The
Regents may terminate the license or convert it to a nonexclusive license upon
60 days notice if the Company fails to meet certain milestones. However, the
date by which such milestones must be completed may be extended by the Company
for up to three years upon payment of a specified fee for each year a date is
extended. In addition, the Regents may also terminate the license upon 60 days
notice for a material violation or material failure to perform any covenant
under the license.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to the Company's
business. The Company's policy is to file patent applications and to protect
technology, inventions and improvements to inventions that are commercially
important to the development of its business. The Company also relies on trade
secrets, confidentiality agreements and other measures to protect its
technology and proposed products. The Company's failure to obtain patent
protection or otherwise protect its proprietary technology or proposed
products may have a material adverse effect on the Company's competitive
position and business prospects.
The Company has rights under its license with The Regents to one issued
United States patent which expires in 2014. In addition, the Company has
eleven pending patent applications in the United States as well as foreign
counterparts of these applications. The Company has received Notices of
Allowance in the United States with respect to three patent applications. The
patent application process takes several years and entails considerable
expense. In addition to its own patent applications, the Company has acquired
exclusive worldwide licenses to patent applications from The Regents. There is
no assurance that additional patents will issue from these applications or, if
patents do issue, that the claims allowed will be sufficient to protect the
Company's technology.
A number of the gene sequences that the Company and its corporate partners
are investigating or may use in its products are or may become patented by
others. As a result, the Company or its corporate partners may be required to
obtain licenses to such gene sequences or other technology in order to use or
market such products. In addition, some of the products based on the Company's
gene delivery systems may require the use of multiple proprietary
technologies. Consequently, the Company or its corporate partners may be
required to make cumulative royalty payments to several third parties. Such
cumulative royalties could reduce amounts paid to the Company or be
commercially prohibitive. In connection with the Company's efforts to obtain
rights to such gene sequences or other proprietary technology, the Company may
find it necessary to convey rights to its technology to others. There can be
no assurance that the Company or its corporate partners will be able to obtain
any required licenses on commercially reasonable terms or at all.
The patent positions of pharmaceutical and biotechnology firms are often
uncertain and involve complex legal and factual questions. Further, the
breadth of claims allowed in biotechnology patents is unpredictable. Patent
applications in the United States are maintained in secrecy until a patent
issues, and the Company cannot be certain that others have not filed patent
applications for technology covered by the Company's pending
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<PAGE>
applications or that the Company was the first to invent the technology that
is the subject of such patent application. Competitors may have filed
applications for, or may have received patents and may obtain additional
patents and proprietary rights relating to, compounds, products or processes
that block or compete with those of the Company. While the Company is aware of
patent applications filed and patents issued to third parties relating to
genes, gene delivery technologies and gene-based therapeutics, there can be no
assurance that any such patent applications or patents will not have a
material adverse effect on products the Company or its corporate partners are
developing or may seek to develop in the future. There can be no assurance
that third parties will not assert patent or other intellectual property
infringement claims against the Company with respect to its products or
technology or other matters.
Patent litigation is widespread in the biotechnology industry. Litigation
may be necessary to defend against or assert claims of infringement, to
enforce patents issued to the Company, to protect trade secrets or know-how
owned or licensed by the Company, or to determine the scope and validity of
the proprietary rights of third parties. Although no third party has asserted
that the Company is infringing such third party's patent rights or other
intellectual property, there can be no assurance that litigation asserting
such claims will not be initiated, that the Company would prevail in any such
litigation, or that the Company would be able to obtain any necessary licenses
on reasonable terms, if at all. Any such claims against the Company, with or
without merit, as well as claims initiated by the Company against third
parties, can be time-consuming and expensive to defend or prosecute and to
resolve. If other companies prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings to determine priority of invention,
which could result in substantial cost to the Company even if the outcome is
favorable to the Company.
The Company also relies on proprietary information and trade secrets,
including its proprietary database of preclinical in vivo experiments, to
develop and maintain its competitive position. There can be no assurance that
third parties will not independently develop equivalent proprietary
information or techniques, will not gain access to the Company's trade secrets
or disclose such technology to the public, or that the Company can maintain
and protect unpatented proprietary technology. The Company typically requires
its employees, consultants, collaborators, advisors and corporate partners to
execute confidentiality agreements upon commencement of employment or other
relationships with the Company. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company's technology in the event of unauthorized use or disclosure of such
information, that the parties to such agreements will not breach such
agreements or that the Company's trade secrets will not otherwise become known
or be discovered independently by its competitors.
MANUFACTURING AND COMMERCIALIZATION
The Company's focused commercialization strategy is based on entering
corporate partnerships with pharmaceutical and biotechnology companies whereby
the Company will primarily pursue preclinical development of gene-based
therapeutics, and the Company's partners will be responsible for clinical
trials, sales, marketing, and large-scale clinical and commercial
manufacturing. Under the terms of the Glaxo Wellcome Agreement, Pfizer
Agreement and Lilly Agreement, the Company's corporate partners have received
exclusive rights for large-scale, clinical and commercial manufacturing of the
gene-based therapeutics for use in the areas covered by these agreements.
The Company has demonstrated that its DNA plasmids, DNA:lipid complexes and
formulations can be produced at pilot scale and believes that commercial
quantities of material may be prepared using conventional fermentation and
purification processes. The Company currently operates a pilot manufacturing
facility and has produced DNA plasmids at a contract manufacturer at the 1,000
liter scale. The lipid components of Megabios' gene delivery systems can be
synthesized using readily scalable, organic synthesis procedures. To date, the
Company has obtained access to lipid manufacturing through arrangements with
contract manufacturers. Preparation of DNA:lipid complexes is carried out at
the Company's pilot manufacturing facility using proprietary processes.
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The Company has supplied clinical-grade material to Glaxo Wellcome for use
in a Phase I/II clinical trial of a gene-based therapeutic to treat cystic
fibrosis. Glaxo Wellcome is in the process of scaling up its production
capabilities using the Company's proprietary processes and methods to meet
clinical requirements. Under the Pfizer Agreement and the Lilly Agreement,
Megabios is obligated to provide material used in preclinical testing and may
supply material for clinical trials.
Megabios does not currently operate manufacturing facilities for commercial
production of its gene delivery systems. The Company has no experience in, and
currently lacks the resources and capability to, manufacture or market any of
its products on a commercial scale. Accordingly, the Company will be dependent
initially on corporate partners, licensees or other third parties for
commercial-scale manufacturing of its products. Successful large-scale
manufacturing of gene-based therapeutics has not been demonstrated by any
third parties. There can be no assurance that the Company will be able to
reach satisfactory agreements with its partners or that its corporate partners
will be able to develop adequate manufacturing capabilities for production of
commercial-scale quantities of gene-based therapeutics.
Under the terms of the Glaxo Wellcome Agreement, Pfizer Agreement and Lilly
Agreement, the corporate partners have received exclusive rights to market and
sell the Company's gene-based therapeutics that are developed pursuant to
these corporate partnerships. The Company is highly dependent upon each of its
corporate partnerships with Glaxo Wellcome, Pfizer and Lilly. The Company
cannot control whether Glaxo Wellcome, Pfizer or Lilly will devote sufficient
resources to the commercialization of the Company's potential products on a
timely basis, and such resources could vary due to factors unrelated to the
Company's products. If such corporate partners fail to conduct these
activities in a timely manner or at all, the commercialization of the
Company's products could be delayed or terminated. There can be no assurance
that any of these corporate partnerships will result in successfully
manufactured or commercialized products and the receipt by the Company of
related royalty revenues. Failure of the Company's corporate partners to
manufacture successfully the potential products for large-scale clinical
trials or commercial use, or to commercialize successfully the potential
products, would have a material adverse effect on the Company's business,
financial condition and results of operations.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to extensive regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. In the United States, pharmaceutical products are subject
to rigorous regulation by the FDA. The Company believes that the commercial
uses of its products will be regulated as biologics by the FDA and comparable
foreign regulatory bodies. Biologics are regulated under certain provisions of
the Public Health Service Act and the Federal Food, Drug, and Cosmetic Act.
These laws and the regulations promulgated thereunder govern, among other
things, testing, manufacturing, safety, efficacy, labeling, storage, record
keeping, and the promotion, marketing and distribution of biological products.
At the FDA, the Center for Biologics Evaluation and Research is responsible
for the regulation of biological products and has handled FDA's regulation of
most gene-based therapeutics to date. Gene-based therapy, however, is a
relatively new technology and the regulatory requirements governing gene-based
therapeutics are uncertain. The Company is not aware of any gene-based
therapeutics that have received marketing approval from the FDA or any
comparable foreign authorities.
The necessary steps before a new biological product may be marketed in the
United States include: (i) preclinical laboratory tests and in vivo
preclinical studies; (ii) the submission to the FDA of an IND for clinical
testing, which must become effective before clinical trials commence; (iii)
under certain circumstances, approval by a special advisory committee convened
to review IND's involving gene-based therapeutics; (iv) adequate and well-
controlled clinical trials to establish the safety and efficacy of the
product; (v) the submission to the FDA of a product license application and
establishment license application ("PLA/ELA") and (vi) FDA approval of the
PLA/ELA prior to any commercial sale or shipment of the biologic. The FDA has
eliminated the requirement of a separate ELA for certain categories of
biotechnology products, including, for example, therapeutic recombinant DNA-
derived products. At this time, however, it is unclear whether these new
regulations would apply to gene-
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based therapeutics. Furthermore, the FDA has announced its intention
ultimately to review all new biologic products under a single biologics
license application. However, it is impossible to predict when this procedure
will be adopted.
Manufacturing facilities in the United States are subject to periodic
inspection by the FDA and state authorities, and must comply with GMP.
Manufacturers of biologics also must comply with FDA general biological
product standards and also may be subject to state regulation. Failure to
comply with GMP or other applicable regulatory requirements may result in
withdrawal of marketing approval, criminal prosecution, civil penalties,
recall or seizure of products, warning letters, total or partial suspension of
production, FDA refusal to review pending marketing approval applications or
supplements to approved applications, or injunctions, as well as other legal
or regulatory action against the Company or its corporate partners.
Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess the potential safety and efficacy of the product.
Preclinical safety tests must be conducted by laboratories that comply with
FDA regulations regarding Good Laboratory Practice. The results of the
preclinical tests, together with manufacturing information and analytical
data, are submitted to the FDA as a part of an IND, which must become
effective before clinical trials may commence. The IND will automatically
become effective 30 days after receipt by the FDA unless the FDA indicates
prior to the end of the 30-day period that the proposed protocol raises
concerns that must be resolved before the FDA will allow the trials to proceed
as outlined in the IND. In such case, there can be no assurance that such
resolution will be achieved in a timely fashion, if at all. In addition, the
FDA may impose a clinical hold on an ongoing clinical trial, in which case the
study cannot recommence without FDA authorization under terms sanctioned by
the agency. There be no assurance that the Company's corporate partners will
not encounter problems in clinical trials that cause the Company's corporate
partners or the FDA to delay, suspend or terminate such trials.
Clinical trials involve the administration of the investigational product to
healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the trial,
inclusion and exclusion criteria, the parameters to be used to monitor safety,
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical trial must be reviewed and
approved by an independent IRB at the academic or medical institution at which
the trial will be conducted. The IRB will consider, among other things,
ethical factors and the safety of human subjects. The IRB may require changes
in a protocol, and there can be no assurance that submission of an IND will
permit a study to be initiated or completed.
Clinical trials are conducted in three sequential phases, but the phases may
overlap. In Phase I, the initial introduction of the product into healthy
human subjects or patients, the drug is tested to assess safety, metabolism,
pharmacokinetics and pharmacological actions associated with increasing doses.
Phase II usually involves studies in a limited patient population to (i)
determine the efficacy of the potential product for specific, targeted
indications, (ii) determine dosage tolerance and optimal dosage and (iii)
further identify possible adverse effects and safety risks. If a compound is
found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials are undertaken to evaluate further clinical
efficacy and to test further for safety within a broader patient population at
geographically dispersed clinical sites. There can be no assurance that Phase
I, Phase II or Phase III testing will be completed successfully within any
specific time period, if at all, with respect to any of the Company's or its
corporate partners' products subject to such testing. In addition, after
marketing approval is granted, the FDA may require post-marketing clinical
studies which typically entail extensive patient monitoring and may result in
restricted marketing of the product for an extended period of time.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a PLA/ELA for approval
of the manufacture, marketing and commercial shipment of the biological
product. The testing and approval process is likely to require substantial
time, effort and financial and human resources, and there can be no assurance
that any approval will be granted on a timely basis, if at all or that any
product developed by the Company and its corporate partners will prove safe
and effective in clinical
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trials or will meet all the applicable regulatory requirements necessary to
receive marketing approval from the FDA or the comparable regulatory body of
other countries. Data obtained from preclinical studies and clinical trials
are subject to interpretations that could delay, limit or prevent regulatory
approval. The FDA may deny the PLA/ELA if applicable regulatory criteria are
not satisfied, require additional testing or information, or require
postmarketing testing and surveillance to monitor the safety or efficacy of a
product. Moreover, if regulatory approval of a biological product is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for PLA/ELA approval is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform to the appropriate GMP regulations, which must be followed at all
times. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, financial resources and effort in
the area of production and quality control to ensure full compliance.
For clinical investigation and marketing outside the United States, the
Company and its corporate partners may be subject to FDA as well as regulatory
requirements of other countries. The FDA regulates the export of biological
products, whether for clinical investigation or commercial sale. In Europe,
the approval process for the commencement of clinical trials varies from
country to country. The regulatory approval process in other countries
includes requirements similar to those associated with FDA approval set forth
above. Approval by the FDA does not ensure approval by the regulatory
authorities of other countries.
The Company's research and development processes involve the controlled use
of hazardous materials, chemicals and radioactive materials, and produce waste
products. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated completely.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company. Although the Company believes that it is in compliance in all
material respects with applicable environmental laws and regulations, there
can be no assurance that it will not be required to incur significant costs to
comply with environmental laws and regulations in the future, or that any the
operations, business or assets of the Company will not be materially adversely
affected by current or future environmental laws or regulations.
COMPETITION
Gene delivery and gene-based therapy are relatively new, rapidly evolving
areas of science in which significant and unexpected technological advances
are likely. Rapid technological development could result in the Company's
products or technologies becoming obsolete before the Company recovers a
significant portion of its related research, development and capital
expenditures. The Company is aware of several pharmaceutical and biotechnology
companies which are exploring the field of gene-based therapy, are actively
engaged in research and development in areas related to gene-based therapy, or
have commenced clinical trials of gene-based therapeutics. Many of these
companies are addressing diseases which have been targeted by the Company or
its corporate partners. Megabios also may experience competition from
companies that have acquired or may acquire gene-based technology from
universities and other research institutions. As competitors develop their
technologies, they may develop proprietary positions in certain aspects of
gene delivery and gene-based therapeutics that may materially and adversely
affect Megabios. In addition, the Company faces and will continue to face
competition from other companies for corporate partnerships with
pharmaceutical and biotechnology companies, for establishing relationships
with academic and research institutions, and for licenses to proprietary
technology, including intellectual property related to gene delivery systems.
Corporate partners may also elect to internally develop gene-based
therapeutics which compete with the Company's products. In addition, many
other companies are developing non-gene-based therapies to treat these same
diseases.
Most of the Company's competitors and potential competitors have
substantially greater product development capabilities and financial,
scientific, manufacturing, managerial and human resources than the
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Company. There can be no assurance that research and development by others
will not render the Company's delivery systems or the products developed by
corporate partners using the Company's delivery systems obsolete or non-
competitive or that any product developed by the Company or its corporate
partners will be preferred to any existing or newly developed technologies. In
addition, there can be no assurance that the Company's competitors will not
develop safer, more effective or less costly gene delivery systems, gene-based
therapeutics or non-gene based therapies, achieve superior patent protection
or obtain regulatory approval or product commercialization earlier than the
Company, any of which could have a material adverse effect on the Company's
business, financial condition or results of operations.
PRODUCT LIABILITY INSURANCE
The manufacture and sale of human therapeutic products involve an inherent
risk of product liability claims and associated adverse publicity. The Company
currently has only limited product liability insurance, and there can be no
assurance that it will be able to maintain existing or obtain additional
product liability insurance on acceptable terms or with adequate coverage
against potential liabilities. Such insurance is expensive, difficult to
obtain and may not be available in the future on acceptable terms, or at all.
An inability to obtain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of products by the Company. A product liability
claim brought against the Company in excess of its insurance coverage, if any,
or a product withdrawal, could have a material adverse effect upon the
Company's business, financial condition and results of operations.
EMPLOYEES
As of July 15, 1997, Megabios employed 63 individuals full-time, including
17 who hold doctoral degrees. Of the Company's total work force, 52 employees
are engaged in or directly support research and development activities, and 11
are engaged in business development, finance and administrative activities.
The Company's employees are not represented by a collective bargaining
agreement. The Company believes its relationships with its employees are good.
FACILITIES
The Company currently leases approximately 45,300 square feet in Burlingame,
California, of which approximately 34,700 square feet is occupied or under
construction (the "Facility"). The Facility has been built to the Company's
specifications to accommodate the Company's laboratory, support and
administrative needs and includes a pilot manufacturing facility designed to
supply material required for preclinical research and development. The term of
the lease for the 34,700 square feet in use expires in 2004, at which time the
Company has the option to renew the lease. Approximately 10,600 square feet of
the Facility is not currently occupied by the Company and is expected to be
built-out for use as a manufacturing facility. The term of the lease for this
portion of the facility expires in 2007, at which time the Company has the
option to renew the lease. Megabios believes that the Facility and its
expansion will be adequate to meet the Company's needs for the foreseeable
future.
SCIENTIFIC ADVISORY BOARD
Megabios' Scientific Advisory Board ("SAB") consists of academic and
industry experts in the fields of gene-based therapeutics, molecular biology,
drug delivery, immunology and infectious diseases. The Company meets with the
members of the SAB on an ad hoc basis to discuss research and development
strategies, and certain members communicate with the Company's scientists
periodically to discuss the details of specific projects. All SAB members own
shares or have been granted options to acquire Common Stock of the Company.
Each SAB member has entered into a consulting agreement which provides for
certain cash compensation and specifies the terms and scope of the advisory
relationship with the Company, which provides that the SAB member will not
consult or otherwise provide services to any other Company engaged in the
development of gene-based therapeutics without the prior consent of Megabios.
The Company does not believe that termination of any individual consulting
agreement would materially affect its business. All of the SAB members are
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employed by employers other than the Company and may have other commitments
and consulting advisory contracts with other entities which may compete for
such member's time and with their obligations to the Company.
Abul K. Abbas, M.B.B.S., has served as Head of the Immunology Research
Division in the Department of Pathology at Brigham and Women's Hospital, and
Professor of Pathology at Harvard Medical School since July 1991. He is a
member of the American Association of Pathologists and the American
Association of Immunologists. Dr. Abbas received his medical degree from the
All-India Institute of Medical Sciences, New Delhi, India.
Donald E. Ganem, M.D., has served as Investigator, Howard Hughes Medical
Institute since September 1994 and Professor of Microbiology and Medicine,
University of California, San Francisco since July 1990. He is a member of the
American Academy of Microbiology, the American Society for Virology and the
Infectious Diseases Society of America. Dr. Ganem received his M.D. from
Harvard University.
Raju Kucherlapati, Ph.D., has served as the Lola and Saul Kramer Professor
and Chairman of the Department of Molecular Genetics at Albert Einstein
College of Medicine since 1989. He was a founder and serves on the Board of
Directors of both Cell Genesys, Inc. ("Cell Genesys") and Millennium
Pharmaceuticals, Inc.. Dr. Kucherlapati received his Ph.D. from the University
of Illinois and did post-doctoral training at Yale University. Dr.
Kucherlapati also serves on the Board of Directors of the Company.
Robert S. Langer, Sc.D., has served as the Kenneth J. Germeshausen Professor
of Chemical and Biomedical Engineering at the Massachusetts Institute of
Technology ("MIT") since July 1988. He is a member of the Institute of
Medicine, the National Academy of Engineering and the National Academy of
Sciences. Dr. Langer received his Sc.D. in Chemical Engineering from MIT. He
also serves as a consultant to the Company.
Stuart H. Orkin, M.D., has served as the Leland Fikes Professor of Pediatric
Medicine at Harvard University since June 1987 and Investigator, Howard Hughes
Medical Institute since March 1986. From 1989 to 1990, he was the President of
The American Society of Clinical Investigation. He is a member of the National
Academy of Sciences, the American Academy of Arts and Sciences, and the
American Society of Human Genetics. Dr. Orkin received his M.D. from Harvard
University.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company and their
ages as of July 15, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Executive Officers
Benjamin F. McGraw, III, 48 Chairman, Chief Executive Officer and President
Pharm.D. ..............
Patrick G. Enright...... 35 Chief Financial Officer and Vice President
Rodney Pearlman, Ph.D. . 46 Vice President, Research and Development
Key Employees
Simba Gill, Ph.D. ...... 33 Vice President, Business Development
Beatrice C. Langton- Senior Director, Life Sciences
Webster, Ph.D. ........ 39
Lee B. Bussey, Ph.D. ... 44 Director, Bioprocessing
Helen Jenkins........... 34 Director, Project Development
Ralph W. Niven, Ph.D. .. 37 Director, Pharmaceutics and Delivery
Robert I. Grove, Ph.D. . 49 Principal Scientist, Cardiovascular
Jackie Papkoff, Ph.D.... 41 Principal Scientist, Oncology
Directors
Frank J. Caufield(1).... 57 Director
Edward L. Erickson...... 50 Director
A. Grant Heidrich(2).... 44 Director
Russell C. Hirsch, M.D., Director
Ph.D.(1)............... 34
Raju Kucherlapati, Director
Ph.D.(2)............... 54
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Benjamin F. McGraw, III, Pharm.D., joined the Company as President, Chief
Executive Officer and director in September 1994 and became Chairman of the
Board of Directors in February 1997. From April 1993 to September 1994, Dr.
McGraw was Corporate Vice President for Corporate Development for Allergan,
Inc., a pharmaceutical company. From November 1990 to April 1993, he served as
President of MedTech Trends, Inc., an investment advisory company. From
November 1991 to April 1993, Dr. McGraw was President of Carerra Capital
Management, Inc., an investment company, where he was the fund manager for a
limited partnership that invested in health care companies. From July 1989 to
November 1990, Dr. McGraw was Vice President, Development at Marion Merrell
Dow, Inc., a pharmaceutical company. From November 1987 to July 1989, he was
Vice President, Development at Marion Laboratories, Inc., a pharmaceutical
company. Dr. McGraw received his Doctor of Pharmacy from the University of
Tennessee Center for the Health Sciences.
Patrick G. Enright joined the Company as Chief Financial Officer and Vice
President in March 1995. From September 1993 to June 1994, Mr. Enright was
Senior Vice President of Finance and Business Development for Boehringer
Mannheim Therapeutics ("Boehringer Mannheim"), a pharmaceutical company and a
subsidiary of Corange Ltd. From September 1989 to September 1993, Mr. Enright
was employed at PaineWebber Incorporated, an investment banking firm, where he
became a Vice President in January 1992. From June 1984 to August 1989, he was
employed by Sandoz Corporation, a pharmaceutical company. Mr. Enright received
his M.B.A. from The Wharton School of Business at the University of
Pennsylvania and his B.S. in Biological Sciences from Stanford University.
Rodney Pearlman, Ph.D., has served as Vice President, Research and
Development since January 1995. From January 1988 to December 1994, Dr.
Pearlman was Director of Pharmaceutical Research and Development
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at Genentech, Inc. ("Genentech"), a biotechnology company. At Genentech, he
was a Project Team Leader for Human Growth Hormone from March 1992 to June
1994. From September 1987 to December 1994, Dr. Pearlman was a senior
scientist at Genentech. Dr. Pearlman joined Genentech as a scientist in
September 1984. Prior to joining Genentech, he was an Assistant Professor of
Pharmaceutics at the University of Texas at Austin. From 1978 to 1981, Dr.
Pearlman was a Senior Scientist at Lilly. Dr. Pearlman received his Ph.D. in
Pharmaceutical Chemistry from the University of Kansas.
Simba Gill, Ph.D., joined the Company as Director, Business Development in
November 1995 and has served as Vice President, Business Development since
March 1997. From January 1995 to October 1995, Dr. Gill was Director of
Business Development at Systemix, Inc. ("Systemix"), a biotechnology company.
From September 1994 to December 1994, he was an independent consultant to
Systemix. From April 1991 to September 1994, Dr. Gill held various positions
at Boehringer Mannheim including Global Product Manager for Erythropoietin,
Global Business Development Manager focusing on Genomics and Gene Therapy and
Director of New Diagnostics Business Development. Dr. Gill received his Ph.D.
in Molecular Immunology from King's College, London University and his M.B.A.
from INSEAD, Fontainebleau, France.
Beatrice C. Langton-Webster, Ph.D., joined the Company as Director, Life
Sciences in November 1996 and has served as Senior Director, Life Sciences
since March 1997. From June 1992 to November 1996, Dr. Langton-Webster was the
Head of the Oncology Strategic Research Unit at Berlex Biosciences, a
subsidiary of Schering AG, a pharmaceutical company. From September 1985 to
October 1990, Dr. Langton-Webster was a Senior Research Scientist at Triton
Biosciences, a biotechnology company. Dr. Langton-Webster received her Ph.D.
in Medical Microbiology and Immunology from the University of California at
Davis.
Lee B. Bussey, Ph.D., has served as Director, Bioprocessing since June 1994.
From August 1990 to June 1994, Dr. Bussey was the Technical Manager of
Bioprocessing for Pel-Freez Biologicals, a biotechnology company. Dr. Bussey
received his Ph.D. in Microbiology from the University of California at Davis.
Helen Jenkins joined the Company as Project Manager in July 1994 and has
served as Director, Project Development since April 1996. From May 1993 to
June 1994, she was Product Manager at Glycomed Incorporated, a biotechnology
company. From August 1990 to May 1993, Ms. Jenkins served as a Project
Coordinator and a Senior Project Coordinator at Genentech. Ms. Jenkins
received her B.S. in Biochemistry from the California Polytechnic State
University at San Luis Obispo and her M.A. in Cellular and Molecular Biology
from San Francisco State University.
Ralph W. Niven, Ph.D. joined Megabios in January 1996 as a Senior Scientist
and has served as Director, Pharmaceutics and Delivery since October 1996.
From July 1991 to December 1995, Dr. Niven was a Research Scientist at Amgen
Inc., a biopharmaceutical company. Dr. Niven received his Ph.D. in
Pharmaceutical Sciences from the University of Kentucky.
Robert I. Grove, Ph.D., joined the Company as Principal Scientist,
Cardiovascular in March 1997. From November 1993 to March 1997, Dr. Grove was
Senior Scientific Investigator/Assistant Director and Group Leader of the
Hypercholesterolemia team in the Gene Therapy Department of Immune Response
Corporation, a biotechnology company. From January 1985 to November 1993, he
served as Senior Research Investigator in the preclinical Cardiovascular
Research Growth Regulators, and Autoimmunity and Transplantation Departments
of Bristol-Myers Squibb, a pharmaceutical company. Dr. Grove received his
Ph.D. in biochemistry from the University of South Florida.
Jackie Papkoff, Ph.D., joined the Company as Senior Scientist in February
1996 and has served as Principal Scientist, Oncology since November 1996. From
July 1993 to February 1996, Dr. Papkoff was a Senior Scientist at Sugen, Inc.,
a biotechnology company. From January 1993 to June 1993, she served as Group
Leader of the Tumor Biology Department and from January 1987 to January 1993,
Dr. Papkoff served as a Staff Researcher in the Biochemistry Department of
Syntex Research, a pharmaceutical company. Dr. Papkoff received her Ph.D. in
Biology from the University of California at San Diego.
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Frank J. Caufield has served as a director of the Company since November
1992. Since 1978 he has held the position of partner of Kleiner Perkins
Caufield & Byers, a venture capital partnership. He serves on the Board of
Directors of Raster Graphics, Inc. and America Online, Inc. He received his
M.B.A. from the Harvard Business School and his B.S. in Engineering from the
United States Military Academy.
Edward L. Erickson has served as a director of the Company since July 1995.
Since June 1993, he has served as the President, Chief Executive Officer and a
director of DepoTech Corporation, a biopharmaceutical company in the field of
drug delivery. From 1991 to 1993, Mr. Erickson was the President, Chief
Executive Officer and a director of Cholestech Corporation, a medical products
company. Prior to joining Cholestech Corporation, he held senior management
positions with two international, publicly-traded biomedical companies, The
Ares-Serono Group and Amersham International plc. Mr. Erickson received his
M.B.A. from the Harvard Business School and his B.S. and M.S. degrees in
Mathematics from the Illinois Institute of Technology.
A. Grant Heidrich, III, has served as a director of the Company since August
1993. Mr. Heidrich joined Mayfield Fund ("Mayfield"), a venture capital firm,
in 1982 and has been a general partner or managing member of several venture
capital funds affiliated with Mayfield since 1983. Mr. Heidrich serves on the
Board of Directors of Millennium Pharmaceuticals, Inc. Mr. Heidrich received
his M.B.A. from Columbia University Graduate School of Business and his B.A.
in Human Biology from Stanford University.
Russell C. Hirsch, M.D., Ph.D., has served as a director of the Company
since August 1993. He joined Mayfield 1992, and has been a managing member of
several venture capital funds affiliated with Mayfield since 1995. From 1984
to 1992, Dr. Hirsch conducted research in the laboratories of Nobel Laureate
Harold Varmus, M.D., and Don Ganem, M.D., at the University of California, San
Francisco. Dr. Hirsch received his M.D. and Ph.D. in Biochemistry from the
University of California, San Francisco.
Raju Kucherlapati, Ph.D., has served as a director of the Company since
March 1995 and also serves on the Company's Scientific Advisory Board. Dr.
Kucherlapati has served as the Lola and Saul Kramer Professor and Chairman of
the Department of Molecular Genetics at Albert Einstein College of Medicine
since 1989. He was a founder of and serves on the Board of Directors of both
Cell Genesys and Millennium Pharmaceuticals, Inc. Dr. Kucherlapati received
his Ph.D. from the University of Illinois.
BOARD COMPOSITION
The Company currently has authorized eight directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, effective upon
the closing of this offering, the terms of office of the Board of Directors
will be divided into three classes: Class I, whose term will expire at the
annual meeting of stockholders to be held in 1998; Class II, whose term will
expire at the annual meeting of stockholders to be held in 1999; and Class
III, whose term will expire at the annual meeting of stockholders to be held
in 2000. The Class I directors are Benjamin F. McGraw, III and Frank J.
Caufield, the Class II directors are A. Grant Heidrich, III and Edward L.
Erickson, and the Class III directors are Raju Kucherlapati and Russell C.
Hirsch. At each annual meeting of stockholders after the initial
classification, the successors to directors whose term will then expire will
be elected to serve from the time of election and qualification until the
third annual meeting following election. In addition, the Company's Restated
Certificate of Incorporation provides that the authorized number of directors
may be changed only by resolution of the Board of Directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the Board
of Directors may have the effect of delaying or preventing changes in control
or management of the Company. Although directors of the Company may be removed
for cause by the affirmative vote of the holders of a majority of the Common
Stock, the Company's Restated Certificate of Incorporation provides that
holders of two-thirds of the Common Stock must vote to approve the removal of
a director without cause.
44
<PAGE>
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews the internal
accounting procedures of the Company and consults with and reviews the
services provided by the Company's independent auditors. The Compensation
Committee of the Board of Directors reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company and
reviews general policy relating to compensation and benefits of employees of
the Company. The Compensation Committee also administers the issuance of stock
options and other awards under the Company's stock plans.
DIRECTOR COMPENSATION
The Company does not currently provide cash compensation to directors for
services in such capacity, but directors may be reimbursed for certain
expenses in connection with attendance at Board and Committee meetings. In
January 1995, the Board granted an option to Dr. Kucherlapati to purchase
13,333 shares of Common Stock at an exercise price of $0.30 per share. In
September 1995, the Board granted an option to Mr. Erickson to purchase 13,333
shares of Common Stock at an exercise price of $0.30 per share. The Company
intends to consider compensating non-employee directors in the future. In
February 1997, for his service as a member of the Company's SAB, the Board
granted an option to Dr. Kucherlapati to purchase an additional 13,333 shares
of Common Stock at an exercise price of $1.50 per share.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
Company during the fiscal year ended June 30, 1997 to its President and Chief
Executive Officer and the Company's other executive officers who earned more
than $100,000 during the fiscal year ended June 30, 1997 (collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION(1) SECURITIES ALL OTHER
------------------ UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) ($)(2)
- --------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Benjamin F. McGraw, III, Pharm.D.. $258,174 $25,000 73,333 $509
Chairman, Chief Executive Officer
and President
Patrick G. Enright................ 166,539 16,000 30,000 329
Chief Financial Officer and Vice
President
Rodney Pearlman, Ph.D............. 169,904 16,500 25,000 335
Vice President, Research and
Development
</TABLE>
- --------
(1) In accordance with Securities and Exchange Commission ("Commission")
rules, other annual compensation in the form of perquisites and other
personal benefits has been omitted where the aggregate amount of such
perquisites and other personal benefits constitutes less than the lesser
of $50,000 or 10% of the total annual salary and bonus for the Named
Executive Officer for the fiscal year.
(2) Represents insurance premiums paid by the Company with respect to group
life insurance for the benefit of the Named Executive Officer.
45
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended June 30, 1997, to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM(4)
OPTIONS FISCAL YEAR PRICE EXPIRATION -----------------------
NAME GRANTED (#)(1) (%)(2) ($/SH)(3) DATE 5% ($) 10% ($)
---- -------------- ------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Benjamin F. McGraw, III, 73,333 18.9% $1.50 02/28/07 $ 1,324,394 $ 2,169,199
Pharm.D. ..............
Chairman, Chief
Executive
Officer and President
Patrick G. Enright...... 30,000 7.7 1.50 02/28/07 541,800 887,400
Chief Financial Officer
and Vice President
Rodney Pearlman, Ph.D... 25,000 6.4 1.50 02/28/07 451,400 739,500
Vice President,
Research and
Development
</TABLE>
- --------
(1) Twenty-five percent of such options granted vest one year from the vesting
commencement date with remaining options vesting at a rate of 1/36th per
month over three years. Options may be exercised immediately pursuant to
early exercise provisions contained in option agreements. Any shares
issued pursuant to such early exercise provisions are subject to
repurchase upon termination of employment. Such repurchase option
terminates at the rate of twenty five percent after one year from the
vesting commencement date and thereafter at a rate of 1/36th per month
over three years. The options expire 10 years from the date of grant, or
earlier upon termination of employment.
(2) Based on an aggregate of 388,680 options granted to employees, consultants
and directors of the Company during fiscal year ended June 30, 1997,
including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
the Company's securities that the actual stock price appreciation over the
10-year term will be at the assumed 5% or 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from the option grants
made to the executive officers. The potential realizable value is
calculated by assuming that the assumed initial public offering price of
$12.00 per share appreciates at the indicted rate for the entire term of
the option and that the option is exercised at the exercise price and sold
on the last day of its term at the appreciated price.
46
<PAGE>
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND JUNE 30, 1997 OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options
during the fiscal year ended June 30, 1997 and the number and value of
securities underlying unexercised options held by the Named Executive Officers
at June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
JUNE 30, 1997(#)(1) JUNE 30, 1997($)(2)
---------------------- --------------------
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#)(1) REALIZED($)(2) UNEXERCISABLE UNEXERCISABLE
---- -------------- -------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Benjamin F. McGraw, III, -- -- 73,333/0 $769,997/0
Pharm.D................
Chairman, Chief
Executive Officer
and President
Patrick G. Enright...... -- -- 30,000/0 315,000/0
Chief Financial Officer
and Vice President
Rodney Pearlman, Ph.D... 29,166 $341,242 25,000/0 262,500/0
Vice President,
Research and
Development
</TABLE>
- --------
(1) Options may be exercised immediately pursuant to early exercise provisions
contained in option agreements. Any shares issued pursuant to such early
exercise provisions are subject to repurchase at the original exercise
price paid per share upon termination of employment. Such repurchase
option terminates at the rate of twenty five percent after one year from
the vesting commencement date and thereafter at a rate of 1/36th per month
over three years.
(2) Value realized and value of unexercised in-the-money options is based on a
value of $12.00 per share of the Company's Common Stock, the assumed
initial public offering price, even though at the time of grant the fair
market value of the Common Stock was determined by the Board of Directors
to be $0.30 to $1.50 per share. Amounts reflected are based on the assumed
value minus the exercise price multiplied by the number of shares acquired
on exercise and do not indicate that the optionee sold such stock.
EMPLOYMENT AGREEMENTS
In August 1994, the Company entered into an employment agreement with Dr.
McGraw providing for an annual compensation of $250,000, an option to purchase
up to 250,000 shares of Common Stock at $0.30 per share subject to a four-year
vesting schedule, a signing bonus of $65,000 payable in quarterly
installments, certain relocation expenses and a severance payment equal to
twelve months salary in the event of termination without cause.
In February 1995, the Company entered into an employment agreement with Mr.
Enright providing for an annual compensation of $160,000, an option to
purchase up to 91,666 shares of Common Stock at an exercise price of $0.30 per
share subject to a four-year vesting schedule, a $10,000 signing bonus and
payment of certain relocation expenses.
In November 1994, the Company entered into an employment agreement with Dr.
Pearlman providing for an annual compensation of $165,000, an option to
purchase up to 83,333 shares of Common Stock at an exercise price of $0.30 per
share subject to a four-year vesting schedule and a $30,000 bonus payable in
quarterly installments during 1995.
In January 1996, the Board of Directors approved the Change of Control
Policy for the protection of the Company's executive officers. In the event of
a merger in which the Company is not the surviving entity or a transaction or
series of transactions in which more than 50% of the Company's voting power is
transferred or
47
<PAGE>
the sale of all or substantially all the assets of the Company (each a "Change
of Control"), an executive officer will continue to receive salary and
benefits for twelve months from the date of his or her termination unless such
termination is for cause (or voluntary termination of his or her employment
for good cause). Further, in the event of a Change of Control, all outstanding
stock options of each executive officer shall automatically accelerate by the
greater of twelve months or the number of full months during which the officer
has been employed by the Company. However, the Board of Directors of the
Company may provide that options be assumed by the acquiror, remain
outstanding or provide for a replacement benefit equal in value.
STOCK PLANS
Equity Incentive Plan. The Company's 1997 Equity Incentive Plan (the
"Incentive Plan") was adopted by the Board of Directors in July 1997 as an
amendment and restatement of the Company's 1993 Stock Option Plan (the "1993
Plan"). There are currently 2,100,000 shares of Common Stock authorized for
issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options under
the Internal Revenue Code of 1986, as amended (the "Code"), to employees
(including officers and employee-directors) and nonstatutory stock options,
restricted stock purchase awards and stock bonuses to employees, directors and
consultants. The Incentive Plan is administered by the Board of Directors or a
committee appointed by the Board which determines recipients and types of
awards to be granted, including the exercise price, number of shares subject
to the award and the exercisability thereof.
The terms of stock options granted under the Incentive Plan generally may
not exceed 10 years. The exercise price of options granted under the Incentive
Plan is determined by the Board of Directors, provided that the exercise price
for an incentive stock option cannot be less than 100% of the fair market
value of the Common Stock on the date of the option grant and the exercise
price for a nonstatutory stock option cannot be less than 85% of the fair
market value of the Common Stock on the date of option grant. Options granted
under the Incentive Plan vest at the rate specified in the option agreement.
No stock option may be transferred by the optionee other than by will or the
laws of descent or distribution, provided that a nonstatutory stock option may
be transferable if provided in the option agreement, and provided further that
an optionee may designate a beneficiary who may exercise the option following
the optionee's death. An optionee whose relationship with the Company or any
related corporation ceases for any reason (other than by death or permanent
and total disability) may exercise options in the three-month period following
such cessation (unless such options terminate or expire sooner or later by
their terms). Options may be exercised for up to twelve months after an
optionee's relationship with the Company and its affiliates ceases due to
death or disability (unless such options expire sooner or later by their
terms).
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the
option does not exceed five years from the date of grant. The aggregate fair
market value, determined at the time of grant, of the shares of Common Stock
with respect to which incentive stock options are exercisable for the first
time by an optionee during any calendar year (under all such plans of the
Company and its affiliates) may not exceed $100,000. Upon the expiration of
the transition rule extending the effective date of code section 162(m) for
newly public companies no person shall be eligible to receive options covering
more than 500,000 shares in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full (or vested in the case of restricted
stock awards) shall again become available for the grant of awards under the
Incentive Plan.
The Board of Directors has the authority to reprice outstanding options and
to offer optionees the opportunity to replace outstanding options with new
options for the same or a different number of shares.
48
<PAGE>
Restricted stock purchase awards granted under the Incentive Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and at a price determined by the Board of Directors.
Restricted stock purchases must be at a price equal to at least 85% of the
stock's fair market value on the award date, but stock bonuses may be awarded
in consideration of past services without a purchase payment. Rights under a
stock bonus or restricted stock bonus agreement may not be transferred other
than by will, the laws of descent and distribution or a domestic relations
order while the stock awarded pursuant to such an agreement remains subject to
the agreement.
Upon a change in control of the Company, the vesting of options held by
executive officers will accelerate by the greater of 12 months or the number
of months of the executive officer's employment, unless the Board of Directors
finds that it is in the best interest of the Company's stockholders and the
optionees to provide otherwise. If such a finding is made, the options shall
either remain outstanding or be assumed by the acquiror (with the optionee
being entitled to receive the same consideration as was received by the
Company's stockholders in the change of control transaction) or the Board of
Directors and/or the acquiror shall adopt a replacement benefit which shall
(at a minimum) provide value to the executive officer on the vesting dates of
the non-accelerated options substantially equal to the value the executive
officer would have received if the shares had participated in all steps of the
transaction. With respect to optionees who are not executive officers, upon a
change in control any options shall remain outstanding, be assumed by the
acquiror or be substituted with similar options. In the event the acquiror
refuses to assume, substitute or continue any options, then such options shall
be terminated if not exercised prior to the change of control. For purposes of
this Plan, "Change in Control" means: any consolidation or merger of the
Company with or into any other entity or person, or any other corporate
reorganization, in which the Company is not the continuing or surviving
entity, or any transaction or series of related transactions by the Company in
which in excess of 50% of the Company's voting power is transferred, or any
sale, lease, license or other disposition of all or substantially all of the
assets of the Company.
As of June 30, 1997, 878,224 shares of Common Stock had been issued upon the
exercise of options granted under the 1993 Plan and the Incentive Plan (39,545
of which had been repurchased and of which were subject to repurchase),
options to purchase 479,622 shares of Common Stock at a weighted average
exercise price of $1.22 were outstanding and 121,699 shares remained available
for future grant. The Incentive Plan will terminate in July 2007 unless sooner
terminated by the Board of Directors. As of June 30, 1997, no stock bonuses or
restricted stock have been granted under the Incentive Plan.
Employee Stock Purchase Plan. In July 1997, the Company's Board of Directors
approved the Employee Stock Purchase Plan (the "Purchase Plan") covering an
aggregate of 200,000 shares of Common Stock. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423
of the Code. Under the Purchase Plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings
following the adoption of the Purchase Plan. The offering period for any
offering will be no more than 27 months.
Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board of Directors and are
employed at least 20 hours per week and five months per year. Employees who
participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by
the Board of Directors, to the purchase of shares of Common Stock. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock on the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the
Company.
In the event of certain changes of control, the Company and the Board of
Directors has discretion to provide that each right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor
corporation, or the Board may shorten the offering period and provide for all
sums collected by payroll deductions to be applied to purchase stock
immediately prior to the change in control. The Purchase Plan will terminate
at the Board's discretion.
49
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and
other agents to the fullest extent permitted by Delaware law. The Company is
also empowered under its Bylaws to enter into indemnification contracts with
its directors and officers and to purchase insurance on behalf of any person
it is required to permitted to indemnify. Pursuant to this provision, the
Company expects to enter into indemnification agreements with each of its
directors and executive officers.
The Company has obtained officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters
arising under the Securities Act. In addition, the Company's Restated
Certificate of Incorporation provides that, to the fullest extent permitted by
Delaware law, the Company's directors will not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Company and its
stockholders. This provision in the Restated Certificate of Incorporation does
not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under Delaware law. Under current Delaware law, a director's
liability to the Company or its stockholders may not be limited with respect
to any breach of the director's duty of loyalty to the Company or its
stockholders, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, for improper transactions
between the director and the Company and for improper distributions to
stockholders and loans to directors and officers. This provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, nor is the Company
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
50
<PAGE>
CERTAIN TRANSACTIONS
In August 1994, Mayfield VII, Mayfield Associates Fund II, William L. Brown,
a former director and a 5% stockholder of the Company, and Frank J. Caufield,
a director of the Company, extended bridge loans to the Company in an
aggregate principal amount of $250,000 in order to provide temporary working
capital for the Company. Mr. Heidrich, a director of the Company, is a member
of Mayfield Fund, the general partner of Mayfield VII and Mayfield Associates
Fund II. The loans accrued interest at 5.8% per annum. The outstanding
principal balance and accrued interest on the loans automatically converted
into 64,442 shares of Series C Preferred Stock upon the first closing of the
Company's sale of Series C Preferred Stock in September 1994.
From September 1994 through October 1995, 37 investors purchased an
aggregate of 3,184,424 shares of the Company's Series C Preferred Stock at a
per share price of $3.88. Dr. McGraw, the Company's Chairman of the Board,
President and Chief Executive Officer, purchased 33,333 shares of Series C
Preferred Stock. Frank J. Caufield purchased 45,062 shares of Series C
Preferred Stock. William L. Brown purchased 57,937 shares of Series C
Preferred Stock. Institutional Venture Partners V and Institutional Venture
Management V, together holders of more than 5% of the Common Stock, purchased
312,701 and 6,380 shares, respectively, of Series C Preferred Stock. Various
entities affiliated with Burr, Egan, Deleage & Co., a holder of more than 5%
of the Common Stock, purchased shares of Series C Preferred Stock as follows:
Alta V Limited Partnership, 509,643 shares; and Custom House Partners, 5,356
shares. Mayfield VII and Mayfield Associates Fund II, together holders of more
than 5% of the Common Stock, purchased 611,724 and 32,195 shares,
respectively, of Series C Preferred Stock. The Series C Preferred shares
purchased by the holders of more than 5% of the Common Stock and their
affiliates and by Dr. McGraw were purchased on the same terms and conditions
as Series C Preferred shares purchased by other investors.
In October 1996, 24 investors purchased an aggregate of 1,333,333 shares of
the Company's Series E Preferred Stock at a per share price of $7.50. Lombard
Odier & Cie, a holder of more than 5% of the Common Stock, purchased
359,999 shares of Series E Preferred Stock. Triaxis Trust AG, a beneficial
owner of more than 5% of the Common Stock, purchased shares of Series E
Preferred Stock as follows: ABN Amro Bank as nominee for various investors,
321,667 shares and Ueberseebank AG as nominee for various investors, 65,000
shares. Entities affiliated with Burr, Egan, Deleage & Co. purchased shares of
Series E Preferred Stock as follows: Alta V Limited Partnership,
65,973 shares; and Custom House Partners, 693 shares. The Series E Preferred
shares purchased by the holders of more than 5% of the Common Stock of the
Company and their affiliates were purchased on the same terms and conditions
as Series E Preferred shares purchased by other investors. In connection with
the sale of the Series E Preferred Stock, the Company also issued 13,333
shares of Common Stock to Hans-Peter John who is the Chairman of the Board and
a partner of Triaxis Trust AG, as compensation for services as placement
agent.
In May and June 1997, 17 investors purchased an aggregate of 1,333,332
shares of the Company's Series F Preferred Stock at a per share price of
$10.50. Lombard Odier & Cie, a holder of more than 5% of the Common Stock,
purchased 333,333 shares of Series F Preferred Stock. Triaxis Trust AG,
purchased shares of Series F Preferred Stock as follows: ABN Amro Bank, as
nominees for various entities, 83,333 shares; Bank Julius Baer, as nominee for
various entities, 5,000 shares; Credit Suisse, as nominees for various
entities, 90,000 shares; Centrum Bank, as nominee for various entities, 10,000
shares; Ueberseebank AG, as nominee for various entities, 10,000 shares; and
Bank Eduoard Constant, as nominees for various entities, 35,000 shares. The
Series F Preferred Shares purchased by the holders of more than 5% of the
Common Stock of the Company and their affiliates were purchased on the same
terms and conditions as Series F Preferred Shares purchased by other
investors.
The Company has entered into indemnification agreements with its directors
and executive officers for the indemnification of and advancement of expenses
to such persons to the full extent permitted by law. The Company also intends
to execute such agreements with its future directors and executive officers.
The Company believes that the foregoing transactions were in its best
interest. As a matter of policy the transactions were, and all future
transactions between the Company and any of its officers, directors or
principal stockholders will be, approved by a majority of the independent and
disinterested members of the Board of Directors, will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties and will be in connection with bona fide business purposes of the
Company.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 15, 1997 and as adjusted to
reflect the sale of the Common Stock being offered hereby by: (i) each
stockholder who is known by the Company to own beneficially more than 5% of
the Common Stock; (ii) each Named Executive Officer of the Company; (iii) each
director of the Company and (iv) all directors and executive officers of the
Company as a group. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES -----------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ------------ ---------- ----------
<S> <C> <C> <C>
Entities affiliated with Mayfield Fund(2). 1,287,668 13.2% 10.5%
2800 Sand Hill Road
Menlo Park, CA 94025
Lombard Odier & Cie(3).................... 693,332 7.1% 5.7%
11 Rue de la Corraterie
1211 Geneva
Switzerland
Entities affiliated with
Institutional Venture Partners(4)........ 640,955 6.6% 5.2%
3000 Sand Hill Road
Suite 2-290
Menlo Park, CA 94025
Triaxis Trust AG(5)....................... 633,333 6.5% 5.2%
Burglistrasse 6 Postfach
CH-8027 Zurich Switzerland
Entities affiliated with
Burr, Egan, Deleage & Co(6).............. 581,665 6.0% 4.8%
One Embarcadero Center, #4050
San Francisco, CA 94111
William L. Brown.......................... 531,817 5.5% 4.3%
Two Embarcadero Center, #1660
San Francisco, CA 94111
Benjamin F. McGraw, III, Pharm.D.(7)...... 406,666 4.1% 3.3%
Patrick G. Enright(8)..................... 144,499 1.5% 1.1%
Rodney Pearlman, Ph.D.(9)................. 137,499 1.4% 1.1%
Edward Erickson(10)....................... 13,333 * *
Frank J. Caufield......................... 406,821 4.2% 3.3%
A. Grant Heidrich(2)...................... 1,287,668 13.2% 10.5%
Russell C. Hirsch, M.D., Ph.D............. 0 * *
Raju Kucherlapati(11)..................... 26,666 * *
All directors and executive officers as a
group (8 persons)(12).................... 2,423,152 24.5% 19.6%
</TABLE>
52
<PAGE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of the Company's Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Beneficial ownership also includes shares of stock subject
to options and warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of the date of this table.
Percentage of beneficial ownership is based on 9,725,939 shares of Common
Stock outstanding as of July 15, 1997 and 12,225,939 shares of Common
Stock outstanding after completion of this offering.
(2) Includes 1,226,505 shares held by Mayfield VII and 61,163 shares held by
Mayfield Associates Fund II. Mr. Heidrich is a member of Mayfield Fund,
the general partner of Mayfield Associates Fund II and Mayfield VII. Mr.
Heidrich disclaims beneficial ownership of all such shares held by
Mayfield VII or Mayfield Associates Fund II, except to the extent of his
proportionate pecuniary interest therein.
(3) Shares are held in the name of Ryco & Co, as nominee for Lombard Odier &
Cie.
(4) Includes 628,138 shares held by Institutional Venture Partners V and
12,817 held by Institutional Venture Management V.
(5) Triaxis Trust acts as financial advisor for various investors and has
voting and dispositive power over the shares held by such investors.
Includes an aggregate 405,000 shares held in the name of ABN Amro Bank as
nominee for various investors, 5,000 shares held in the name of Bank
Julius Baer, as nominee for various investors, 35,000 shares held in the
name of Banque Eduoard Constant, as nominee for various investors, 10,000
shares held in the name of Centrum Bank, as nominee for various
investors, 90,000 shares held in the name of Credit Suisse as nominee for
various investors, 75,000 shares held in the name of Ueberseebank AG as
nominee for various investors and 13,333 shares held by Hans-Peter John,
the Chairman of the Board and a partner of Triaxis Trust.
(6) Includes 575,616 shares held by Alta V Limited Partnership and 6,049
shares held by Customs House Partners. The principals of Burr, Egan,
Deleage & Co. are general partners of Alta V Management Partners, L.P.
(which is a general partner of Alta V Limited Partnership), and Customs
House Partners. The principals of Burr, Egan, Deleage & Co. disclaim
beneficial ownership of all such shares held by the foregoing funds,
except to the extent of their proportionate pecuniary interests therein.
(7) Includes 300,000 shares Dr. McGraw acquired pursuant to the exercise of
stock options, 92,708 of which will be subject to repurchase by the
Company as of September 13, 1997. Also includes 73,333 shares Dr. McGraw
has the right to acquire pursuant to an option exercisable within 60
days, all of which will be subject to repurchase by the Company at such
date, if issued.
(8) Includes 2,000 shares held by Enright Capital Advisors, an investment
partnership of which Mr. Enright is a partner. Mr. Enright disclaims
beneficial ownership of all such shares owned by the foregoing
partnership, except to the extent of his proportionate pecuniary interest
therein. Includes 112,499 shares Mr. Enright acquired pursuant to the
exercise of stock options, 46,961 of which will be subject to repurchase
by the Company as of September 13, 1997. Also includes 30,000 shares Mr.
Enright has the right to acquire pursuant to an option exercisable within
60 days, all of which will be subject to repurchase by the Company at
such date, if issued.
(9) Includes 112,499 shares Dr. Pearlman acquired pursuant to the exercise of
stock options, 45,398 of which will be subject to repurchase by the
Company as of September 13, 1997. Also includes 25,000 shares Dr.
Pearlman has the right to acquire pursuant to options exercisable within
60 days, all of which will be subject to repurchase by the Company at
such date, if issued.
(10) Includes 13,333 shares Mr. Erickson acquired pursuant to the exercise of
stock options, 6,389 of which will be subject to repurchase by the
Company as of September 13, 1997.
(11) Includes 26,666 shares Dr. Kucherlapati has the right to acquire pursuant
to options exercisable within 60 days, 16,666 of which will be subject to
repurchase by the Company at such date, if issued.
(12) Includes 1,287,668 shares held by entities affiliated with certain
directors of the Company as described in footnote 2 above and 154,999
shares subject to options exercisable within 60 days.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock, $.001 par value,
and 10,000,000 shares of Preferred Stock, $.001 par value.
COMMON STOCK
As of July 15, 1997, there were 1,571,160 shares of Common Stock outstanding
held of record by approximately 64 stockholders. There will be 12,225,939
shares of Common Stock outstanding after giving effect to the sale of
2,500,000 shares of Common Stock offered by the Company hereby and after
giving effect to the conversion of all shares of Preferred Stock into an
aggregate of 8,154,779 shares of Common Stock.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, holders of the Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock to be outstanding upon completion of this offering will be,
fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock, $.001 par
value, in one or more series and to fix the rights, preferences, privileges
and restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and
the number of shares constituting any series or the designation of such
series, without any further vote or action by stockholders. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.
WARRANTS
As of July 15, 1997, the Company had outstanding warrants to purchase 84,008
shares of Common Stock at an exercise price of $3.88 per share. The warrants
expire at various times from the day prior to the effectiveness of this
initial public offering to five years following the closing of this initial
public offering. Each warrant contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise
of the warrant under certain circumstances, including stock dividends, stock
splits, reorganizations, reclassification, consolidations and certain dilutive
sales of the securities for which the warrant is exercisable below the then
existing exercise price. Each warrant may be exercised, without the payment of
cash, for the number of shares of Common Stock purchasable, at the current
market value of the Common Stock, by the difference between the aggregate
exercise price of the warrant and the value, at the current market price per
share of Common Stock of the aggregate number of shares purchasable under the
warrant.
REGISTRATION RIGHTS
Following this offering, holders (or their permitted transferees)
("Holders") of 8,154,779 shares of Common Stock and warrants to purchase
84,008 shares of Common Stock will be entitled to certain rights with respect
to the registration of their shares under the Securities Act. Under the terms
of that certain Amended and Restated Investor Rights Agreement dated May 23,
1997 (the "Investor Rights Agreement"), if the Company proposes to register
any of its securities under the Securities Act, either for its own account or
the account of
54
<PAGE>
others, certain of the Holders are entitled to notice of such registration and
are entitled to include their shares of Common Stock; provided, among other
conditions, that the underwriters of any offering have the right to limit the
number of such shares included in such registration or exclude such shares
entirely. Certain of the Holders may also require the Company, at the
Company's expense, to register all or a portion of their shares of Common
Stock on form S-3 when such form becomes available to the Company, subject to
certain conditions and limitations. In addition, certain of the Holders may
also require the Company, beginning 180 days after the date of this
Prospectus, on not more than two occasions, to file a registration statement
under the Securities Act at the Company's expense with respect to their shares
of Common Stock, and the Company is required to use its best efforts to effect
such registration, subject to certain conditions and limitations. In addition,
one holder of 484,697 shares of Common Stock has a right to include its shares
of Common Stock only in connection with the first firm underwritten public
offering after May 30, 2001.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware Law,
an anti-takeover law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder,
and an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The Company's Certificate of Incorporation and Bylaws also require that,
effective upon the closing of this offering, any action required or permitted
to be taken by stockholders of the Company must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by a
consent in writing. In addition, special meetings of the stockholders of the
Company may be called only by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer of the Company or by any person or persons
holding shares representing at least 10% of the outstanding capital stock. The
Company's Certificate of Incorporation also provides for a classified Board
and specifies that the authorized number of directors may be changed only by
resolution of the Board of Directors. See "Management--Board Composition."
These provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
First National Bank of Boston has been appointed as the transfer agent and
registrar for the Company's Common Stock.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the Common
Stock of the Company. Further sales of substantial amounts of Common Stock in
the open market may adversely affect the market price of the Common Stock
offered hereby.
Upon completion of this offering, based on the number of shares outstanding
as of July 15, 1997, the Company will have outstanding an aggregate of
12,247,569 shares of Common Stock assuming (i) the issuance by the Company of
2,500,000 shares of Common Stock offered hereby, (ii) the issuance of 21,630
shares of Common Stock relating to an outstanding warrant to purchase Common
Stock that expires upon this Offering and no issuance of 62,378 shares of
Common Stock relating to other outstanding warrants, (iii) no exercise of
exercisable vested options to purchase 64,371 shares of Common Stock, and (iv)
no exercise of the Underwriters' over-allotment option to purchase 375,000
shares of Common Stock. Of these shares, 2,500,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, except for shares held by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act (whose
sales would be subject to certain limitations and restrictions described
below) and the regulations promulgated thereunder.
The remaining 9,725,939 shares held by officers, directors, employees,
consultants and other stockholders of the Company were sold by the Company in
reliance on exemptions from registration requirements of the Securities Act
and are "restricted" securities within the meaning of Rule 144 under the
Securities Act. As a result, on the date of this prospectus, approximately
22,645 shares, other than the 2,500,000 shares offered hereby, will be
eligible for sale pursuant to subsection (k) of Rule 144 promulgated under the
Securities Act. An additional 8,045,052 shares and 96,709 shares issuable upon
exercise of outstanding vested options will be eligible for sale 180 days
after the date of this Prospectus upon expiration of the lock-up agreements
described below and in compliance with certain limitations set forth in the
Securities Act. An additional 1,385,706 shares held by existing shareholders
will become eligible for sale at various times over a period of less than one
year. The remaining 272,536 shares currently held by existing shareholders
will be subject to rights of repurchase in favor of the Company that expire at
various dates through May 2001 pursuant to monthly vesting.
Each officer, director and certain stockholders of the Company have agreed
that for a period of 180 days after the date of this Prospectus, they will
not, directly or indirectly, offer, sell, contract to sell, grant any option
to sell or otherwise dispose of, directly or indirectly, any shares of Common
Stock or securities convertible into or exchangeable for, or any rights to
purchase or acquire, Common Stock, without the prior written consent of the
Company or Montgomery Securities, as applicable. Montgomery Securities or the
Company, as applicable, at any time without notice, may release all or any
portion of the securities subject to the 180-day lock-up agreement. The
Company has agreed with Montgomery Securities not to release any stockholder
from such lock-up agreement between the stockholder and the Company without
the prior written consent of Montgomery Securities.
In general, under rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares that were not acquired from the Company or an affiliate of the Company
within the previous one year, will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of the Company's Common Stock (approximately 122,475
shares immediately after this offering) or (ii) the average weekly trading
volume of the Company's Common Stock in the Nasdaq National Market during the
four calendar weeks immediately preceding the date on which notice of the sale
is filed with the Securities and Exchange Commission. Sales pursuant to Rule
144 are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person (or
person whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and who beneficially owns Restricted Shares is entitled to sell such
shares pursuant to Rule 144(k) without regard to the limitations described
above; provided that at least two years have elapsed since the later of the
date the shares were acquired from the Company or from an affiliate of the
Company.
56
<PAGE>
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits affiliates and
non-affiliates to sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions, in each case commencing 90 days after
the date of this Prospectus. In addition, non-affiliates may sell Rule 701
shares without complying with public information, volume and notice provisions
of Rule 144.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under the
Incentive Plan and the Purchase Plan, thus permitting the resale of such
shares by non-affiliates in the public market without restriction under the
Securities Act. Such registration statement will become effective immediately
upon filing.
As of the date of this Prospectus, warrants to purchase an aggregate of
84,008 shares of Common Stock were outstanding, all of which are subject to
the 180-day lock-up.
In addition, after this offering, the holders of approximately 8,154,779
shares will be entitled to certain rights with respect to registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by
affiliates of the Company) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
57
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities and
Hambrecht & Quist LLC (the "Representatives"), have severally agreed, subject
to the terms and conditions set forth in the Underwriting Agreement (the
"Underwriting Agreement") by and between the Company and the Underwriters, to
purchase from the Company the aggregate number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to certain conditions precedent, and that the Underwriters are
committed to purchase all of such shares if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Montgomery Securities..............................................
Hambrecht & Quist LLC..............................................
---------
Total............................................................ 2,500,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on
the cover page of this Prospectus. The Underwriters may allow selected dealers
a concession of not more than $ per share, and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the initial public offering, the offering price
and other selling terms may be changed by the Representatives. The Common
Stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 375,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 2,500,000 shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise
such option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the initial
public offering.
The Representatives have advised the Company that the Underwriters do not
expect to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may
be required to make in respect thereof.
For a period of 180 days after the effectiveness of the Registration
Statement, without the prior written consent of Montgomery Securities and/or
the Company, as applicable, the Company and holders of 9,562,429 shares of
Common Stock including the Company's directors and executive officers have
agreed not to offer, sell
58
<PAGE>
or contract to sell, grant any option to purchase, make any short sale, pledge
or otherwise dispose of, directly or indirectly, any shares of Common Stock or
securities exchangeable or exercisable for or convertible into shares of, or
any other rights to purchase or acquire Common Stock of the Company other than
issuances pursuant to existing employee compensation plans and transfers into
trusts for the benefit of the original holder or members of the original
holder's immediate family.
Prior to the initial public offering, there has been no public market for
the Common Stock of the Company. Consequently, the initial public offering
price for the Common Stock will be negotiated between the Company and the
Representatives. Among the factors to be considered in determining the initial
public offering price of the Common Stock will be prevailing market and
economic conditions, market valuations of other companies engaged in
activities similar to the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant.
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when
the Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
59
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward LLP ("Cooley Godward"), Palo Alto, California.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Menlo Park, California. As of the date of this Prospectus, certain
members of Cooley Godward own an aggregate of 11,587 shares of Common Stock of
the Company.
EXPERTS
The financial statements of Megabios Corp. as of June 30, 1996 and 1997, and
for each of the three years in the period ended June 30, 1997 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk Factors--
Uncertainty of Patent Position and Proprietary Rights" and "Business--Patents
and Proprietary Technology" have been reviewed and approved by McDonnell,
Boehnen, Hulbert, Berghoff Ltd., special patent counsel for the Company, as
experts in such matters, and are included herein in reliance upon such review
and approval.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office in Washington, D.C. and
copies of all or any part thereof may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, upon payment of certain fees prescribed by the
Commission. In addition, the Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission through the Electronic Data Gathering, Analysis, and Retrieval
system.
60
<PAGE>
MEGABIOS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Financial Statements
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statement of Shareholders' Equity......................................... F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Megabios Corp.
We have audited the accompanying balance sheets of Megabios Corp. as of June
30, 1996 and 1997, and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Megabios Corp. as of June
30, 1996 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
August 4, 1997, except for Note 11,
as to which the date is September 8, 1997
F-2
<PAGE>
MEGABIOS CORP.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
JUNE 30, EQUITY AT
------------------ JUNE 30,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 5,253 $ 9,044
Short-term investments..................... -- 15,225
Other receivables.......................... 16 238
Prepaid expenses and other current assets.. 275 390
-------- --------
Total current assets....................... 5,544 24,897
Property and equipment, net.................. 4,091 4,733
Other receivables............................ 35 27
Deposits and other assets.................... 286 321
-------- --------
$ 9,956 $ 29,978
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 148 $ 694
Accrued compensation....................... 133 170
Accrued construction-in-progress........... -- 249
Other accrued liabilities.................. 95 35
Deferred revenue........................... 531 887
Current portion of long-term debt.......... 1,069 1,233
-------- --------
Total current liabilities.............. 1,976 3,268
Long-term debt............................... 1,894 1,487
Commitments
Shareholders' equity:
Preferred stock, no par value, issuable in
series; 11,333,333 shares authorized;
5,754,069 and 8,420,720 convertible shares
issued and outstanding at June 30, 1996
and 1997, respectively; aggregate
liquidation preference of $51,200 at June
30, 1997 (no shares outstanding pro
forma).................................... 20,905 44,700 $ --
Common stock, no par value, 15,000,000
shares authorized; 1,368,148 and 1,567,727
shares issued and outstanding at June 30,
1996 and 1997, respectively (9,722,506
shares outstanding pro forma)............. 442 1,410 46,110
Deferred compensation, net of amortization. -- (679) (679)
Accumulated deficit........................ (15,261) (20,208) (20,208)
-------- -------- --------
Total shareholders' equity............. 6,086 25,223 $ 25,223
-------- -------- ========
$ 9,956 $ 29,978
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MEGABIOS CORP.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Collaborative research and development revenue...... $ 1,157 $ 1,890 $ 5,793
Operating expenses:
Research and development.......................... 4,691 6,487 8,598
General and administrative........................ 1,811 2,169 2,417
------- ------- -------
Total operating expenses........................ 6,502 8,656 11,015
------- ------- -------
Loss from operations................................ (5,345) (6,766) (5,222)
Interest income..................................... 56 230 656
Interest expense.................................... (140) (365) (381)
------- ------- -------
Net loss............................................ $(5,429) $(6,901) $(4,947)
======= ======= =======
Pro forma net loss per share........................ $ (0.50)
=======
Shares used in computing pro forma net loss per
share.............................................. 9,926
=======
</TABLE>
See accompanying notes.
F-4
<PAGE>
MEGABIOS CORP.
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TOTAL
----------------- ----------------- DEFERRED ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT EQUITY
--------- ------- --------- ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30,
1994................... 2,084,970 $ 5,150 613,941 $ 217 $ -- $ (2,931) $ 2,436
Exercise of stock
options................ -- -- 68,164 20 -- -- 20
Issuance of Series C
convertible preferred
stock, net of issuance
costs of $76........... 1,292,089 4,942 -- -- -- -- 4,942
Conversion of notes
payable of $250 into
Series C convertible
preferred stock........ 64,442 250 -- -- -- -- 250
Net loss................ -- -- -- -- (5,429) (5,429)
--------- ------- --------- ------ ----- -------- -------
Balances at June 30,
1995................... 3,441,501 10,342 682,105 237 -- (8,360) 2,219
Issuance of Series C
convertible preferred
stock, net of issuance
costs of $36........... 1,827,871 7,063 -- -- -- -- 7,063
Issuance of Series D
convertible preferred
stock.................. 484,697 3,500 -- -- -- -- 3,500
Exercise of stock
options................ -- -- 693,543 208 -- -- 208
Repurchase of common
stock from employee.... -- -- (7,500) (3) -- -- (3)
Net loss................ -- -- -- -- -- (6,901) (6,901)
--------- ------- --------- ------ ----- -------- -------
Balance at June 30,
1996................... 5,754,069 20,905 1,368,148 442 -- (15,261) 6,086
Issuance of Series E
convertible preferred
stock, net of issuance
costs of $15........... 1,333,325 9,985 -- -- -- -- 9,985
Issuance of Series F
convertible preferred
stock, net of issuance
costs of $11........... 1,333,326 13,989 -- -- -- -- 13,989
Issuance of common stock
in lieu of cash payment
of Series E and F stock
offering commissions... -- (179) 119,046 179 -- -- --
Exercise of stock
options................ -- -- 116,517 56 -- -- 56
Repurchase of common
stock from employees... -- -- (35,984) (17) -- -- (17)
Deferred compensation
related to grant of
certain stock options,
net of amortization.... -- -- -- 750 (750) -- --
Amortization of deferred
compensation........... -- -- -- -- 71 -- 71
Net loss................ -- -- -- -- -- (4,947) (4,947)
--------- ------- --------- ------ ----- -------- -------
Balance at June 30,
1997................... 8,420,720 $44,700 1,567,727 $1,410 $(679) $(20,208) $25,223
========= ======= ========= ====== ===== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
MEGABIOS CORP.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss........................................... $(5,429) $(6,901) $(4,947)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation...................................... 732 1,101 1,294
Amortization of deferred compensation............. -- -- 71
Changes in operating assets and liabilities:
Other receivables................................ (85) 93 (214)
Prepaid expenses and other assets................ 163 (87) (115)
Deferred revenue................................. 250 281 356
Accounts payable................................. (334) (33) 546
Accrued liabilities.............................. (736) 95 (23)
------- ------- -------
Net cash used in operating activities........... (5,439) (5,451) (3,032)
------- ------- -------
Cash flow from investing activities
Purchase of property and equipment................. (2,829) (1,111) (1,687)
Deposits and other assets.......................... (210) (12) (35)
Purchases of short-term investments................ -- -- (15,725)
Maturities of short-term investments............... -- -- 500
------- ------- -------
Net cash used in investing activities........... (3,039) (1,123) (16,947)
------- ------- -------
Cash flows from financing activities
Proceeds from issuance of notes payable -.......... 250 -- --
Proceeds from issuance of long-term debt........... 1,894 1,683 894
Payments on long-term debt......................... (232) (906) (1,137)
Proceeds from issuance of convertible preferred
stock, net of issuance costs...................... 4,942 10,563 23,974
Proceeds from issuance of common stock, net of
purchases......................................... 20 205 39
------- ------- -------
Net cash provided by financing activities....... 6,874 11,545 23,770
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ (1,604) 4,971 3,791
Cash and cash equivalents, beginning of period...... 1,886 282 5,253
------- ------- -------
Cash and cash equivalents, end of period............ $ 282 $ 5,253 $ 9,044
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid....................................... $ 158 $ 357 $ 381
======= ======= =======
Schedule of noncash transactions
Conversion of notes payable and related accrued
interest into convertible preferred stock......... $ 250 $ -- $ --
======= ======= =======
Construction-in-progress included in accrued
liabilities....................................... $ -- $ -- $ 249
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Megabios Corp. ("Megabios" or the "Company") develops proprietary gene
delivery systems and provides preclinical development expertise to create
gene-based therapeutics designed for the treatment or prevention of genetic
and acquired diseases. The Company has developed several in vivo, non-viral
gene delivery systems to address a number of potential therapeutic
applications using a variety of therapeutic genes. The Company's clinical
development and commercialization strategy is to enter into collaborative
research and development agreements or "corporate partnerships" with
pharmaceutical and biotechnology companies.
Through June 30, 1995, the Company was in the development stage. During
fiscal 1996, the Company recognized significant revenues associated with its
collaborative agreements and expects to receive significant revenues under
these agreements in the future. Consequently, the Company is no longer
considered to be in the development stage. The Company will require additional
financial resources to complete development and commercialization of its
products. Management plans to continue to finance the Company primarily
through issuances of equity securities, collaborative research and development
arrangements and debt financing. If the financing arrangements contemplated by
management are not consummated, the Company may have to seek other sources of
capital or reevaluate its operating plans.
Revenue Recognition
Revenue related to collaborative research agreements with the Company's
corporate partners are recognized over the related funding periods for each
contract. The Company is required to perform research and development
activities as specified in each respective agreement on a best-efforts basis.
The Company is reimbursed based on the costs associated with the number of
full time equivalent employees working on each specific contract, which is
generally on a ratable basis over the term of the agreement. Research and
development expenses under the collaborative research agreements approximate
the revenue recognized under such agreements over the term of the respective
agreements. Deferred revenue may result when the Company does not incur the
required level of effort during a specific period in comparison to funds
received under the respective contracts. Milestone payments, if any, will be
recognized pursuant to collaborative agreements upon the achievement of
specified milestones, such as the filing of Investigational New Drug
Applications, commencement of clinical trials or receipt of regulatory
approvals. No milestone payments have been earned or recognized to date.
Research and Development Expenses
Research and development expenses consist of costs incurred for independent
and collaborative research and development. These costs include direct and
research-related overhead expenses.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities from
date of purchase of 90 days or less. At June 30, 1996 and 1997, the Company
had approximately $5,022,000 and $8,041,000, respectively, in a money market
mutual fund which invests in various U.S. government securities including
Treasury bills, notes and bonds. In addition, at June 30, 1997, the Company
had approximately $1,000,000 in a corporate note (none in fiscal 1996). These
amounts are included in cash and cash equivalents. The Company has not
recognized any gains or losses on the sale of cash equivalents and any
unrecognized gains and losses at June 30, 1996 and June 30, 1997 are not
material.
F-7
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and Amortization
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets (generally five years). Leasehold
improvements are amortized over five years which is the lease term and the
estimated useful life of the assets.
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of ("Statement 121"), and in accordance with Statement 121
identifies and records impairment losses, as circumstances dictate, on long-
lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
No such events have occurred with respect to the Company's long-lived assets,
which consist primarily of machinery and equipment and leasehold improvements.
The adoption of Statement 121 did not have a material impact on the financial
position, results of operations or cash flows of the Company.
Stock-Based Compensation
The Company generally grants stock options to employees for a fixed number
of shares with an exercise price equal to the fair value of the shares at the
date of grant. In accordance with the provisions of Statements of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), the Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations in accounting for option grants to employees under its
employee stock option plan and to adopt the pro forma disclosure alternative
as described in SFAS 123 (see Note 9). Option grants to all others are
accounted for using the fair value method prescribed by SFAS 123.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares (stock options, warrants and
convertible preferred stock) issued during the period commencing 12 months
prior to the initial filing of a proposed public offering at prices below the
assumed public offering price have been included in the calculation as if they
were outstanding for all periods presented (using the treasury stock method
for stock options and warrants and the if-converted method of preferred
stock). Per share information calculated on the above noted basis is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net loss per share..................................... $(1.49) $(1.81) $(1.11)
====== ====== ======
Shares used in calculating net loss per share (in
thousands)............................................ 3,638 3,812 4,438
====== ====== ======
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect, pursuant to SEC policy, to common equivalent shares from
convertible preferred stock issued more than 12 months prior to the initial
filing of the proposed initial public offering (using the if-converted method)
from the original date of issuance.
F-8
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires that Company's present two measures of earnings per share, basic
and diluted. Basic earnings per share is computed by dividing the net loss
available to common shareholders by the weighted-average number of common
shares outstanding for the period while diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of the
Company. SFAS 128 is effective for interim and annual periods ending after
December 15, 1997. The Company does not believe the adoption of SFAS 128 will
have a material impact on its loss per share calculations.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates its fair value.
Investments
The Company determines fair values based on quoted market values.
Long- and Short-Term Debt
The carrying amounts of the Company's borrowings under its term loan
and equipment financing agreements approximate their fair value. The
fair values of the Company's long-term debt are estimated using
discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
2. COLLABORATIVE AGREEMENTS
Glaxo Wellcome plc
In April 1994, the Company entered into a five-year collaborative agreement
with Glaxo Wellcome plc ("Glaxo Wellcome") to develop a gene-based therapeutic
for the treatment of cystic fibrosis. In May 1996, the agreement was amended
such that it expired as of April 1, 1997. The agreement provided for quarterly
nonrefundable research and development fees. The Company has completed all of
its obligations under the Glaxo Wellcome agreement and will receive future
payments, if any, only through the achievement of a certain clinical milestone
and the payment of royalties. Revenue for research and development was
recorded as earned in accordance with the agreement. Revenue recognized under
agreement with Glaxo Wellcome was $1,157,000, $1,625,000 and $1,971,000 for
the years ended June 30, 1995, 1996 and 1997, respectively. These amounts
represent 100%, 86% and 34% of total collaborative research and development
funding recognized by the Company during the years ended June 30, 1995, 1996
and 1997, respectively.
Pfizer Inc
In May 1996, the Company entered into a four-year collaborative research
agreement, as well as a license and royalty agreement, with Pfizer Inc
("Pfizer") to develop a gene-based therapeutic for the treatment of solid
tumors via angiogenesis inhibition. Under the terms of the collaborative
research agreement, the Company is
F-9
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
conducting research and preclinical development activities and will receive
funding for such activities through at least June 1998. However, Pfizer can,
at its option, terminate the program after June 1998 upon six months prior
notice to the Company. The agreements also provide for royalty and milestone
payments to the Company upon the occurrence of specified events as set forth
in the agreements. Pfizer will be responsible for clinical development and
regulatory functions, as well as large scale clinical and commercial
manufacturing and sales and marketing. Pfizer has worldwide marketing rights
to any products resulting from the collaboration. Revenue recognized under the
collaborative research agreement with Pfizer was $265,000 (14% of total
revenues) and $3,352,000 (58% of total revenues) for the year ended June 30,
1996 and 1997, respectively. Deferred revenue of $735,000 as of June 30, 1997
represents payment for research to be performed in the following quarter.
In May 1996, in connection with the above agreements, Pfizer purchased
484,697 shares of the Company's Series D convertible preferred stock at $7.22
per share. Furthermore, should Pfizer decide to extend the research term
beyond two years, it will be required, prior to January 1998 to commit to
purchase within 60 days $10,000,000 of the Company's common stock at a premium
to the then current market value.
Eli Lilly and Company
In May 1997, the Company entered into a two-year collaborative research
agreement with Eli Lilly and Company ("Lilly") to develop gene-based
therapeutics using BRCA1, a gene which has been identified as a putative tumor
suppressor. The agreement provides for research and development funding fees
as well as funding to support manufacturing and process development efforts.
Lilly has the option to extend the initial term of the agreement by up to two
years. However, after 21 months from the commencement date of the
collaborative research agreement, Lilly can, at its option, extend the
collaborative research agreement upon three-months advance notice to the
Company. The agreement provides for certain royalty and milestone payments to
the Company upon the occurrence of specified events as set forth in the
agreement. Lilly will be responsible for clinical development and regulatory
functions, as well as large-scale clinical and commercial manufacturing and
sales and marketing. Revenue recognized under the collaborative research
agreement with Lilly was $270,000 (5% of total revenues) for the year ended
June 30, 1997. Deferred revenue of $152,000 as of June 30, 1997 represents
payment for research to be performed in the following quarter.
In June 1997, in connection with the Lilly agreement, Lilly purchased
285,714 shares of the Company's Series F convertible preferred stock at $10.50
per share.
3. SPONSORED UNIVERSITY RESEARCH
The Company has entered into several research agreements with universities.
These agreements are generally cancelable by either party upon written notice
and may be extended by mutual consent of both parties. Research and
development expenses are recognized as the related services are performed,
generally ratably over the period of service. Expenses under these agreements
were approximately $865,000, $1,100,000, and $496,000 for the years ended June
30, 1995, 1996 and 1997, respectively.
4. INVESTMENTS
Short-term investments consist of corporate notes with remaining maturities
at the date of purchase of greater than 90 days but less than one year.
The Company accounts for marketable investments in accordance with Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities ("Statement 115"). Under Statement 115,
management determines the appropriate classification of debt securities at the
time of purchase
F-10
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and reevaluates such designation as of each balance sheet date. To date, all
marketable securities have been classified as held to maturity and are carried
at amortized cost. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. The cost of securities sold
is based on the specific identification method. Interest earned on securities
are included in interest income.
A summary of the Company's investments at June 30, 1997 follows (in
thousands).
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Short-term investments:
Corporate notes.................... $15,225 $ 2 $(10) $15,217
======= === ==== =======
</TABLE>
The Company held no such investments at June 30, 1995 or 1996. There have
been no realized gains or losses on short-term investments.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1997
------- ------
<S> <C> <C>
Machinery and equipment..................................... $ 2,493 $3,239
Furniture and fixtures...................................... 250 481
Leasehold improvements...................................... 3,230 3,235
Construction-in-progress.................................... -- 954
------- ------
5,973 7,909
Less accumulated depreciation............................... (1,882) (3,176)
------- ------
Property and equipment, net................................. $ 4,091 $4,733
======= ======
</TABLE>
6. LONG-TERM DEBT
Term Loan
In 1995, the Company established a line of credit for $1,500,000 with a
commercial bank. As of June 30, 1995, the Company had drawn down $510,000
under the line of credit. In July and August 1995, the Company drew down the
remaining $990,000 available line of credit, and in accordance with the terms
of the agreement, the Company elected to convert the entire balance to a term
loan bearing interest at prime plus 2% (10.25% and 10.75% at June 30, 1996 and
1997, respectively) due in 36 equal monthly installments. The loan is secured
by all tangible personal property, accounts receivable and funds on deposit,
other than the assets securing the equipment financing. As a condition of the
term loan, the Company must maintain a minimum net worth of $3,000,000 and is
prohibited from paying dividends. In conjunction with this financing
arrangement, the Company issued the bank a warrant to purchase 24,140 shares
of the Company's Series C convertible preferred stock at $3.88 per share (see
Note 9).
F-11
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Equipment Financing
In December 1993, the Company entered into an equipment financing agreement
for up to $2,300,000 with a financing company. As of June 30, 1996 and 1997,
the Company had financed $1,922,000 in equipment purchases under this
agreement structured as loans. The equipment loans are to be repaid over 42
months at interest rates ranging from 13.8% to 16.2% and are secured by the
related equipment. In conjunction with the original agreement, the Company
issued the financing company a warrant to purchase 21,630 shares of Company's
Series B convertible preferred stock at $3.88 per share (see Note 9).
In May 1996, the Company entered into an equipment financing agreement for
up to $2,700,000 with another financing company. As of June 30, 1996 and 1997,
the Company had financed $693,000 and $1,587,000, respectively, in equipment
purchases under this agreement structured as loans. The equipment loans are to
be repaid over 48 months at interest rates ranging from 15.2% to 16.2% and are
secured by the related equipment. In conjunction with this equipment financing
agreement, the Company issued a warrant to purchase 38,238 shares of Series C
convertible preferred stock at $3.88 per share (see Note 9).
Following is a schedule of future minimum principal payments under the term
loan and equipment financing arrangements at June 30, 1997 (in thousands):
<TABLE>
<S> <C>
Year ended June 30,
1998................................................................ $1,233
1999................................................................ 603
2000................................................................ 536
2001................................................................ 315
2002................................................................ 33
------
$2,720
======
</TABLE>
7. FACILITY LEASE
The Company leases its facility under operating leases. These leases expire
in November 2004 and October 2007 with renewal options at the end of the
initial terms of the leases. Minimal annual rental commitments under the
operating leases at June 30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Year ended June 30,
1998................................................................ $ 459
1999................................................................ 496
2000................................................................ 521
2001................................................................ 537
2002................................................................ 540
Thereafter.......................................................... 2,085
------
$4,638
======
</TABLE>
Rent expense for the years ended June 30, 1995, 1996 and 1997 was
approximately $221,000, $273,000, and $295,000, respectively.
8. RELATED PARTY TRANSACTIONS
The Company has issued loans to certain employees, of which $27,500 was
outstanding at June 30, 1997 ($46,000 as of June 30, 1996). These loans,
classified as other receivables on the balance sheet, bear interest at
approximately 4.8% to 6.0% per annum.
F-12
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. SHAREHOLDERS' EQUITY
Convertible Preferred Stock
The following table describes information with respect to the various series
of convertible preferred stock outstanding as of June 30, 1997:
<TABLE>
<CAPTION>
SHARES AGGREGATE
SHARES ISSUED AND ISSUANCE PRICE LIQUIDATION
AUTHORIZED OUTSTANDING PER SHARE PREFERENCE
---------- ----------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Series A................ 1,029,222 1,029,222 $ 1.05 $ 1,050
Series B................ 1,089,083 1,055,748 $ 3.88 4,100
Series C................ 3,700,000 3,184,402 $ 3.88 18,550
Series D................ 2,515,028 484,697 $ 7.22 3,500
Series E................ 1,333,333 1,333,325 $ 7.50 10,000
Series F................ 1,333,333 1,333,326 $10.50 14,000
Undesignated............ 333,334 -- -- --
---------- --------- -------
Total................... 11,333,333 8,420,720 $51,200
========== ========= =======
</TABLE>
Series A, B, C, D, E and F convertible preferred shareholders are entitled
to noncumulative annual dividends, when and if declared by the board of
directors, of $0.0612, $0.2331, $0.2331, $0.2331, $0.2331 and $0.2331 per
share, respectively, payable in preference to common stock dividends. No
dividends have been declared or paid by the Company.
Series A, B, C, D, E and F convertible preferred shares have a liquidation
preference of $1.0203, $3.8835, $5.8254, $7.2210, $7.50 and $10.50 per share,
respectively, plus all declared but unpaid dividends. Upon liquidation, after
payment of the full liquidation preference has been made to the Series A, B,
C, D, E and F shareholders, the remaining assets of the Company, if any, shall
be distributed ratably among the common shareholders and Series C convertible
preferred shareholders.
Preferred stock is convertible at any time at the option of the shareholder.
Each share of Series A convertible preferred stock is convertible into 0.74161
shares of common stock plus any accumulated and unpaid dividends. Each share
of Series B, C, D, E and F convertible stock is convertible into one share of
common stock plus any accumulated and unpaid dividends. While the conversion
ratios are subject to adjustment, based upon certain events including the
issuance of additional shares of common stock, to date no such adjustment has
occurred. Each share of Series A, B, C, D, E and F convertible preferred stock
automatically converts into common stock at the then effective conversion rate
(noted above) in the event of an underwritten public offering of the Company's
common stock at an offering price of not less than $7.50 per share and with
aggregate net proceeds to the Company, after deduction of underwriting
commissions and expenses, of at least $7,500,000. Each share of convertible
preferred stock votes equally with shares of common stock on an "if-converted"
basis.
In December 1996, in connection with the Series E preferred stock financing,
the board of directors approved the issuance of 66,666 shares of common stock
as commissions to certain financial advisors. The common stock was issued in
February 1997. Also, in May 1997, in connection with the Series F preferred
stock financing, the Company issued 52,380 shares of common stock as
commissions to certain financial advisors. Total offering costs of $179,000
associated with these issuances was recorded based on the fair value of the
common stock at the time of issuance.
F-13
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warrants
In connection with the equipment financing agreement entered into in
December 1993, the Company issued a warrant to purchase 21,630 shares of
Series B convertible preferred stock at an exercise price of $3.88 per share.
The warrant expires on the earliest of May 13, 2000, or the day prior to the
effectiveness of a registration statement covering an underwritten offering of
the Company's securities with aggregate proceeds of $7,500,000, or a merger or
sale of substantially all of the Company's assets. The warrant is exercisable
immediately.
The Company issued a warrant to purchase 28,969 shares of Series C
convertible stock at $3.88 per share to the commercial bank providing the line
of credit to the Company. In accordance with the terms of the warrant, the
number of shares subject to the warrant was reduced from 28,969 to 24,140 in
July 1995. The warrant provided for a reduction in the number of shares upon
securing a commitment of at least $7,000,000 in sales of Series C preferred
stock. The warrant is exercisable immediately and expires at the earlier of
June 1, 2000, or in the event of a merger or sale of substantially all of the
assets of the Company.
In connection with the equipment financing agreement in May 1996, the
Company issued a warrant to purchase 38,238 shares of Series C convertible
preferred stock at $3.88 per share. The warrant is exercisable immediately and
expires at the earlier of ten years from the date of issuance or five years
after an initial public offering of the Company's common stock.
The value ascribed to warrants issued by the Company as noted above, both
individually and in the aggregate, was immaterial.
Stock Option Plan
On October 14, 1993, the board of directors approved a stock option plan
(the "Plan"). As of June 30, 1997, the Company had reserved 1,440,000 shares
of common stock for issuance under the plan. Under the plan, incentive stock
options may be granted to employees, and nonstatutory stock options may be
granted to employees, directors, and consultants. Options are granted at an
exercise price of not less than the fair value per share of the common stock
on the date of grant and expire no later than ten years from the date of
grant. The options may be exercised immediately upon grant, however, the
shares issuable upon exercise of the options are subject to repurchase by the
Company. Options under the Plan generally vest 25% one year after the date of
grant and on a pro rata basis over the following 36 months. An aggregate of
344,654 shares are subject to repurchase at an aggregate repurchase price of
$120,000 as of June 30, 1997. Such repurchase rights will lapse at a minimum
rate of 20% per annum and over a period of time not to exceed five years from
the date the option was granted.
In October 1994, the Company offered all option holders with per share
exercise prices above $0.30, the fair value on the date of the offer, the
opportunity to reprice their options to the fair value as determined by the
board of directors on the date of the offer. The new unvested options have a
vesting period three months longer than the original vesting terms under the
previous option. In response to the offer, options on 143,546 shares were
returned by employees and canceled, and a similar number of new options were
regranted with an exercise price of $0.30 per share.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's stock
options equal the price set by the Company's Board of Directors for the
underlying stock as of the grant date, no compensation expense is recognized.
F-14
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value option valuation 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 valuation models require the input of
highly speculative assumptions including the expected stock price volatility.
Because the Company'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.
Pro forma information regarding net earnings and earnings per share is
required by SFAS 123 which also requires that the information be determined as
if the Company had accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that statement. The fair
value of these options was estimated at the date of grant using a minimum
value option pricing model, with the following assumptions: risk-free interest
rates from 4.8% to 6.4% and from 5.7% to 6.5% for grants in fiscal 1996 and
1997, respectively; a weighted-average expected life of the option from grant
date of 2.5 years; and a dividend yield of zero. The effect of applying the
minimum value model to the stock option activity did not result in pro forma
net loss and loss per share that are materially different from historical
amounts reported. Therefore, such pro forma information is not separately
presented herein. Future pro forma net income or loss and earnings or loss per
share may be materially different from actual amounts reported. The Company
will not use the minimum value option pricing model once the Company becomes a
publicly traded company.
Activity under the plan was as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
SHARES ---------------------------- WEIGHTED-
AVAILABLE NUMBER OF PRICE AVERAGE
FOR GRANT SHARES PER SHARE EXERCISE PRICE
--------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Balance at June 30,
1994................... 221,340 111,994 $1.11 $1.11
Additional
authorization........ 433,333 -- -- --
Options granted....... (666,870) 666,870 $0.30-$1.11 $0.34
Options exercised..... -- (68,164) $0.30 $0.30
Options canceled...... 153,879 (153,879) $0.30-$1.11 $1.07
-------- ----------- -------------- -----
Balance at June 30,
1995................... 141,682 556,821 $0.30 $0.30
Additional
authorization........ 320,000 -- -- --
Options granted....... (387,329) 387,329 $0.30 $0.30
Options exercised..... -- (693,543) $0.30 $0.30
Options canceled...... 16,582 (16,582) $0.30 $0.30
Options underlying
shares repurchased... 7,500 -- $0.30 $0.30
-------- ----------- -------------- -----
Balance at June 30,
1996................... 98,435 234,025 $0.30 $0.30
Additional
authorization........ 353,333 -- -- --
Options granted....... (388,680) 388,680 $1.50 $1.50
Options exercised..... -- (116,517) $0.30-$1.50 $0.45
Options canceled...... 26,566 (26,566) $0.30-$1.50 $0.51
Options underlying
shares repurchased... 32,045 -- $0.30-$1.50 $0.39
-------- ----------- -------------- -----
Balance at June 30,
1997................... 121,699 479,622 $0.30-$1.50 $1.22
======== =========== ============== =====
</TABLE>
F-15
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The options outstanding and exercisable at June 30, 1997 have been
segregated into ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING WEIGHTED WEIGHTED
EXERCISE AND EXERCISABLE AVERAGE AVERAGE
PRICE AT REMAINING EXERCISE
PER SHARE JUNE 30, 1997 CONTRACTUAL LIFE PRICE
--------- --------------- ---------------- --------
(IN YEARS)
<S> <C> <C> <C>
$0.30 110,421 8.26 $0.30
$1.50 369,201 9.65 $1.50
------- -----
479,622 9.33 $1.22
======= =====
</TABLE>
The weighted average fair value of options granted in fiscal 1996 and 1997
was $0.037 and $0.199 respectively. There were 61,025 shares vested and
unexercised at June 30, 1997 at a weighted average exercise price of $0.42.
In December 1996, the Company increased the shares reserved for issuance
under the stock option plan to 1,440,000 shares.
Through the year ended June 30, 1997, options to purchase 359,700 shares of
common stock, net of cancellations, were granted at $1.50 per share. Deferred
compensation of $750,000 was recorded on these options based on the deemed
fair value of the common stock at the dates of grant at prices ranging from
$1.50 to $3.75 per share, respectively. The Company recognized expense of
$71,000 in the period ended June 30, 1997 related to these options. In July
and August 1997, the Company granted options to purchase a total of 59,949
shares at exercise prices ranging from $2.70 to $2.88 per share. Additional
deferred compensation of approximately $390,000 is expected to be recorded
based on the deemed fair values of common stock ranging from $9.00 to $9.60
per share. The deferred compensation is being amortized to expense over the
vesting period of the options, generally four years.
Common Stock Reserved for Future Issuance
At June 30, 1997, the Company had reserved shares of common stock for future
issuance as follows:
<TABLE>
<S> <C>
Conversion of convertible preferred stock......................... 8,154,779
1993 Stock Option Plan............................................ 601,321
Exercise of Series B convertible preferred stock purchase warrants
convertible into common shares................................... 21,630
Exercise of Series C convertible preferred stock purchase warrants
convertible into common shares................................... 62,378
---------
8,840,108
=========
</TABLE>
10. INCOME TAXES
As of June 30, 1997, the Company had federal net operating loss
carryforwards and federal research credit carryforwards of approximately
$15,637,000 and $379,000, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in 2007 through 2012, if
not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
F-16
<PAGE>
MEGABIOS CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
for federal income taxes as of June 30 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 4,101 $ 5,425
Research and development credits........................... 429 625
Capitalized research and development....................... 775 724
Depreciation............................................... 460 840
Other, net................................................. 311 467
------- -------
Net deferred tax assets.................................... 6,076 8,081
Valuation allowance........................................ (6,076) (8,081)
------- -------
$ -- $ --
======= =======
</TABLE>
The net valuation allowance increased by $2,077,000 and $2,769,000 during
the years ended June 30, 1995 and 1996, respectively.
11. SUBSEQUENT EVENTS
In July 1997, the board of directors authorized management of the Company to
file a registration statement with the SEC permitting the Company to sell up
to 2,875,000 shares of Common Stock to the public (the "Offering"). In
connection with the Offering, the board of directors approved, subject to
shareholder approval, a one-for-three reverse stock split covering each class
and series of the Company's capital stock, options and warrants outstanding.
The reverse stock split, which was approved by the shareholders, was effected
on September 8, 1997. All share and per share amounts, as well as the dividend
and liquidation preferences for Series A, B, C, D, E and F convertible
preferred stock, included in the accompanying financial statements have been
retroactively adjusted to reflect the reverse stock split. If the Offering is
completed under the terms currently contemplated, 8,420,720 shares of
outstanding Series A, B, C, D, E and F convertible preferred stock will
convert into 8,154,779 shares of common stock. In conjunction with the
Offering, the board of directors authorized, subject to shareholder approval,
the reincorporation of the Company into Delaware. In connection with the
reincorporation the Company will adopt an Amended and Restated Certificate of
Incorporation which provides that the Company will be authorized to issue
10,000,000 shares of $0.001 par value preferred stock and 30,000,000 shares of
$0.001 par value common stock.
In July 1997, the board of directors also adopted, subject to shareholder
approval, the Company's 1997 Equity Incentive Plan (the "Incentive Plan") as
an amendment and restatement of the Company's 1993 stock option plan. There
are currently 2,100,000 shares of common stock authorized for issuance under
the Incentive Plan. Also in July 1997, the board of directors adopted, subject
to shareholder approval, the Company's Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 200,000 shares of common stock.
Under the Purchase Plan, the board of directors may authorize participation by
eligible employees, including officers, in periodic offerings following the
adoption of the Purchase Plan.
Unaudited pro forma shareholders' equity, as adjusted for the assumed
conversion of the Series A, B, C, D, E and F convertible preferred stock, is
set forth on the accompanying balance sheet.
F-17
<PAGE>
===============================================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the shares of Common Stock to which it relates, or an
offer to, or a solicitation of, any person in any jurisdiction where such an
offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as
of any time subsequent to the date hereof.
--------------------
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Special Note Regarding Forward-Looking Statements......................... 15
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 24
Management................................................................ 42
Certain Transactions...................................................... 51
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 58
Legal Matters............................................................. 60
Experts................................................................... 60
Additional Information.................................................... 60
Index to Financial Statements............................................. F-1
</TABLE>
--------------------
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in
this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
2,500,000 SHARES
[LOGO OF MEGABIOS]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
MONTGOMERY SECURITIES
HAMBRECHT & QUIST
, 1997
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in
connection with the distribution of the Common Stock being registered. All
amounts are estimated, except the SEC Registration Fee, the NASD Filing Fee
and the Nasdaq National Market Filing Fee:
<TABLE>
<S> <C>
SEC Registration Fee............................................... 11,325
NASD Filing Fee.................................................... 4,240
Nasdaq National Market Filing Fee.................................. 48,065
Blue Sky Fees and Expenses......................................... 5,000
Accounting Fees.................................................... 125,000
Legal Fees and Expenses............................................ 250,000
Transfer Agent and Registrar Fees.................................. 15,000
Printing and Engraving............................................. 125,000
Miscellaneous...................................................... 16,370
--------
Total............................................................ $600,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation provides that directors of the
Registrant shall not be personally liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
to the fullest extent permitted by the General Corporation Law of the State of
Delaware. The Registrant's Bylaws provide for indemnification of officers and
directors to the full extent and in the manner permitted by Delaware law.
Section 145 of the Delaware General Corporation Law makes provision for such
indemnification in terms sufficiently broad to cover officers and directors
under certain circumstances for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act").
The Registrant intends to enter into indemnification agreements with each
director and certain officers which provide indemnification under certain
circumstances for acts and omissions which may not be covered by any
directors' and officers' liability insurance.
The form of Underwriting Agreement, filed as Exhibit 1.1 to the Registration
Statement, provides for indemnification of the Registrant and its controlling
persons against certain liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since April 1, 1994, the Company has sold and issued the following
unregistered securities (share and dollar amounts do not reflect the 1 for 3
reverse stock split assumed elsewhere in this registration statement).
(1) Since inception to June 30, 1997, the Registrant has granted stock
incentive stock options and nonstatutory stock options to employees, directors
and consultants under its 1993 Stock Option Plan covering an aggregate of
4,664,795 shares of the Registrant's Common Stock, at an average exercise
price of $0.225 per share. Options to purchase 591,127 shares of Common Stock
have been canceled or have lapsed without being exercised, and 118,643 shares
of Common Stock have been repurchased by the Registrant.
(2) In May 1994, the Registrant issued a warrant exercisable for 64,890
shares of Series B Preferred Stock, convertible into 64,890 shares of Common
Stock, at an exercise price of $1.2945 per share to an accredited investor.
II-1
<PAGE>
(3) Between September 1994 and October 1995, the Registrant issued and sold
9,553,274 shares of Series C Preferred Stock, convertible into 9,553,274
shares of Common Stock, to a total of 37 accredited investors, including one
officer, for cash in the aggregate amount of $12,366,711.
(4) In June 1995, the Registrant issued a warrant exercisable for 115,875
shares, which number was subsequently adjusted to 72,422 shares by agreement
of the parties, of Series C Preferred Stock, convertible into 72,422 shares of
Common Stock, at an exercise price of $1.2945 per share to an accredited
investor.
(5) In April 1996, the Registrant issued a warrant exercisable for 114,716
shares of Series C Preferred Stock, convertible into 114,716 shares of Common
Stock, at an exercise price of $1.2945 per share to an accredited investor.
(6) In May 1996, the Registrant issued and sold 1,454,092 shares of Series D
Preferred Stock, convertible into 1,454,092 shares of Common Stock, to an
accredited investor for cash in the amount of $3,500,000.
(7) In October 1996, the Registrant issued and sold 4,000,000 shares of
Series E Preferred Stock, convertible into 4,000,000 shares of Common Stock to
24 investors for cash in the aggregate amount of $10,000,000. In connection
with the private placement, the Registrant issued 200,000 shares of Common
Stock to the placement agents equal in value to the aggregate amount of
$100,000.
(8) In May and June 1997, the Registrant issued and sold 3,999,998 shares of
Series F Preferred Stock, convertible into 3,999,998 shares of Common Stock to
17 investors, for cash in the aggregate amount $14,000,000. In connection with
the private placement, the Registrant issued 157,142 shares of Common Stock to
the placement agents equal in value to the aggregate amount of $78,571.
The sales and issuances of securities in the transactions described in
paragraph (1) above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation, as provided by Rule
701.
The sales and issuances of securities in the transactions described in
paragraphs (2) through (8) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2), Regulation D or Regulation
S promulgated thereunder. The purchasers in each case represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Appropriate legends are affixed to the stock
certificates issued in such transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
received either received adequate information about the Registrant or had
access, through employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<C> <S>
1.1 Underwriting Agreement(1)
3.1 Fifth Amended and Restated Articles of Incorporation of the Registrant
as filed May 14, 1997(1)
3.2 Certificate of Correction of Fifth Amended and Restated Articles of
Incorporation as filed July 25, 1997(1)
3.3 Bylaws of the Registrant(1)
3.4 Certificate of Incorporation to be effective upon closing of the
offering(1)
3.5 Bylaws of the Registrant to be effective upon the closing of the
offering(1)
4.1 Specimen Common Stock Certificate(1)
5.1 Opinion of Cooley Godward llp as to legality of the Common Stock(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.1 1997 Equity Incentive Plan(1)
10.2 Form of Incentive Stock Option Grant(1)
10.3 Form of Non-Incentive Stock Option Grant(1)
10.4 1997 Employee Stock Purchase Plan(1)
10.5 1997 Employee Stock Purchase Offering(1)
10.6 Form of Indemnification Agreement between the Registrant and its
directors and executive officers(1)
10.7 Amended and Restated Investor Rights Agreement, dated as of May 23,
1997 among the Registrant and the investors named therein(1)
10.8 Letter Agreement between the Registrant and Benjamin F. McGraw, III,
Pharm.D.(1)
10.9 Letter Agreement between the Registrant and Patrick G. Enright(1)
10.10 Letter Agreement between the Registrant and Rodney Pearlman, Ph.D.(1)
10.11 Lease Agreement between the Registrant and Provident Life and
Accident Insurance Company ("Provident"), dated December 21, 1993(1)
10.12 First Amendment to Lease Agreement between the Registrant and SFO
Associates LLC (successor in interest to Provident)(1)
10.13 Lease Agreement between the Registrant and SFO Associates LLC, dated
March 18, 1997(1)
10.14 Credit Agreement between the Registrant and Imperial Bank, dated as
of August 31, 1995(1)
10.15 Lease Agreement between the Registrant and LMSI, dated May 13, 1994,
as amended as of May 13, 1994(1)
10.16 Senior Loan and Security Agreement No. L0016 between the Registrant
and Phoenix Leasing Incorporated, dated as of April 22, 1996(1)
10.17* Research and License Agreement between the Registrant and Glaxo
Wellcome Group Limited, dated April 11, 1994, as amended as of May
31, 1996
10.18* Collaborative Research Agreement between the Registrant and Pfizer
Inc, dated May 31, 1996(1)
10.19* License and Royalty Agreement between Registrant and Pfizer Inc,
dated June 1, 1996
10.20 Stock Purchase Agreement between Registrant and Pfizer Inc, dated May
30, 1996(1)
10.21* Exclusive License Agreement between the Registrant and the Regents of
the University of California, dated May 9, 1996 as amended May 15,
1997
10.22* Research and License Agreement between the Registrant and Eli Lilly
and Company, effective May 23, 1997
10.23 Preferred Stock Warrant issued to Lease Management Services, Inc.,
dated May 13, 1994(1)
10.24 Preferred Stock Warrant issued to Imperial Bank, dated June 1,
1995(1)
10.25 Series C Preferred Stock Warrant issued to Phoenix Leasing
Incorporated, dated April 30, 1996(1)
11.1 Statement re computation of net loss per share(1)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page II-6)
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1)(1)
23.3 Consent of McDonnell, Boehnen, Hulbert, Berghoff, Ltd.(1)
24.1 Power of Attorney (see page II-5)(1)
27.1 Financial Data Schedule(1)
</TABLE>
- --------
* Confidential treatment being sought for portions of this document. A
separate filing setting forth the Registrant's application for confidential
treatment has been made with the Commission.
(1) Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because they are not applicable, or because the
information is included in the Financial Statements or the Notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
A. The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 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 of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
C. The 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 purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, MEGABIOS CORP.
HAS DULY CAUSED THIS AMENDMENT NUMBER 3 TO REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF, BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
BURLINGAME, COUNTY OF SAN MATEO, STATE OF CALIFORNIA, ON SEPTEMBER 11, 1997.
Megabios Corp.
/s/ Benjamin F. McGraw, III
By: _________________________________
BENJAMIN F. MCGRAW III, PHARM.D.
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NUMBER 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Benjamin F. McGraw, III Chairman, Chief September 11, 1997
- ------------------------------------- Executive Officer
BENJAMIN F. MCGRAW III, PHARM.D. and President
(Principal
Executive Officer)
/s/ Patrick G. Enright Chief Financial September 11, 1997
- ------------------------------------- Officer and Vice
PATRICK G. ENRIGHT President
(Principal
Financial and
Accounting Officer)
* Director September 11, 1997
- -------------------------------------
FRANK J. CAUFIELD
* Director September 11, 1997
- -------------------------------------
EDWARD L. ERICKSON
* Director September 11, 1997
- -------------------------------------
A. GRANT HEIDRICH
* Director September 11, 1997
- -------------------------------------
RUSSELL C. HIRSCH, M.D., PH.D.
* Director September 11, 1997
- -------------------------------------
RAJU KUCHERLAPATI, PH.D.
/s/ Benjamin F. McGraw, III
*By: ________________________________
BENJAMIN F. MCGRAW III, PHARM.D.
ATTORNEY-IN-FACT
/s/ Patrick G. Enright
*By: ________________________________
PATRICK G. ENRIGHT
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated August 4,
1997, for Note 11, as to which the date is September 8, 1997, in Amendment
No. 3 to the Registration Statement (Form S-1, No. 333-32593) and related
Prospectus of Megabios Corporation for the registration of 2,875,000 shares of
its common stock.
/s/ ERNST & YOUNG LLP
Palo Alto, California
September 10, 1997
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<C> <S> <C>
1.1 Underwriting Agreement(1)
3.1 Fifth Amended and Restated Articles of Incorporation of
the Registrant as filed May 14, 1997(1)
3.2 Certificate of Correction of Fifth Amended and Restated
Articles of Incorporation as filed July 25, 1997(1)
3.3 Bylaws of the Registrant(1)
3.4 Certificate of Incorporation to be effective upon closing
of the offering(1)
3.5 Bylaws of the Registrant to be effective upon the closing
of the offering(1)
4.1 Specimen Common Stock Certificate(1)
5.1 Opinion of Cooley Godward llp as to legality of the
Common Stock(1)
10.1 1997 Equity Incentive Plan(1)
10.2 Form of Incentive Stock Option Grant(1)
10.3 Form of Non-Incentive Stock Option Grant(1)
10.4 1997 Employee Stock Purchase Plan(1)
10.5 1997 Employee Stock Purchase Offering(1)
10.6 Form of Indemnification Agreement between the Registrant
and its directors and executive officers(1)
10.7 Amended and Restated Investor Rights Agreement, dated as
of May 23, 1997 among the Registrant and the investors
named therein(1)
10.8 Letter Agreement between the Registrant and Benjamin F.
McGraw, III, Pharm.D.(1)
10.9 Letter Agreement between the Registrant and Patrick G.
Enright(1)
10.10 Letter Agreement between the Registrant and Rodney
Pearlman, Ph.D.(1)
10.11 Lease Agreement between the Registrant and Provident Life
and Accident Insurance Company ("Provident"), dated
December 21, 1993(1)
10.12 First Amendment to Lease Agreement between the Registrant
and SFO Associates LLC (successor in interest to
Provident)(1)
10.13 Lease Agreement between the Registrant and SFO Associates
LLC, dated March 18, 1997(1)
10.14 Credit Agreement between the Registrant and Imperial
Bank, dated as of August 31, 1995(1)
10.15 Lease Agreement between the Registrant and LMSI, dated
May 13, 1994, as amended as of May 13, 1994(1)
10.16 Senior Loan and Security Agreement No. L0016 between the
Registrant and Phoenix Leasing Incorporated, dated as of
April 22, 1996(1)
10.17* Research and License Agreement between the Registrant and
Glaxo Wellcome Group Limited, dated April 11, 1994, as
amended as of May 31, 1996
10.18* Collaborative Research Agreement between the Registrant
and Pfizer Inc, dated May 31, 1996(1)
10.19* License and Royalty Agreement between Registrant and
Pfizer Inc, dated June 1, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<C> <S> <C>
10.20 Stock Purchase Agreement between Registrant and Pfizer
Inc, dated May 30, 1996(1)
10.21* Exclusive License Agreement between the Registrant and
the Regents of the University of California, dated May
9, 1996 as amended May 15, 1997
10.22* Research and License Agreement between the Registrant
and Eli Lilly and Company, effective May 23, 1997
10.23 Preferred Stock Warrant issued to Lease Management
Services, Inc., dated May 13, 1994(1)
10.24 Preferred Stock Warrant issued to Imperial Bank, dated
June 1, 1995(1)
10.25 Series C Preferred Stock Warrant issued to Phoenix
Leasing Incorporated, dated April 30, 1996(1)
11.1 Statement re computation of net loss per share(1)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see
page II-6)
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1)(1)
23.3 Consent of McDonnell, Boehnen, Hulbert, Berghoff,
Ltd.(1)
24.1 Power of Attorney (see page II-5)(1)
27.1 Financial Data Schedule(1)
</TABLE>
- --------
* Confidential treatment being sought for portions of this document. A
separate filing setting forth the Registrant's application for confidential
treatment has been made with the Commission.
(1) Previously filed.
<PAGE>
EXHIBIT 10.17
RESEARCH & LICENSE AGREEMENT BETWEEN
------------------------------------
MEGABIOS CORP.
AND
GLAXO GROUP LIMITED
APRIL 11, 1994
<PAGE>
RESEARCH AND LICENSE AGREEMENT
<TABLE>
<CAPTION>
ARTICLE PAGE
<S> <C>
ARTICLE I - DEFINITIONS............................................ 1
ARTICLE II - RESEARCH.............................................. 6
ARTICLE III - RESEARCH FEES........................................ 7
ARTICLE IV - INFORMATION, REPORTS AND SAMPLES...................... 7
ARTICLE V - DEVELOPMENT, MARKETING AND SALES....................... 9
ARTICLE VI - GRANT OF CYSTIC FIBROSIS LICENSES AND SUBLICENSES..... 10
ARTICLE VII- GRANT OF ASTHMA OPTION................................ 12
ARTICLE VIII - PAYMENT OBLIGATIONS................................. 13
ARTICLE IX - OWNERSHIP, PATENTS AND INFRINGEMENT................... 16
ARTICLE X - CONFIDENTIALITY........................................ 19
ARTICLE XI- WARRANTIES AND COVENANTS............................... 22
ARTICLE XII - TERM AND TERMINATION................................. 23
ARTICLE XIII - ASSIGNMENT.......................................... 27
ARTICLE XIV - PUBLICITY............................................ 27
ARTICLE XV - MISCELLANEOUS......................................... 28
</TABLE>
<PAGE>
RESEARCH AND LICENSE AGREEMENT
------------------------------
THIS AGREEMENT is entered into as of the 11th day of April, 1994, by and
between MEGABIOS CORP., a California corporation, having offices at 871
Industrial Road, San Carlos, California 94070 ("MEGABIOS") and GLAXO GROUP
LIMITED, a corporation organized under the laws of England and Wales having
offices at Glaxo House, Berkeley Avenue, Greenford, Middlesex, UB60NN, England,
("Glaxo"), each of MEGABIOS and Glaxo being referred to herein as a "Party."
WHEREAS, MEGABIOS owns or has rights to technology related to delivery
systems for DNA fragments, particularly the Cystic Fibrosis Transmembrane
Regulator ("CFTR") gene; and
WHEREAS, Glaxo has established expertise in the worldwide development and
sale of pharmaceuticals, particularly those in the area of respiratory
therapeutics; and
WHEREAS, the Parties desire to establish a relationship to foster research
in such delivery system for the treatment of cystic fibrosis and to provide a
mechanism for the commercialization of products resulting therefrom;
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I - DEFINITIONS
-----------------------
1.1 "Affiliate" means any entity that directly or indirectly Owns, is
Owned by, or is under common Ownership with, a Party to this Agreement, where
"Owns" or "Ownership" means direct or indirect possession of at least 50% of the
outstanding voting securities of a corporation or a comparable equity interest
in any other type of entity.
1.2 "Agreement" means the present agreement together with all appendices.
---------
1
<PAGE>
1.3 "Asthma Agent" means any Complex containing at least a [*] which
------------
Complex is useful In the prevention or treatment of asthma.
1.4 "Asthma Field" means the subject matter of the disease asthma and
------------
methods and compounds including Asthma Agents, to prevent or treat asthma.
1.5 "Complex" means an aggregate, assemblage, association or construct of
-------
at least two different molecules.
1.6 "Control" means possession of the ability, or an option to obtain such
-------
ability, to grant a license or sublicense as provided for herein without
violating the terms of any agreement with or other arrangement with, or the
rights of, any Third Party.
1.7 "Cystic Fibrosis Agent" means any Complex containing at least a
---------------------
nucleotide sequence and a Lipid, which Complex is useful in the prevention or
treatment of cystic fibrosis, and includes without limitation a Complex of [*]
and one of the plasmid DNA's referred to by MEGABIOS as [*]
1.8 "Cystic Fibrosis Field" means the subject matter of Cystic Fibrosis
---------------------
Agents, the disease cystic fibrosis, and methods and compounds to prevent or
treat cystic fibrosis, including the CFTR gene.
1.9 "Cystic Fibrosis Information" means any and all present and future
---------------------------
information relating to the Cystic Fibrosis Field, including but not limited to
techniques, inventions, designs, practices, knowledge, know-how, skill and
experience, test data (including pharmacological and clinical test data),
analytical and quality control data, and marketing, sales and manufacturing
data.
2
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<PAGE>
1.10 "Development Costs" means the costs to find the desired formulation
-----------------
of a Cystic Fibrosis Agent and to prove its safety and efficacy prior to it
being approved by a governmental agency for sale in the prevention or treatment
of cystic fibrosis, including, without Limitation, the costs of toxicology
studies, clinical safety studies and clinical efficacy studies.
1.11 "Effective Date" means the date first written above.
--------------
1.12 "Glaxo Nucleotide Sequence" means a nucleotide sequence as to which
-------------------------
(i) Glaxo has filed one or more patent applications or has been issued one or
more patents in the United States and the European Patent Office containing one
or more claims covering such sequence or its use, or (ii) Glaxo has some other
demonstrable market exclusivity for the commercialization of, including, orphan
drug status, in both the United States and the EEC.
1.13 "Joint Research Policy Committee" or "JRPC" means a committee of
-------------------------------
MEGABIOS and Glaxo employees as described in Article II of this Agreement.
1.14 "Lipid" means[ * ]amphiphile of a hydrophilic
headgroup and one or more attached hydrophobic moieties, which amphiphile
spontaneously forms multimolecular structures of various forms on dispersion in
aqueous media, including naturally occurring compounds, derivatives thereof, or
compounds that do not occur in nature. Naturally occurring compounds include,
without limitation, phospholipids, sphingolipids, glycolipids, sterols,
glycerides, and other known structures. The headgroup may contain the following
in any desired or preferred combination:
1.[ * ]
2.[ * ]
3.[ * ]
4.[ * ]
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<PAGE>
5. [ * ]
The hydrophobic moieties of the molecule may be composed, without
limitation, of one or more of the following:
1.[ * ]most likely composed of between [ * ] carbon atoms,
with between [ * ]
2.[ * ]most likely composed of between [ * ] carbon atoms,
with between
3. [*]
The hydrophobic moieties of the molecule may be linked to the headgroup via
a number of possible chemical bonds, including, but not limited to, ester bonds,
ether bonds, and amide bonds.
1.15 "Michigan License" means the form of license agreement entitled
----------------
"License Agreement/Michigan File 492c2 Technology/Therapeutic License" offered
by the University of Michigan, a copy of which is attached hereto as Appendix 1.
1.16 "Net Sales Revenue" means the gross receipts from sales in the
-----------------
Territory by Glaxo, or its Affiliates or sublicensees, as appropriate, of Cystic
Fibrosis Agents to Third Parties less deductions for, to the extent specifically
allocated to sales of such Agents, (i) direct transportation charges, including
transit insurance, of transport of the Agent to the customer, (ii) sales and
excise taxes and duties and any other governmental charges imposed upon
production, importation, use or sale of such Agent all to the extent paid or
allowed by Glaxo, its Affiliate or sublicensee (iii) normal and customary trade,
quantity and cash rebates, credits or discounts actually allowed or incurred,
(iv) actual allowances or credits to customers on account of
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<PAGE>
rejection or return of Cystic Fibrosis Agents to Glaxo its Affiliates or
sublicensees and (v) royalties and fees payable to Third Parties under Section
9.5.
1.17 "Patent" means a valid and enforceable patent including any
------
extension, registration, confirmation, supplementary protection certificate,
reissue or renewal thereof.
1.18 "Patent Application" means an application for a Patent.
------------------
1.19 "Patent Rights" means the rights granted by any governmental
-------------
authority under those claims of a Patent which cover a method or material in the
Cystic Fibrosis Field, which Patent is owned or Controlled by MEGABIOS or an
Affiliate of MEGABIOS, provided that such Patent issues from (i) a Patent
--------
Application filed at any time prior to one year following the termination of the
Research Term or (ii) a Patent Application which claims priority from or has an
effective filing date of any Patent Application disclosing the same method or
material and filed at any time prior to one year following termination of the
Research Term.
1.20 "Research Term" means the period commencing on the Effective Date
-------------
and ending on such date as determined pursuant to Section 12.9.
1.21 "Sublicensing Revenue" means the gross revenues actually received by
--------------------
Glaxo as a result of the sublicensing of any Cystic Fibrosis Agents, including
upfront fees and milestone payments, but excluding royalty payments.
1.22 "Territory" means all countries of the world, including nations,
---------
states, provinces and territories.
1.23 "Third Party" means any party other than MEGABIOS or Glaxo or an
-----------
Affiliate of MEGABIOS or Glaxo.
1.24 "UCSF Option" means the option to license granted to MEGABIOS
-----------
pursuant to the Option to an Exclusive License for In Vivo Gene Therapy
agreement dated as of April 30,
5
<PAGE>
1992, by and between the Regents of the University of California and MEGABIOS,
attached hereto as Appendix 2.
ARTICLE II - RESEARCH
---------------------
2.1 MEGABIOS Research. MEGABIOS will conduct research in the Cystic
-----------------
Fibrosis Field for the Research Term with the goal of identifying Cystic
Fibrosis Agents as outlined in the research plan attached as Appendix 3.
MEGABIOS will expend reasonable efforts in the conduct of such research and
maintain laboratories and offices necessary to carry out the goals of the
research plan, as determined by the JRPC. Except as provided in Article III,
MEGABIOS will bear all of its own expenses incurred in connection with such
research and will manage and compensate its employees and consultants assigned
to such research as it deems appropriate.
2.2 Responsibilities of the JRPC. Scientific aspects of the research under
----------------------------
Section 2.1 will be reviewed by the JRPC, which will be comprised of four
members with two being appointed and replaced by Glaxo and two being appointed
and replaced by MEGABIOS. The JRPC shall establish the research objectives to be
achieved by the Parties. It will be the responsibility of the JRPC to establish
such research objectives in a manner that advances compounds to exploratory
development as rapidly as possible, consistent with Article 2.1 and subject to
the requirements of responsible drug development. The initial members of the
JRPC will be appointed by the Parties within 30 days following the Effective
Date. The JRPC, in establishing the research objectives, will consider such
scientific aspects of the research as scientific direction, allocation of
resources within the scope of Section 2.1, and selection of compounds for
further evaluation. The JRPC will meet at least four times per year at
locations and times to be determined by the JRPC, with each Party to bear all
travel and related costs for
6
<PAGE>
its members. A chair of the JRPC will be nominated alternatively by Glaxo and
MEGABIOS to twelve month terms.
2.3 Disagreements. Any disagreement among members of the JRPC will be
-------------
resolved within the JRPC based on the efficient achievement of the objects of
this Agreement. Should the members maintain their disagreement and MEGABIOS or
Glaxo request a resolution, the Chief Executive Officer of MEGABIOS and the
Senior Science Officer of Glaxo will confer and use their best efforts to
resolve the disagreement.
ARTICLE III - RESEARCH FEES
---------------------------
3.1 Research Fees. On the Effective Date Glaxo will pay MEGABIOS[ * ]and
-------------
on the first days of July and October in 1994, and on the first days of January,
April, July and October of up to and including October 1, 1998, Glaxo will pay
MEGABIOS[ * ] for research to be conducted by MEGABIOS under Section 2.1.
ARTICLE IV - INFORMATION, REPORTS AND SAMPLES
---------------------------------------------
4.1 Disclosure by MEGABIOS. During the Research Term, MEGABIOS will make
----------------------
available and, upon request, disclose to Glaxo all Cystic Fibrosis Information
known and Controlled by MEGABIOS as of the Effective Date and at any time during
the Research Term, as provided in this Section 4.1. It is understood and
acknowledged by the Parties that personnel from Glaxo and MEGABIOS shall
informally confer with respect to efforts conducted in the Cystic Fibrosis
Field. With respect to Cystic Fibrosis Information which MEGABIOS desires that
Glaxo not use outside the Cystic Fibrosis Field, MEGABIOS shall deliver to
Glaxo, in writing, a non-confidential (for purposes of Section 10.5) summary of
such Cystic Fibrosis
7
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<PAGE>
Information. Upon receipt of such summary, Glaxo shall request or decline, in
writing, receipt of the Cystic Fibrosis Information so summarized. Should Glaxo
request receipt, MEGABIOS shall set forth such Cystic Fibrosis Information in
full, in writing and marked as confidential. All Cystic Fibrosis Information
disclosed to Glaxo in writing and marked confidential as provided above will not
be disclosed by MEGABIOS to any Third Party for use in the Cystic Fibrosis
Field. During the Research Term MEGABIOS will deliver a semi-annual report
presenting a summary of its research in the Cystic Fibrosis Field pursuant to
Section 2.1. MEGABIOS will also communicate through the JRPC to inform Glaxo of
research conducted pursuant to Section 2.1. MEGABIOS will provide Glaxo with
[ * ] or photocopies thereof for any and all work carried out under this
Agreement, as reasonably requested by Glaxo Any publication of Cystic Fibrosis
Information will be subject to Section 10.4. MEGABIOS agrees that during the
term of this Agreement it will not enter into any arrangement with any Third
Party with the purpose of developing Cystic Fibrosis Agents.
4.2 Use of Cystic Fibrosis Information. Glaxo may use all Cystic Fibrosis
----------------------------------
Information conveyed to Glaxo by MEGABIOS under Section 4.1 in any manner it
wishes, at its sole discretion, consistent with the license to Patent Rights
granted with respect thereto under Article VI and subject to the restrictions
and limitations on use set forth in Section 10.5. The disclosure by Glaxo to any
Third Party of Cystic Fibrosis Information disclosed by MEGABIOS to Glaxo will
be subject to Section 10.1 of this Agreement.
4.3 Testing of Samples. Upon request, during the Research Term samples
------------------
of all compounds reasonably believed by either Party to be Cystic Fibrosis
Agents or to be useful in the design of Cystic Fibrosis Agents shall be tested
for such utility by Glaxo. Glaxo shall communicate the results of such testing
to MEGABIOS and such results will be considered
8
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<PAGE>
Cystic Fibrosis Information to be maintained under obligations of
non-disclosure under Section 10.1 of this Agreement. Any such samples delivered
to Glaxo by MEGABIOS shall be subject to Section 10.3.
ARTICLE V - DEVELOPMENT, MARKETING AND SALES
--------------------------------------------
5.1 Development. Based on research conducted under Article II and Cystic
-----------
Fibrosis Information disclosed under Article IV, the JRPC will recommend to
Glaxo and Glaxo will select Cystic Fibrosis Agents to be developed to the stage
of being approved by relevant regulatory authorities for sale in the Territory.
Glaxo will carry out its responsibilities outlined in the research plan attached
hereto as Appendix 3 including the funding of the Development Costs after such
selection for such development for sales in various countries of the Territory
with the amount of such funding and the selection of countries being at Glaxo's
sole discretion. Glaxo will promptly notify MEGABIOS of any decision not to
----------------------------------------------------------
develop a particular Cystic Fibrosis Agent.
- ---------------------------
5.2 Marketing. Glaxo will evaluate and position Cystic Fibrosis Agents
---------
as it deems appropriate m its sole discretion; provided, however, that Glaxo
shall discuss and consider contributions from MEGABIOS regarding such evaluation
and positioning.
5.3 Sales. Glaxo will sell Cystic Fibrosis Agents in quantities and
-----
packaging to buyers and with sales, detailing, advertising and promotional
efforts as it deems appropriate in its sole discretion; provided, however, that
Glaxo shall discuss and consider contributions from MEGABIOS regarding such
sales, detailing, advertising and promotional efforts, including co-promotion
with Glaxo of a Cystic Fibrosis Agent.
9
<PAGE>
5.4 Pricing. It is the mutual objective of the Parties to develop Cystic
-------
Fibrosis Agents and make them available to the medical community as rapidly as
practical, consistent with each Parties' internal standards, and to derive
overall profits from the sale of such Agents consistent with industry standards.
Consistent with the foregoing, Glaxo will sell Cystic Fibrosis Agents at prices
it deems appropriate in its sole discretion. In determining price, Glaxo will
adhere to all state and federal laws and regulations regarding discriminatory
pricing, predatory pricing, bundling and dumping, including the Robinson-Patman
Act and the Sherman Anti-Trust Act.
5.5 Non-Exclusivity. It is recognized by the Parties that Glaxo may wish
---------------
to enter into agreements with Third Parties regarding products to treat diseases
other than cystic fibrosis, including products which contain [*]
Glaxo shall have the right to enter into such agreements, providing Glaxo
adheres to the provisions of Article X.
ARTICLE VI - GRANT OF CYSTIC FIBROSIS LICENSES AND SUBLICENSES
--------------------------------------------------------------
6.1 Research License to Glaxo. MEGABIOS grants Glaxo a sole license, with
-------------------------
the right to grant sublicenses only as set forth in Article 6.3, under its
Patent Rights to make and use materials to conduct research solely in the Cystic
Fibrosis Field and in the Territory. MEGABIOS shall retain the right under its
Patent Rights to make and use all materials in the Cystic Fibrosis Field to the
extent necessary to perform its obligations under this Agreement. MEGABIOS
retains all rights under its patent rights to conduct research outside the
Cystic Fibrosis Field.
6.2 Commercialization License to Glaxo. MEGABIOS grants Glaxo the
----------------------------------
exclusive, even as to MEGABIOS, license, with the right to grant sublicenses
only as set forth in Section
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6.3 below under MEGABIOS' Patent Rights, in the Territory, to make, have made,
use, sell, supply and import Cystic Fibrosis Agents in the Cystic Fibrosis
Field.
6.3 Sublicensing. Glaxo may grant a sublicense of any of its rights under
------------
Sections 6.1 and 6 2 to an Affiliate of Glaxo upon prior written notice to
MEGABIOS, and to a Third Party upon grant of written permission by MEGABIOS,
which permission shall not be unreasonably withheld, based solely upon the
ability of the sublicensee to achieve reasonable sales volumes of Cystic
Fibrosis Agents on which payments are to be made to MEGABIOS under Article VIII.
Any sublicenses granted hereunder shall be consistent with the terms and
conditions in this Agreement, and as a condition of the effectiveness of any
sublicense hereunder, the sublicensee shall agree in writing to be bound by the
terms and conditions of this Agreement to which Glaxo is bound, without
limitation.
6.4 Third Party License to Glaxo. MEGABIOS grants Glaxo a sublicense under
----------------------------
any license it Controls which is granted to MEGABIOS by a Third Party and which
concerns a method or material in the Cystic Fibrosis Field, including the UCSF
Option, such sublicense herein granted to Glaxo to be effective only upon
MEGABIOS' exercise, where applicable, of an option for such Third Party license.
Such sublicense shall be on terms substantially identical to the license granted
to MEGABIOS by such Third Party and shall be limited to the Cystic Fibrosis
Field. Glaxo understands and acknowledges that it has the sole responsibility
for obtaining a license under the Michigan License, and for making all payments
due in connection therewith.
6.5 Disclosure; Research License to MEGABIOS. During the Research Term,
----------------------------------------
Glaxo will make available and, upon request, disclose to MEGABIOS information
controlled by Glaxo regarding Cystic Fibrosis Agents. Glaxo hereby grants to
MEGABIOS a royalty-free, non-
11
<PAGE>
exclusive license, under Glaxo's patent rights, to make and use any materials
solely for the conduct of research by MEGABIOS in the Cystic Fibrosis Field
pursuant to Article II.
ARTICLE VII - GRANT OF ASTHMA OPTION
------------------------------------
7.1 Option MEGABIOS grants Glaxo the right to negotiate with MEGABIOS
------
regarding a non-exclusive, worldwide license, with the right to grant
sublicenses, solely to develop, manufacture and sell Asthma Agents in the Asthma
Field under MEGABIOS patent rights (and/or using MEGABIOS know-how) covering
such Asthma Agents. The terms of such license shall include a royalty payment at
a rate [ * ] of net sales, minimum royalty obligations and milestone
payments (the "Asthma Option"). The Asthma Option shall expire on the earlier of
(i) the [ * ]anniversary of the Effective Date, (ii) the termination of this
Agreement pursuant to Article XII, or (iii) thirty (30) days written notice of
unilateral termination of the option by Glaxo to MEGABIOS (the "Option Term").
The disclosure to Glaxo of any information regarding Complexes designed or
constructed primarily to be Asthma Agents shall be governed by separate
agreement between the parties. If, upon expiration of the Option Term, the
Parties have not entered into a license agreement with respect to Asthma Agents,
then Glaxo's rights with respect to such Agents shall terminate, and MEGABIOS
shall be free to enter into any arrangement with any Third Party regarding such
Agents.
7.2 Option Fees. In consideration for the option granted in Section 7.1
-----------
above, Glaxo shall pay to MEGABIOS the amounts set forth below in each of the
years of the Research Term so indicated:
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Year 1 [ * ]
Year 2 [ * ]
Year 3 [ * ]
Year 4 [ * ]
Year 5 [ * ]
Such amounts shall be payable in advance, 30 days prior to the commencement of
the relevant Year for which payment is due, with "Year 1" commencing on the
Effective Date and each "Year" thereafter commencing upon the respective
anniversary thereof.
ARTICLE VIII - PAYMENT OBLIGATIONS
----------------------------------
8.1 Royalty Payments. Glaxo will pay MEGABlOS a royalty equal to [*] of
-----------------
the Net Sales Revenue for Cystic Fibrosis Agents sold by Glaxo, its Affiliates
or sublicensees. In addition, Glaxo shall pay to MEGABIOS an amount equal to [*]
of all Sublicensing Revenue. Glaxo shall pay to MEGABIOS the payments provided
in this Section 8.1 for
8.2 Minimum Royalties. Glaxo agrees that in each of the first [ * ]
------- ----------
following first commercial sale of a Cystic Fibrosis Agent in any country, Glaxo
shall pay to MEGABIOS a minimum royalty as follows:
First Year [ * ]
Second Year [ * ]
Third Year [ * ]
All such minimum royalties shall be paid quarterly, beginning in the quarter
following the quarter during which such first commercial sale occurs, in U.S.
dollars, within 60 days after the
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end of each calendar quarter. Any failure of Glaxo to pay to MEGABIOS the
applicable minimum royalty shall be deemed a material breach of this Agreement
by Glaxo, subject to the remedies of Section 12.7.
8.3 Milestone Payment. Within 30 days prior to its initiation of the first
-----------------
Phase III clinical trials to be conducted with respect to a Cystic Fibrosis
Agent, Glaxo will deliver to MEGABIOS written notice of such initiation. Within
60 days following such notice, Glaxo will pay MEGABIOS [ * ] Glaxo shall be
entitled to credit [ * ] of such milestone payment (i.e.,:[*] against the
royaltiesowed pursuant to Sections 8.1 and 8.2 for a period of [ * ] provided
that the credit allowable in any year shall not exceed [*]
8.4 Third Party Royalties. In addition to and not in lieu of any other
----------------------
payments provided for in this Agreement, Glaxo shall pay to MEGABIOS, or to the
Regents of the University of California on behalf of MEGABIOS, the royalties
owed by MEGABIOS to the Regents of the University of California pursuant to any
license taken under the UCSF Option, as set forth in Section 5.1(d) of the UCSF
Option. Such royalties and payments shall be made according to the terms and
subject to the conditions of such license agreement and the UCSF Option.
8.5 Royalty Calculation; Reports. Within 60 days after the end of each
----------------------------
calendar quarter, Glaxo will deliver to MEGABIOS a report of its Net Sales
Revenue and Sublicensing Revenue, a report of the accounting used to calculate
Net Sales Revenue and Sublicensing Revenue, including line items for each
deduction, and payment due to MEGABIOS under Section 8.1 and 8.2, in the
currency in which such Net Sales Revenue or Sublicensing Revenue takes place.
Each payment and report shall be accompanied by a certificate of a financial
officer of Glaxo stating that the payment calculation is correct.
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8.6 Records Retention. Glaxo shall keep, and shall cause its Affiliates
-----------------
and sublicensees to keep, complete and accurate records pertaining to the sale
of Cystic Fibrosis Agents in sufficient detail to enable MEGABIOS to confirm the
accuracy of calculations of all payments hereunder. Such records shall be
maintained for a two year period following the year in which such payments were
made to MEGABIOS
8.7 Audit Request. At the request and expense of MEGABIOS, Glaxo shall
-------------
permit MEGABIOS or a certified public accountant designated by MEGABIOS
reasonably acceptable to Glaxo, at reasonable times and upon reasonable notice
to examine Glaxo records to determine the correctness of any report or payment
made hereunder.
8.8 Tax Withholding. In the event that Glaxo is required to withhold
---------------
taxes imposed upon MEGABIOS for any payment under this Agreement by virtue of
the statutes, laws, codes or governmental regulations of a country in which
Cystic Fibrosis Agents are sold, then such payments will be made by Glaxo on
behalf of MEGABIOS by deducting from the payment due MEGABIOS and remitting such
taxes to the proper authorities on a timely basis and the payments provided for
under this Agreement will be adjusted appropriately, provided that Glaxo
supplies MEGABIOS with official documentation and/or tax receipts of such
withholdings supporting such taxes and such payments as may be required by
MEGABIOS for its tax records on or before the date on which such payment is due
MEGABIOS under this Agreement.
15
<PAGE>
ARTICLE IX - OWNERSHIP, PATENTS AND INFRINGEMENT
------------------------------------------------
9.1 Ownership.
---------
(a) Inventions. As determined in accordance with the rules of
----------
inventorship under U.S. law, each Party shall have sole ownership of all
inventions invented, discovered or developed solely by it, its employees or
agents during the term of this Agreement which cover a method or material in the
Cystic Fibrosis Field. Glaxo and MEGABIOS shall own jointly all inventions
invented, discovered or developed jointly by the parties, their employees or
agents.
(b) Know-How. All non-patented or non-patentable inventions, know-
--------
how, techniques, processes and the like invented, discovered or developed
jointly by Glaxo and MEGABIOS shall be considered prior knowledge of each Party
under Sections 10.2(a) and 10.6(a).
9.2 Filing of MEGABIOS Patent Applications. MEGABIOS will have full
--------------------------------------
responsibility to file, prosecute and maintain Patent Applications in the Cystic
Fibrosis Field according to its own internal standards and in its own name, so
as to obtain Patents covering inventions which it owns under Section 9.1(a),
including Cystic Fibrosis Agents, their preparation, formulation and use. Should
MEGABIOS not wish to proceed with any such filing, Glaxo may request such filing
and MEGABIOS will make such filing in any country of the Territory. All of the
out-of-pocket expenses of such filing, prosecution, maintenance and issue in a
particular country shall be [* ] by MEGABIOS and Glaxo, except that if MEGABIOS
or Glaxo does not wish to pay for any such expenses, the Party paying the
entirety of such expenses in such country will recover such amount not paid by
the other Party from the
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<PAGE>
other Party's share of Net Sales Revenue for a Cystic Fibrosis Agent covered by
Patent Rights resulting from such filing in the applicable jurisdiction and
marketed by Glaxo.
9.3 Filing of Glaxo Patent Applications. Glaxo will have full
-----------------------------------
responsibility to file, prosecute and maintain Patent Applications in the Cystic
Fibrosis Field according to its own internal standards and in its own name, so
as to obtain Patents covering inventions which it owns under Section 9.1(a),
including Cystic Fibrosis Agents, their preparation, formulation and use. All
of the out-of-pocket expenses of such filings, prosecution, maintenance and
issue shall be paid by Glaxo, except that if Glaxo does not wish to proceed with
any such filings, MEGABIOS may request such filing and Glaxo will make such
filing in any country of the Territory at the expense of MEGABIOS and MEGABIOS
will recover such amount paid in a like manner to Section 9.2 in addition to any
payments made pursuant to Articles III and VIII hereof.
9.4 Joint Patent Applications. The Parties will discuss and agree as to
-------------------------
which Party shall have the primary responsibility for the application and
prosecution of Patent Applications and maintenance of patent rights worldwide
for those inventions owned jointly under Section 9.1(a).
9.5 Third Party Technology. Should Glaxo determine that an additional
----------------------
license from a Third Party is reasonably necessary to sell Cystic Fibrosis
Agents, Glaxo will negotiate with the Third Party in good faith [*] any bona
fide royalties or fee payable to such Third Party.
9.6 Patent Application Files, Assistance. Glaxo and MEGABIOS will provide
------------------------------------
each other with copies of Patent Applications filed under Sections 9.2 and 9.3
and such will be maintained under the obligations of Article X. Each Party
agrees to assist the other in every proper way in the application, prosecution,
and maintenance of Patent Applications and Patent
17
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
Rights under this Article IX, including the execution of all proper documents
requested by the filing Party.
9.7 Enforcement of Patent Rights. Glaxo and MEGABIOS shall promptly
----------------------------
notify the other in writing of any infringement of a Patent within the Patent
Rights of which they become aware. MEGABIOS may, but shall not be required to,
prosecute any alleged infringement or threatened infringement of a Patent within
the Patent Rights of which it is aware or which is brought to its attention. In
the event MEGABIOS brings such action, Glaxo shall, at MEGABIOS' expense,
cooperate fully with MEGABIOS, including if required to bring such action, the
furnishing of a power of attorney. MEGABIOS shall act in its own name and at its
own expense unless, with respect to alleged infringement or threatened
infringement of such a Patent in the Cystic Fibrosis Field, Glaxo or its
Affiliate elects to pay a percentage of all MEGABIOS reasonable out-of-pocket
costs. Any recovery obtained shall belong to MEGABIOS unless Glaxo pays some
percentage of said costs, in which case Glaxo shall receive [ * ]
9.8 Glaxo Right to Enforce Patent Rights. If MEGABIOS fails to commence
------------------------------------
prosecution of an alleged or threatened infringement under Section 9.7 above
within six months after it has been brought to MEGABIOS' attention, Glaxo may,
but shall not be required to, prosecute such alleged or threatened infringement.
Glaxo shall act in its own name and at its own expense. In such event, MEGABIOS
shall cooperate fully with Glaxo, at Glaxo's expense, including if required in
order to bring such an action, the furnishing to Glaxo of a power of attorney.
Any recovery obtained shall be applied first to reimburse Glaxo for its out of
pocket expenses incurred in such action. Any remaining sums, unless specified as
punitive damages, shall be [ * ]
18
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
ARTICLE X - CONFIDENTIALITY
---------------------------
10.1 Obligation of Non-Disclostire. Any Cystic Fibrosis information
-----------------------------
communicated by the Parties under this Agreement shall be maintained by the
receiving Party in strict confidence and shall not be disclosed by either Party
to any Third Party, except as provided in Section 10.2 or 10.4 or the following
sentence. Such information may be disclosed by a Party to an Affiliate of the
Party, to a consultant retained by the Party or retained by an Affiliate of the
Party, or any other person or entity, provided that such Affiliate, consultant
or other person or entity agrees to be bound substantially to the same extent as
the Parties under this Article X.
10.2 Exceptions. The Section 10.1 obligation of non-disclosure of Cystic
----------
Fibrosis Information will apply to all such Information except that which:
(a) is known by the receiving Party prior to its disclosure as
demonstrated by written evidence; or
(b) becomes known to the receiving Party from a Third Party who was under
no obligation of non-disclosure regarding such Information; or
(c) is public knowledge or later becomes public knowledge through no act
on the part of the receiving Party, provided such disclosure occurs
only after such Information becomes public knowledge.
The disclosing Party shall use its best efforts to summarize in writing and
deliver to the other Party within 90 days following disclosure any Cystic
Fibrosis Information that is disclosed orally or visually and which the
disclosing Party wishes the receiving Party to maintain under an obligation of
non-disclosure under Section 10.1. Nothing in this Article X shall prevent a
Party from disclosing to government authorities information received hereunder
or generated by such Party by itself which is necessary, in the good faith
opinion of such Party, to receive
19
<PAGE>
government permission to make, have made, use, sell, supply or import Cystic
Fibrosis Agents, or as permitted by Article XIV.
10.3 Samples. Any samples delivered to Glaxo by MEGABIOS pursuant to
-------
Section 4.3, or any other biological or chemical materials delivered to Glaxo,
shall be used by Glaxo solely in the Cystic Fibrosis Field, unless such samples
or materials are freely available from a Third Party or are already in the
possession of Glaxo from sources other than MEGABIOS. Title to such samples and
materials shall remain with MEGABIOS, and their physical conveyance by MEGABIOS
to Glaxo in and of itself shall not convey upon Glaxo any rights to MEGABIOS's
intellectual property rights. Any samples submitted to a Party under Article IV
which have apparent applicability only in the Cystic Fibrosis Field will not be
transferred by such Party to any Third Party, including transfer to another
research partner of such Party, except as directed by the JRPC. The foregoing
restriction shall end with respect to a particular sample when its structure is
properly made public, including disclosure by publication under Section 10.4.
Any samples submitted to a Party under Article IV which have apparent
applicability inside and outside, or only outside, the Cystic Fibrosis Field may
be disclosed or transferred by such Party to a Third Party only under the
conditions of Section 10.1 or 10.4.
10.4 Publications. MEGABIOS shall submit to Glaxo manuscripts, including
------------
abstracts, and texts of poster presentations and other presentations, of any of
its research applicable to the Cystic Fibrosis Field at least 30 days prior to
presentation or submission for publication for purposes of allowing Glaxo to
comment on the manuscript or text, request filing by MEGABIOS of a Patent
Application under Section 9.2, or initiate filing of a Patent Application under
Section 9.3. Glaxo will make decisions on such publications and filing of
Patent Applications at its sole
20
<PAGE>
discretion. MEGABIOS will make such submission to Glaxo until one year
following the end of the Research Term.
10.5 Obligation of Non-Use. Any Cystic Fibrosis Information disclosed by
---------------------
MEGABIOS in writing and marked as confidential pursuant to Section 4.1, or
disclosed by Glaxo and marked as confidential, shall not be used by the
receiving Party outside of the Cystic Fibrosis Field, except as provided under
Section 10.6.
10.6 Exceptions. The Section 10.5 obligation of non-use of Cystic Fibrosis
----------
Information will apply to all such Information except that which:
(a) is known by the receiving Party prior to its disclosure as
demonstrated by written evidence; or
(b) becomes known to the receiving Party from a Third Party who was
under no obligation of non-use regarding such Information; or
(c) is public knowledge or later becomes public knowledge through no
act on the part of the receiving Party, provided such use occurs
only after such Information becomes public knowledge.
10.7 Termination of Prior Agreements. The Confidential Disclosure
-------------------------------
Agreement by and between Glaxo and MEGABIOS dated as of April 26, 1993, is
hereby terminated with respect to the disclosure and use of Cystic Fibrosis
Information only and all such Information to be kept confidential under such
agreements as of the Effective Date shall be maintained by the receiving Party
under the obligations of nondisclosure and non-use set forth in this Agreement.
21
<PAGE>
ARTICLE XI - WARRANTIES AND COVENANTS
-------------------------------------
11.1 No Conflict. Each Party represents and warrants that (i) it has not
-----------
granted any license rights, or committed itself to grant any license rights, to
any Third Party within the Cystic Fibrosis Field, and (ii) its execution,
delivery and performance of this Agreement will not conflict with the terms of
any other agreement to which it is or becomes a party or by which it is or
becomes bound.
11.2 Disclaimer of Warranties. The Parties understand that research under
------------------------
this Agreement will involve technologies that have not been approved by any
regulatory authority and that neither Party guarantees the safety or usefulness
of any Cystic Fibrosis Agent. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
THE PARTIES DISCLAIM ALL WARRANTIES OF ANY NATURE, EXPRESS OR IMPLIED, INCLUDING
THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR THAT ANY
CYSTIC FIBROSIS AGENTS OR CYSTIC FIBROSIS INFORMATION ARE FREE FROM ANY THIRD
PARTY INFRINGEMENT CLAIM. Without limiting the generality of the foregoing,
MEGABIOS expressly does not warrant (i) the patentability or usefulness of any
Cystic Fibrosis Information, or (ii) that the research conducted by MEGABIOS
pursuant to Article II will yield any Useful or patentable results or
inventions.
11.3 Indemnification. Glaxo hereby agrees to save, defend and hold
---------------
MEGABIOS and its agents and employees harmless from and against any and all
suits, claims, actions, demands, liabilities, expenses and/or loss, including
reasonable legal expense and attorneys fees ("Losses") resulting directly or
indirectly from the manufacture, use, handling, storage, sale or other
disposition of chemical agents, including Cystic Fibrosis Agents, by Glaxo, its
Affiliates or sublicensees, except to the extent such Losses result from the
negligence of MEGABIOS.
22
<PAGE>
In the event MEGABIOS seeks indemnification under this Section 11.3, it
shall inform Glaxo of a claim as soon as reasonably practicable after it
receives notice of the claim, shall permit Glaxo to assume direction and control
of the defense of the claim (including the right to settle the claim solely for
monetary consideration), and shall cooperate as requested (at the expense of
Glaxo) in the defense of the claim.
11.4 Thirty Party Licenses. MEGABIOS warrants that it is and will
---------------------
continue to be an optionee under the UCSF Option until the earlier of April 30,
1995 or expiration or termination of that certain Research Agreement between
MEGABIOS and the Regents of the University of California dated April 30,1992.
MEGABIOS warrants that it is empowered to, and will upon request of Glaxo, grant
the sublicenses to Glaxo thereunder as set forth in Section 6.4, without
compensation to MEGABIOS for the granting of such sublicense.
ARTICLE XII - TERM AND TERMINATION
----------------------------------
12.1 Term. Unless sooner terminated as provided in this Article XII, the
----
term of this Agreement will be from the Effective Date until Glaxo, its
Affiliates and sublicensees ceases selling Cystic Fibrosis Agents for which
payments are due MEGABIOS in accordance with Article VIII, in every country of
the Territory.
12.2 Termination by Mutual Agreement. By mutual written agreement, the
----------- -- ------ ---------
Parties may at any time terminate this entire Agreement or the Research Term.
12.3 Termination by Glaxo for Cause. Upon 90 days notice, Glaxo may
------------------------------
terminate this Agreement, under any of the following circumstances:
(i) The issuance of a Patent in the United States or the European Patent
Office owned or Controlled by a Third Party which contains a claim that covers a
Cystic
23
<PAGE>
Fibrosis Agent which the JRPC recommends for development under this Agreement or
its use and for which there is not a viable alternative, provided Glaxo or
MEGABIOS have obtained a bona fide opinion from an independent patent attorney
who has analyzed such Patent and concluded that the Patent is more likely than
not valid and infringed by the making, using or selling of such Cystic Fibrosis
Agents; or
(ii) The regulatory approval in the United States or the EEC, of a
pharmaceutical containing a nucleotide sequence to treat cystic fibrosis,
including a Cystic Fibrosis Agent, under laws, including the Orphan Drug
Statutes of the United States, or circumstances which make it unlikely that
Glaxo will be able to obtain regulatory approval of a Cystic Fibrosis Agent in
the U.S. or the EEC containing a CFTR gene within three years after the end of
the Research Term, in the opinion of independent regulatory counsel approved by
both parties.
In the event of termination by Glaxo under this Section 12.3, all licenses
granted to Glaxo under Article VI will terminate, Glaxo will convey and assign
all Cystic Fibrosis Information in its possession to MEGABIOS, and Glaxo will
not use such Information in any research and Glaxo will not conduct any research
in the area of liposomal delivery of the CFTR gene until the three-year
anniversary of the date of such termination.
12.4 Glaxo Unilateral Termination. Following the tenth anniversary of the
----------------------------
Effective Date, Glaxo shall have the right, for any or no reason, to terminate
this Agreement upon 12 months written notice, provided that during such time
Glaxo shall use its good faith efforts to transfer to MEGABIOS all aspects of
the manufacture, marketing and sale of the Cystic Fibrosis Agents, at Glaxo's
expense. In the event of such termination, Glaxo shall assign to MEGABIOS any
and all regulatory filings and approvals for commercial sale of such Cystic
24
<PAGE>
Fibrosis Agents, and shall License and/or assign to MEGABIOS all rights
necessary for MEGABIOS to continue to manufacture, market and sell such Cystic
Fibrosis Agents in the countries in which such Agents had been sold by Glaxo, at
Glaxo's expense.
12.5 Termination by MEGABIOS.
-----------------------
(a) In the event Glaxo, its Affiliates or sublicensees cease to conduct
research, development or commercialization efforts with respect to Cystic
Fibrosis Agents for a period of 12 months then MEGABIOS shall have the right to
-----------
terminate this Agreement upon written notice, whereupon the licenses granted to
Glaxo under Article VI shall terminate, and MEGABIOS shall be free to enter into
any arrangement with any Third Party with respect to the development and
commercialization of Cystic Fibrosis Agents.
(b) In the event Glaxo fails to file an IND or its equivalent in the
United States or the United Kingdom within 3 years from the Effective Date, then
MEGABIOS shall have the right to terminate this Agreement upon written notice,
whereupon the licenses granted to Glaxo under Article VI shall terminate,
MEGABIOS shall be free to enter into any arrangement with any Third Party with
respect to the development and commercialization of Cystic Fibrosis Agents, and
Glaxo's obligation to pay Research Fees under Article III shall terminate;
provided, however, that such 3 year period shall be suspended for a period
equal to the time of any delay incurred by Glaxo in attempting to file any such
IND, which delay arose solely from Force Majeure, as defined under Section 15.1.
12.6 Termination after the Research Term. In the event Glaxo, its
-----------------------------------
Affiliates or sublicensees obtain IND approval but fail to commence clinical
trials with respect to one or more Cystic Fibrosis Agents during the Research
Term in any country of the Territory, then MEGABIOS shall have the right to
terminate this Agreement upon written notice to Glaxo. In
25
<PAGE>
the event of any termination under this Section 12.6, the licenses granted to
Glaxo under Article VI shall terminate, and MEGABIOS shall be free to enter into
any arrangement with any Third Party with respect to the development and
commercialization of Cystic Fibrosis Agents.
12.7 Material Breach. MEGABIOS or Glaxo may terminate this Agreement
---------------
because of a material breach of this Agreement by the other Party upon 90 days
written notice of such termination setting forth in reasonable detail the
specifics of the breach; provided, however, that if within such 90 day period
the Party in breach cures the deficiency, then termination of the Agreement
shall not occur; and provided further, that in the event of nonpayment of
amounts due hereunder such notice and cure period shall be 30 days. In the event
of termination of this Agreement pursuant to this Section 12.7, all licenses
granted under Article VI shall terminate, and Glaxo will return to MEGABIOS all
MEGABIOS Cystic Fibrosis Information, and in the case of breach by Glaxo, Glaxo
will convey and assign all Cystic Fibrosis Information in its possession to
MEGABIOS.
12.8 Survival of Confidentiality Article. The provisions of Article X
-----------------------------------
with respect to Cystic Fibrosis Information or samples generated or conveyed
prior to the end of the term of this Agreement or the termination thereof shall
survive the end of such term or termination.
12.9 End of Research Term. The Research Term will commence on the
--------------------
Effective Date and, unless this Agreement is sooner terminated as provided in
Section 12.2, 12.3, 12.5 or 12.7, will continue until the 5 year anniversary
thereof; provided, however, that Glaxo's obligations to pay Research Fees to
MEGABIOS under Article III shall survive any termination of this Agreement,
except termination by Glaxo under Section 12.7 or by MEGABIOS under Section
12.5(b).
26
<PAGE>
ARTICLE XIII - ASSIGNMENT
-------------------------
13.1 Successor. Neither this agreement nor the obligation of the Parties
---------
hereunder shall be assignable except upon the prior written permission of the
other Party; provided, however, that either Party shall each have the right to
assign its respective obligations hereunder to any successive owner or any
Affiliate without such consent.
ARTICLE XIV - PUBLICITY
-----------------------
14.1 Publicity Review. Glaxo and MEGABIOS will jointly discuss and agree,
----------------
based on the principles of Section 14.2, on any statement to the public
regarding the execution and the subject matter of this Agreement, the research
to be conducted by the Parties under this Agreement, or any other aspect of this
Agreement, except with respect to disclosures required by law or regulation;
provided, however, that MEGABIOS shall be free to discuss the existence and
general terms of this Agreement with potential investors of MEGABIOS. Promptly
following the Effective Date, the Parties shall issue the press release attached
hereto as Appendix 4. Subject to Section 10.2, any of such statements may be
made to a Third Party providing any such Third Party is bound under obligations
of confidentiality substantially similar to those of Article X.
14.2 Standards. In the discussion and agreement referred to in Section
---------
14.1, the principles observed by Glaxo and MEGABIOS will be accuracy, the
requirements for confidentiality under Article X, the advantage a competitor of
Glaxo or MEGABIOS may gain from any public statements or statements to Third
Parties under Section 14.1, the requirements of disclosure under any securities
laws or regulations of the United States or the United Kingdom, including those
associated with public offerings, and the standards and custom in the
27
<PAGE>
pharmaceutical industry for such disclosures by Companies comparable to Glaxo
and MEGABIOS.
ARTICLE XV - MISCELLANEOUS
--------------------------
15.1 Force Majeure. Neither party shall lose any rights hereunder or be
-------------
Liable to the other party for damages or losses on account of failure of
performance by the defaulting Party if the failure is occasioned by government
action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or
any other similar cause beyond the control of the defaulting Party, provided
that the Party claiming force majeure has exerted all reasonable efforts to
avoid or remedy such force majeure.
15.2 Notices. Any notices or communications provided for in this
-------
Agreement to be made by either of the parties to the other shall be in writing,
in English, and shall be made by prepaid courier service with return receipt
addressed to the other at its address set forth above. Any such notice or
communication may also be given by hand, or facsimile to the appropriate
destination, followed by a mailing. Either Party may by like notice specify an
address to which notices and communications shall thereafter be sent. Notices
sent by mail, facsimile or cable shall be effective upon receipt and notices
given by hand shall be effective when delivered.
15.3 Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Delaware, as such laws are applied to contracts entered into and to be
performed within such state.
15.4 Waiver. Except as specifically provided for herein, the waiver from
------
time to time by either of the Parties of any of their rights or their failure to
exercise any remedy shall not
28
<PAGE>
operate or be construed as a continuing waiver of same or of any other of such
Party's rights or remedies provided in this Agreement.
15.5 Severability. If any term, covenant or condition of this Agreement
------------
or the application thereof to any 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.
15.6 Entire Agreement. This Agreement sets forth all the covenants,
----------------
promises, agreements, warranties, representations, conditions and understandings
between the Parties hereto and supersedes and terminates all prior agreements
and understanding between the Parties regarding the subject matter hereof. There
are no covenants, promises, agreements, warranties, representations, conditions
or understandings, either oral or written, between the Parties other than as set
forth herein or therein. No subsequent alteration, amendment, change or addition
to this Agreement shall be binding upon the Parties hereto unless reduced to
writing and signed by the respective authorized officers of the Parties.
29
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate
originals by their proper officers as of the date and year first above written.
MEGABIOS CORP GLAXO GROUP LIMITED
/s/WILLIAM L. BROWN /s/RICHARD B. LYKER
By _____________________________ By____________________________
Vice President
Title: ___________________________ Title:__________________________
April 11, 1994
Date: __________________________ Date:__________________________
30
<PAGE>
APPENDIX 1
----------
[MICHIGAN FORM OF LICENSE]
31
<PAGE>
LICENSE AGREEMENT
MICHIGAN FILE 492c2 TECHNOLOGY
THERAPEUTIC LICENSE
This is an Agreement, effective as of the _____ day of ______ 1992 (the
"Effective Date"), entered into by __________________, a corporation
incorporated in the State of ______________ with offices located at
______________________________ ("LICENSEE") , the Regents of the University
of Michigan, a constitutional corporation of the State of Michigan
("MICHIGAN"), and HSC Research and Development Limited Partnership, a
Partnership Organized and subsisting under the laws of the Province of
Ontarion, Canada ("RDLP"). LICENSEE, MICHIGAN and RDLP agree as follows:
1. BACKGROUND.
----------
1.1 Michigan and the Research Institute of the Hospital for Sick Children of
Toronto, Ontario, Canada, ("HSC") have conducted research relating to
cystic fibrosis. As a result of that research, MICHIGAN and RDLP have
developed rights in the "Licensed Patents" defined below.
1.2 LICENSEE desires to obtain, and MICHIGAN and RDLP, consistent with their
missions of education and research, desire to grant a license of the
Licensed Patents on the terms and conditions listed below.
2. DEFINITIONS.
-----------
2.1 "TECHNOLOGY", as used in this Agreement, shall mean the information,
manufacturing techniques, data, designs or concepts developed by MICHIGAN
and HSC, Covering the gene for cystic fibrosis and uses thereof as [ * ]
2.2 "Parties", in singular or plural usage as required by the context, shall
mean LICENSEE, MICHIGAN and/or RDLP.
2.3 "Affiliate(s)" shall mean any individual, corporation, Partnerships,
proprietorship or other entity controlled by, controlling, or under common
control with LICENSEE through equity ownership, ability to elect directors,
or by virtue of a majority of overlapping directors, and shall include any
individual, corporation, partnership, proprietorship or other entity
directly or indirectly owning, owned by or under common ownership with
LICENSEE to the extent of thirty percent 30% or more of the voting
shares, including shares owned beneficially by such party.
2.4 "Licensed Patent(s)" shall mean [ * ] and all foreign
equivalent patent applications and Patent Cooperation Treaty filings, and
all patents issuing therefrom in which MICHIGAN
1
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
and/or RDLP has or acquires a properly interest. "Licensed Patent(s)" shall
also include any divisional, continuation (excluding continuations-in-
part), reissue, reexamination or extension of the above-described patent
applications and resulting patents, along with any extended or restored
term, and any confirmation patent, registration patent, or patent of
addition.
2.5 "Valid Claim(s)" means any claim(s) in an unexpired patent or pending in a
patent application included within the Licensed Patents which has not been
held unenforceable, unpatentable, or invalid by a decision of a court or
other governmental agency of competent jurisdiction, unappealable or
unappealed within the time allowed for appeal, and which has not been
admitted to be invalid or unenforceable through reissue 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 conflicting decisions are equal in number, and the
majority of decisions shall prevail when the conflicting decisions are
unequal in number.
2.6 "Product(s)" shall mean any product(s) whose manufacture, use or sale in
any country would, but for this Agreement, comprise an infringement,
including contributory infringement, of one or more Valid Claims.
2.7 "Field of Use" shall refer to the field for which Products may be designed,
manufactured, used and/or marketed under this Agreement, and shall mean
solely Products to be used for the therapeutic treatment of the disease
cystic fibrosis.
2.8 "Net Sales" shall mean the sum, over the term of this Agreement, of all
amounts received and all other consideration received (or, when in a form
other than cash or its equivalent, the fair market value thereof when
received) by LICENSEE and its Affiliates from persons or entities due to or
by reason of the sale or other distribution of Products, or the use of
Products, including any use by LICENSEE and Affiliates in the performance
of services for their customers; less the following deductions and offsets,
but only to the extent such sums are otherwise included in the computation
of Net Sales, or are paid by LICENSEE and not otherwise reimbursed:
refunds, rebates, replacements or credits actually allowed and taken by
purchasers for return of Products; customary trade, quantity and cash
discounts actually allowed and taken; excise, value-added, and sales taxes
actually paid by LICENSEE for Products; and shipping and handling charges
actually paid by LICENSEE for Products.
2
<PAGE>
2.9 "Royalty Quarter(s)" shall mean the three-month periods ending on the last
day of March, June, September and December of each year.
2.10 "Territory" means all Countries of the world.
2.11 "First Therapeutic Sale" shall mean the first sale of any Product
(including any sale of a service using a Product in the Field of Use) by
LICENSEE or an Affiliate, other than for use in clinical trials being
conducted to obtain FDA or other governmental approvals to market Products.
3. GRANT OF LICENSE.
----------------
3.1 MICHIGAN and RDLP hereby grant to LICENSEE a non-exclusive license under
the Licensed Patents to make, have made, use (including use in the
performance of services for its customers), market and sell, in the
Territory, Products designed and marketed solely for use in the Field of
Use.
3.2 MICHIGAN and RDLP reserve the right to license and use all aspects of the
TECHNOLOGY and the Licensed Patents for any use or purpose, including the
right to develop and produce Products.
3.3 The license granted to LICENSEE herein shall be without the right to
sublicense, except that LICENSEE may sublicense Affiliate(s) who agree to
be and are bound in writing to the terms and conditions of this Agreement
to the same extent as LICENSEE. LICENSEE agrees to strictly monitor and
enforce compliance with the terms and conditions of this Agreement by all
Affiliate sublicensees.
4. CONSIDERATION.
4.1 LICENSEE shall pay to MICHIGAN a one-time license issue fee of [*]
forthwith following the Effective Date. Notwithstanding any other terms of
this Agreement, this Agreement and the license granted hereunder shall not
become effective until such issue fee is received by MICHIGAN.
4.2 LICENSEE shall also pay MICHIGAN, with respect to each Royalty Quarter, a
royalty equal to [ * ] of the Net Sales of LICENSEE and Affiliates.
4.3 The obligation to pay MICHIGAN a royalty under this Article 4 is imposed
only once with respect to the same unit of Product regardless of the
number of Valid Claims or Licensed Patents covering the same; however, for
purposes of determination of Payments due hereunder, whenever the term
"Product" may apply to a property during various stages of manufacture, use
or sale, Net Sales, as otherwise defined, shall be derived from the sale,
distribution or use of such Product by LICENSEE or Affiliates at the stage
of its highest invoiced value to unrelated third parties.
3
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
4.4 LICENSEE shall pay to MICHIGAN an annual license maintenance fee. This
annual fee shall accrue in the Royalty Quarter ending in March of the years
specified below, and shall be due and payable and included with the report
for that quarter.
If LICENSEE defaults in the payment of any annual license maintenance fee,
and fails to remedy that default within thirty (30) days after written
notice of it by MICHIGAN, then this Agreement and the license rights
conveyed herein shall terminate.
The annual license maintenance fees shall be as follows:
(1) In 1994 and 1995: [ * ]
(2) In 1996, 1997 and 1998: [ * ]
(3) In 1999, and in each year thereafter during the term of this Agreement
up to and including the year in which LICENSEE first obtains FDA
approval or other governmental approval to distribute or use Products
in the Field of Use: [ * ]
Also, notwithstanding (1-3) above (and in place of the amounts therein
listed, when applicable):
(4) In the first calendar year following the year in which LICENSEE
obtains the approval described in (3) above, and in each year
thereafter during the term of this Agreement up to and including the
year in which the First Therapeutic Sale occurs: [ * ]
Also, notwithstanding (1-4) above (and in place of the amounts therein
listed, when applicable):
(5) In the first calendar year following the First Therapeutic Sale: [*]
(6) In the second year following the First Therapeutic Sale: U.S. [*]
(7) In the third year following the First Therapeutic Sale:
U.S. [ * ] and
(8) In the fourth year following the First Therapeutic Sale, and in each
year thereafter during the term of this Agreement; [ * ]
Each annual fee paid under (5-8) above may be credited by LICENSEE in full
against all earned royalties otherwise to be paid to MICHIGAN under
Paragraph 4.2 for the calendar year in which the specific annual fee is
paid. The year for which such credits against royalties may be taken
includes the
4
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
Royalty Quarter in which the annual fee accrues and the next three Royalty
Quarters.
Each annual fee paid under (1-4) above may be credited by LICENSEE in full
against all earned royalties otherwise to be paid to MICHIGAN under
Paragraph 4.2 after such annual fee is paid.
4.5 If it is necessary for LICENSEE to take any license(s), in a given country,
under valid third party patents which would be infringed by the practice of
Licensed Patents in that country, then LICENSEE can deduct [ * ]
of the royalties otherwise due and payable in each Royalty Quarter under
Paragraph 4.2 above for Net Sales in that country, until such time as
LICENSEE has recovered an amount equal to [ * ] of the
royalty paid to such third parties; provided that in no event shall such
deducted amounts be applied to reduce or require reimbursement of the
annual fees required under Paragraph 4.4. This Paragraph is not intended
to imply an obligation upon MICHIGAN to reimburse LICENSEE's above-
described third-party royalties; the rights granted to LICENSEE in this
Paragraph shall not exceed the ability of the above-described mechanism
(i.e., a deduction of [ * ] due upon Net Sales in the
country in question) to reimburse such expenses. LICENSEE shall make an
accounting to MICHIGAN of all such third-party royalties, and all resulting
deduction from royalties otherwise due and payable to MICHIGAN, as part of
its reporting obligations under Article 5 below.
5 REPORTS.
-------
5.1 Within sixty (60) days after the close of each Royalty Quarter during the
term of this Agreement (including the close of any Royalty Quarter
immediately following any termination of this Agreement), LICENSEE shall
report to MICHIGAN all royalties accruing to MICHIGAN during such Royalty
Quarter. Such quarterly reports shall indicate for each Royalty Quarter
the gross sales and Net Sales of Products by LICENSEE and Affiliates, and
any other revenues with respect to which payments are due, and the amount
of such payments, as well as the various calculations used to arrive at
said amounts, including the quantity, description (nomenclature and type
designation), country of manufacture and country of sale of Products. In
case no payment is due for any such period, LICENSEE shall so report.
5.2 LICENSEE covenants that it will promptly establish and consistently employ
a system of specific nomenclature and type designations for Products so
that various types can be identified and segregated, where necessary;
LICENSEE and Affiliates shall consistently employ such system when
rendering invoices thereon and henceforth agree to inform MICHIGAN, or its
auditors, when requested as to the details
5
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
concerning such nomenclature system as well as to all additions thereto and
changes therein.
5.3 LICENSEE shall keep, and shall require its Affiliates to keep, true and
accurate records and books of account containing data reasonably required
for the computation and verification of payments to be made as provided by
this Agreement, which records and books shall be open for inspection upon
reasonable notice during business hours by either MICHIGAN auditor(s) or an
independent certified accountant selected by MICHIGAN, for the purpose of
verifying the amount of payments due and payable. Said right of inspection
will exist for six (6) years from the date of origination of any such
record, and this requirement and right of inspection shall survive any
termination of this Agreement. MICHIGAN shall be responsible for all
expenses of such inspection, except that if such inspection reveals an
underpayment of royalties to MICHIGAN in excess of ten percent (10%), then
said inspection shall be at LICENSEE's expense and such underpayment shall
become immediately due and payable to MICHIGAN.
5.4 The reports provided for hereunder shall be certified by an authorized
representative of LICENSEE to be correct to the best of LICENSEE's
knowledge and information.
6. TIMES AND CURRENCIES OF PAYMENTS.
--------------------------------
6.1 Payments accrued during each Royalty Quarter shall be due and payable in
Ann Arbor, Michigan on the date each quarterly report is due (as provided
in Paragraph 5.1), shall be included with such report and shall be paid in
United States dollars. LICENSEE agrees to make all payments due hereunder
to MICHIGAN by check made payable to "The Regents of The University of
Michigan," and sent by prepaid, certified or registered mail, return
receipt requested, to the address for notices set forth in Article 19
herein.
6.2 On all amounts outstanding and payable to MICHIGAN, interest shall accrue
from the date such amounts are due and payable at two percentage points
above the prime lending rate as established by the Chase Manhattan Bank,
N.A., in New York City, New York, or at such lower rate as may be required
by law.
6.3 Where Net Sales are generated in foreign currency, such foreign currency
shall be converted into its equivalent in United States dollars at the
exchange rate of such currency as reported (or if erroneously reported, as
subsequently corrected) in the Wall Street Journal on the last business day
of the Royalty Quarter during which such payments are received by LICENSEE
or Affiliates (or if not reported on that date, as quoted by the Chase
Manhattan Bank, N.A., in New York City, New York).
6
<PAGE>
6.4 Except as provided in the definition of Net sales, all royalty payments to
MICHIGAN under this Agreement shall be without deduction for sales, use,
excise, personal property or other similar taxes or other duties imposed on
such payments by the government of any country or any political subdivision
thereof; and any and all such taxes or duties shall be assumed by and paid
by LICENSEE.
7. COMMERCIALIZATION.
-----------------
7.1 It is understood that LICENSEE has the responsibility to do all that is
necessary for any governmental approvals to manufacture and/or sell
Products.
7.2 LICENSEE agrees to use reasonable efforts to develop Products, obtain any
government approvals necessary, and manufacture and sell Products at the
earliest possible date; and to effectively exploit, market and manufacture
in sufficient quantities to meet anticipated customer demand and to make
the benefits of the Products reasonably available to the public.
7.3 Within fifteen (15) days of the First Therapeutic Sale, LICENSEE shall
report by written letter to MICHIGAN the date and general terms of that
sale.
7.4 LICENSEE shall promptly inform MICHIGAN of any patent applications or
similar applications relating to the TECHNOLOGY filed by or on behalf of
LICENSEE or Affiliates anywhere in the world.
8. PATENT APPLICATIONS AND MAINTENANCE.
-----------------------------------
MICHIGAN and RDLP shall control all aspects of filing, prosecuting, and
maintaining Licensed Patents, including foreign filings and Patent
Cooperation Treaty filings. MICHIGAN and RDLP may in their sole discretion
decide to refrain from or to cease prosecuting or maintaining any of the
Licensed Patents, including any foreign filing or any Patent Cooperation
Treaty filing.
9. INFRINGEMENT.
------------
If LICENSEE becomes aware of or reasonably suspects infringement of
Licensed Patents by third parties, LICENSEE agrees to promptly notify
MICHIGAN of such alleged infringement. MICHIGAN and RDLP, at their sole
discretion and at their own expense, may initiate proceedings in response
to alleged infringement.
10. NO WARRANTIES; LIMITATION ON MICHIGAN'S and RDLP'S LIABILITY.
------------------------------------------------------------
10.1 MICHIGAN and RDLP, including their fellows, officers, employees and agents,
make no representations or warranties that any Licensed Patent is or will
be held valid, or that the manufacture, use, sale or other distribution of
any
7
<PAGE>
Products will not infringe upon any patent or other rights not vested in
MICHIGAN or RDLP.
10.2 MICHIGAN AND RDLP, INCLUDING THEIR FELLOWS, OFFICERS, EMPLOYEES AND
AGENTS, MAKE NO REPRESENTATIONS, EXTEND NO WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES or
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND ASSUME NO
RESPONSIBILITIES WHATEVER WITH RESPECT TO DESIGN, DEVELOPMENT,
MANUFACTURE, USE, SALE On OTHER DISPOSITION BY LICENSEE OR AFFILIATES OF
PRODUCTS.
10.3 THE ENTIRE RISK AS TO THE DESIGN, DEVELOPMENT, MANUFACTURE, OFFERING FOR
SALE, SALE OR OTHER DISPOSITION, AND PERFORMANCE OF PRODUCTS IS ASSUMED BY
LICENSEE AND AFFILIATES. In no event shall MICHIGAN, RDLP or HSC,
including their fellows, officers, employees and agents, be responsible or
liable for any direct, indirect, special, incidental, or consequential
damages or lost profits to LICENSEE, Affiliates or any other individual or
entity regardless of legal theory. The above limitations on liability
apply even though MICHIGAN, RDLP, or HSC, including their fellows,
officers, employees or agents, may have been advised of the possibility of
such damage.
10.4 LICENSEE shall not, and shall require that its Affiliates do not, make any
statements, representations or warranties or accept any liabilities or
responsibilities whatsoever to or with regard to any person or entity
which are inconsistent with any disclaimer or limitation included in this
Article 10.
10.5 Regardless of any testing that may have been done at HSC or MICHIGAN, HSC,
MICHIGAN and RDLP make no representations regarding how Products can or
should be used in the therapeutic treatment of the disease cystic
fibrosis.
10.6 IT IS UNDERSTOOD THAT THE TECHNOLOGY AND THE LICENSED PATENTS DO NOT
IDENTIFY THE PRESENCE OF THE CYSTIC FIBROSIS DISEASE IN ALL CASES.
11. INDEMNITY; INSURANCE.
--------------------
11.1 LICENSEE shall defend, indemnify and hold harmless and shall require its
affiliates to defend, indemnify and hold harmless MICHIGAN, RDLP and HSC,
as well as their fellows, officers, trustees, directors, employees and
agents, for and against any and all claims, demands, damages, losses, and
expenses of any nature (including attorneys' fees and other litigation
expenses), resulting from, but not limited to, death, personal injury,
illness, property damage, economic loss or products liability arising from
or in connection with, any of the following:
(l) Any manufacture, use, sale or other disposition by LICENSEE,
Affiliates or transferees of Products;
8
<PAGE>
(2) The direct or indirect use by any person of Products made, used, sold
or otherwise distributed by LICENSEE or Affiliates;
(3) The use by LICENSEE or Affiliates of any invention related to the
TECHNOLOGY or the Licensed Patents.
11.2 MICHIGAN and RDLP shall be entitled to participate at their option and
expense through counsel of its own selection, and may join in any legal
actions related to any such claims, demands, damages, losses and expenses
under Paragraph 11.1 above.
11.3 LICENSEE shall purchase and maintain in effect a policy of product
liability insurance covering all claims with respect to any Products
manufactured, sold, licensed or otherwise distributed by LICENSEE and
Affiliates, and shall specify MICHIGAN, RDLP and HSC, including their
fellows, officers, trustees, directors and employees, as an additional
insured. LICENSEE shall furnish certificate(s) of such insurance to
MICHIGAN, upon request.
12. TERM AND TERMINATION.
--------------------
12.1 Upon any termination of this Agreement, and except as provided herein to
the contrary, all rights and obligations of the Parties hereunder shall
cease, except as follows:
(1) Obligations t6 pay royalties and other sums accruing hereunder up
to the day of such termination;
(2) MICHIGAN's rights to inspect books and records as described in
Article 5, and LICENSEE's obligations to keep such records for
the required time;
(3) Obligations of defense and indemnity under Article 11;
(4) Any cause of action or claim of LICENSEE or MICHIGAN accrued or
to accrue because of any breach or default by the other Party
hereunder;
(5) The general rights, obligations, and understandings of Articles
2, 10, 15, 17, 26 and 27; and
(6) All other terms, provisions, representations, rights and
obligations contained in this Agreement that by their sense and
context are intended to survive until performance thereof.
12.2 This Agreement will become effective on its Effective Date and, unless
terminated under another, specific provision of this Agreement, will
remain in effect until and terminate upon the last to expire of Licensed
Patents.
9
<PAGE>
12.3 If LICENSES shall at any time default in the payment of any royalty or the
making of any report hereunder, or shall make any false report, or shall
commit any material breach of any covenant or promise herein contained,
and shall fail to remedy any such default, breach or report within thirty
(30) days after written notice thereof by MICHIGAN specifying such
default, then MICHIGAN and RDLP may, at their option, terminate this
Agreement and the license rights granted herein by notice in writing to
such effect. Any such termination shall be without prejudice to any
Party's other legal rights for breach of this Agreement.
12.4 LICENSEE may terminate this Agreement by giving MICHIGAN a notice of
termination, which shall include a statement of the reasons, whatever they
may be, for such termination and the termination date established by
LICENSEE, which date shall not be sooner than ninety (90) days after the
date of the notice. Such notice shall be deemed by the Parties to be
final.
12.5 In the event LICENSEE shall at any time during the term of this Agreement
deal with the TECHNOLOGY or Products in any manner which violates the
laws, regulations or similar legal authority of any jurisdiction
including, but not limited to, the public health requirements relating to
the TECHNOLOGY or Products or the design, development, manufacture,
offering for sale, sale or other disposition of Products, the license
granted herein shall terminate immediately with respect to such Products
within the territory encompassed by such jurisdiction.
13. ASSIGNMENT
----------
Due to the unique relationship between the Parties, this Agreement shall
not be assignable by LICENSEE without the prior written consent of
MICHIGAN and RDLP. Any attempt to assign this Agreement without such
consent shall be void from the beginning. MICHIGAN and RDLP shall not
unreasonably withhold consent for LICENSEE to assign this Agreement to a
purchaser of all or substantially all of LICENSEE's business. No
assignment shall be effective unless and until the intended assignee
agrees in writing with RDLP and MICHIGAN to accept all of the terms and
conditions of this Agreement. Further, LICENSEE shall refrain from
pledging any of the license rights granted in this Agreement as security
for any creditor.
14. REGISTRATION AND RECORDATION.
----------------------------
14.1 If the terms of this Agreement, or any assignment or license under this
Agreement are or become such as to require that the Agreement or license
or any part thereof be registered with or reported to a national or
supranational agency of any area in which LICENSEE or Affiliates would do
business, LICENSEE will, at its expense, undertake such registration or
10
<PAGE>
report. Prompt notice and appropriate verification of the act of
registration or report or any agency ruling resulting from it will be
supplied by LICENSEE to MICHIGAN.
14.2 Any formal recordation of this Agreement or any license herein granted
which is required by the law of any country, as a prerequisite to
enforceability of the Agreement or license in the courts of any such
country or for other reasons, shall also be carried out by LICENSEE at its
expense, and appropriately verified proof of recordation shall be promptly
furnished to MICHIGAN.
15. LAWS AND REGULATIONS OF THE UNITED STATES AND CANADA; EXPORT.
------------------------------------------------------------
15.1 Activities under this Agreement shall be subject to all appropriate United
States and Canadian laws and regulations now or hereafter applicable.
15.2 LICENSEE shall comply, and shall require its Affiliates to comply, with
all provisions of any applicable laws, regulations, rules and orders
relating to the license herein granted and to the testing, Production,
transportation, export, packaging, labeling, sale or use of Products, or
otherwise applicable to LICENSEE'S or its Affiliates activities
hereunder.
15.3 LICENSEE shall obtain, and shall require its Affiliates to obtain, such
written assurances regarding export and reexport of technical data
(including Products made by use of technical data) as may be required by
the United States Office of Export Administration Regulations, and
LICENSEE hereby gives such written assurances as may be required under
those Regulations to MICHIGAN.
15.4 LICENSEE shall obtain, and shall require its Affiliates to obtain, such
authorization regarding export and re-export of technical data (including
Products made by use of technical data) as may be required by the
Department of External Affairs, Export Controls Division, or any
authorization necessary for export from or import into Canada, and
LICENSEE hereby gives written assurances as may be required under those
regulations to RDLP.
16. BANKRUPTCY
----------
If during the term of this Agreement, LICENSEE shall make an assignment
for the benefit of creditors, or if proceedings in voluntary or
involuntary bankruptcy shall be instituted on behalf of or against
LICENSEE, or if a receiver or trustee shall be appointed for the property
of LICENSEE, MICHIGAN and RDLP may, at their option terminate this
Agreement and revoke the license herein granted by written notice to
LICENSEE.
11
<PAGE>
17. PUBLICITY
---------
LICENSEE agrees to refrain from using and to require Affiliates to refrain
from using the name of MICHIGAN, RDLP and HSC in publicity or advertising
without the prior written approval of that entity.
18. PRODUCT MARKING.
---------------
LICENSEE agrees to mark, and to require Affiliates to mark, Products with
the appropriate patent notice as approved by MICHIGAN (when appropriate),
such approval not to be unreasonably withheld.
19. NOTICES.
-------
Any notice, request, report or payment required or permitted to be given or
made under this Agreement by a Party shall be given by sending such notice
by certified or registered mail, return receipt requested, to the address
set forth below or such other address as such Party shall have specified by
written notice given in conformity herewith. Any notice not so given shall
not be valid unless and until actually received, and any notice given in
accordance with the provisions of this Paragraph shall be effective when
mailed.
To LICENSEE: ____________________________
____________________________
____________________________
Attn: _______________________
To MICHIGAN: The University of Michigan
Intellectual Properties Office
475 E. Jefferson St., Room 2354
Ann Arbor, MI 48109-1248
U.S.A.
Attn: File No. 492c2
with a copy to: Research and Development
Limited Partnership
- 88 Elm Street
Toronto, Ontario M5G 1X8
CANADA
Attn: Barbara Lavers
20. INVALIDITY.
-----------
In the event that-any term, provision, or covenant of this Agreement shall
be determined by a court of competent jurisdiction to be invalid, illegal
or unenforceable, that term will be curtailed, limited or deleted, but only
to the extent necessary to remove such invalidity, illegality or
12
<PAGE>
unenforceability, and the remaining terms, provisions and covenants shall
not in any way be affected or impaired thereby.
21. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement contains the entire understanding of the Parties with
respect to the matter contained herein. The Parties may, from time to time
during the Continuance of this Agreement, modify, vary or alter any of the
provisions of this Agreement, but only by an instrument duly executed by
authorized officials of all Parties hereto.
22. WAIVER.
No waiver by a Party of any breach of this Agreement, no matter how long
continuing or how often repeated, shall be deemed a waiver of any
subsequent breach thereof, nor shall any delay or omission on the part of a
Party to exercise any right, power, or privilege hereunder be deemed a
waiver of such right, power or privilege.
23. ARTICLE HEADINGS.
The Article headings herein are for purposes of convenient reference only
and shall not be used to construe or modify the terms written in the text
of this Agreement.
24. NO AGENCY RELATIONSHIP.
The relationship between the Parties is that of independent contractor and
contractees. LICENSEE shall not be deemed to be an agent of MICHIGAN or
RDLP in connection with the exercise of any rights hereunder, and shall not
have any right or authority to assume or create any obligation or
responsibility on behalf of MICHIGAN or RDLP.
25. FORCE MAJEURE.
-------------
No Party hereto shall be deemed to be in default of any provision of this
Agreement, or for any failure in performance, resulting from acts or events
beyond the reasonable control of such Party, such as Acts of God, acts of
civil or military authority, civil disturbance, war, strikes, fires, power
failures, natural catastrophes or other "force majeure" events.
26. GOVERNING LAW.
-------------
This Agreement and the relationships of the Parties shall be governed in
all respects by the law of the State of Michigan (notwithstanding any
provisions governing conflict of laws under such Michigan law to the
contrary), except that questions affecting the construction and effect of
any patent shall be determined by the law of the country in which the
patent has been granted.
13
<PAGE>
27. JURISDICTION AND FORUM.
----------------------
LICENSEE hereby consents to the jurisdiction of the courts of the State of
Michigan over any dispute concerning this Agreement or the relationship of
the Parties. Should LICENSEE bring any claim, demand or other action
against MICHIGAN or RDLP, including their fellows, officers, employees or
agents, arising cut of this Agreement or the relationship between the
Parties, LICENSEE agrees to bring said action only in an appropriate court
of the State or Province of that Party.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in
triplicate originals by their duly authorized officers or representatives.
FOR LICENSEE
By _____________________________
(authorized representative)
Typed Name_____________________
Title__________________________
Date_______________________
FOR RESEARCH AND DEVELOPMENT FOR THE REGENTS OF
LIMITED PARTNERSHIP THE UNIVERSITY or MICHIGAN
By ________________________ By _________________________
(authorized representative) (authorized representative)
Typed Name__________________ Typed Name____________________
Title_______________________ Title__________________________
Date________________________ Date____________________________
14
<PAGE>
APPENDIX 2
[UCSF Option Agreement]
<PAGE>
APPENDIX 2
OPTION TO AN EXCLUSIVE LICENSE
FOR
IN VIVO GENE THERAPY
THIS OPTION AGREEMENT ("Agreement") effective this 30TH day of April, 1992,
by and between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a California
corporation, having its statewide administrative offices at 22nd Floor, 300
Lakeside Drive, Oakland, California 94612-3550 ("THE REGENTS") and MEGABIOS
Corp., a California corporation, having a principal place of business at Suite
410, Two Embarcadero Center, San Francisco,; California 94111, ("OPTIONEE").
RECITALS
--------
WHEREAS, certain inventions, generally characterized as a IN VIVO GENE
THERAPY, hereinafter collectively referred to as the "Invention", were made in
the course of research at the University of California, San Francisco, by Dr.
Robert J. Debs and are covered by Regents' Patent Rights as defined below;
WHEREAS, THE REGENTS is desirous that the Invention be developed and
utilized to the fullest extent so that the benefits can be enjoyed by the
general public; and
WHEREAS, OPTIONEE is desirous of obtaining certain rights from THE REGENTS
which would allow it to explore the commercial potential of the Invention, and
THE REGENTS is willing to grant such rights; and
WHEREAS, OPTIONEE wishes to support a program of research in Dr. Debs'
laboratory at the University of California, San
1
<PAGE>
Francisco, with Dr. Debs as the Principal Investigator ("Research Project") as
provided in the sponsored research agreement ("Research Agreement") of even date
between the parties herein; and
WHEREAS, OPTIONEE is desirous of obtaining Tangible Research Product which
are owned by the Regents and are not a part of the public domain of information;
and
WHEREAS, THE REGENTS has no obligation to prevent such Tangible Research
Product from becoming a part of the public domain of information.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS.
-----------
1.1 "Regents' Patent Rights" means patent rights to any subject
----------------------
matter claimed in or covered by any of the following: (a) pending U.S. Patent
Application, [*
](b) any continuing or continuation-in-part applications thereof
including divisions and substitutions; (c) to the extent not expressly
prohibited by past agreements between the Regents and third parties any patent
applications that cover IN VIVO GENE THERAPY naming Dr. Debs or scientists
working in Dr. Debs' laboratory or under his supervision and which applications
such scientists are under a
12
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
duty to assign to THE REGENTS and which are conceived or reduced to practice
during the term of the Research Agreement as amended; (d) any patents issuing on
said applications or continuing application including reissues; (e) all
patentable inventions developed as part of the Research Project during the term
of the Research Agreement for which OPTIONEE has elected to obtain rights; and
(f) any corresponding foreign patents or patent applications.
1.2 "Licensed Product" means any material either that is covered by
----------------
Regents' Patent Rights or whose manufacture, use, or sale by an unlicensed third
party would constitute an infringement of any pending or issued claim within
Regents' Patent Rights.
1.3 "Licensed Method" means any method either that is covered by
---------------
Regents' Patent Rights or whose use or practice by an unlicensed third party
would constitute an infringement of any pending or issued claim within Regents'
Patent Rights.
1.4 "License Agreement" means the license agreement between THE
-----------------
REGENTS and OPTIONEE that shall result if OPTIONEE exercises its option pursuant
to Article 4.
1.5 "Research Agreement" means the Research Agreement between the
------------------
parties hereto dated this date.
1.6 "Tangible Research Product" means all know-how inventions, data,
-------------------------
technology and information (other than Regents' Patent Rights) developed in Dr.
Debs' laboratory and owned by THE REGENTS, or concerning which they have
the right to license, which is useful in connection with Licensed Product or
Licensed Method, including, but not limited
3
<PAGE>
to, (i) medical, clinical, toxicological or other Scientific data, (ii)
processes and analytical methodology used in development, testing, analysis and
manufacture, and (iii) materials developed under the Research Agreement
including any cell line or derivatives, progenies or materials derived from it;
("Biological Materials").
1.7 "In Vivo Gene Therapy" means administration of genes,
--------------------
transgenes, or other nucleic acids directly into the human or animal body by any
means of delivery for the prevention, mitigation or treatment of diseases or
conditions of the human or animal body.
2. OPTION FOR EXCLUSIVE LICENSE.
----------------------------
2.1 Subject to the limitations set forth in this Agreement, THE
REGENTS hereby grant to OPTIONEE an option to acquire an exclusive license (with
right to sublicense) under Regents' Patent Rights (or any part thereof that
OPTIONEE desires) to make, have made, use and sell Licensed Products and to
practice Licensed Methods.
2.2 Said option shall commence on the effective date of this
Agreement and shall have an expiration date of the later of (i) three (3) years
from the effective date or (ii) expiration or termination of the Research
Agreement.
2.3 This Agreement does not constitute a license to make, have made,
use or sell Licensed Products or to practice the Licensed Method except for the
sole purpose of evaluating OPTIONEE's interest in exercising the option. See
also Article 6 (Due Diligence).
4
<PAGE>
3. OPTION FEE
----------
As Consideration for this Agreement, OPTIONEE agrees to pay to THE
REGENTS an Option Fee of Twelve Thousand Dollars ($12,O00.00) per year to be
paid within thirty (30) days from the effective date of this Agreement and
within thirty (30) days from each subsequent anniversary date thereof during the
term of this Agreement. This Option Fee is neither refundable nor deductible
nor an advance against future royalties.
4. EXERCISE OF THE OPTION.
----------------------
4.1 If OPTIONEE elects to exercise its option rights to a License
Agreement under paragraph 2.1 hereof, OPTIONEE shall notify THE REGENTS in
writing pursuant to Article 14 (Notices) prior to the expiration of this
Agreement. Failure of OPTIONEE to so notify THE REGENTS shall be deemed to be
an election by OPTIONEE not to secure a license.
4.2 When OPTIONEE notifies THE REGENTS pursuant to paragraph 4.1, it
shall specify in writing those particular patent applications, fields of use and
territory for which it desires a license from THE REGENTS and those in which it
has no interest.
5. TERMS OF PROPOSED LICENSE.
-------------------------
5.1 If OPTIONEE exercises its option under Article 4, OPTIONEE and
THE REGENTS shall thereupon negotiate in good faith to arrive at mutually
agreeable, reasonable terms and conditions for the license. The terms of the
License Agreement shall include, but not be limited to, the following
provisions, all of which shall be fair and reasonable as compared with the then
5
<PAGE>
contemporary license terms offered by THE REGENTS far biotechnology of similar
value:
a. a worldwide, exclusive license under Regents' Patent Rights
and, to the extent THE REGENTS is legally able, Tangible
Research Product to make, have made, use, and sell Licensed
Products and to practice the Licensed Method for the life of
Regents' Patent Rights on a country-by-country basis;
b. a right to sublicense THE REGENTS' Patent Rights and
Tangible Research Product worldwide;
c. a one-time license issue fee of [ * ] for all Licensed
Products and Licensed Methods;
d. a royalty rate based upon OPTIONEE's net receipts from Net
Sales (sales less customary allowances, charges and credits)
of Licensed Products, such rate to be [*
]
e. diligence terms; and
f. indemnification, infringement and warranty terms as set
forth in Exhibit 5.1 attached hereto.
-----------
5.2 If the parties are unable to reach agreement on the terms and
conditions of a proposed License Agreement in accordance with paragraph 5.1, the
parties shall resolve any
6
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
unsettled terms, other than those covered by Exhibit 5 1, by arbitration
-----------
pursuant to Article 19 hereof.
6. DUE DILIGENCE.
-------------
6.1 Subject to paragraph 2.3, OPTIONEE shall diligently undertake the
requisite research and testing of Licensed Products necessary to evaluate its
interest in exercising the option. It is understood between the parties that
OPTIONEE may meet its diligence obligation by its continued funding of the
Research Project.
6.2 OPTIONEE shall be entitled to exercise prudent and reasonable
business judgment in meeting its due diligence obligations hereunder.
6.3 OPTIONEE shall provide THE REGENTS with a progress report
covering its activities relating to the development and testing of Licensed
Products semi-annually on or before the following dates of each calendar year:
February 28
August 31
6.4 In addition to the obligations set forth above OPTIONEE shall
spend an aggregate of not less than Seven Hundred Forty-One Thousand Four
Hundred Three ($741,403.00) for the direct and indirect costs of development of
Licensed Products during the first three (3) years of this Agreement pursuant
and subject to the provisions of the Research Agreement.
7
<PAGE>
7. PATENT PROSECUTION AND MAINTENANCE.
----------------------------------
7.1 THE REGENTS shall prosecute and maintain the United States and
foreign patent applications and patents in THE REGENTS' Patent Rights using
counsel of its choice and after due consultation with OPTIONEE. THE REGENTS
shall provide OPTIONEE with copies of all relevant documentation so that
OPTIONEE may be informed and apprised of the continuing prosecution, and
OPTIONEE agrees to keep this documentation Confidential.
7.2 THE REGENTS shall use reasonable efforts to amend any patent
application to include claims requested by OPTIONEE and required to protect the
products contemplated to be sold under the License Agreement.
7.3 All past direct costs (not to exceed $25,000) and all future
direct costs incurred by THE REGENTS in the filing, prosecuting and maintaining
of the United States patent applications and patents in Regents' Patent Rights
shall be borne by OPTIONEE.
7.4 THE REGENTS shall obtain patent protection on the invention in
foreign countries if available and if OPTIONEE so desires. OPTIONEE must notify
THE REGENTS within seven (7) months of the filing of the corresponding United
States application of its decision to obtain foreign patents. This notice
concerning foreign filing shall be in writing, must identify the countries
desired, and reaffirm OPTIONEE's obligation to underwrite the costs thereof.
The absence of such a notice from OPTIONEE to THE REGENTS shall be considered an
election not to secure foreign rights.
8
<PAGE>
7.5 The preparation, filing and prosecuting of all foreign patent
applications filed at OPTIONEE'S request, as well as the maintenance of all
resulting foreign patents, shall be at the sole expense of OPTIONEE. Such
patents shall be held in the name of THE REGENTS and shall be obtained using
counsel selected by OPTIONEE from a list of three patent law firms proposed by
THE REGENTS.
7.6 OPTIONEE's obligation to underwrite and to pay patent prosecution
costs shall continue for so long as this Agreement remains in effect, provided,
however, that OPTIONEE may terminate its obligations with respect to any patent
application or patent upon three-(3) months' written notice to THE REGENTS. THE
REGENTS will use its best efforts to curtail the associated patent costs after
such notice is received from OPTIONEE. THE REGENTS may continue prosecution
and/or maintenance of such application(s) or patents(s) at its sole discretion
and expense; provided, however, that if THE REGENTS' unreimbursed expenditures
on account of any such application exceeds thirty-three (33) percent of the
amount reimbursed by OPTIONEE on account of said application or if OPTIONEE does
not reimburse THE REGENTS for such unreimbursed expenditures within thirty (30)
days after it receives written notice of granting of said application, OPTIONEE
shall have no further right or licenses thereunder.
8. LIFE OF THE AGREEMENT.
---------------------
8.1 Unless otherwise terminated by operation of law or by acts of the
parties in accordance with the terms of this Agreement, this Agreement shall be
in full force and effect from
9
<PAGE>
the effective date recited on page one and shall remain in effect for the
period specified in Article 2 (OPTION FOR EXCLUSIVE LICENSE).
8.2 Any termination of this Agreement shall not affect the rights and
obligations set forth in the following Articles:
Article 11 Use of Names, Trademarks and
Confidential Information
Article 13 Indemnification
Article 16 Late Payments
8.3 Any termination of this Agreement shall not relieve OPTIONEE of
its obligation to pay any monies due or owing at the time of such termination
and shall not impair any accrued right of THE REGENTS.
9. TERMINATION BY THE REGENTS.
--------------------------
9.1 If OPTIONEE should violate or fail to perform any term or
covenant of this Agreement, then THE REGENTS may give written notice of such
default (Notice of Default) to OPTIONEE. If OPTIONEE should fail to repair such
default within thirty (30) days of the effective date of such notice, THE
REGENTS shall have the right to terminate this Agreement by a second written
notice (Notice of Termination) to OPTIONEE; provided, however, that if such
default inherently requires additional time to cure then OPTIONEE will request
in writing an extension from THE REGENTS, such extension shall not be
unreasonably withheld. For events of default not involving the payment of money
by Optionee which cannot be cured within thirty (30) days, THE REGENTS will
grant a reasonable extension of time within which to cure such default based
upon the circumstances present at the time such extension
10
<PAGE>
is requested by Optionee. If a proper Notice of Termination is sent to
OPTIONEE, this Agreement shall automatically terminate on the effective date of
such notice. These notices shall be subject to Article 14 (Notices). No
termination of this Exclusive Option Agreement shall affect any licenses granted
hereunder prior to the effective date of termination.
9.2 THE REGENTS shall also have the right and option to terminate
this Agreement if the Research Project, under the Research Agreement, sponsored
by OPTIONEE on the Invention at the University of California, San Francisco
under Dr. Robert Debs is prematurely terminated by OPTIONEE and there has been
no breach thereof by THE REGENTS. Said termination of this Agreement shall be
carried out in the manner set forth in paragraph 9.1.
10. TERMINATION By OPTIONEE.
-----------------------
OPTIONEE shall have the right at any time to terminate this Agreement
in whole or as to any portion of Regents' Patent Rights by giving notice in
writing to THE REGENTS. Such Notice of Termination shall be subject to Article
14 (Notices) and such termination shall be effective thirty (30) days from the
effective date of such notice.
11. USE OF NAMES, TRADEMARKS, AND CONFIDENTIAL INFORMATION.
------------------------------------------------------
11.1 Nothing contained in this Agreement shall be construed as
conferring any right to use in advertising, publicity, or other promotional
activities any name, trade name, trademark, or other designation of either party
hereto (including contraction, abbreviation or simulation of any of the
foregoing). Unless required by law, the use of the name, "THE REGENTS of the
11
<PAGE>
University of California" or the name of any campus of the University of
California by the Optionee is expressly prohibited.
11.2 It is understood that THE REGENTS shall be free to release to
the inventors and Senior administrative officials employed by THE REGENTS the
terms and conditions of this Agreement upon their request. If such release is
made, THE REGENTS shall request that such terms and conditions not be disclosed
to others. It is further understood that should a third party inquire whether a
license to Regents' Patent Rights is available, THE REGENTS may disclose the
existence of this Agreement and the Extent of the grant in Article 2 to such
third party, but shall not disclose the name of the Licensee, except where THE
REGENTS is required to release such information under either the California
Public Records Act or other applicable law.
11.3 With regard to confidential information ("Data"), which can be
oral or written or both, received from THE REGENTS regarding this invention,
OPTIONEE agrees:
(a) not to use the Data except for the sole purpose of
performing under the terms of this Agreement;
(b) to safeguard Data against disclosure to others with the same
degree of care as it exercises with its own data of a
similar nature; and
(c) not to disclose Data to others (except to its employees,
agents or consultants who are bound to OPTIONEE by a like
obligation of
12
<PAGE>
confidentiality) without the express written permission of
THE REGENTS,
except that OPTIONEE shall not be prevented from using or disclosing any of the
Data:
(i) which OPTIONEE can demonstrate by written records was
previously known to it;
(ii) which is now, or becomes in the future, public
knowledge other than through acts or omissions of
OPTIONEE; or
(iii) which is lawfully obtained by OPTIONEE from sources
independent of THE REGENTS; and
(d) that the secrecy obligations of OPTIONEE with respect to
Data shall continue for a period ending five (5) years from the termination date
of this Agreement.
With regard to Biological Material received from THE REGENTS,
OPTIONEE hereby agrees:
(e) not to use Biological Material except for the sole purpose
of performing under the terms of this Agreement;
(f) not to transfer Biological Material to others (except to its
employees, agents or consultants who are bound to the
Licenses by like obligations conditioning and restricting
access, use and continued use of Biological Material)
without the express written permission of THE REGENTS,
except that OPTIONEE shall not be prevented from
transferring Biological Material which:
13
<PAGE>
(i) becomes publicly available other than through acts or
omissions of OPTIONEE, or
(ii) is lawfully obtained by OPTIONEE from sources
independent of THE REGENTS;
(g) to safeguard Biological Material against disclosure and
transmission to others with the same degree of care as it
exercises with its own biological materials of a similar
nature;
(h) to destroy all copies of Biological Material at the
termination of this Agreement.
12. LIMITED WARRANTY.
----------------
12.1 THE REGENTS warrant to OPTIONEE that it has the lawful right to
grant this option and that there is no conflict between this option and any
other grant of rights by THE REGENTS.
12.2 Except as set forth in paragraph 12.1, this Agreement and the
associated Invention are provided WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. THE REGENTS
MAKE NO REPRESENTATION OR WARRANTY THAT THE LICENSED PRODUCTS OR LICENSED
METHODS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT.
12.3 IN NO EVENT WILL THE REGENTS BE LIABLE FOR ANY INCIDENTAL,
SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS AGREEMENT OR
THE USE OF THE INVENTION OR LICENSED PRODUCTS.
14
<PAGE>
12.3 Nothing in this Agreement shall be construed as:
(12.3a) a warranty or representation by THE REGENTS as to the
validity or Scope of any Regents' Patent Rights; or
(12.3b) a warranty or representation that anything made, used,
sold or otherwise disposed of under any license of
Regents' Patent Rights is or will be free from
infringement of patents of third parties; or
(12.3c) an obligation to bring or prosecute actions or suits
against third parties for patent infringement; or
(12.3d) conferring by implication, estoppel or otherwise any
license or rights under any patents of THE REGENTS
other than Regents' Patent Rights as defined herein,
regardless of whether such patents are dominant or
subordinate to Regents' Patent Rights; or
(12.3e) an obligation to furnish any know-how not provided in
Regents' Patent Rights or Tangible Research Product.
13. INDEMNIFICATION; INSURANCE.
--------------------------
13.1 Except as set forth in paragraph 12.1, the OPTIONEE agrees to
indemnify hold harmless and defend THE REGENTS, its officers, employees, and
agents; the sponsors of the
15
<PAGE>
research that lead to the Invention; and the inventors of the patents and
patent application in Regents' Patent Rights and their employers against any and
all claims, suits, losses, damages, costs, fees, and expenses resulting from or
arising out of exercise of this Agreement.
13.2 THE REGENTS shall promptly notify OPTIONEE in writing of any
claim or suit brought against THE REGENTS in respect of which THE REGENTS intend
to invoke the provisions of this Article 13. OPTIONEE will keep THE REGENTS
informed on a current basis of its defense of any claims pursuant to this
Article 13.
13.3 At such time as OPTIONEE commences research activities in its
own facilities utilizing its own employees, OPTIONEE, at its sole cost and
expense, shall insure its activities in connection with the work under this
Agreement and obtain, keep in force and maintain insurance as follows, or an
equivalent program of self insurance;
Comprehensive or Commercial Form General Liability Insurance
(contractual liability included) with limits as follows:
(a) Each occurrence $1,000,000
(b) Personal injury $1,000,000
(c) General aggregate (commercial form only) $3,000,000
It should be expressly understood, however, that the coverages
and limits referred to under the above shall not in
16
<PAGE>
any way limit the liability of OPTIONEE. OPTIONEE shall furnish THE REGENTS
with certificates of insurance evidencing compliance with all requirements.
Such certificates shall:
(a) Provide for thirty-(30) day advance written notice to THE
REGENTS of any modification.
(b) Indicate that THE REGENTS has been endorsed as an additional
Insured under the coverages referred to under the above.
(c) Include a provision that the coverages will be primary and
will not participate with nor will be excess over any valid and collectible
insurance or program of self-insurance carried or maintained by THE REGENTS.
13.4 THE REGENTS shall promptly notify OPTIONEE in writing of any
claim or suit brought against THE REGENTS in respect of which THE REGENTS
intends to invoke the provisions of this Article 13. OPTIONEE will keep THE
REGENTS informed on a current basis of its defense of any claims pursuant to
this Article 13.
14. NOTICES.
Any notice or payment required to be given to either party shall be deemed
to have been properly given and to be effective (a) on the date of delivery if
delivered in person or (b) five (5) days after mailing if mailed by certified
mail, postage paid, to the respective addresses given below or to such other
address as shall be designated by written notice given to the other party.
17
<PAGE>
To OPTIONEE MEGABIOS Corp.
Suite 410
Two Embarcadero Center
San Francisco, California 94111
Attention: William L. Brown
Vice President
To THE REGENTS: The Regents of the University
of California (Case No. 91-281-1)
Office of Technology Transfer
1320 Harbor Bay Parkway, Suite 150
Alameda, California 9451
Attention: Director
15. ASSIGNABILITY.
-------------
This Agreement is binding upon and shall inure to the benefit of THE
REGENTS, their successors and assigns, but shall be personal to OPTIONEE and
assignable by OPTIONEE only with the written consent of THE REGENTS, which
consent shall not be unreasonably withheld.
16. LATE PAYMENTS.
-------------
In the event fees or payments are not received by THE REGENTS when due,
OPTIONEE agrees to pay THE REGENTS interest charges at a rate per annum of Ten
(10) percent. Such interest shall be calculated from the date payment was due
until actually received by THE REGENTS.
17. WAIVER.
------
It is agreed that no waiver by either party hereto of any breach or
Default of any of the covenants or agreements herein set forth shall be deemed a
waiver as to any subsequent and/or similar breach or default.
18. GOVERNING LAWS.
--------------
THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA.
18
<PAGE>
NOTWITHSTANDING, THE SCOPE AND VALIDITY OF ANY PATENT APPLICATION SHALL BE
GOVERNED BY THE APPLICABLE LAWS OF THE COUNTRY OF SUCH PATENT OR PATENT
APPLICATION.
19. ARBITRATION
-----------
Except for the provisions of Section 9.2, any controversy or claim
arising out of or relating to this contract, or the breach thereof, shall be
settled by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, and judgment upon the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction thereof.
20. MISCELLANEOUS.
-------------
20.1 The headings of the several sections are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretations of this Agreement.
20.2 This Agreement will not be binding upon the parties until it has
been signed below on behalf of each party, in which event, it shall be effective
as of the date recited on page one.
20.3 No amendment or modification hereof shall be valid or binding
upon the parties unless made in writing and signed on behalf of each party.
20.4 Except for the Research Agreement, this Agreement embodies the
entire understanding of the parties relating to the subject matter hereof and
shall supersede all previous
19
<PAGE>
communications, representations or understandings, either oral or written,
between the parties relating to such subject matter.
20.5 In case any of the provisions contained in this Agreement shall
be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provisions hereof, but
this Agreement shall be construed as if such invalid or illegal or unenforceable
provisions had never been contained herein.
IN WITNESS WHEREOF, both THE REGENTS and OPTIONEE have executed this
Agreement, in duplicate originals, by their respective officers hereunto duly
authorized as of the day and year first set forth above.
OPTIONEE THE REGENTS:
MEGABIOS Corp. THE REGENTS OF THE UNIVERSITY OF
CALIFORNIA
/s/WILLIAM L. BROWN /s/
By: ____________________________ By: _______________________________
(Signature) (Signature)
Name: William L. Brown Name: Carl B. Wotten
Title: Vice President Title: Director, Office of Technology
Transfer
Approval as to legal form /s/MARTY SIMPSON, JR. 5/1/92
_______________________________________ ______
P. Martin Simpson, Jr. Resident Counsel Date
Office Of Technology Transfer
University of California
20
<PAGE>
EXHIBIT 5.1
-----------
A. LIMITED WARRANTY.
----------------
l. The Regents warrant to LICENSEE that it has the lawful right to
grant this License and that such grant does not conflict with any other grant of
rights by The Regents.
2. Except as set forth in paragraph 12.1, this Agreement and the
associated Invention are provided WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. THE REGENTS
MAKE NO REPRESENTATION OR WARRANTY THAT THE LICENSED PRODUCTS OR LICENSED
METHODS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT.
3. IN NO EVENT WILL THE REGENTS BE LIABLE FOR ANY INCIDENTAL,
SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS AGREEMENT OR
THE USE OF THE INVENTION OR LICENSED PRODUCTS.
4. Nothing in this Agreement shall be construed as:
(a) a warranty or representation by The Regents as to the validity or
scope of any Regents' Patent Rights; or
(b) a warranty or representation that anything made, used, sold or
otherwise disposed of under any license of Regents' Patent Rights
is or will be free from infringement of patents of third parties;
or
(c) an obligation to bring or prosecute actions or suits against
third parties for patent infringement; or
1
<PAGE>
(d) conferring by implication, estoppel or otherwise any license or
rights under any patents of The Regents other than Regents'
Patent Rights as defined herein, regardless of whether such
patents are dominant or subordinate to Regents' Patent Rights; or
(e) an obligation to furnish any know-how not provided in Regents'
Patent Rights or Tangible Research Product.
B. INDEMNIFICATION; INSURANCE.
--------------------------
l. The LICENSEE agrees to indemnify, hold harmless and defend The
Regents, their officers, employees, and agents; the sponsors of the research
that lead to the Invention; and the inventors of the patents and patent
application in Regents' Patent Rights and their employers against any and all
claims, suits, losses, damages, costs, fees, and expenses resulting from or
arising out of exercise of this Agreement.
2. The Regents shall promptly notify LICENSEE in writing of any
claim or suit brought against The Regents in respect of which The Regents intend
to invoke the provisions of this Article. LICENSEE will keep The Regents
informed on a current basis at its defense of any claims pursuant to this
Article.
3. At such time as LICENSEE commences research activities in its own
facilities utilizing its own employees, LICENSEE, at its sole cost and expense,
shall insure its activities in connection with the work under this Agreement and
2
<PAGE>
obtain, keep in force and maintain insurance as follows, or an equivalent
program of self insurance:
Comprehensive or Commercial Form General Liability Insurance
(contractual liability included) with limits as follows:
(a) Each occurrence $1,000,000
(b) Products/Comprehensive Operations Aggregate $3,000,000
(c) Personal injury $1,000,000
(d) General aggregate (commercial form only) $3,000,000
It should be expressly understood, however, that the coverages and
limits referred to under the above shall not in any way limit the liability of
LICENSEE. LICENSEE shall furnish The Regents with certificates of insurance
evidencing compliance with all requirements. Such certificates shall:
(a) Provide for thirty-(30) day advance written notice to The
Regents of any modification.
(b) Indicate that The Regents has been endorsed as an additional
Insured under the coverages referred to under the above.
(c) Include a provision that the coverages will be primary and will
not participate with nor will be excess over any valid and collectible insurance
or program of self-insurance carried or maintained by The Regents.
Licensee shall further obtain insurance for products liability hazards
and for general aggregate with limits of $5,000,000 each prior to the first use
of a Licensed Product
3
<PAGE>
or Licensed Method in commerce or Licensee shall maintain a comparable Self-
insurance program at such time.
4. The Regents shall promptly notify LICENSEE in writing of any
claim or suit brought against The Regents in respect of which The Regents
intends to invoke the provisions of this Article. LICENSEE will keep The
Regents informed on a current basis of its defense of any claims pursuant to
this Article.
C. PATENT INFRINGEMENT.
-------------------
l. In the event that the LICENSEE shall learn of the substantial
infringement of any patent licensed under this Agreement, the LICENSEE shall
call The Regents' attention thereto in writing and shall provide The Regents
with reasonable evidence of such infringement. Both parties to this Agreement
agree that during the period and in a jurisdiction where the LICENSEE has
exclusive rights under this Agreement, neither will notify a third party of the
infringement of any of The Regents' Patent Rights without first obtaining
consent of the other party, which consent shall not be unreasonably denied.
Both parties shall use their best efforts in cooperation with each other to
terminate such infringement without litigation.
2. The LICENSEE may request that The Regents take legal action
against the infringement of The Regents' Patent Rights. Such request shall be
made in writing and shall include reasonable evidence of such infringement and
damages to the LICENSEE. If the infringing activity has not been abated within
ninety (90) days following the effective date of such request.
The Regents shall have the right to:
4
<PAGE>
(a) commence suit on its own account; or
(b) refuse to participate in such suit, and The Regents shall
give notice of its election in writing to the LICENSEE by the end of the one-
hundredth (100th) day after receiving notice of such request from the LICENSEE.
The LICENSEE may thereafter bring suit for patent infringement if and only if
The Regents elects not to commence suit (other than as nominal party plaintiff)
and if the infringement occurred during the period and in a jurisdiction where
the LICENSEE had exclusive rights under this Agreement. However, in the event
the LICENSEE elects to bring suit in accordance with this paragraph, The Regents
may thereafter join such suit at its own expense.
3. Such legal action as is decided upon shall be at the expense of
the party on account of whom suit is brought and all recoveries recovered
thereby shall belong to such party, provided, however, that legal action
brought jointly by The Regents and the LICENSEE and fully participated in by
both shall be at the joint expense of the parties and all recoveries shall be
shared jointly by them in proportion to the share of expense paid by each party.
4. Each party agrees to cooperate with the other in litigation
proceedings instituted hereunder but at the expense of the party on account of
whom suit is brought. Such litigation shall be controlled by the party bringing
the suit, except that The Regents may be represented by counsel of its choice
pursuant to The Regents' determination in any suit brought by the LICENSEE.
5
<PAGE>
APPENDIX 3
Research Plan
Glaxo and MEGABIOS will collaborate on the basic research programs
indicated below:
Glaxo Responsibilities:
- ----------------------
. Preclinical and clinical development of [*
]
. Preclinical and clinical development of other Cystic Fibrosis Agents
constructed by MEGABIOS
. Develop systems for the detection of [* ] as part of an overall
toxicology program.
MEGABIOS Responsibilities:
- --------------------------
. Construct novel plasmids, of which [ * ] shall be one, containing the
cystic fibrosis transmembrane regulator coding sequence and:
. -- At least [ * ] different promoter elements, [ * ] of which
shall be intended to give lung-specific expression.
-- At least [ * ] vectors with alternative 5' and 3' untranslated
regions.
-- A variety of E. coil host/strain backgrounds.
. Evaluate the novel plasmids in mice for:
-- Efficiency of transfection and expression of the CFTR protein.
-- Tissue specific expression.
-- The quantity of CFTR protein expressed.
. Evaluate up to [ * ] lipid formulations in conjunction with the
novel plasmids reference above for efficiency, specificity and
quantification of CFTR protein expression.
6
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
APPENDIX 4
To be revised and released within 60 days
after the Effective Date
DRAFT
Announcement of agreement
Between Glaxo and Megabios
LONDON (DATE XX, 1994) -- Glaxo Holdings p.l.c. and Megabios Corp. today
announced they have agreed to collaborate on the development of a gene therapy
product for the prevention and treatment of cystic fibrosis.
The agreement represents Glaxo's first foray into the field gene therapy. Gene
therapy is any therapy in which a DNA fragment is introduced into cells to
direct the production of a protein which in turn, produces a therapeutic effect.
Leveraging Megabios' gene therapy program, the two corporations will collaborate
on the development and commercialization of a product designed to produce a
healthy protein in the cells lining the airways of cystic fibrosis patients with
the hope alleviating the disease in the lungs.
"The collaboration with Megabios should provide a model system for gaining
knowledge, experience and expertise in this rapidly emerging approach to
therapeutic treatment," said (GLAXO PERSON - ANDO?) "Glaxo has long been a
leader in developing medicines to treat respiratory disease, and this
collaboration gives us the opportunity to apply our expertise to the area of
gene therapy, and benefit of thousands of young people around the world whose
lives are threatened by this disease."
(Quote from a Megabios person -- call William Brown at -Megabios, 415-434-3333
Liza is his secretary.)
The gene therapy product has potential to deliver into lung cells of cystic
fibrosis patients the molecular machinery to replace defective cystic fibrosis
proteins. It will combine proprietary lipids and cDNA fragments which code for
the cystic fibrosis transmembrane regulator protein (CFTR).
Cystic fibrosis affects about 33,000 people in the United States and Canada, and
about 20,000 in Europe. It is the most common lethal hereditary disease
affecting Caucasian
7
<PAGE>
populations, and occurs in about one of every 2,000 births. The average life
span of a person with CF is less than 30 years. The disease results from defects
in CFTR proteins that regulate the transport of salt through cell walls. The
transport defect causes the mucus in the lining of the lung, pancreas and liver
to accumulate and become abnormally thick and sticky, and significantly impair
the organ's function.
Present treatments help thin the mucus or treat infections associated with the
mucous load, but don't correct the genetic flaw. Gene therapy would represent a
significant advance over currently therapies.
London-based Glaxo Holdings, p.l.c., is a leader in research and treatment of
respiratory disease as well as gastrointestinal, central nervous system,
cardiovascular and infectious diseases. Glaxo is an integrated research-based
group of companies whose corporate purpose is to create, discover, develop,
manufacture and market throughout the world safe, effective medicines of the
highest quality which will bring benefit to patients through improved longevity
and quality of life, and to society in general through economic value.
Megabios Corp., located in San Carlos, Calif., is a privately-held
biopharmaceutical company formed to develop and commercialize lipid-based in
vivo gene therapeutics for the treatment of life-threatening disorders. The
company's unique knowledge of gene delivery and expression, lipid synthesis,
DNA/lipid complex formulation and multiple routes of administration is the basis
for the development of new therapeutics.
8
<PAGE>
AMENDMENT NO. 1
TO
RESEARCH AND LICENSE AGREEMENT
THIS AMENDMENT NO. 1 (the "Amendment") is entered into as of this 31st
----
day of May, 1996, by and between MEGABIOS CORP., a California corporation,
having offices at 863A Mitten Road, Burlingame, California 94010 ("MEGABIOS")
and GLAXO GROUP LIMITED, a corporation organized under the laws of England and
Wales having offices at Glaxo House, Berkeley Avenue, Greenford, Middlesex,
UB60NN, England ("Glaxo"), each of MEGABIOS and Glaxo being referred to herein
as a "Party" and both being referred to herein as "Parties."
WHEREAS, the Parties entered into a Research and License Agreement dated
April 11, 1994 (the "Original Agreement") to foster research in delivery systems
for DNA fragments, particularly the Cystic Fibrosis Transmembrane Regulator
("CFTR") gene, for the treatment of cystic fibrosis and to provide a mechanism
for the commercialization of products resulting therefrom; and
WHEREAS, the Parties desire to amend the Original Agreement on the terms
and conditions provided below;
NOW, THEREFORE, in consideration of the premises and mutual promises set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which the Parties acknowledge by their signatures below, the
Parties, intending to be legally bound, agree as follows:
<PAGE>
1. Section 2.1 of the Original Agreement shall be deleted in its entirety and
the following Section 2.1 shall be inserted in lieu thereof:
2.1 MEGABIOS Research The Parties concur that the responsibilities of
-----------------
MEGABIOS described in Appendix 3: Part I: Research Plan for Period
Commencing On the Effective Date and Ending on April 1, 1996, have been
fulfilled. During each applicable period of the Research Term identified in
Appendix 3, MEGABIOS will conduct development studies in the Cystic
Fibrosis Field as outlined in the work plan attached as Appendix 3 for such
period. MEGABIOS will expend reasonable efforts in the conduct of such work
and maintain laboratories and offices necessary to carry out the goals of
Appendix 3, as determined by the JRPC. Except as provided in Article III,
MEGABIOS will bear all of its own expenses incurred in connection with such
research and will manage and compensate its employees and consultants
assigned to such research as it deems appropriate.
2. Section 3.1 of the Original Agreement shall be deleted in its entirety and
the following Section 3.1 shall be inserted in lieu thereof:
3.1 Research Fees Glaxo will pay MEGABIOS during the term of this
-------------
Agreement Research Fees up to a total amount of [*] according to the
following payment schedule for research to be conducted by MEGABIOS under
Article III:
2
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
------------------------------------------------
Payment Due Date Payment Amount
------------------------------------------------
Effective Date [ * ]
------------------------------------------------
July 1, 1994 [ * ]
------------------------------------------------
October 1, 1994 [ * ]
------------------------------------------------
January 1, 1995 [ * ]
------------------------------------------------
April 1, 1995 [ * ]
------------------------------------------------
July 1, 1995 [ * ]
------------------------------------------------
October 1, 1995 [ * ]
------------------------------------------------
January 1, 1996 [ * ]
------------------------------------------------
April 1, 1996 [ * ]
------------------------------------------------
July 1, 1996 [ * ]
------------------------------------------------
October 1, 1996 [ * ]
------------------------------------------------
January 1, 1997 [ * ]
------------------------------------------------
Upon Execution of the [ * ]
Agreement
------------------------------------------------
3. Section 12.5(b) shall be amended by removing the period at the end of
Section 12.5(b) and inserting the following language:
;and provided further that, in the event of the occurrence of a
circumstance(s) which MEGABIOS and Glaxo mutually acknowledge to be
completely beyond the control of MEGABIOS and Glaxo, and which results in a
delay in the filing of an IND or its equivalent in the United States or the
United Kingdom within 3 years from the Effective Date, then MEGABIOS and
Glaxo shall use good faith efforts to agree upon an appropriate extension,
if any, of such 3 year period taking into account such circumstance(s).
3
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
4. Section 12.9 of the Original Agreement shall be deleted in its entirety and
the following Section 12.9 shall be inserted in lieu thereof:
12.9 End of Research Term. The Research Term will commence on the Effective
--------------------
Date and, unless this Agreement is sooner terminated as provided in Section
12.2, 12.3, 12.5, or 12.7, shall expire as of April 1, 1997; provided,
however, that Glaxo's obligations to pay Research Fees to MEGABIOS under
Article III shall survive any termination of this Agreement, except
termination by Glaxo under Section 12.7.
5. A new Article 16 shall be added to read as follows:
ARTICLE XVI - POST RESEARCH PERIOD DEVELOPMENT SERVICES
-------------------------------------------------------
After the end of the Research Term, Glaxo shall have the option to enter
into discussions with MEGABIOS for the performance of consulting services with
respect to the development of Cystic Fibrosis Agents and MEGABIOS agrees to
enter into good faith negotiations with Glaxo to agree upon reasonable terms and
conditions for the provision of such services and to provide such services
pursuant to such agreed-upon terms and conditions.
6. The existing Appendix 3 shall be retitled "Appendix 3: Part 1: Research
Plan for Period Commencing on the Effective Date and Ending on April 1, 1996"
and the attached Part II shall be added to Appendix 3.
4
<PAGE>
7. Except as provided above, the Original Agreement shall remain in full
force and effect. IN WITNESS WHEREOF, the Parties have executed this Agreement
in duplicate originals by their proper officers as of the date and year first
above written.
MEGABIOS CORP. GLAXO GROUP LIMITED
By: /s/ Benjamin F. McGraw By: /s/ T. Eaves
------------------------- ------------------------
Name: /s/ Benjamin F. McGraw Name: /s/ T. Eaves
----------------------- ----------------------
Title: /s/ President & CEO Title: /s/ Director
---------------------- ---------------------
5
<PAGE>
APPENDIX 3: Part II
Research Plan for Period
Commencing April 2, 1996
and Ending April 1, 1997
During the period commencing April 2, 1996 and ending on April 1, 1997, Megabios
will provide general assistance to Glaxo Wellcome, as further described below,
in the submission of an [ * ]
The goal for this program is to submit the [ * ]
Preclinical Testing
- -------------------
. [ * ]
. Performance of model as needed for R&D
. Technology transfer to contract toxicology house (excluding out-of-
pocket costs associated with the use of a contract toxicology house).
. [ * ] to contract toxicology house (excluding
out-of-pocket costs associated with the use of a contract toxicology house).
. [ * ] performance as necessary.
Manufacturing
- -------------
. Production of [ * ] of DNA for GLP studies (excluding supplies, reagents and
other raw materials).
. Production of liposomes [ * ] and complexes [ * ] for use in [ * ]
toxicology study (excluding supplies, reagents and other raw materials).
. Preparation for [ * ] excluding out-of-pocket costs associated
with use of [ * ] which will be required to prepare for [ * ]
. Production of [ * ] (excluding supplies, reagents and other raw
material).
. Assist Glaxo Wellcome with production of [ * ]
(excluding out-of-pocket costs and any costs associated with the use of a
contract manufacturer).
. Preliminary [ * ] studies [ * ] on material for GLP studies.
. Provision of information and technical assistance (including up to one week
of [ * ] in the UK) in transferring the technology for
the [ * ] to Glaxo Wellcome.
Documentation
- -------------
. [ * ]
. [ * ]
. Preparation of [ * ] together with Glaxo Wellcome regulatory
specialists.
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT 10.19
LICENSE AND ROYALTY AGREEMENT
This LICENSE AND ROYALTY AGREEMENT is entered into as of June 1, 1996 (the
"Effective Date") by and between PFIZER INC, a Delaware corporation, having an
office at 235 East 42nd Street, New York, New York 10017 and its Affiliates
("Pfizer") and MEGABIOS CORP ("Megabios"), a California corporation, having an
office at 863A Mitten Road, Burlingame, CA 94010.
WHEREAS, Pfizer desires to obtain licenses to Megabios' right, title and
interest in the Patent Rights so that Pfizer can manufacture, use or sell the
Licensed Products; and
WHEREAS, Megabios is willing to grant such license;
Therefore, in consideration of the mutual covenants and promises set forth in
this Agreement, the parties agree as follows:
1. DEFINITIONS. The capitalized terms used in this Agreement and not defined
elsewhere in it shall have the meanings specified for such terms in this Section
1 and in the Research Agreement.
1.1 "RESEARCH AGREEMENT" means the Collaborative Research Agreement
between Pfizer and Megabios effective the Effective Date.
1.2 "NET SALES" means the gross amount invoiced by Pfizer or any
sublicensee of Pfizer for sales to a third party or parties of Licensed
Products, less normal and customary trade discounts actually allowed, rebates,
returns, credits, taxes the legal incidence of which is on the purchaser and
separately
<PAGE>
2
shown on Pfizer's or any sublicensee of Pfizer's invoices and transportation,
insurance and postage charges, if prepaid by Pfizer or any sublicensee of Pfizer
and billed on Pfizer's or any sublicensee of Pfizer's invoices as a separate
item.
1.3 "LICENSED PRODUCT" means any Product arising from the Research
Program, the manufacture, use or sale of which would infringe a Valid Claim
within Patent Rights in the absence of a license.
2. GRANT OF LICENSE, TERM, RIGHTS AND OBLIGATIONS.
2.1 LICENSES GRANTED TO PFIZER UNDER THE PATENT RIGHTS.
(a) Megabios grants to Pfizer a non-exclusive, worldwide license or sublicense,
as the case may be, including such right to grant sublicenses that Megabios may
have, to manufacture, use, offer for sale and import Licensed Products under all
Megabios' right, title and interest in the Patent Rights described in Section
1.16 (a) of the Research Agreement (the "1.16 (a) License").
(b) Megabios grants to Pfizer the exclusive, worldwide license, including the
right to grant sublicenses, to manufacture (subject to Section 8), use, sell,
offer for sale an import Licensed Products under all Megabios' right, title and
interest in the Patent Rights described in Section 1.16 (b) of the Research
Agreement (the "1.16 (b) License").
(c) Pfizer acknowledges and agrees that its rights granted under this Agreement
and the Research Agreement, with respect to such aspects of the Megabios
Technology and Patent Rights licensed from the University of California are
subject to the terms and conditions contained in the UC License Agreement
including provisions related to the reservation of certain rights in the
technology licensed under such UC License Agreement, disclaimers of liability,
indemnification of the licensor by sublicensees, and provisions regarding the
right to prosecute, maintain and defend patent rights in such technology;
<PAGE>
3
provided, however, that Megabios agrees and acknowledges that, to the extent any
royalty payments are owed, pursuant to the UC License Agreement, to the Regents
of the University of California ("The Regents") based upon sale of Licensed
Products by Pfizer for consideration other than cash, Megabios will be solely
liable for the payment of such royalties to The Regents, and Pfizer will be
under no obligation to pay to Megabios any royalty on Licensed Products sold by
Pfizer for consideration other than cash; and further provided that Megabios
further agrees and acknowledges that, in the event that currency restrictions
imposed by a foreign government prevent the prompt remittance of part or all of
any royalty payments owed, pursuant to the UC License Agreement, to The Regents
based upon the sale of Licensed Products by Pfizer with respect to any country
where a Licensed Product is sold or distributed, Megabios will be solely liable
for the timely payment of such royalties to The Regents, and Pfizer will not be
required to convert the amount owed into U.S. funds as is required under the UC
License.
2.2 TERM OF LICENSE GRANT AND PAYMENT OF ROYALTIES. Unless terminated
earlier as provided below, the License shall commence on the Effective Date and
shall terminate on the date of the last to expire of the Patent Rights.
2.3 PFIZER OBLIGATIONS.
2.3.1 Pfizer shall use reasonably diligent efforts to exploit Licensed
Products commercially, including conducting clinical trials and obtaining
regulatory approvals.
2.3.2 If Pfizer grants a sublicense pursuant to Section 2, Pfizer
shall guarantee that any sublicensee fulfills all of Pfizer's obligations under
this Agreement; provided, however, that Pfizer shall not be relieved of its
obligations pursuant to this Agreement.
<PAGE>
4
2.4 TECHNICAL ASSISTANCE. Megabios shall provide to Pfizer or any
sublicensee of Pfizer, at Pfizer's request and expense, any technical assistance
reasonably necessary to enable Pfizer or such sublicensee to manufacture, use or
sell each Licensed Product and to enjoy fully all the rights granted to Pfizer
pursuant to this Agreement; provided, however, that Megabios is reasonably
capable of providing that assistance.
2.5 REVERSION OF RIGHTS. If Pfizer discontinues the development of any
Licensed Product; and if such discontinuance results from circumstances other
than U.S. Food and Drug Administration, or other regulatory body action, or, in
Pfizer's sole and unfettered judgment, lack of efficacy or safety of such
Licensed Product; and if, at the time of discontinuance, Pfizer has not begun
development of another Licensed Product, the licenses granted to Pfizer pursuant
to this Agreement shall terminate with respect to the discontinued Licensed
Product. In such event, Megabios shall have the right to develop and
commercialize such Licensed Product alone or with third parties pursuant to the
terms of a license agreement to be negotiated in good faith by the parties.
Such agreement shall provide that Pfizer shall grant Megabios an exclusive,
worldwide, royalty-bearing license at the rate of [ * ] of Net
Sales, with the right to grant sublicenses, under Pfizer Technology and other
Patent rights necessary for the manufacture, use and sale of such Licensed
Product, and shall provide that Megabios shall have access to and the right to
use any regulatory filings made by Pfizer with respect to such Licensed Product.
3. ROYALTIES, PAYMENTS OF ROYALTIES, ACCOUNTING FOR ROYALTIES, RECORDS,
MILESTONE PAYMENTS.
3.1 PATENT RIGHTS. Pfizer shall pay Megabios a royalty based on the Net
Sales of each Licensed Product. Such royalty shall be paid with respect to each
country of the world from the date of the first commercial sale (the date of
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
5
the invoice of Pfizer or any sublicensee of Pfizer with respect to such sale) of
such Licensed Product in each such country until the expiration of the last
Patent Right to expire with respect to each such country and each such Licensed
Product.
3.2 ROYALTY RATES.
3.2.1 Pfizer shall pay Megabios a royalty for the sale of each
Licensed Product under Section 2.1 as set forth in Section 3.2.2.
3.2.2 The royalty paid by Pfizer to Megabios with respect to the
1.16(b) License shall be [ * ] of Net Sales; provided, however,
that, if, with respect to the 1.16(a) License or 1.16(b) License it becomes
necessary or desirable for Megabios or Pfizer to take a license from a third
party in any country, including the UC License Agreement license [ * ]
of any resulting royalty unless the royalty rate payable
to Megabios in any such country would be less than [ * ] of Net Sales.
In such event, [ * ] which would otherwise [ *
]
3.2.3 Section 3.2.2 to the contrary notwithstanding, if Pfizer's
manufacturing cost of goods including royalties, as determined by generally
acceptable accounting principles consistently applied, [ *
] of Net Sales for a particular Licensed Product, then Megabios' royalty
rate for that Licensed Product shall be adjusted downward to a royalty rate of
no less than [ * ] as follows:
MANUFACTURING COST OF GOODS ROYALTY RATE
- --------------------------- ------------
[ * ]
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
6
[ * ]
It is understood by the parties that the cumulative application of this Section
and Section 3.3.2 shall in no event operate to reduce the royalty rate payable
to Megabios to less than [ * ] Net Sales.
3.2.4 If both the manufacture and sale of a Product which employs
Joint Technology takes place in countries in which there are no Patent Rights,
Pfizer shall pay Megabios a royalty of [ * ] based on the Net Sales
of each Product in each such country beginning on the date of the first
commercial sale in each country and ending ten (10) years later.
3.3 PAYMENT DATES. Royalties shall be paid by Pfizer on Net Sales within
sixty (60) days after the end of each calendar quarter in which such Net Sales
are made. Such payments shall be accompanied by a statement showing the Net
Sales of each Licensed Product by Pfizer or any sublicensee of Pfizer in each
country, the applicable royalty rate for such Licensed Product, and a
calculation of the amount of royalty due.
3.4 ACCOUNTING. The Net Sales used for computing the royalties payable to
Megabios by Pfizer shall be computed and paid in U.S. dollars by check or other
mutually acceptable means. For purposes of determining the amount of royalties
due, the amount of Net Sales in any foreign currency shall be computed by (a)
converting such amount into dollars at the prevailing commercial rate of
exchange for purchasing dollars with such foreign currency as quoted by Citibank
in New York on the last business day of the calendar quarter for which the
relevant royalty payment is to be made by Pfizer and (b) deducting the amount of
any governmental tax, duty, charge, or other fee actually paid in respect of
such conversion into, and remittance of dollars.
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
7
3.5 RECORDS. Pfizer shall keep for three (3) years from the date of each
payment of royalties complete and accurate records of sales by Pfizer of each
Licensed Product in sufficient detail to allow the accruing royalties to be
determined accurately. Megabios shall have the right for a period of three (3)
years after receiving any report or statement with respect to royalties due and
payable to appoint at its expense an independent certified public accountant
reasonably acceptable to Pfizer to inspect the relevant records of Pfizer to
verify such report or statement. Pfizer shall make its records available for
inspection by such independent certified public accountant during regular
business hours at such place or places where such records are customarily kept,
upon reasonable notice from Megabios, to verify the accuracy of the reports and
payments. Such inspection right shall not be exercised more than once in any
calendar year nor more than once with respect to sales in any given period.
Megabios agrees to hold in strict confidence all information concerning royalty
payments and reports, and all information learned in the course of any audit or
inspection, except to the extent necessary for Megabios to reveal such
information in order to enforce its rights under this Agreement or if disclosure
is required by law. The failure of Megabios to request verification of any
report or statement during said three-year period shall be considered acceptance
of the accuracy of such report, and Pfizer shall have no obligation to maintain
records pertaining to such report or statement beyond said three-year period.
The results of each inspection, if any, shall be binding on both parties.
3.6 MILESTONE PAYMENTS. Pfizer shall pay Megabios, within thirty (30)
days of the completion of each respective event for the Licensed Product set
forth below ("Event"), the payment listed opposite that Event. Payments shall
be made in U.S. dollars by check or other mutually acceptable means. Pfizer
shall be obligated to make each payment only once with respect to the first
indication
<PAGE>
8
of a Licensed Product affected by an Event so that the occurrence of that same
Event with respect to additional indications described in each subsection will
not require Pfizer to make an additional payment with respect to that Event.
One hundred percent (100%) of all payments made by Pfizer pursuant to this
Section 3.8 shall be credited against all sums due to Megabios pursuant to
Section 3.2 of this Agreement; provided, however, that the sums due pursuant to
Section 3.2 in any calendar year shall not be reduced by virtue of this credit
by more than [ * ]
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
9
EVENT PAYMENT
- ----- -------
[ *
]
Notwithstanding anything to the contrary in this Section, if an additional
indication with respect to a Licensed Product which has received PLA/NDA
approval, receives PLA/NDA approval or its equivalent in a Major Market, Pfizer
will pay Megabios [ * ] within 30 days of such event. If
Phase III trials are not conducted, but Pfizer or its sublicensee nonetheless
pursues regulatory approval of the Licensed Product based upon the Phase II
trial results, the Phase III "Event" will be deemed to have occurred at the end
of such Phase II trials.
4. LEGAL ACTION.
4.1 ACTUAL OR THREATENED DISCLOSURE OR INFRINGEMENT. When information
comes to the attention of Pfizer to the effect that any Patent Rights relating
to a Licensed Product to which Pfizer has an exclusive license under Section
2.1 (b) have been or are threatened to be unlawfully infringed, Pfizer shall
have the right at its expense to take such action as it may deem necessary to
prosecute or prevent such unlawful infringement, including the right to bring or
defend any suit, action or proceeding involving any such infringement. Pfizer
shall notify Megabios promptly of the receipt of any such information and of the
commencement of any such suit, action or proceeding. If Pfizer determines that
it is necessary or desirable for Megabios to join any such suit, action or
proceeding, Megabios shall, at Pfizer's expense, execute all papers and perform
such other acts as may be reasonably required to permit Pfizer to act in
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
10
Megabios' name. If Pfizer brings a suit, it shall have the right first to
reimburse itself out of any sums recovered in such suit or in its settlement for
all costs and expenses, including attorney's fees, related to such suit or
settlement, and [ * ] of any funds that shall remain
from said recovery shall be paid to Megabios and the balance of such funds shall
be retained by Pfizer. If Pfizer does not, within one hundred twenty (120) days
after giving notice to Megabios of the above-described information, notify
Megabios of Pfizer's intent to bring suit against any infringer, Megabios shall
have the right to bring suit for such alleged infringement, but it shall not be
obligated to do so, and may join Pfizer as party plaintiff, if appropriate, in
which event Megabios shall hold Pfizer free, clear and harmless from any and all
costs and expenses of such litigation, including attorney's fees, and any sums
recovered in any such suit or in its settlement shall belong to Megabios.
However [ * ] of any such sums received by Megabios,
after deduction of all costs and expenses related to such suit or settlement,
including attorney's fees paid, shall be paid to Pfizer. Each party shall always
have the right to be represented by counsel of its own selection and at its own
expense in any suit instituted by the other for infringement under the terms of
this Section. If Pfizer lacks standing and Megabios has standing to bring any
such suit, action or proceeding, then Megabios shall do so at the request of
Pfizer and at Pfizer's expense.
4.2 DEFENSE OF INFRINGEMENT CLAIMS. Megabios will cooperate with Pfizer at
Pfizer's expense in the defense of any suit, action or proceeding against Pfizer
or any sublicensee of Pfizer alleging the infringement of the intellectual
property rights of a third party by reason of the use of Patent Rights in the
manufacture, use or sale of the Licensed Product. Pfizer shall give Megabios
prompt written notice of the commencement of any such suit, action or proceeding
or claim of infringement and will furnish Megabios a copy of each
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
11
communication relating to the alleged infringement. Megabios shall give to
Pfizer all authority (including the right to exclusive control of the defense of
any such suit, action or proceeding and the exclusive right after consultation
with Megabios, to compromise, litigate, settle or otherwise dispose of any such
suit, action or proceeding), information and assistance necessary to defend or
settle any such suit, action or proceeding; provided, however, Pfizer shall
obtain Megabios' prior consent to such part of any settlement which requires
payment or other action by Megabios or has a material adverse effect on
Megabios' business. If the parties agree that Megabios should institute or join
any suit, action or proceeding pursuant to this Section, Pfizer may, at Pfizer's
expense, join Megabios as a defendant if necessary or desirable, and Megabios
shall execute all documents and take all other actions, including giving
testimony, which may reasonably be required in connection with the prosecution
of such suit, action or proceeding.
4.3 HOLD HARMLESS. Megabios agrees to defend, protect, indemnify and hold
harmless Pfizer and any sublicensee of Pfizer, from and against any loss or
expense arising from any proved claim of a third party that it has been granted
rights by Megabios that Pfizer or any sublicensee of Pfizer in exercising their
rights granted to Pfizer by Megabios pursuant to this Agreement, has infringed
upon such rights granted to such third party by Megabios.
5. REPRESENTATION AND WARRANTY. Megabios represents and warrants to Pfizer
that it has the right to grant the License granted pursuant to this Agreement,
and that the License so granted does not conflict with or violate the terms of
any agreement between Megabios and any third party.
6. TREATMENT OF CONFIDENTIAL INFORMATION.
<PAGE>
12
6.1 CONFIDENTIALITY.
6.1.1 Pfizer and Megabios each recognize that the other's Confidential
Information constitutes highly valuable, confidential information. Subject to
Pfizer's rights and obligations pursuant to this Agreement, Pfizer and Megabios
each agree that during the term of the Research Agreement and for five (5) years
thereafter, it will keep confidential, and will cause its Affiliates to keep
confidential, all Megabios Confidential Information or Pfizer Confidential
Information, as the case may be, that is disclosed to it or to any of its
Affiliates pursuant to this Agreement.
6.1.2 Subject to Pfizer's rights and obligations pursuant to this
Agreement, Pfizer and Megabios each agree that any disclosure of the other's
Confidential Information to any officer, employee or agent of the other party or
of any of its Affiliates shall be made only if and to the extent necessary to
carry out its responsibilities under this Agreement and shall be limited to the
maximum extent possible consistent with such responsibilities. Subject to
Pfizer's rights and obligations pursuant to this Agreement, Pfizer and Megabios
each agree not to disclose the other's Confidential Information to any third
parties under any circumstance without written permission from the other party.
Each party shall take such action, and shall cause its Affiliates to take such
action, to preserve the confidentiality of each other's Confidential Information
as it would customarily take to preserve the confidentiality of its own
Confidential Information. Each party, upon the other's request, will return all
the Confidential Information disclosed to the other party pursuant to this
Agreement, including all copies and extracts of documents, within sixty (60)
days of the request upon the termination of this Agreement except for one (1)
copy which may be kept for the purpose of complying with continuing obligations
under this Agreement.
<PAGE>
13
6.2 PUBLICITY. Except as required by law, neither party may disclose the
terms of this Agreement without the written consent of the other party, which
consent shall not be unreasonably withheld.
6.3 DISCLOSURE OF INVENTIONS. Each party shall promptly inform the other
about all inventions in the Area that are conceived, made or developed in the
course of carrying out the Research Program by employees of, consultants to,
either of them solely, or jointly with employees of, or consultants to the
other.
7. PROVISIONS CONCERNING THE FILING, PROSECUTION AND MAINTENANCE OF PATENT
RIGHTS. The following provisions relate to the filing, prosecution and
maintenance of Patent Rights during the term of this Agreement and after the
termination or expiration of the Research Agreement:
7.1 FILING, PROSECUTION AND MAINTENANCE BY MEGABIOS. Subject to Section
2.1 (c), with respect to Patent Rights in which Megabios employees or
consultants, alone or together with Pfizer employees, or consultants are named
as inventors, Megabios shall have the exclusive right and obligation:
(a) to file applications for letters patent on any patentable
invention included in Patent Rights; provided, however, that Megabios shall
consult with Pfizer regarding countries in which such patent applications should
be filed and shall file patent applications in those countries where Pfizer
requests that Megabios file such applications; and, further provided, that
Megabios, at its option and expense, may file in countries where Pfizer does not
request that Megabios file such applications;
(b) to prosecute all pending and new patent applications included
within Patent Rights;
<PAGE>
14
(c) to respond to oppositions, nullity actions, re-examinations,
revocation actions and similar proceedings filed by third parties against the
grant of letters patent for such applications; and
(d) to maintain in force any letters patent included in Patent Rights
by duly filing all necessary papers and paying any fees required by the patent
laws of the particular country in which such letters patent were granted.
Megabios shall notify Pfizer in a timely manner of any decision to abandon
a pending patent application or an issued patent included in Patent Rights.
Thereafter, Pfizer shall have the option, at its expense, of continuing to
prosecute any such pending patent application or of keeping the issued patent in
force.
7.1.1 COPIES OF DOCUMENTS. Megabios shall provide to Pfizer copies of all
patent applications that are part of Patent Rights prior to filing, for the
purpose of obtaining substantive comment of Pfizer patent counsel. Megabios
shall also provide to Pfizer copies of all documents relating to prosecution of
all such patent applications in a timely manner and shall provide to Pfizer
every six (6) months a report detailing their status. Pfizer shall provide to
Megabios every six (6) months a report detailing the status of all patent
applications that are a part of Patent Rights in which Pfizer employees or
consultants alone are named as inventors.
7.1.2 REIMBURSEMENT OF COSTS FOR FILING, PROSECUTING AND MAINTAINING PATENT
RIGHTS. Within thirty (30) days of receipt of invoices from Megabios, Pfizer
shall reimburse Megabios for all the costs of filing, prosecuting, responding to
opposition and maintaining patent applications and patents in countries where
Pfizer requests that patent applications be filed, prosecuted and maintained.
Such reimbursement shall be in addition to funding payments under the Research
Agreement. However, Pfizer may, upon sixty (60) days +/- notice, request that
Megabios discontinue filing or prosecution of patent
<PAGE>
15
applications in any country and discontinue reimbursing Megabios for the costs
of filing, prosecuting, responding to opposition or maintaining such patent
application or patent in any country. Megabios shall pay all costs in those
countries in which Pfizer does not request that Megabios file, prosecute or
maintain patent applications and patents, but in which Megabios, at its options,
elects to do so.
7.1.3 Pfizer shall have the right to file on behalf of Megabios all
applications and take all actions necessary to obtain patent extensions pursuant
to 35 USC Section 156 for Patent Rights described in this Section 7.1 licensed
to Pfizer. Megabios agrees to sign, at Pfizer's expense, such further documents
and take such further actions as may be requested by Pfizer in this regard.
7.2 FILING, PROSECUTION AND MAINTENANCE BY PFIZER. With respect to Patent
Rights in which Pfizer employees or consultants alone are named as inventors,
Pfizer shall have those rights and duties ascribed to Megabios in Section 7.1.
7.3 Neither party may disclaim a Valid Claim within Patent Right without
the consent of the other.
8. MANUFACTURING.
(a) Megabios will manufacture final dosage form of all Licensed Products
through the end of [ * ] with respect to each such Product at a negotiated
price [ * ] Pfizer understands and acknowledges that Megabios
does not, as of the Effective Date, have the capability to undertake
manufacturing of Licensed Products in accordance with GMP in excess of the
requirements of Licensed Products for the conduct of [ * ] clinical trials.
Accordingly, the obligation of Megabios to supply Licensed Product manufactured
in accordance with GMP for the conduct of [ * ]
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
16
clinical trials is subject to the limitations of its then current manufacturing
facility and Megabios will be under no obligation to construct a new facility,
buy additional manufacturing equipment or reserve third party manufacturing
capacity in order to supply such GMP materials, unless Pfizer has agreed in
advance to pay all costs, plus a negotiated profit margin, associated with
procuring or constructing such facilities and the production of such GMP
material, pursuant to a separate supply agreement.
(b) When Pfizer decides to take any Product to [ * ] it will so notify
Megabios. Upon receipt of such notice, Pfizer and Megabios will attempt to
negotiate a manufacturing agreement for supplies of Product for [ * ] and
commercial use. The parties acknowledge that Pfizer can probably manufacture the
requisite DNA more inexpensively than Megabios and that Pfizer shall have no
obligation to enter an agreement for any component of the Product which it can
obtain more inexpensively or reliably from itself or one or more third parties
or both. Any provision in this Agreement to the contrary notwithstanding, Pfizer
shall be free to obtain additional Product from one or more additional vendors
or to establish back-up facilities to assure itself of adequate supplies of each
Product throughout the world.
(c) Pfizer will, at reasonable times during normal working hours and with
reasonable notice, have the right, by itself or through third parties under
confidential obligation to Pfizer and Megabios, to conduct quality
assurance/quality control audits of Megabios facility and manufacturing
procedures with respect to Product. Failure to maintain adequate standards in
Pfizer's sole, unfettered judgment shall be treated as an Event of Termination
pursuant to Section 10.1(b), but only with respect to this Section 8. No other
provision of this Agreement will be affected by termination of this section.
[*] Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
17
9. OTHER AGREEMENTS. Concurrently with the execution of this Agreement,
Megabios and Pfizer shall enter into the Research Agreement and the Stock
Purchase Agreement. This Agreement, the Stock Purchase Agreement and the
Research Agreement are the sole agreements with respect to the subject matter
and supersede all other agreements and understandings between the parties with
respect to same. In addition, if Pfizer decides to continue the Research
Agreement beyond the initial two Commitment Years, within sixty (60) days of the
eighteenth-month anniversary of the effective Date, the parties will execute a
second stock purchase agreement whereby Pfizer purchases the lesser of an
additional $10,000,000.00 in Megabios securities or that number of additional
shares such that Pfizer's aggregate ownership of Megabios stock is 19.99%, on
substantially those terms set forth in the Stock Purchase Agreement. The
purchase price of such securities shall be 137.5% of the value of each share of
similar Megabios stock as determined by its most recent private offering or the
closing price on the exchange on which it is traded on the date (such date not
to be earlier than sixteen months following the Effective Date) on which Pfizer
decides to continue to Research Agreement, as the case may be (the "Base
Price"). Megabios stock must be traded at or above the premium price for five
consecutive days during the twelve months following the date of the second stock
purchase by Pfizer (or, if not publicly traded, Megabios stock must be traded at
or above the premium price during the twelve month period following an initial
public offering of Megabios stock). If not, Megabios will issue additional
shares to Pfizer to cover the balance of the premium. Such share adjustment will
be equal to (a) the actual dollar amount of Pfizer's second stock purchase
divided by the greater of (i) the highest average five consecutive day trading
price (or, if Megabios stock is not publicly traded, the highest price as
determined by a private offering during the twelve month period following the
second stock
<PAGE>
18
purchase by Pfizer or (ii) the Base Price, minus (b) the number of shares
purchased by Pfizer under this Section 9.
10. TERMINATION AND DISENGAGEMENT.
10.1 TERM; EVENTS OF TERMINATION. Unless earlier terminated as provided
in this Section 10, the term of this Agreement shall extend from the Effective
Date until the last to expire of the Patent Rights covering a Licensed Product
at which time Pfizer will have a fully paid up, perpetual license. The
following events shall constitute events of termination ("Events of
Termination"):
(a) Any material written representation or warranty by Megabios or
Pfizer, or any of its officers, made under or in connection with this Agreement
shall prove to have been incorrect in any material respect when made.
(b) Megabios or Pfizer shall fail in any material respect to perform
or observe any material term, covenant or understanding contained in this
Agreement or in any of the other documents or instruments delivered pursuant to,
or concurrently with, this Agreement, and any such failure shall remain
unremedied for ninety (90) after written notice to the failing party.
10.2 TERMINATION. Upon the occurrence of any Event of Termination, the
party not responsible may, by notice to the other party, terminate this
Agreement.
10.3 Termination of this Agreement by either party, with or without cause,
will not terminate the licenses granted pursuant to Section 5.2 of the Research
Agreement.
10.4 Termination of this Agreement for any reason shall be without
prejudice to:
(a) the rights and obligations of the parties provided in Sections 6
and 11;
<PAGE>
19
(b) Megabios' right to receive all royalty payments accrued
hereunder; or
(c) any other remedies which either party may otherwise have.
11. INDEMNIFICATION. Pfizer will indemnify Megabios for damages, settlements,
costs, legal fees and other expenses incurred in connection with a claim against
Megabios based on any action or omission of Pfizer whether such claim alleges
negligence, willful misconduct or strict liability, its agents or employees
related to the obligations of Pfizer under this Agreement; provided, however,
that the foregoing shall not apply (i) if the claim is found to be based upon
the negligence, recklessness or willful misconduct of Megabios, or (ii) if
Megabios fails to give Pfizer prompt notice of any claim it receives and such
failure materially prejudices Pfizer with respect to any claim or action to
which Pfizer's obligation pursuant to this Section applies. Pfizer, in its sole
discretion, shall choose legal counsel, shall control the defense of such claim
or action, and shall have the right to settle same on such terms and conditions
it deems advisable.
12. NOTICES. All notices shall be in writing mailed via certified mail, return
receipt requested, courier, or facsimile transmission addressed as follows, or
to such other address as may be designated from time to time:
If to Pfizer: To Pfizer at its address as set forth
at the beginning of this Agreement
Attention: President, Central Research
---------
with copy to: Office of the General Counsel
If to Megabios: Megabios at its address as set forth at the
beginning of this Agreement
<PAGE>
20
Attention: President
---------
Notices shall be deemed given as of the date received.
13. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
14. MISCELLANEOUS.
14.1 BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective legal representatives,
successors and permitted assigns.
14.2 HEADINGS. Paragraph headings are inserted for convenience of
reference only and do not form a part of this Agreement.
14.3 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original.
14.4 AMENDMENT, WAIVER. This Agreement may be amended, modified,
superseded or canceled, and any of the terms may be waived, only by a written
instrument executed by each party or, in the case of waiver, by the party or
parties waiving compliance. The delay or failure of any party at any time or
times to require performance of any provisions shall in no manner affect the
rights at a later time to enforce the same. No waiver by any party of any
condition or of the breach of any term contained in this Agreement, whether by
conduct, or otherwise, in any one or more instances, shall be deemed to be, or
considered as, a further or continuing waiver of any such condition or of the
breach of such term or any other term of this Agreement.
14.5 NO THIRD PARTY BENEFICIARIES. Subject to Section 2.1(c) an the
rights of third party licensors under the UC license Agreement, no third party
<PAGE>
21
including any employee of any party to this Agreement, shall have or acquire any
rights by reason of this Agreement. Nothing contained in this Agreement shall be
deemed to constitute the parties partners with each other or any third party.
14.6 ASSIGNMENT AND SUCCESSORS. This Agreement may not be assigned by
either party, except that each party may assign this Agreement and the rights
and interests of such party, in whole or in part, to any of its Affiliates, any
purchaser of all or substantially all of its assets or to any successor
corporation resulting from any merger or consolidation of such party with or
into such corporations.
14.7 FORCE MAJEURE. Neither Pfizer nor Megabios shall be liable for failure
of or delay in performing obligation set forth in this Agreement, and neither
shall be deemed in breach of its obligations, if such failure or delay is due to
natural disasters or any causes reasonably beyond the control of Pfizer or
Megabios.
14.8 SEVERABILITY. If any provision of this Agreement is or becomes invalid
or is ruled invalid by any court of competent jurisdiction or is deemed
unenforceable, it is the intention of the parties that the remainder of the
Agreement shall not be affected.
<PAGE>
22
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
PFIZER INC MEGABIOS CORP
By: /s/ George M. Milne, Jr. By:
--------------------------------- -----------------------------
Title: Vice President Title:
------------------------------ --------------------------
Date: 31 May 1996 Date:
------------------------------- ---------------------------
cc: Pfizer Inc, Legal Division, Groton, CT 06340
<PAGE>
23
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
PFIZER INC MEGABIOS CORP
By: By: /s/ Benjamin F. McGraw
--------------------------------- -----------------------------
Title: Title: President and CEO
------------------------------ --------------------------
Date: Date: May 30, 1996
------------------------------- ---------------------------
<PAGE>
EXHIBIT 10.21
EXCLUSIVE LICENSE AGREEMENT
BETWEEN
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
AND
MEGABIOS CORP.
FOR
EXPRESSION OF CLONED GENES IN THE LUNG
BY AEROSOL AND LIPOSOME BASED DELIVERY
AND HIGH LEVEL TRANSGENE EXPRESSION
U.C. Case Nos 91-O51-2,-3, -4, &-5 and 91-281-1, -2, -4 & -5; 95-222-1
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
ARTICLE NO. TITLE PAGE
- ---------- ----- ----
<C> <S> <C>
Recitals.................................................. 1
1. Definitions............................................... 3
2. Grant..................................................... 8
3. License Issue and Milestone Fees.......................... 10
4. Royalties................................................. 12
5. Due Diligence............................................. 16
6. Progress and Royalty Reports.............................. 20
7. Books and Records......................................... 22
8. Life of the Agreement..................................... 23
9. Termination by The Regents................................ 23
10. Termination by Licensee................................... 24
11. Disposition of Patent Products On Hand Upon Termination... 25
12. Use of Names and Trademarks............................... 25
13. Limited Warranty.......................................... 26
14. Patent Prosecution and Maintenance........................ 28
15. Patent Marking............................................ 31
16. Patent Infringement....................................... 31
17. Indemnification and Insurance............................. 35
18. Notices................................................... 37
19. Assignability............................................. 38
20. Late Payments............................................. 38
21. Waiver.................................................... 38
22. Failure to Perform........................................ 39
23. Governing Laws............................................ 39
24. Foreign Government Approval or Registration............... 39
25. Export Control Laws....................................... 40
26. Force Majeure............................................. 40
27. Confidentiality........................................... 41
28. Miscellaneous............................................. 43
</TABLE>
<PAGE>
U.C. Case Nos. 91-051-2, -3, -4, & -5, 91-281-1, -2, -4 & -5; and 95-222-1
Exclusive License Agreement
for
Expression of Cloned Genes in the Lung
by Aerosol and Liposome Based Delivery
and High Level Transgene Expression
This license agreement ("Agreement") is effective this 9th day of May 1996,
--- ---
by and between The Regents of the University of California ("The Regents"), a
California corporation, having its statewide administrative offices at 300
Lakeside Drive, 22nd Floor, Oakland, California 94612-3550 and Megabios Corp.
("Licensee"), a California corporation, having a principal place of business at
863 A Mitten Road, Burlingame, California 94010.
Recitals
--------
Whereas, Licensee sponsored research in the laboratory of Dr. Robert J. Debs
at The University of California at San Francisco under a 3 year research
agreement effective April 30, 1992;
Whereas, Licensee entered into an Option Agreement ("Option Agreement"),
having U.C. Agreement Control No. 92-11-0192, effective
<PAGE>
April 30, 1992 that allowed Licensee to evaluate its interest in taking a
license to any inventions arising under the research agreement:
Whereas, certain inventions useful for gene delivery and therapy in the lung
were made under the research sponsored by Licensee at the University of
California, San Francisco ("UCSF") by Dr. Robert J. Debs, Mr. Ning Zhu, and
others, and are claimed in Patent Rights defined below ("Inventions");
Whereas, The Licensee is a "small business firm" as defined in 15 U.S.C.
Section 632;
Whereas, Licensee delivered a notice, dated January 23, 1995, electing to
exercise the option granted under the Option Agreement;
Whereas, both parties recognize that royalties due under this Agreement will
be paid on pending patent applications and issued patents;
Whereas, The Regents agree to grant the following rights to Licensee so that
the products and other benefits derived from the Inventions can be enjoyed by
the general public.
--oo0oo--
2
<PAGE>
The parties agree as follows:
1. Definitions
- -- -----------
As used in this Agreement, the following terms will have the meaning set
forth below:
1.1 "Patent Rights" means all U.S. patents and patent applications and
corresponding foreign patents and patent applications related to Inventions
assigned to The Regents, and in the case of foreign patents and patent
applications, those requested under Paragraph 14.4, including any reissues,
extensions, substitutions, continuations, divisions, and continuations-in-part
applications (only to the extent, however, that claims in the continuations-in-
part applications are entitled to the priority filing date of the parent patent
application) relating to any subject matter claimed in or covered by any of the
following:
1.1.1 U.S. Patent Application Serial Number[*
]
1.1.2 U.S. Patent Application Serial Number[*
]
1.1.3 U.S. Patent Application Serial Number[*
3
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
]
1.1.4 U.S. Patent Application Serial Number[*
]
1.1.5 U.S. Patent Application Serial Number[*
]
1.1.6 U.S. Patent Application Serial Number entitled "Transfection
of Lung Via Aerosolized[*
]
1.1.7 U.S. Patent Application Serial Number[*
]
1.1.8 U.S. Patent Application Serial Number[*
]
4
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
1.1.9 U.S. Patent Application Serial Number[*
]
1 .1.10 U.S. Patent Application Serial Number[*
]
1.1.11 any subject matter claimed in patent applications covering
University of California case file disclosure number[*
]
1.2 "Patent Products" means:
1.2.1 any kit, composition of matter, material, or product;
1.2.2 any kit, composition of manor, material, or product to be used
in a manner requiring the performance of the Patent Method; or
1.2.3 any kit, composition of matter, material, or product
produced by the Patent Method;
to the extent that the manufacture, use, or sale of such kit composition of
matter, material or product, in a particular country, would be covered by or
infringe, but for the license granted to Licensee pursuant to this Agreement.
5
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
an unexpired claim of an issued patent or a claim of a patent application under
Patent Rights in that country in which such patent has issued or application is
pending. This definition of Patent Products also includes a service either used
by Licensee or provided by Licensee to its customers when such service requires
the practice of the Patent Method.
1.3 "Patent Method" means any process or method covered by the claims of a
patent application or patent within Patent Rights, the use or practice of which
would be covered by or infringe in a particular country, but for the license
granted to Licensee pursuant to this Agreement an unexpired claim of an issued
patent or a pending claim of a patent application within Patent Rights in that
country in which the Patent Method is used or practiced.
1.4 "Net Sales" means the gross invoice prices from the sale of Patent
Products by Licensee, an Affiliate, a Joint Venture or a sublicensee to
independent third parties for cash or other forms of consideration in accordance
with Generally Acceptable Accounting Principles limited to the following
deductions (if not already deducted from the gross invoice prices): (a)
allowances (actually paid and limited to rejections, returns, and prompt payment
and volume discounts granted to customers of Patent Products, whether in cash or
Patent Products in lieu of cash); (b) freight, transport packing, insurance
charges associated with transportation; and (c) taxes,
6
<PAGE>
tariff, or import/export duties based on sales when included in gross sales, but
not value-added taxes or taxes assessed on income derived from such sales. Where
Licensee distributes Patent Products for end use to itself, an Affiliate, a
Joint Venture, or a sublicensee, then such distribution will be considered a
sale at list price normally charged to independent third parties, and The
Regents will be entitled to collect a royalty on such sale in accordance with
Article 4 (Royalties). Sales of Patent Products for use in research and
development, including human clinical trials, shall not be included within "Net
Sales."
1.5 "Affiliate(s)" of Licensee means any entity which, directly or
indirectly, controls Licensee, is controlled by Licensee, or is under common
control with Licensee ("control" for these purposes being defined as the actual,
present capacity to elect a majority of the directors of such affiliate, or if
not, the capacity to elect the members that control fifty percent (50%) of the
outstanding stock or other voting rights entitled to elect directors) provided,
however, that in any country where the local law will not permit foreign equity
participation of a majority, then an "Affiliate" will include any company in
which Licensee will own or control, directly or indirectly, the maximum
percentage of such outstanding stock or voting rights permitted by local law.
Each reference to Licensee herein will be meant to include its Affiliates.
7
<PAGE>
1.6 "Joint Venture" means any separate entity established pursuant to an
agreement between a third party and Licensee to constitute a vehicle for a joint
venture, in which the separate entity manufactures, uses, purchases, sells, or
acquires Patent Products from Licensee. Each reference to Licensee herein will
be meant to include its Joint Venture(s).
2. Grant
- -- -----
2.1 Subject to the limitations set forth in this Agreement, The Regents
hereby grants to Licensee exclusive licenses under Patent Rights relating to
Sub-paragraphs 1.1.1 to 1.1.10 to make, have made, use, import, offer for sale,
and sell Patent Products and to practice the Patent Method in the United States
and all countries where Patent Rights exist as designated by Licensee pursuant
to Paragraph 14.4.
2.2 Subject to the limitations set forth in this Agreement, The Regents
hereby grants to Licensee exclusive licenses in the undivided interest of The
Regents in the Patent Rights relating to Sub-paragraph 1.1.11 to make, have
made, use, import, offer for sale, and sell Patent Products and to practice the
Patent Method in the United States and all countries where Patent Rights exist
as designated by Licensee pursuant to Paragraph 14.4.
2.3 The Regents also grants to Licensee the right to issue sublicenses to
third parties to make, have made, use, import, offer for sale,
8
<PAGE>
and sell Patent Products and to practice the Patent Method, provided Licensee
retains current exclusive rights thereto under this Agreement prior to the grant
at the sublicense. Throughout the term of each such sublicense, Licensee shall
ensure compliance with, to the extent applicable, all of the rights due to The
Regents contained in this Agreement, including payment of royalties as provided
for in Article 4. (Royalties).
2.4 Subject to Paragraph 6.4 herein, Licensee will notify The Regents of
each sublicense granted hereunder and provide The Regents with a summary of the
major non-financial terms of each sublicense. Licensee will carry out and
guarantee the collection and payment from sublicensees of all royalties due The
Regents as set forth in Paragraph 4.1 herein. Licensee will require
sublicensees to provide it with progress and royalty reports in accordance with
the provisions herein, and Licensee will collect and deliver to The Regents all
such reports due from sublicensees.
2.5 Upon termination of this Agreement for any reason (including
termination under Paragraph 5.5 or any termination that might result from the
institution of any proceeding by or against Megabios in bankruptcy), or should
Licensee retain a non-exclusive license to any patent or patent application
pursuant to Paragraphs 5.4 and 5.5 herein, Licensee agrees that it will assign
to The Regents all sublicense agreements entered into by Licensee and its
sublicensees and The Regents agree to assume such
9
<PAGE>
assigned sublicenses. The Regents will not be bound by duties or obligations
contained in sublicenses that are not contained in this Agreement. The Regents
will not be bound by duties extending beyond this Agreement. This Paragraph 2.5
shall not apply to any sublicensee whose actions or omissions caused this
Agreement to be terminated by The Regents pursuant to Paragraph 9.1.
2.6 Nothing in this Agreement will be deemed to limit the right of The
Regents to publish any and all technical data resulting from any research
performed by The Regents relating to the Inventions and to make and use the
Inventions, Patent Product(s), Patent Method(s), and associated technology
solely for educational and non-commercial research purposes.
3. License Issue and Milestone Fees
- -- --------------------------------
3.1 As consideration for all the rights and licenses granted to Licensee,
Licensee will pay to The Regents a license issue fee of[*
]Dollars payable in three installments in the amounts and at the
times specified below:
3.1.1 $[* ]to be paid to The Regents within seven (7)
days after the execution of this Agreement by Licensee:
10
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
3.1.2[* ]to be paid to The Regents on or before
June 15th, 1997;
3.2 Licensee shall pay to The Regents milestone fees in the amounts and
upon the events specified below within 60 days after the occurrence of each
such event:
3.2.1 $[*][*]in the United States with the first Patent Product;
3.2.2 $[*][*]in the United States for the first Patent Product;
3.2.3 $[*][*]in the United States with the second Patent Product;
3.2.4 $[*][*]for the first Patent Product;
3.2.5 $[*][*]in the United States for the second Patent Product;
3.2.6 $[*][*]for the second Patent Product.
11
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
3.3 The fees and payments set forth in Paragraphs 3.1 and 3.2 above
are[* ]
4. Royalties
- -- ---------
4.1 As further consideration for all the rights and licenses granted to
Licensee, Licensee will also pay to The Regents an earned royalty at the rate of
[* ]based on the Net Sales of Patent Products.
4.2 Paragraphs 1.1, 1.2, and 1.3 define Patent Rights, Patent Products,
and Patent Method so that royalties will be payable on Patent Products and
Patent Methods covered by both issued patents and pending patent applications
included within Patent Rights. Earned royalties will accrue in each country for
the duration of Patent Rights in that country and will be payable to The Regents
when Patent Products are invoiced, or if not invoiced, when delivered to a third
party or to itself, an Affiliate, Joint Venture, or sublicensee in the case
where such delivery of the Patent Product to Licensee, an Affiliate, Joint
Venture, or sublicensee is intended for end use.
4.3 To the extent royalties are paid for Patent Products that have been
invoiced, but for which payment is not actually received by the seller within a
reasonable time, Licensee may credit the amount of such royalties
12
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
against future payments at the time Licensee writes-off as a bad debt monies due
it in association with such royalties.
4.4 Royalties accruing to The Regents will be paid to The Regents
quarterly on or before the following dates of each calendar year:
March 15 for the calendar quarter ending December 31
June 15 for the calendar quarter ending March 31
September 15 for the calendar quarter ending June 30
December 15 for the calendar quarter ending September 30
Each such payment will be for royalties which accrued up to Licensee's most
recently completed calendar quarter.
4.5 In the event that the amount of earned royalties provided for in
Paragraph 4.1 and based on Net Sales of Patent Products in the calendar years
set forth below is less than the corresponding minimum royalty amounts, Licensee
shall pay the amount of the difference to The Regents by March 15 of the
following calendar year:
[*]
13
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THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
In each succeeding calendar year after the year[* ]Licensee will pay a
minimum annual royalty of[* ]and thereafter for the life of this
Agreement.
4.6 All monies due The Regents will be payable in United States funds
collectible at par in San Francisco, California. When Patent Products are sold
for monies other than United States dollars, the earned royalties will first be
determined in the foreign currency of the country in which such Patent Products
were sold and then converted into equivalent United States funds. The exchange
rate will be that rate quoted in the Wall Street Journal on the last business
day of the reporting period.
4.7 Earned royalties based on sales of Patent Products occurring in any
country outside the United States will not be reduced by any taxes, fees, or
other charges imposed by the government of such country, except those taxes,
fees, and other charges allowed under the provisions of Paragraph 1.4 herein.
Notwithstanding the foregoing, if The Regents is required to pay taxes on its
royalties under the laws of any country, then Licensee will pay such amounts to
the proper authorities, withhold such amounts from royalties paid to The
Regents, and provide The Regents with all documents and assistance reasonably
necessary to enable The Regents to recover all or part of such amounts pursuant
to any double taxation treaty or otherwise. Licensee will also be responsible
for all bank transfer charges.
14
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THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
4.8 Should the claims in any of the Patent Rights be narrowed to the
extent that it is not obvious that Licensee is infringing the narrower Patent
Rights and Licensee has the option of either making, using or selling certain
Licensed Products within the scope of the narrower claims or making, using or
selling equivalent non-infringing products, The Regents will enter into good-
faith negotiations to appropriately reduce the royalty rate set forth in
Paragraph 4.1, provided that in no case will the royalty rate be less than[*
]based on the Net Sales of Patent Products.
The Regents will lower the minimum annual royalties by a percent amount equal to
the reduction in the royalty rate. In no case, however, will the minimum annual
royalties due The Regents fall below[* ]of the amounts listed in Paragraph
4.5 above. Further, Licensee must make a request to The Regents in writing for
such a reduction in the royalty rate and reduced minimum annual royalty payment
sixty (60) days prior to the beginning of the first calendar year in which such
reductions would apply.
4.9 Notwithstanding the provisions of Article 26 (Force Majeure), if at
any time legal restrictions prevent prompt remittance of part or all royalties
owed to The Regents by Licensee with respect to any country where a Patent
Product is sold or distributed, Licensee will convert the amount owed to The
Regents into United States funds and will pay The Regents directly from another
source of funds for the amount impounded.
15
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
4.10 In the event that any patent or any claim thereof included within the
Patent Rights is held invalid in a final decision by a court of competent
jurisdiction and from which no appeal has or can be taken, all obligation to pay
royalties based on, such patent or claim or any claim patentably indistinct
therefrom will cease as of the date of such final decision. Licensee will not,
however, be relieved from paying any royalties that accrued before such decision
or that are based on another patent or claim that has not expired or that is not
involved in such decision.
5. Due Diligence
- -- -------------
5.1 Licensee, upon execution of this Agreement, will diligently proceed
with the development, manufacture and sale of Patent Products in the United
States, France, Germany, Italy, and the United Kingdom, and will earnestly and
diligently market the same within a reasonable time after execution of this
Agreement and in quantities sufficient to meet the market demands therefor at
the price(s) established by Licensee or it sublicensee(s) in accordance with
applicable laws and regulations.
5.2 Licensee will be entitled to exercise prudent and reasonable business
judgment in the manner in which it meets its due diligence obligations
hereunder. In no case, however, will Licensee be relieved of its obligations to
meet the due diligence provisions of this Article 5. (Due
16
<PAGE>
Diligence). It is understood and agreed by The Regents, that, notwithstanding
anything to the contrary in this Agreement, the activities of Licensee's
sublicensees in the development, manufacture and sale of Patent Products will be
deemed activities of Licensee in meeting its obligations under this Article 5.
5.3 Licensee will obtain all necessary governmental approvals in each
country in which Patent Products are manufactured, used or sold.
5.4 If Licensee is unable to perform any of the following:
5.4.1 [* ]with the first Patent Product on
or before December 31, 1998; and
5.4.2 [*
]in the United States for the first Patent Product on or
before July 31, 2001; and
5.4.3 [* ]with the second Patent Product
on or before December 31, 2002; and
5.4.4 [*
]for the first Patent
Product on or before December 31, 2003; and
5.4.5 [*
]in the United States for the second Patent
Product on or before July 31, 2005; and
5.4.6 [*
]for the second Patent
Product on or before December 31, 2007; and
5.4.7 [* ]
within six (6) months after receiving marketing approval
for such Patent Products from the United States Food and
Drug Administration
17
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
and
5.4.8 [*]at all times during the term of this Agreement in the
United States, France, Germany, Italy, and the United
Kingdom after receiving marketing approvals from the
corresponding regulatory agency in each of such countries;
then The Regents will have the right and option to terminate this Agreement or
reduce Licensee's exclusive licenses to non-exclusive licenses in accordance
with Paragraph 5.5 hereof; provided, however, that if the first Patent Product
does not meet the diligence milestones referenced in subparagraphs 5.4.1, 5.4.2,
5.4.4, or 5.4.7, but the second or a later Patent Product meets such diligence
milestones, Licensee will be deemed to be in compliance with this Paragraph 5.4
and Licensee's licenses under Article 2 shall remain exclusive and in full force
and effect. The exercise of this right and option by The Regents supersedes the
rights granted in Article 2. (Grant).
5.5 To exercise either the right to terminate this Agreement or reduce the
exclusive licenses granted to Licensee to non-exclusive licenses for lack of
diligence required in this Article 5. (Due Diligence), The Regents will give
Licensee written notice of the deficiency. Licensee thereafter has 60 (sixty)
days to cure the deficiency. Licensee shall be entitled to extend each of the
dates set forth in Subparagraphs 5.4.1 through 5.4.7 which have
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[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
not been met by Licensee by up to three additional years upon payment to The
Regents of a fee for each year a date is extended. The amounts of the extension
fees due The Regents for the first, second and final one-year extensions will be
[*] and such extensions will be automatically granted by The Regents provided
that the corresponding extension-fee payment is received by The Regents within
thirty (30) days of Licensee's receipt of written notice from The Regents of
Licensee's deficiency. Each extension shall serve to extend by one year not just
the immediately applicable deadline, but all subsequent milestone deadlines
applicable to such Patent Product. If The Regents has not received the payment
for the one-year extension within the thirty (30) day period or written tangible
evidence satisfactory to The Regents that the deficiency has been cured by the
end of the sixty (60) day period, then The Regents may, at its option, terminate
this Agreement or reduce the exclusive licenses granted to Licensee to non-
exclusive licenses by giving written notice to Licensee. These notices will be
subject to Article 18. (Notices). Notwithstanding the foregoing, if Licensee's
failure pertains to the second Patent Product, Licensee shall be entitled to
retain its exclusive licenses with respect to the first Patent Product.
19
[*]=CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE>
6. Progress and Royalty Reports
- -- ----------------------------
6.1 Beginning June 15, 1996 and semi-annually thereafter, Licensee will
submit to The Regents a progress report covering the activities of Licensee
related to the development and testing of all Patent Products and the obtaining
of the governmental approvals necessary for marketing. These progress reports
will be provided to The Regents to cover the progress of the research and
development of the Patent Products until their first commercial sale in the
United States. Notwithstanding the foregoing, Licensee shall not be required to
include in any reports to The Regents hereunder any confidential or proprietary
scientific information disclosed to Licensee by its sublicensees.
6.2 The progress reports submitted under Paragraph 6.1 will include, but
not be limited to, the following topics so that The Regents may be able to
determine the progress of the development of Patent Products and may also be
able to determine whether or not Licensee has met its diligence obligations set
forth in Article 5. (Due Diligence) above:
. summary of work completed
. key scientific discoveries
. summary of work in progress
. current schedule of anticipated events or milestones
20
<PAGE>
. the introduction date of Patent Products to the market
. activities of sublicensees, if any.
6.3 Licensee will also report to The Regents the date of its first
commercial sale of a given Patent Product in a given country in the progress and
royalty report immediately following the first commercial sale of a Patent
Product in a such country.
6.4 After the first commercial sale of a Patent Product, Licensee will
provide The Regents with quarterly royalty reports to The Regents on or before
each March 15, June 15, September 15 and December 15 of each year. Each such
royalty report will cover the most recently completed calendar quarter (October
through December, January through March, April through June, and July through
September) and will show:
6.4.1 the gross sales and Net Sales of Patent Products sold by
Licensee and reported to Licensee as sold by its
sublicensees during the most recently completed calendar
quarter;
6.4.2 the names and number of Patent Products sold or distributed
by Licensee and reported to Licensee as sold or distributed
by its sublicensees;
6.4.3 the royalties, in U.S. dollars, payable hereunder with
respect to Net Sales; and
6.4.4 the exchange rates used, if any.
21
<PAGE>
6.5 If no sales of Patent Products have been made during any reporting
period after the first commercial sale of a Patent Product, then a statement,
signed and dated by Licensee, is required.
7. Books and Records
- -- -----------------
7.1 Licensee will keep books and records accurately showing all Patent
Products manufactured, used, and/or sold under the terms of this Agreement. Such
books and records will be preserved for at least three (3) years from the date
of the royalty payment to which they pertain and will be open to inspection by a
certified public accountant designated by The Regents and reasonably acceptable
to Licensee at reasonable times to determine the accuracy of the books and
records and to determine compliance by Licensee with the terms of this
Agreement. Records regarding sales in any given period shall be subject to
inspection only once. All inspections shall be conducted under reasonable
confidentiality restrictions.
7.2 The fees and expenses of representatives performing such an
examination will be borne by The Regents. However, if an error in royalties of
more than five percent (5%) of the total royalties due for any year is
discovered, then the fees and expenses of these representatives will be borne by
Licensee.
22
<PAGE>
8. Life of the Agreement
- -- ---------------------
8.1 Unless otherwise terminated by operation of law or by acts of the
parties in accordance with the terms of this Agreement, this Agreement will be
in force from the effective date recited on page one and will remain in effect
for the life of the last-to-expire patent licensed under this Agreement, or
until the last patent application licensed under this Agreement is abandoned,
whichever is later.
8.2 Any termination of this Agreement will not affect the rights and
obligations set forth in the following Articles:
Article 7 Books and Records
Article 11 Disposition of Patent Products on Hand Upon
Termination
Article 12 Use of Names and Trademarks
Paragraph 14.6 Patent Prosecution and Maintenance
Article 17 Indemnification and Insurance
Article 22 Failure to Perform
Article 27 Confidentiality
9. Termination by The Regents
- -- --------------------------
9.1 If Licensee should materially violate or materially fail to perform
any term or covenant of this Agreement (other than Article 5), then The Regents
may give written notice of such default ("Notice of Default") to
23
<PAGE>
Licensee. If Licensee should fail to repair such default within sixty (60) days
of the date of such notice, The Regents will have the right to terminate this
Agreement and the licenses herein by a second written notice ("Notice of
Termination") to Licensee. If a Notice of Termination is sent to Licensee, this
Agreement will automatically terminate on the date such notice is delivered.
Such termination will not relieve Licensee of its obligation to pay any royalty
or license fees owing at the time of such termination and will not impair any
accrued right of The Regents. These notices will be subject to Article 18.
(Notices).
10. Termination by Licensee
- --- -----------------------
10.1 Licensee will have the right at any time to terminate this
Agreement in whole or as to any portion of Patent Rights by giving notice in
writing to The Regents. Such Notice of Termination will be subject to Article
18. (Notices) and termination of this Agreement will be effective sixty (60)
days from the effective date of such notice.
10.2 Any termination pursuant to the above paragraph will not relieve
Licensee of any obligation or liability accrued hereunder prior to such
termination or rescind anything done by Licensee or any payments made to The
Regents hereunder prior to the time such termination becomes effective, and such
termination will not affect in any manner any accrued rights or
24
<PAGE>
obligations of The Regents or Licensee arising under this Agreement prior to
such termination.
11. Disposition of Patent Products On Hand Upon Termination
- --- -------------------------------------------------------
11.1 Upon termination of this Agreement, Licensee will have the
privilege of disposing all previously made or partially made Patent Products,
but no more, within a period of one hundred and twenty (120) days, provided,
however, that the sale of such Patent Products will be subject to the terms of
this Agreement including, but not limited to the payment of royalties on the Net
Sales of Patent Products at the rates and at the times provided herein and the
rendering of reports in connection therewith.
12. Use of Names and Trademarks
- --- ---------------------------
12.1 Nothing contained in this Agreement will be construed as conferring
any right to use in advertising, publicity, or other promotional activities any
name, trade name, trademark, or other designation of either party hereto by the
other (including contraction, abbreviation or simulation of any of the
foregoing). Unless required by law, the use by Licensee of the name, "The
Regents of the University of California" or the name of any campus of the
University of California is expressly prohibited.
25
<PAGE>
12.2 It is understood that The Regents will be free to release to the
inventors and senior administrative officials employed by The Regents the terms
and conditions of this Agreement upon their request. If such release is made,
The Regents will request that such terms and conditions shall be treated in
accordance with the terms of Article 27 (Confidentiality) by such individuals,
but, in any event, The Regents shall remain responsible for continued compliance
with Article 27 (Confidentiality) with respect to disclosure of such information
by such individuals. It is further understood that should a third party inquire
whether a license to Patent Rights is available, The Regents may disclose the
existence of this Agreement and the extent of the grant in Article 2. (Grant) to
such third party, but will not disclose the name of Licensee or any of the
financial terms of this Agreement, except where The Regents is required to
release such information under either the California Public Records Act or other
applicable law.
13. Limited Warranty
- --- ----------------
13.1 The Regents warrants to Licensee that it has the lawful right to grant
this license and that such grant does not conflict with any other grant of
rights by The Regents.
26
<PAGE>
13.2 Except as set forth in Paragraph 13.1 above, this license and the
associated Inventions are provided WITHOUT WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESSED OR IMPLIED.
THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT THE INVENTIONS, PATENT
PRODUCTS, OR PATENT METHOD WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY
RIGHT.
13.3 IN NO EVENT WILL THE REGENTS BE LIABLE FOR ANY INCIDENTAL; SPECIAL OR
CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE
INVENTIONS, PATENT METHOD, OR PATENT PRODUCTS.
13.4 Nothing in this Agreement will be construed as:
13.4.1 a warranty or representation by The Regents as to the
validity, enforceability, or scope of any Patent Rights;
or
13.4.2 a warranty or representation that anything made, used,
sold or otherwise disposed of under any license granted
in this Agreement is or will be free from infringement
of patents of third parties; or
13.4.3 an obligation to bring or prosecute actions or suits
against third parties for patent infringement except as
provided in Article 16. (Patent Infringement); or
13.4.4 conferring by implication, estoppel or otherwise any
license or rights under any patents of The Regents other
than Patent Rights as defined herein, regardless of
whether such patents are dominant or subordinate to
Patent Rights; or
27
<PAGE>
13.4.5 an obligation to furnish any know-how not provided in
Patent Rights.
14. Patent Prosecution and Maintenance
- --- ----------------------------------
14.1 The Regents will diligently prosecute and maintain the United
States and foreign patents comprising Patent Rights and any interference or
opposition proceedings relative to Patent Rights, using counsel of its choice.
In the event that The Regents changes counsel for any reason, The Regents shall
replace such counsel with new counsel of its choice that is reasonably
acceptable to Licensee, provided, however, that if Licensee rejects the choice
of new counsel by The Regents three times consecutively (i.e., three different
new attorneys), then The Regents shall be free, in its sole discretion, to
choose an attorney of its choice. The Regents will promptly provide Licensee
with copies of all relevant documentation so that Licensee may be currently and
promptly informed and apprised of the continuing prosecution and so that
Licensee may comment upon such documentation sufficiently in advance of any
initial deadline for filing a response, provided, however, that if Licensee has
not commented upon such documentation prior to the initial deadline for filing a
response with the relevant government patent office, The Regents will be free to
respond appropriately without waiting for Licensee's comments, if any. Both
parties hereto will keep this documentation in confidence in accordance with the
provisions of Article 27.
28
<PAGE>
(Confidentiality) herein. The Regents' counsel will take instructions only from
The Regents.
14.2 The Regents will use all reasonable efforts to amend any patent
application to include claims requested by Licensee and required to protect the
Patent Products contemplated to be sold or Patent Method to be practiced under
this Agreement.
14.3 The Regents and Licensee will cooperate in applying for an extension
of the term of any patent included within Patent Rights, if appropriate, under
the Drug Price Competition and Patent Term Restoration Act of 1984. Licensee
will prepare all such documents, and The Regents will execute such documents and
will take such additional action as Licensee may reasonably request in
connection therewith.
14.4 The Regents will, at the request of Licensee, file, prosecute, and
maintain patent applications and patents covered by Patent Rights in foreign
countries if available. Licensee must notify The Regents within seven (7) months
of the filing of the corresponding United States application of its decision to
request The Regents to file foreign counterpart patent applications. This
notice concerning foreign filing must be in writing and must identify the
countries desired. The absence of such a notice from Licensee to The Regents
within the seven (7) month period will be considered an election by Licensee
not to request The Regents to secure
29
<PAGE>
foreign patent rights on behalf of Licensee. The Regents will have the right to
file patent applications at its own expense in any country Licensee has not
included in its list of desired countries, and such applications and resultant
patents, it any, will not be included in the licenses granted under this
Agreement.
14.5 All costs incurred after the effective date of this Agreement for
preparing, filing, prosecuting and maintaining all United States and foreign
patent applications and patents covered by Patent Rights in Paragraph 1.1 in
accordance with this Article 14 will be borne by Licensee. The parties
acknowledge that patent preparation and prosecution costs incurred by The
Regents for patent applications claiming Inventions prior to the execution of
this Agreement have been paid or are to be paid by Licensee. The costs of all
interferences and oppositions will be considered prosecution expenses and also
will be borne by Licensee. Licensee will reimburse The Regents for all costs and
charges covered by this Paragraph 14.5 within thirty (30) days following receipt
of an itemized invoice from The Regents for same.
14.6 Licensee's obligation to underwrite and to pay patent filing costs
(and related costs), prosecution and maintenance costs will continue for costs
incurred until three (3) months after receipt by either party of a Notice of
Termination. Licensee will reimburse The Regents for all patent costs incurred
during the term of the Agreement and for three (3) months
30
<PAGE>
thereafter. Licensee may with respect to any particular patent application or
patent terminate its obligations with the patent application or patent in any or
all designated countries upon three (3) months written notice to The Regents.
The Regents will use its best efforts to curtail the associated patent costs
after such notice is received from Licensee. The Regents may continue
prosecution and/or maintenance of such application(s) or patent(s) at its sole
discretion and expense, provided, however, that Licensee will have no further
right or licenses thereunder.
15. Patent Marking
- --- --------------
15.1 Licensee will mark all Patent Products made, used or sold under the
terms of this Agreement, or their containers, in accordance with the applicable
patent marking laws.
16. Patent Infringement
- --- -------------------
16.1 In the event that Licensee learns of the substantial infringement of
any patent licensed under this Agreement, Licensee will call The Regents'
attention thereto in writing and will provide The Regents with reasonable
evidence of such infringement. Both parties to this Agreement agree that during
the period and in a jurisdiction where Licensee has exclusive rights under this
Agreement, neither will notify a third party of the infringement of
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<PAGE>
any of Patent Rights without first obtaining consent of the other party, which
consent will not be unreasonably withheld. Both parties will use their best
efforts in cooperation with each other to terminate such infringement without
litigation.
16.2 Licensee may request that The Regents take legal action against the
infringement of Patent Rights. Such request must be made in writing and must
include reasonable evidence of such infringement and damages to Licensee. If the
infringing activity has not been abated within ninety (90) days following the
effective date of such request, The Regents will have the right to elect to:
16.2.1 commence suit on its own account; or
16.2.2 refuse to participate in such suit.
16.3 The Regents will give notice of its election in writing to Licensee by
the end of the one-hundredth (100th) day after receiving notice of Licensee's
request to bring suit; provided, however, that if suit must be brought earlier
pursuant to any applicable rule, regulation or policy of a governmental
authority and The Regents are made aware of such rule, regulation, policy or
governmental authority, then The Regents will give notice of its election
sufficiently in advance of any applicable deadline to permit suit to be brought
by The Regents or Licensee. In particular, counsel of The Regents will make
his/her best efforts either to obtain permission from
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<PAGE>
The Regents to enter into such law suit or to provide such notice to Licensee
within thirty (30) days of receiving any notice of the filing of an Abbreviated
New Drug Application (ANDA) for a Patent Product. Licensee may thereafter bring
suit for patent infringement if and only if The Regents elects not to commence
suit and if the infringement occurred during the period and in a jurisdiction
where Licensee had exclusive rights under this Agreement.
16.4 If suit is brought solely by The Regents, then Licensee may bring a
second, separate suit following the conclusion of any suit brought by The
Regents unless The Regents provides reasonable institutional or conflict-of-
interest grounds for precluding Licensee from filing a second, separate suit. In
such event Licensee shall not have the right to file such separate suit.
16.5 If either party elects to bring suit in accordance with this Article 16,
the other party may thereafter join suit at its own expense unless The Regents
provides reasonable institutional or conflict-of-interest grounds for precluding
Licensee from joining a suit filed solely by The Regents. In such event,
Licensee shall not have the right to join such suit.
16.6 If the parties bring suit jointly (seeking damages on behalf of both
parties) the parties will control the suit jointly, but, if the parties take
differing positions on the issue of validity of the Patent Rights, The Regents
may control the resolution of such issue. In such event, the parties will share
expenses equally, and all recoveries, whether through settlement or
33
<PAGE>
litigation, will be allocated in the following order: i) to each party
reimbursement in equal amounts of the attorneys' costs, fees, and other related
expenses to the extent each party paid for such costs, fees and expenses until
all such costs, fees, and expenses are reimbursed for each party; ii) all
remaining amounts other than enhanced damages will be allocated based on good
faith negotiations between The Regents and Licensee, taking into account lost
royalties due The Regents, lost profits due Licensee, or any other damages
theory utilized by the court; iii) enhanced damages will be paid one-half to The
Regents and one-half to Licensee.
16.7 If either party brings suit alone, then the other party will cooperate
in the proceedings but at the expense of the party on account of whom suit is
brought. Such litigation will be controlled by the party bringing the suit,
except that The Regents may be represented by counsel of its own choice in any
suit brought by Licensee. All recoveries (whether through settlement or
litigation) from such action will belong to the party bringing suit, provided
that neither party recovers damages suffered by the other or is compensated for
licensing rights that may only be granted to an infringing third party pursuant
to the terms and conditions of this Agreement. In case of The Regents decision
not to require an injunction or its failure to succeed on a claim for an
injunction, such non-requirement or failure shall not be deemed to be a license
grant.
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<PAGE>
17. Indemnification and Insurance
- --- -----------------------------
17.1 Licensee will (and will require its sublicensees to) indemnify, hold
harmless, and defend The Regents, its officers, employees, and agents; the
sponsors of the research that led to the Inventions; the inventors of any
invention covered by patents or patent applications in Patent Rights (including
the Patent Products and Patent Method contemplated thereunder) and their
employers against any and all claims, suits, losses, damages, costs, fees, and
expenses resulting from or arising out of exercise of this license or any
sublicense. This indemnification will include, but will not be limited to any
product liability.
17.2 The Regents will promptly notify Licensee in writing of any claim or
suit which The Regents become aware of and which may be subject to the
provisions of this Article 17 (Indemnification and Insurance). Licensee will
have the sole right to control and settle any such claims or suits, provided
that The Regents' written consent, not to be unreasonably withheld, shall be
required for any settlement adversely affecting The Regents' rights under this
Agreement. The Regents shall cooperate as reasonably requested by Licensee in
handling any such claim or suit. Licensee shall reimburse The Regents for out-
of-pocket expenses incurred providing such assistance. Licensee will keep The
Regents informed on a
35
<PAGE>
current basis of its defense of any claims pursuant to this Article 17.
(Indemnification and Insurance).
17.3 Licensee, at its sole cost and expense, will insure its activities in
connection with the work under this Agreement and obtain, keep in force, and
maintain insurance (or an equivalent program of self insurance) as follows:
17.3.1 Comprehensive or Commercial Form General Liability Insurance
(contractual liability included) with limits as follows:
(a) Each Occurrence............................... $1,000,000
(b) Products/Comprehensive Operations Aggregate... $3,000,000
(c) Personal Injury............................... $1,000,000
(d) General Aggregate (commercial form only)...... $3,000,000
It should be expressly understood, however, that the coverages and limits
referred to under the above will not in any way limit the liability of
Licensee under Paragraph 17.1. Licensee will furnish The Regents with
certificates of insurance evidencing compliance with all such requirements.
Such certificates will:
(a) Provide for thirty (30) day advance written notice to The Regents
of any modification adversely affecting the rights of The Regents
hereunder.
(b) Indicate that The Regents has been endorsed as an additional
Insured under the coverages referred to under the above.
(c) Include a provision that the coverages will be primary and will
not participate with nor will be excess over any valid
36
<PAGE>
and collectable insurance or program of self-insurance carried or
maintained by The Regents.
18. Notices
- --- -------
18.1 Any notice or payment required to be given to either party will be
deemed to have been properly given and to be effective (a) on the date of
delivery if delivered in person, by express mail service or by facsimile (in
each case with receipt confirmed) or (b) five (5) days after mailing if mailed
by first-class certified mail, postage paid, to the respective addresses given
below, or to another address as it may designate by written notice given to the
other party.
In the case of Licensee: MEGABIOS CORP.
863A Mitten Road
Burlingame, CA 94010
Attention: Chief Executive Officer
In the case of The Regents: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
1320 Harbor Bay Parkway, Suite 150
Alameda, California 94502
Attention: Terence Feuerborn
Executive Director
Research Administration
and Technology Transfer
Referring to: U.C. Case Nos. 91-051,
91-281 and 95-222
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<PAGE>
19. Assignability
- --- -------------
19.1 This Agreement may be assigned only with the written consent of the
non-assigning party, not to be unreasonably withheld, provided, however, that
Licensee may assign this Agreement in connection with a merger, sale of assets
or other change of control transaction involving the entire line of business to
which this Agreement relates. This Agreement is binding upon and will inure to
the benefit of each party, its successors and permitted assigns.
20. Late Payments
- --- -------------
20.1 In the event royalty payments or fees or patent prosecution costs
are not received by The Regents when due, Licensee will pay to The Regents
interest charges at a rate of ten percent (10%) simple interest per annum. Such
interest will be calculated from the date payment was due until actually
received by The Regents. Acceptance by The Regents of any late payment interest
from Licensee under this Paragraph 20.1 will in no way affect the provision of
Article 21. (Waiver) herein.
21. Waiver
- --- ------
21.1 It is agreed that no waiver by either party hereto of any breach
or default of any of the covenants or agreements herein set forth will be deemed
a waiver as to any subsequent and/or similar breach or default.
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<PAGE>
22. Failure to Perform
- --- ------------------
22.1 In the event of a failure of performance due under the terms of
this Agreement and if it becomes necessary for either party to undertake legal
action against the other on account thereof, then the prevailing party will be
entitled to reasonable attorney's fees in addition to costs and necessary
disbursements of attorneys.
23. Governing Laws
- --- --------------
23.1 THIS AGREEMENT WILL SE INTERPRETED AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA, excluding any choice of law rules that
would direct the application of the laws of another jurisdiction, but the scope
and validity of any patent or patent application will be governed by the
applicable laws of the country of such patent or patent application.
24. Foreign Government Approval or Registration
- --- -------------------------------------------
24.1 If this Agreement or any associated transaction is required by the
law of any nation to be either approved or registered with any governmental
agency, Licensee will assume all legal obligations to do so. Licensee will
notify The Regents if it becomes aware that this Agreement is subject to a
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<PAGE>
United States or foreign government reporting or approval requirement. Licensee
will make all necessary filings and pay all costs including fees, penalties, and
all other out-of-pocket costs associated with such reporting or approval
process.
25. Export Control Laws
- --- -------------------
25.1 Licensee will observe all applicable United States laws and laws
in countries outside of the United States with respect to the transfer of Patent
Products and related technical data to countries outside the United States,
including, without limitation, the International Traffic in Arms Regulations
(ITAR) and the Export Administration Regulations.
26. Force Majeure
- --- -------------
26.1 The parties to this Agreement will be excused from any performance
required hereunder it such performance is rendered impossible or unfeasible due
to any acts of God, catastrophes, or other major events beyond their reasonable
control, including, without limitation, war, riot, and insurrection; laws,
proclamations, edicts, ordinances, or regulations; strikes, lock-outs, or other
serious labor disputes; and floods, fires, explosions, or other natural
disasters. When such events have abated, the parties' respective obligations
hereunder shall resume. However, any party to this
40
<PAGE>
Agreement will have the right to terminate this Agreement upon thirty (30) days'
prior written notice if either party is unable to fulfill its obligations under
this Agreement due to any of the causes mentioned above and such inability
continues for a period of one (1) year. Notices will be subject to Article 18.
(Notices).
27. Confidentiality
- --- ---------------
27.1 Licensee and The Regents respectively will treat and maintain the
other party's proprietary business, financial, patent prosecution, process,
technical, research, development, regulatory, marketing and sales information,
and other proprietary information and the terms of this Agreement ("Proprietary
Information") in confidence using at least the same degree of care as that party
uses to protect its own proprietary information of a like nature from the date
of disclosure until five (5) years after the date of termination of this
Agreement, provided that all Proprietary Information will be labeled or marked
confidential by the disclosing party, or if the Proprietary Information is
orally disclosed, it will be reduced to writing or some other physically
tangible form, marked and labeled as set forth above by the disclosing party and
delivered to the receiving party within thirty (30) days of the oral disclosure
as a record of the disclosure and the confidential nature thereof.
Notwithstanding the foregoing, Licensee and The Regents
41
<PAGE>
may use and disclose Proprietary Information to their employees, agents,
consultants, contractors, and, in the case of Licensee, its sublicensees,
provided that any such parties are bound by a like duty of confidentiality.
27.2 Nothing contained herein will in any way restrict or impair the right
of Licensee or The Regents to use, disclose or otherwise deal with any
Proprietary Information:
27.2.1 that recipient can demonstrate by written records was
previously known to it;
27.2.2 that is now, or becomes in the future, public knowledge
other than through acts or omissions of recipient;
27.2.3 that is lawfully obtained without restrictions by recipient
from sources independent of the disclosing party who have
the right to disclose such information;
27.2.4 that is required to be disclosed to a governmental entity or
agency in connection with seeking any governmental or
regulatory approval, or pursuant to the lawful requirement
or request of a governmental entity or agency;
27.2.5 that is furnished to a third party by the recipient with
similar confidentiality restrictions imposed on such third
party, as evidenced in writing; or
27.2.5 that The Regents is required to disclose pursuant to the
California Public Records Act or other applicable law.
27.3 Upon termination of this Agreement, Licensee and The Regents will
destroy or return to the disclosing party Proprietary Information received
42
<PAGE>
from the other in its possession within thirty (30) days following the effective
date of termination. Licensee and The Regents will provide each other, within
thirty (30) days following termination, with a written notice that Proprietary
Information has been returned or destroyed. Each party may, however, retain one
copy of Proprietary Information for archival purposes in nonworking files.
28. Miscellaneous
- --- -------------
28.1 The headings of the several sections are inserted for convenience of
reference only and are not intended to be a part of or to affect the meaning or
interpretation of this Agreement.
28.2 This Agreement will not be binding upon the parties until it has
been signed below on behalf of each party, in which event, it will be effective
as of the date recited on page one.
28.3 No amendment or modification hereof will be valid or binding upon
the parties unless made in writing and signed on behalf of each party.
28.4 This Agreement embodies the entire understanding of the parties and
will supersede all previous communications, representations or understandings,
either oral or written, between the parties relating to the subject matter
hereof. The Option Agreement specified in the Recitals in this Agreement and
effective April 30, 1992 is hereby expired.
43
<PAGE>
28.5 In case any of the provisions contained in this Agreement are held
to be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability will not affect any other provisions hereof, but
this Agreement will be construed as if such invalid or illegal or unenforceable
provisions had never been contained herein.
In witness whereof, both The Regents and Licensee have executed this
Agreement, in duplicate originals, by their respective officers hereunto duly
authorized, on the day and year hereinafter written.
MEGABIOS CORP: THE REGENTS OF THE UNIVERSITY
OF CALIFORNIA:
By /s/BENJAMIN F. MCGRAW By /s/ ^^
----------------------- ------------------------------
(Signature) (Signature)
for
Name Benjamin F. McGraw Name: Terence A. Feuerborn
-----------------------
(Please Print)
Title President & CEO Title: Executive Director
---------------------- Research Administration
and Technology Transfer
Date May 9, 1996 Date
----------------------- ----------------------------
44
<PAGE>
EXHIBIT 10.22
RESEARCH AND LICENSE AGREEMENT
THIS RESEARCH AND LICENSE AGREEMENT ("Agreement"), effective as of the last
date signed ("Effective Date") by and between MEGABIOS CORP., a California
corporation having its principal place of business at 863A Mitten Road,
Burlingame, California 94010 ("MEGABIOS")
AND
ELI LILLY AND COMPANY, a corporation organized under the laws of the State
of Indiana having its principal place of business at the Lilly Corporate Center,
Indianapolis, Indiana, 46285 acting through its division Lilly Research
Laboratories ("LILLY").
Recitals
--------
1. LILLY is in the business of developing, manufacturing and marketing
pharmaceutical and animal health products.
2. LILLY has certain rights pertaining to the BRCA1 Gene.
3. MEGABIOS has expertise in lipid-based gene delivery and expression,
and in the production and pre-clinical development of gene-based therapeutics.
4. LILLY AND MEGABIOS desire to collaborate in research regarding
lipid-based gene delivery of the BRCA1 Gene.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter recited, the parties agree as follows:
Article I
---------
Definitions
-----------
Section 1.1. General. When used in this Agreement, each of the following
------------ -------
terms shall have the meaning set forth in this Article.
Section 1.2. "Affiliate" means (a) any corporation or business entity,
------------
other than Competitive Distributors, of which LILLY or MEGABIOS, at the time in
question, directly or indirectly owns or controls fifty percent (50%) or more of
the stock having the right to vote for directors thereof or otherwise controls
the management of the corporation or business entity, or (b) any corporation,
individual or business entity which now or hereafter directly or indirectly owns
or controls fifty percent (50%) or more of the stock of LILLY or MEGABIOS having
the right to vote for directors thereof. Competitive Distributors shall mean
entities, owned or directly or indirectly controlled by LILLY through ownership
of at least fifty percent (50%) of the stock normally entitled to vote for
election of directors, that purchase Products for resale and that also purchase
pharmaceutical products from entities unrelated to LILLY; provided such
purchases of Products are pursuant to arms' length transactions.
<PAGE>
-2-
Section 1.3. "BLA" means with respect to any particular Product, the
------------
Biological License Application, or equivalent, filed with the FDA pursuant
to the Food and Drug Cosmetic Act and the regulations thereunder and any
other authoritative material that interprets such Act with respect to that
Product, together with all additions, deletions and supplements thereto or
any similar filing necessary for marketing or commercialization.
Section 1.4. "BRCA1 Gene" means the nucleotide sequence [ * ].
------------
Section 1.5. "Delivery Technology" means technical information,
------------
inventions, materials, data and know-how that relate to Lipid-based gene
delivery systems.
Section 1.6. "Field" means the use of Lipid-based gene delivery systems
------------
for the delivery of BRCA1 Gene to human cells.
Section 1.7. "Formulation" means a specific formulation, developed in
------------
the course of the Project, of components containing at least the BRCA1 Gene and
a Lipid, characterized by [ * ] included in the formulation.
Section 1.8. "FTE" means a full time equivalent scientific person year or
------------
a total of forty-seven (47) weeks or one thousand eight hundred eighty (1,880)
hours per year of scientific work on or directly related to the Project (or,
for purposes of Section 4.3, the Manufacturing Transfer), carried out by a
MEGABIOS employee ("MEGABIOS FTE"), having at least a Bachelors Degree in a
science. Scientific work on or directly related to the Project to be
performed by MEGABIOS employees can include, but is not limited to,
experimental laboratory work, recording and writing of results, reviewing
literature and references, holding scientific discussions, managing and
leading scientific staff, and carrying out Project management duties. The
Research Plan lists the initial schedule of key employees that shall be
responsible for scientific work under the Project. The parties acknowledge
that, from time to time, such schedule may change to meet the needs of the
Project, however, under no circumstances shall less then [ * ] of the employees
assigned to the Project by MEGABIOS have an educational level less then [ * ]
level except, in the case where the Project's focus is primarily manufacturing
or as the Committee may otherwise deem appropriate.
Section 1.9. "GLP" shall mean the current Good Laboratory Practice
------------
Standards promulgated or endorsed by the FDA (or in the case of foreign
jurisdictions, comparable regulatory standards), including those procedures
expressed or implied in the regulatory filings made with respect to the
Product with the FDA or foreign regulatory agents.
Section 1.10. "GMP" shall mean the current Good Manufacturing Practices
-------------
Standards promulgated or endorsed by the FDA (or in the case of foreign
jurisdictions, comparable regulatory standards), and all additional procedures
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-3-
expressed or implied in the regulatory filings made with respect to the Product
with the FDA or foreign regulatory authorities.
Section 1.11. "LILLY Information" means all confidential and/or
-------------
proprietary technical information, data, know-how, biological materials, and
chemical substances (i) relating to the BRCA1 Gene for use in the Field and
developed or acquired (with the right to disclose to third parties for their
use) by LILLY prior to the Effective Date or (ii) developed or acquired by LILLY
outside the scope of the Project after the Effective Date, but disclosed by
LILLY to MEGABIOS for use in connection with the Project during the term of the
Project. All information that is developed or acquired by LILLY during the term
of the Project in connection with the Project that relates to the BRCA1 Gene or
the Formulation, comprises Delivery Technology or is otherwise useful to the
Project shall be Project Information and not LILLY Information. Subject to
Section 11.1, MEGABIOS acknowledges that notwithstanding the foregoing LILLY may
acquire or develop information during the term of but outside the Project in
connection with the BRCA1 Gene and useful in connection with the Project that
LILLY may choose not to use in connection with the Project or that LILLY may be
unable to disclose to MEGABIOS for use in connection with the Project due to
present or future contractual arrangements with-third parties. MEGABIOS agrees
that such information is specifically excluded from the definitions of LILLY
Information or Project Information under this Agreement.
Section 1.12. "LILLY Patent Right" means a Patent Right that is owned or
-------------
controlled by LILLY and a Patent Right as to which LILLY has the right to grant
licenses or sublicenses within the Field without violating the terms of any
agreement or other arrangement with a third party. LILLY Patent Rights are
specifically excluded from the definition of LILLY Information or Project
Information under this Agreement. LILLY Patent Rights include LILLY's interest
in Patent Rights claiming inventions included in Project Information, as
determined under Section 4.2.
Section 1.13. "Lipid" means [ * ] amphiphile having a hydrophilic headgroup
and one or more attached hydrophobic moieties, including naturally occurring
compounds, derivatives thereof, or compounds that do not occur in nature.
Section 1.14. "MEGABIOS Information" means all confidential and/or
-------------
proprietary technical information, data, know-how, biological materials, and
chemical substances which are (i) useful for the development of the Formulation
or otherwise related to the Project and developed or acquired (with the right to
disclose to third parties for their use) by MEGABIOS prior to the Effective
Date, or (ii) developed or acquired by MEGABIOS outside the scope of the
Project after the Effective Date, but disclosed by MEGABIOS to LILLY for use in
connection with the Project during the term of the Project. All information that
is developed or acquired by MEGABIOS during the term of the Project in
connection with the Project that relates to the BRCA1 Gene or the Formulation,
comprises Delivery Technology or is otherwise useful to the Project shall be
Project Information and not MEGABIOS Information. Subject to Section 11.1,
LILLY acknowledges that notwithstanding the foregoing MEGABIOS may acquire or
develop information during the term of, but outside the Project related to
Delivery Technology and possibly useful in connection with the Project that
MEGABIOS may choose not to use in connection with the Project or that MEGABIOS
may be unable to disclose to
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-4-
LILLY for use in connection with the Project due to present or future
contractual arrangements with third parties. LILLY agrees that such information
is specifically excluded from the definitions of MEGABIOS Information or Project
Information under this Agreement.
Section 1.15. "MEGABIOS Patent Right" means a Patent Right that is owned or
-------------
controlled by MEGABIOS and a Patent Right as to which MEGABIOS has the right to
grant licenses or sublicenses within the Field without violating the terms of
any agreement or other arrangement with a third party. MEGABIOS Patent Rights
are specifically excluded from the definitions of MEGABIOS Information or
Project Information under this Agreement. MEGABIOS Patent Rights include
MEGABIOS' interest in Patent Rights claiming invention included in Project
Information, as determined under Section 4.2. A non-exhaustive list of
potentially relevant MEBAGIOS Patent Rights in existence as of the Effective
date is attached hereto as Appendix I.
Section 1.16. "Net Sales" means, with respect to a product [ * ]by LILLY
-------------
or a LILLY Affiliate or sublicensee to unrelated third parties for the Product
(or as the case may be under Section 6.4, gross amount invoiced by MEGABIOS or
MEGABIOS Affiliate or sublicensee), less the following [ * ].
a. Trade, quantity and cash discounts [ * ].
b. Discounts, refunds, rebates, chargebacks and retroactive price
adjustments [ * ].
c. Product returns and allowances for Product returns;
d. That portion of the sales value (determined by the same methods
described below for combination products) associated with [ * ].
e. Any tax [ * ]
f. Allowances for distribution expenses, [ * ]
g. Any other similar, reasonable and customary deductions which are: [ * ]
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
Such amounts shall be determined from the books and records of LILLY, its
Affiliates or sublicensees [ * ] In the event that LILLY, its Affiliate(s), or
sublicensee(s) distributes Products for commercial human therapeutic end use to
itself or to another Affiliate, or sublicensee for commercial human therapeutic
end use itself (e.g. an Affiliate hospital), then [ * ].
In the event the Product is sold as part of a combination products
including one or more active agents in addition to Product, the Net Sales of the
Product, for the purposes of determining royalty payments, shall be determined
by multiplying [ * ] In the event that such average sale price cannot be
determined for both the Product and the other product(s) separately, Net Sales
of Products shall be determined by multiplying [ * ] If neither the Product nor
the other product(s) are sold separately in finished form or the mechanics
provided above are otherwise inapplicable, Net Sales of Products shall be
determined [ * ].
Section 1.17. "Patent Right" means a patent or patent application and all
-------------
divisions, continuations, continuations-in-part, reissues, extensions,
Supplementary Protection Certificates, foreign counterparts thereof, and any
similar intellectual property that is owned or controlled by MEGABIOS or by
LILLY, at least one claim of which covers the making, using or selling of the
BRCA1 Gene, Delivery Technology or a Product.
Section 1.18. "Phase I Clinical Trials" means human clinical trials
-------------
conducted in subjects to establish the safety profile of a Product.
Section 1.19. "Phase II Clinical Trials" means human clinical trials
-------------
conducted in patients to establish proof of concept in the particular indication
tested and clinical trials conducted in patients to establish proof of concept
in the particular indication tested and clinical trials conducted in patients to
achieve a statistically significant indication of efficacy in the particular
indication tested, as well as to obtain some indication of the dosage regimen
required.
Section 1.20. "Phase III Clinical Trials" means large scale human clinical
-------------
trials conducted in patients to establish product efficacy in the particular
indication tested and required to obtain Product registration with health
regulatory authorities.
Section 1.21. "Product" means a product for use as a human therapeutic that
incorporates a Formulation, in any form or dosage, for delivery by any route of
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-6-
administration. Product shall also include any Product the formulation contained
in which has been modified or adjusted so as to be a "Modified Formulation"
pursuant to Section 5.1(a).
Section 1.22. "Project" means the collaborative research and development
-------------
program to be conducted by MEGABIOS and LILLY in the Field in connection with
this Agreement. The Project is described more fully in a research plan (the
"Research Plan") that has been mutually agreed to and exchanged between the
parties concurrent with the execution of this Agreement. The Research Plan may
be modified by mutual agreement from time to time as provided in Section 2.4.
Section 1.23. "Project Information" means all confidential and/or
-------------
proprietary technical information, data, know-how, biological materials,
chemical substances and inventions (patentable or unpatentable) (which, in the
case of patentable inventions shall include inventions conceived in the course
of and within the scope of the Project and reduced to practice during the
Project or within [ * ] after its expiration) that are developed,
discovered, invented or otherwise generated by MEGABIOS or LILLY in the course
of the Project or are acquired by MEGABIOS or LILLY pursuant to Section 11.1,
with the right to disclose to the other party for its use in connection with the
Project; provided the same either: (i) relates to the BRCA1 Gene, Delivery
Technology or the Formulation or (ii) is otherwise useful to the Project.
MEGABIOS acknowledges that LILLY may acquire or develop information during the
term of but outside the Project in connection with the BRCA1 Gene and useful in
connection with the Project that LILLY may be unable to use in connection with
the Project due to present or future contractual arrangements with third
parties. MEGABIOS agrees that such information is specifically excluded from the
definition of Project information under this Agreement. LILLY acknowledges that
MEGABIOS may acquire or develop information during the term of, but outside the
Project relating to Delivery Technology and possibly useful in connection with
the Project that MEGABIOS may be unable to disclose to LILLY for use in
connection with the Project due to present or future contractual arrangements
with third parties. LILLY agrees that such information is specifically excluded
from the definition of Project Information under this Agreement.
Section 1.24. "Project Team Status" means [ * ].
-------------
Section 1.25. "Project Year" means a twelve-month period during the term of
-------------
the Project. The first Project Year shall commence on the Effective Date.
Section 1.26. "Valid Claim" means an unexpired, issued claim which has not
-------------
been found to be unpatentable, invalid or unenforceable by a court or other
authority in the subject country from which decision no appeal is taken or can
be taken.
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-7-
Article II
----------
Staffing, Planning and Execution of Project
-------------------------------------------
Section 2.1. Commencement and Reasonable Efforts. Upon the Effective Date,
------------ -----------------------------------
LILLY and MEGABIOS shall commence the work on the Project described in the
Research Plan. Both parties will carry out their respective roles and use
reasonable efforts in conducting work on the Project in order to achieve the
research goals set forth in the Research Plan.
Section 2.2. MEGABOIS Effort on the Project. During the first Project Year,
------------ ------------------------------
MEGABOIS shall devote [ * ] MEGABIOS FTEs to the Project. During the second
Project year, MEGABIOS shall devote [ * ] MEGABIOS FTEs to the Project. If the
Committee requests that any specific individual scientist be assigned to the
Project, MEGABIOS will use reasonable efforts to assign such person to the team
for at least [ * ], of his or her time. The names of the MEGABIOS key employees
who are initially scheduled to work on the Project are set forth in the Research
Plan. MEGABIOS will designate a project manager to serve as a primary contact to
LILLY for day-to-day coordination of the Project. MEGABIOS' directors of each
functional group will diligently oversee such group's activities related to the
Project.
SECTION 2.3. Steering Committee Formation. MEGABIOS AND LILLY shall each
------------ ----------------------------
have up to four (4) representatives serve as members of the Steering Committee
(the "Committee"). The respective individual representatives for each party may
be changed from time to time at the discretion of MEGABIOS or LILLY upon receipt
of written notification to the other party by the party making the change,
provided that any replacements shall be of the same general level of authority
and experience as the original members of the Committee. Each party may
designate advisory members to the Committee as each may reasonably deem
appropriate, however, such members shall only serve in an advisory capacity and
shall not have a vote in connection with decisions made by the Committee.
Section 2.4. Steering Committee Responsibilities. MEGABIOS and LILLY
------------ -----------------------------------
have agreed upon an initial plan for research tasks to be completed in the
first Project Year under the Project as set forth in the Research Plan. The
Committee shall: 1) review and approve all plans for research to be done
under the Project, and 2) review all results of work done under the Project.
The Committee shall meet at least once each calendar quarter, or from
time to time as agreed to by the Committee. At these meetings, the Committee
will. 1) review the Project, and 2) modify the scope and goals of the Project
if the Committee deems it necessary, and reallocate resources in accordance
with such modification, provided that the research program shall not be
reduced below the minimum number of MEGABIOS FTEs provided in Section 2.2 in
any Project Year unless the parties mutually agree otherwise. The Committee
must approve any modification to the scope and goals of the Project described in
the Research Plan (including any extra costs arising form work with third
parties) and prepare an appropriate written modification to the Research Plan
for signature by both parties' Committee representatives. Decisions with regards
to the Project shall require a unanimous approval of the Committee.
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-8-
Section 2.5. Conduct of Studies. All work done in connection with the
------------ -------------------
Project shall be carried out in compliance with any federal, state, or local
laws, regulations, or guidelines governing the conduct of research at the site
where such work is being conducted. In addition, any laboratory animals covered
by this Agreement shall be provided humane care and treatment in accordance with
the most acceptable current veterinary practices.
Section 2.6. LILLY's Collaboration Work. LILLY will assign such personnel
------------ ---------------------------
as it deems appropriate in connection with the Project.
Section 2.7. Treatment of Chemical and Biological Materials. Each party
------------ -----------------------------------------------
agrees that it will not transfer to any third party the other party's chemical
or biological materials, unless a duly authorized representative of the other
party agrees in writing. Subject to Sections 4.2 and 7.1, such a transfer may
be made to any biological material depository for patent or other purposes in
accordance with this Agreement, or as required by law to any government agency
or body.
Section 2.8. Safety Concerns. Each party agrees to provide the other with
------------ ----------------
handling instructions, including all safety information known to such party
relating to chemical and biological material to be transferred to the other
party. This will include, but not to be limited to, all applicable Material
Safety Data Sheets (MSDS).
Section 2.9. Clinical Development and Marketing. Except as otherwise
------------ -----------------------------------
provided in this Agreement or as LILLY and MEGABIOS may agree in writing, LILLY,
at its sole discretion, shall have the exclusive right (and the funding and
other responsibilities related thereto) to handle either directly or through
third parties of its choice (subject to Sections 2.10 and 4.3 below) all matters
related to the Product after pre-clinical development including, but not limited
to, clinical development, regulatory registrations and filings, manufacturing
and commercialization of any Product under the terms of this Agreement. LILLY
may also, in its sole discretion, conduct further preclinical studies (including
toxicology studies) beyond those provided for in the Research Plan. LILLY agrees
to provide MEGABIOS with all data and information generated in such further
preclinical studies conducted by LILLY on Products, subject to the
confidentiality provisions of Article VII. For avoidance of any doubt, LILLY
may, in its sole discretion, discontinue clinical development and the
obligations related thereto if it deems it appropriate at anytime, subject to
the terms of this Agreement, including but not limited to Section 5.2(b) and
Articles III and VIII. LILLY shall notify MEGABIOS upon its decision to
discontinue development or commercialization efforts with respect to any
Product, and Lilly's license under Section 5.1 shall terminate with respect to
any such Product.
Section 2.10. Manufacturing. Except as otherwise provided in this
------------- --------------
Agreement, the Research Plan or as LILLY and MEGABIOS may agree in writing,
MEGABIOS shall be responsible for the development, manufacture and supply of
Product material for preclinical testing and toxicology studies and material
suitable for use in Phase I Clinical Trials as contemplated under this
Agreement; [ * ] LILLY shall review, prior to Committee
approval, all protocols for toxicology studies conducted under the terms of the
Research Plan. All applicable manufacturing and toxicology facilities (and
materials made under this Agreement) shall comply with and be operated in
accordance with all applicable GMP, GLP, requirements specified in the IND, and
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-9-
other regulatory requirements. LILLY shall have the right to audit all
manufacturing and toxicology facilities described herein, including procedures
and practices, to verify their conformance with applicable GMP, GLP and other
regulatory requirements. MEGABIOS shall comply with all applicable governmental
requirements, and shall provide LILLY with all information pertinent to
regulatory approvals for manufacturing facilities. Additionally, a Manufacturing
Requirements Document will be developed and agreed to prior to the manufacture
and supply of the first Phase I Clinical Trial Product material. An outline of
the initial content for the Manufacturing Requirements Document is included in
Appendix II. MEGABIOS shall provide to LILLY, in the format reasonably specified
by LILLY, all information related to the chemistry manufacture and control of
the Product required for regulatory submissions. Notwithstanding the foregoing,
such manufacture and supply by MEGABIOS, together with other activities under
the Project, shall not require expenditure by MEGABIOS beyond the funding
provided in Section 3.1 below. MEGABIOS will operate under cGMP control which is
appropriate to its Phase I clinical trial manufacturing activity, as described
in the FDA Guideline on the Preparation of Investigational New Drug Products
(Human and Animal), March 1991, or any applicable successor thereto. MEGABIOS
will supply product manufactured in accordance with current GMP's and in
compliance with the requirements and specifications in LILLY's IND.
LILLY, at its discretion, shall have the sole right (and responsibility
related thereto) for the manufacture of all material, if any, related to the
Product(s) beyond Phase I Clinical Trials. LILLY may appoint any Affiliate or
third party to perform all or a portion of such manufacturing activities. Each
appointee shall be required to undertake in writing for the benefit of MEGABIOS
not to disclose any Manufacturing Information (as defined in Section 4.3) to any
third party or to use such Manufacturing Information outside the scope of the
license set forth in Section 5.1.
Article III
-----------
Funding of Project
------------------
Section 3.1. Duration and Amount of Funding. LILLY shall provide MEGABIOS
------------ ------------------------------
with financial support for the Project for the period commencing on the
Effective Date and expiring two years thereafter, unless the Project is
terminated early under Article VIII or extended by LILLY under Section 8.3 or by
mutual agreement between MEGABIOS and LILLY (the "Funding Term"). During the
Funding Term, LILLY shall provide MEGABIOS with financial support for FTEs at a
rate of [ * ] per MEGABIOS FTE per Project Year. Furthermore, during the Funding
Term, LILLY shall provide funding support of [ * ]. Except for the Funding
described herein or as otherwise provided in this Agreement or approved in
writing by the Committee, LILLY shall not be responsible for funding any other
cost or expense incurred by MEGABIOS for MEGABIOS' effort on the Project.
Section 3.2. Manner of Payments. LILLY shall pay MEGABIOS all funding
------------ -------------------
provided by LILLY during this Project in U.S. Dollars in four (4) quarterly
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-10-
payments during each Project Year. Payment shall be made quarterly (i.e., on or
before April 15th, July 15th, October 15th and January 15th of each Project
Year) by wire transfer in immediately available funds to the account designated
in writing by MEGABIOS. Unless MEGABIOS and LILLY otherwise agree in writing,
the amount of such installment payment shall be the amount budgeted for the
upcoming quarter. An initial payment will be made within thirty (30) days of the
Effective Date, pro-rated to cover the period ending June 30, 1997. The last
payment for the Project shall be pro-rated to the end of the Project.
Section 3.3. Accounting. MEGABIOS shall maintain complete records in
------------ ----------
accordance with GAAP of all monies LILLY pays MEGABIOS for research under the
Project and shall, within sixty (60) days after the end of each calendar year
during the Project and at the end of the Project, provide LILLY with a report,
stating: a) the dollar amount of funds LILLY supplied for that year; b) the
research and manufacturing activities on segregated basis conducted during the
year which account for such support, including the MEGABIOS FTEs devoted to the
Project, using MEGABIOS' standard project accounting procedures; and c) any
supporting details as are reasonably required by LILLY. To the extent permitted
by law, LILLY shall be entitled to any tax credits due on account of research
and development expenses for the funds paid by LILLY. To the extent an average
of 1,880 hours per FTE of Project work has not been completed by the MEGABIOS
FTEs in Section 3.1, MEGABIOS shall give credit to LILLY at the rate of [ * ]
per hour for each hour of shortfall. Such credit shall either be reimbursed to
LILLY by wire transfer in a bank account designated by LILLY and/or applied to
LILLY's next quarterly minimum payment. Such credit shall be made within thirty
(30) days after the report is due. During the Funding Term and within one (1)
year after its termination, LILLY shall not more than once each year have the
right at its expense to have MEGABIOS' independent certified accountants inspect
and audit MEGABIOS' records and accompanying reports for any of the two
preceding years for the purpose of determining the accuracy of the reports and
associated costs of the Project.
Article IV
----------
Results of Project
------------------
Section 4.1. Reports. MEGABIOS and LILLY shall disclose any new Project
------------ -------
Information to the Committee reasonably promptly following its discovery,
generation, or acquisition. At LILLY's or MEGABIOS' request the disclosing
party shall make such Project Information available to the requesting party.
Such disclosure may take the form of visits by MEGABIOS or LILLY personnel to
the facilities being used for the Project to permit observation of the
procedures comprising such Project Information. Those visits will take place at
reasonable times and upon reasonable prior notice at the visitor's expense.
MEGABIOS and LILLY shall submit a detailed written report on the progress
of the Project to the Committee within sixty (60) days following each
semi-annual period of the term of the Project. Within ninety (90) days after
completion of the Project, each party shall provide the Committee with a
comprehensive final written report.
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-11-
Section 4.2. Project Information; Patentable Inventions. If a
------------ ------------------------------------------
patentable invention is conceived in the course of and within the scope of the
Project and is reduced to practice during the Project or within [ * ] after its
expiration or termination, such invention shall be deemed Project Information
and the party making such invention shall notify the other party of such
invention. LILLY and MEGABIOS shall then discuss that invention and the
desirability of filing a United States patent application covering the
invention, as well as any foreign counterparts. If the parties cannot reach an
agreement about the filing of a patent application within ninety (90) days after
the notification by the party making such invention to the other party, then the
party owning the invention as determined pursuant to the following paragraph
shall make the final decision with respect to any such filings. If an invention
is owned jointly, the Committee shall be notified of such invention and shall
determine: (a) which party shall file and prosecute the application, and (b) how
the expenses will be allocated.
Notwithstanding anything to the contrary in this Agreement, LILLY shall own
all Project Information, and any patent applications or patents claiming
inventions included in Project Information, that are either: (a) solely related
to the BRCA1 Gene or (b) made solely by its employees (except for those
inventions solely related to the Delivery Technology). Similarly, MEGABIOS shall
own all Project Information, and any patent applications or patents claiming
inventions included in Project Information, that are either: (a) solely related
to the Delivery Technology or (b) made solely by its employees (except for those
inventions solely related to the BRCA1 Gene). Except as otherwise provided in
this paragraph, all Project Information, and any patent applications and patents
claiming inventions included in Project Information, made jointly by employees
of LILLY and employees of MEGABIOS shall be jointly owned by MEGABIOS and LILLY
and shall be subject to the licensing provisions set forth in Article V.
Each party shall bear its own expenses incurred in filing, prosecuting and
maintaining its patents and patent applications under this Section, including
the expenses of any interference or opposition proceedings in connection with
such prosecution.
Each party shall provide the other party with a copy of any patent
application which claims Project Information prior to the first filing of that
application for review and comment by the other party. The receiving party shall
maintain any such patent application in confidence, pursuant to Section 7.1. The
employees of both parties will cooperate in the preparation of all such patent
applications, including execution of assignments and other documents, and in the
defense of any patents issued on such patent applications. The prosecuting party
shall periodically update the other party regarding significant developments
concerning the prosecution and maintenance of such applications and patents.
If a party decides not to file or maintain an application or patent on any
invention made solely or jointly by such party claiming Project Information in
any country, it shall give the other party reasonable notice to this effect;
after that notice, the other party may, at its expense, file or maintain the
application or patent and such other party shall own all rights related to such
patent or patent applications, including any inventions claimed thereunder. Any
assignment under this paragraph may result in the reduction and/or elimination
of royalties paid with respect to a particular country to the extent that such
assignment results in the
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-12-
assignment of a Valid Claim with respect to such country as described in
Sections 6.5 and 6.6.
Section 4.3. Manufacturing Technology Transfer. Except as the Committee
------------ ---------------------------------
may otherwise agree in writing, in order to effectuate an orderly transition of
the uninterrupted availability of Product to LILLY for purposes contemplated
under this Agreement, MEGABIOS, at least ninety (90) days prior to completion of
the Project or completion of Phase I Clinical Trials, whichever is earlier,
shall transfer to LILLY all information and instructions concerning the
manufacturing process and related matters in MEGABIOS' possession which may be
necessary for LILLY to manufacture Product (including information regarding
obtaining necessary Lipids related thereto) for clinical trials and
commercialization as contemplated hereunder including, but not limited to,
analytical and manufacturing methods. MEGABIOS shall also provide assistance (in
the form of consultation) to LILLY with respect to manufacturing matters for a
period of [ * ] months after completion of the initial transfer of information
and instructions as provided below. Such transfer and assistance by MEGABIOS
will be referred to herein as the "Manufacturing Transfer." All such
information, methods and instructions transferred to LILLY under this Section
4.3 shall be referred to herein as the "Manufacturing Information," and shall be
maintained in confidence by LILLY pursuant to Section 7.1, except that LILLY's
obligation to maintain in confidence such Manufacturing Information shall
survive for ten (10) years following expiration or termination of this
Agreement. LILLY agrees that it will use all such transferred Manufacturing
Information only for the manufacture of the Products and shall not disclose or
transfer such Manufacturing Information to any third party manufacturer except
as provided in Section 2.10. MEGABIOS shall provide, and bear its costs for, up
to [ * ] FTEs for a period of up to [ * ] months [ * ] in aggregate) to
accomplish the Manufacturing Transfer. Such FTEs, at LILLY's request, shall
include visits to LILLY's facilities by MEGABIOS personnel including up to [ * ]
from MEGABIOS' head of manufacturing. MEGABIOS shall furnish any additional
reasonable assistance beyond the assistance described above regarding
manufacturing matters that LILLY may request and that MEGABIOS is able to
provide, for up to [ * ] after the initial transfer of Manufacturing
Information, providing that LILLY [ * ] incurred with respect to such additional
assistance.
Section 4.4. Publications. LILLY and MEGABIOS agree that, during the
------------ ------------
term of the Project and for one (1) year thereafter, neither party shall publish
the results of studies carried out under this Agreement without the opportunity
for prior review by the other party. During the term of the Project and for one
(1) year thereafter, each party agrees to provide the other party the
opportunity to review any proposed abstracts or manuscripts which relate to the
Project at least sixty (60) days prior to their intended submission for
publication and agrees, upon request, not to submit such an abstract or
manuscript for publication until the other party is given a reasonable period of
time to secure patent protection for any material in such publication which it
believes to be patentable. Upon request, confidential information of the non-
disclosing party shall be removed from such proposed publication. During the
term of the Project and for one (1) year thereafter, the parties agree that all
publications relating to the results of studies carried out under this Agreement
shall be submitted for review and approval by the Committee to ensure that, to
the extent appropriate, scientific credit is given to researchers at both LILLY
and MEGABIOS.
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-13-
Article V
---------
Commercial Rights
-----------------
Section 5.1. License to LILLY.
------------ -----------------
(a) Subject to the terms and conditions set forth herein, MEGABIOS grants
LILLY an exclusive, worldwide license, with the right to sublicense, under
MEGABIOS Information, MEGABIOS Patent Rights, and MEGABIOS' interest in the
Project Information to discover, develop, make, have made (subject to Section
2.10), import, offer for sale, sell and have sold Products. MEGABIOS hereby
retains such rights under the MEGABIOS Information, MEGABIOS Patent Rights and
Project Information to discover, develop and make Products as are necessary for
it to fulfill its obligations under this Agreement. LILLY's right to develop
Products pursuant to the license in this Section 5.1(a) includes the right to
adjust or modify one or more components in the Formulation contained therein, as
necessary or desirable for the further development or commercialization of such
Products (a "Modified Formulation"); provided that any such Modified Formulation
shall nevertheless contain at least the BRCA1 Gene and a Lipid.
(b) Subject to the terms and conditions set forth in this paragraph and
the rest of this Agreement, MEGABIOS also grants to LILLY a non-exclusive,
worldwide, fully-paid license, with no right to sublicense, under MEGABIOS
Information and MEGABIOS' interest in Patent Rights (including, but not limited
to, MEGABIOS Patent Rights) and Project Information for LILLY's internal non-
commercial research purposes (the "Research License"). Such Research License
shall terminate one (1) year after the completion of the Project (including
extensions related thereto). Consistent with the terms of the Research License
granted herein, LILLY agrees that it shall not use the Research License to
commercialize a product except pursuant to a further written agreement which may
be negotiated between LILLY and MEGABIOS. If LILLY requests and MEGABIOS agrees
to provide materials or assistance for use under the Research License and not in
the Project, then LILLY shall reimburse MEGABIOS for its reasonable costs of
providing such material or assistance.
Subject to the confidentiality provisions described herein and any
applicable confidentiality provisions set forth in agreements that LILLY may
have with third parties, LILLY shall disclose to MEGABIOS, in summary form,
technical information, know-how, data, biological materials, chemical substances
and all inventions (patentable or unpatentable) generated by LILLY pursuant to
the Research License and related to the Delivery Technology ("Research
Developments"). All Research Developments shall be owned by and assigned to
MEGABIOS and LILLY shall disclose to MEGABIOS any information that was not
previously disclosed to MEGABIOS which is reasonably necessary to practice any
invention which claims Research Developments. Research Developments owned by
MEGABIOS shall be included in the Research License to LILLY.
(C) LILLY hereby covenants and agrees that it will not practice the
MEGABIOS Patent Rights, MEGABIOS Information or Project Information solely owned
by MEGABIOS except as licensed in this Section 5.1.
<PAGE>
-14-
Section 5.2. License to MEGABIOS. Subject to the terms and conditions set
------------ --------------------
forth herein, LILLY grants MEGABIOS:
(a) During the term of the Project, a non-exclusive, worldwide license,
under the LILLY Information, LILLY Patent Rights, and LILLY's interest in
Project Information to discover, develop and make Products and otherwise to
comply with its obligations under this Agreement; and
(b) In the event of a "Trigger Event", as defined below in this Section
5.2(b), the licenses granted under Section 5.1 to LILLY shall terminate and
MEGABIOS shall have the right to retain from LILLY an exclusive, sublicensable,
worldwide license within the Field under LILLY's interest in the Project
Information, LILLY Information, and LILLY Patent Rights, to discover, develop,
make, have made, import, offer for sale, sell and have sold Products. A
"Trigger Event" shall occur upon the occurrence of either of the following
events:
1) the early termination of the Project by LILLY under Article VIII
and LILLY's, or LILLY's sublicensee's discontinuation of its research and
development, programs with respect to the BRCA1 Gene, including abandoning
its BRCA1 program related to [ * ] or
2) after the conclusion of the Project, LILLY's, or LILLY's
sublicensee's discontinuation of its research and development programs with
respect to the BRCA1 Gene, including abandoning its BRCA1 program related
to [ * ]
LILLY shall provide written notification to MEGABIOS of the occurrence of a
Trigger Event. MEGABIOS shall have ninety (90) days from the receipt of such
notification from LILLY to elect to retain the exclusive license referred to
above in this Section 5.2(b). Such election shall be made by written
notification to LILLY. If MEGABIOS elects to retain such an exclusive license,
such license shall be granted upon receipt by LILLY of MEGABIOS' written
election to retain such license. Such license shall be subject to the royalty
provisions of Section 6.4 together with milestone fees at [ * ] the amounts
described in Section 6.2, except that only [ * ] of the royalty rate shall apply
under circumstances where LILLY had discontinued development of the Product
prior to the initiation of Phase II Clinical Trials with respect to such Product
.
MEGABIOS covenants and agrees that it will not practice the LILLY Patent
Rights or LILLY Information except as licensed in this Section 5.2.
Section 5.3. Exclusivity. Except as provided for herein, during the term of
------------ ------------
the Project, neither party will participate with or fund any third party in any
research and/or development activity within the Field.
Section 5.4. Acknowledgement by MEGABIOS of Sublicensee Status.
------------ --------------------------------------------------
MEGABIOS acknowledges that the license granted to MEGABIOS by LILLY in Section
5.2 includes a limited sublicense of rights from [ * ] MEGABIOS acknowledges
receipt of a copy of an Agreement between LILLY and [ * ] and MEGABIOS agrees to
be bound by terms of this Agreement to the same extent that LILLY is bound.
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-15-
MEGABIOS further acknowledges that [ * ] and LILLY own and control certain
information about the BRCA1 Gene which will not be shared with MEGABIOS.
Section 5.5. Acknowledgment by LILLY of Sublicensee Status. LILLY
------------ ----------------------------------------------
acknowledges that the license granted to LILLY by MEGABIOS in Section 5.1
includes a sublicense of the rights from the Regents of the University of
California ("UC"). LILLY acknowledges receipt of a copy of that certain License
Agreement dated May 9, 1996 between MEGABIOS and UC and LILLY agrees to be bound
by the terms of the UC License Agreement to the same extent that MEGABIOS is
bound, including provisions related to the reservation of certain rights in the
technology licensed thereunder, disclaimers of liability, indemnification of UC
by sublicensees, and provisions regarding the right to prosecute, maintain and
defend patent rights licensed thereunder. [ * ] Further, LILLY acknowledges and
understands that the license granted under Section 5.1 does not include a
sublicense of any rights granted to MEGABIOS pursuant to that certain Agreement
dated August 25, 1995 between MEGABIOS and Stanford University.
Article VI
----------
Equity Investments and Milestone Fees
-------------------------------------
Section 6.1. Equity Investment. Until December 31, 1997, MEGABIOS shall
------------ ------------------
have the right to require LILLY to purchase shares of MEGABIOS' capital stock in
one private transaction for an aggregate purchase price of three million dollars
($3,000,000), subject to the terms of this Section 6.1 and applicable securities
laws. Such equity purchase shall be concurrent with the first to occur of an
initial public offering ("IPO") or a Qualified Financing (defined below). If
MEGABIOS closes an initial public offering of MEGABIOS common stock under the
Securities Act of 1933, as amended, prior to such date, then LILLY shall
purchase shares of MEGABIOS common stock in a private transaction concurrently
with the closing of the IPO at the price at which shares are offered to the
public. Such purchase shall be made pursuant to a Stock Purchase Agreement
customary under such circumstances.
Alternatively, MEGABIOS may require LILLY, prior to December 31, 1997, to
purchase shares of MEGABIOS capital stock in a private equity financing raising
aggregate proceeds to MEGABIOS of at least $6.0 million ("Qualified Financing").
The LILLY purchase shall take place pursuant to terms substantially similar to
those set forth in a Stock Purchase Agreement, Amended and Restated Investors
Rights Agreement and Fourth Amended and Restated Articles of Megabios
Corporation, all of which were furnished to LILLY on April 28, 1997, and May 7,
1997. The price paid by LILLY for such capital stock shall be the same price
paid by other investors in such Qualified Financing and shall be set by
negotiation between MEGABIOS and such other investors. Any equity investment
made under this Section 6.1 shall be subject to applicable regulatory
requirements, including, if applicable, the notice provisions of the Hart Scott
Rodino Antitrust Improvements
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-16-
Act, and the period for making such investments shall be adjusted as necessary
to permit the parties to comply with such regulatory requirements.
Section 6.2. Milestone Fees. Upon achievement of the respective milestone
------------ ---------------
events listed in paragraphs (a), (b) and (c) below, LILLY shall pay a milestone
fee to MEGABIOS as provided below. If MEGABIOS is in material breach of its
obligations under this Agreement at the time any such payment is due, LILLY may
notify MEGABIOS of such breach in writhing on or prior to such date in lieu of
making the payment. Such notice shall cite the breached section(s) of this
Agreement and the actions or omissions of MEGABIOS that constitute breach. If
and when MEGABIOS reasonably cures such breach, it shall notify LILLY in writing
of the cure and the milestone payment shall be due within thirty (30) days of
the date of such notice. For avoidance of any doubt, nothing in this paragraph
shall be construed as a wavier of any legal and/or equitable remedies available
to LILLY as a result of such breach.
(a) Ovarian Cancer. For each Product developed by LILLY for [ * ]
---------------
treatment of ovarian cancer LILLY shall pay to MEGABIOS:
(1) [ * ]
(2) [ * ]
(3) [ * ]
(4) [ * ]
(5) [ * ]
(b) Breast Cancer. For each Product developed by LILLY for [ * ]
--------------
treatment of breast cancer LILLY shall pay to MEGABIOS:
(1) [ * ]
(2) [ * ]
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-17-
(3)[ * ]
(4)[ * ]
(c) Other Indications. Subject to the last paragraph of this Section
-----------------
6.2(c), in addition to the milestone fees described above, for each Product
developed by LILLY for an indication other than cancers of the ovary or breast
[ * ] (the "Other Indications"), LILLY shall pay to MEGABIOS
additional milestone fees as follows:
(1) [ * ]
(2) [ * ]
Notwithstanding the foregoing in this Section 6.2, no milestone payment as
described hereunder shall be due if such Product[ * ] from a Product for which
a milestone payment has previously been made. For purposes of this Section
6.2(c),[ * ] shall mean that [ * ] For avoidance of any doubt, under no
circumstance shall any additional milestone fees be due for any Product where
milestone fees had been previously paid for such Product irrespective of the
number of indications that such Product is ultimately developed or used for nor
shall milestone fees be paid with respect to [ * ] provided such development
[ * ] and where such in a Product for which all milestone payments associated
with said Product set forth above have been paid.
(d) If LILLY begins the development of a Product and later ceases
development of said Product for any reason including, but not limited to, lack
of efficacy, potency or adverse reactions found in the course of human clinical
trials or the Product is not registered after the filing of a BLA (or its
equivalent in the European Union), then any milestone payment made under this
Article with respect to such Product shall be credited against any milestone
payments which otherwise
<PAGE>
-18-
would be payable if LILLY elects to develop another Product (including, but not
limited to, developing another Product derived from adjusting or modifying a
Formulation) for the same indication (i.e., ovarian cancer, breast cancer,
prostate cancer, et cetera).
(e) LILLY shall notify MEGABIOS upon the achievement of each milestone
event and make the applicable payment to MEGABIOS within thirty (30) days of the
achievement of such event.
Section 6.3. Royalty Payments To MEGABIOS on Products. In consideration for
the licenses granted and the services provided hereunder, with respect to each
calendar quarter, LILLY shall pay to MEGABIOS royalties equal to the following
[ * ] Net Sales of all Products on an annual basis: [ * ]
For example if during the fourth calendar quarter of a particular annual year
Net Sales were [ * ] which resulted in aggregate Net Sales for such year of
[ *] the royalty payment due MEGABIOS for such fourth calendar quarter would
equal [ * ] For purpose of this Agreement, annual year shall mean the 12 month
period commencing on January 1.
Section 6.4. Royalty Payments To LILLY on Products. In the event of a
Trigger Event and if MEGABIOS elects to retain an exclusive license from LILLY
under Section 5.2(b), and MEGABIOS thereafter develops and sells a Product or
Product(s), with respect to each calendar quarter, MEGABIOS shall pay to LILLY
royalties equal to the following [ * ] Net Sales of Products on
an annual basis: [ * ]
Only [ * ] of the royalty rates described above shall apply under circumstances
where LILLY has discontinued development of the Product prior to the initiation
of Phase II Clinical Trials with respect to such Product.
Section 6.5. Term of Royalty Payments by LILLY. Running royalties paid by
----------- ---------------------------------
LILLY pursuant to Sections 6.3 shall be paid [ * ] from the date of the first
commercial sale of each Product [ * ] until the later of (i) the expiration date
of the last to expire of any MEGABIOS Patent Rights in that country for which a
Valid Claim thereof covers the manufacture, use or sale of the Product or (ii)
seven (7) years from the first commercial sale of such Product [ * ] provided
that in the [ * ] years under (ii) above running royalties shall be due at [ * ]
the percentage rates set forth in Section 6.3. The parties recognize that there
may be [ * ] in any given royalty payment period. The parties
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-19-
agree that [ * ] Attached as Appendix III, is an example of how royalties are to
be calculated under certain circumstances.
Section 6.6 Term of Royalty Payments by MEGABIOS. Running royalties paid
----------- ------------------------------------
by MEGABIOS pursuant to Section 6.4 shall be paid [ * ] from the date of the
first commercial sale of each Product [ * ] until the later of (i) the
expiration date of the last to expire of any LILLY Patent Rights in that country
for which a Valid Claim thereof covers the manufacture, use or sale of the
Product or (ii) seven (7) years from the first commercial sale of such Product [
* ] provided that in the [ * ] years under (ii) above running royalties shall be
due at [ * ] the percentage rates set forth in Section 6.3 The parties recognize
that there may be [ * ] in any given royalty payment period. The parties agree
that [ * ]
Section 6.7. MEGABIOS Obligations to [ * ]
------------ -----------------------------
In the event of a Trigger Event and if MEGABIOS elects to retain an exclusive
license from LILLY under Section 5.2(b), and MEGABIOS thereafter develops and
sells a Product or Product(s), in addition to the royalties owed to LILLY by
MEGABIOS under Section 6.4, MEGABIOS acknowledges its potential obligation to
pay a [ * ] royalty to [ * ] on the Net Sales of Products sold by MEGABIOS as
consideration for the sublicensed rights acquired from [ * ] through LILLY, as
set forth in Section 5.4. At LILLY's option, MEGABIOS shall pay such [ * ]
royalty directly to [ * ] or MEGABIOS shall pay such [ * ] royalty to LILLY in
addition to the royalty owed to LILLY under Section 6.4 and LILLY shall
thereafter be responsible for the royalty payment to [ * ] provided MEGABIOS, in
fact, makes and continues to make the payments to LILLY as described herein.
Section 6.8. Royalty Payment Reports. Royalty payments under this
------------ ------------------------
Agreement shall be made to the receiving party within sixty (60) days following
the end of each calendar quarter for which royalties are due. Each royalty
payment shall be accompanied by a statement detailing the Net Sales and royalty
calculations on a worldwide, country-by-country and Product-by-Product basis.
Section 6.9. Records. Within the term of this Agreement and within one (1)
------------ --------
year after its termination, the party receiving the royalty shall not more than
once each year have the right to have the royalty payor's independent certified
accountant inspect the royalty payer's records for any of the three (3)
preceding years for the purpose of determining the accuracy of royalty payments
including reviewing gross sales and the deductions described in Section 1.16 of
this Agreement. The independent certified accountant shall keep confidential any
information obtained during such inspection and shall report to the party
receiving the royalty only the information necessary to make an accurate
calculation of amounts of royalties due and payable. For avoidance of any doubt,
the parties acknowledge that the audit rights described under this Section 6.9
shall not require LILLY to obtain records from its Affiliates other than those
records that it regularly receives from such Affiliates, however, the
independent certified accountant may inspect the records that LILLY possesses
and the records that its Affiliates possess at their respective locations to the
extent described in this Section 6.9 of the Agreement. The receiving party shall
bear the expenses of such audit, provided that, in the event of material
underpayment (in excess of 5%) of any royalties owing hereunder, the paying
party shall bear the reasonable expenses of such audit, in addition to
reimbursement for such underpayment.
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
at their respective locations to the extent described in this Section 6.9 of the
Agreement. The receiving party shall bear the expenses of such audit, provided
that, in the event of material underpayment (in excess of 5%) of any royalties
owing hereunder, the paying party shall bear the reasonable expenses of such
audit, in addition to reimbursement for such underpayment.
Section 6.10. 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 royalty 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.
Section 6.11. Exchange Rates. All payments to be made by one party to the
------------- --------------
other under this Agreement shall be made in United States dollars. In the case
of sales outside the United States, the rate of exchange to be used in computing
the amount of currency equivalent in United States dollars due to the other
party shall be made using payor's then current standard exchange rate
methodology consistently applied for payor's own internal accounting purposes,
which methodology shall be in conformity with generally accepted accounting
principles. Attached as Appendix IV is a general description of the exchange
rate methodology that is currently employed by LILLY any change to such
methodology would be applied to LILLY on a global basis.
Article VII
-----------
Confidentiality
---------------
Section 7.1. Except as otherwise provided in writing by the parties, both
------------
parties shall use their best efforts to retain in confidence and not use, except
as provided in this Agreement, all MEGABIOS Information or LILLY Information, as
the case may be, disclosed under this Agreement and all Project Information of
either party. Such information may, however, be disclosed insofar as such
disclosure is necessary (where possible, with adequate safeguards for
confidentiality) to allow either party to defend against litigation with a
third-party, to file and prosecute patent applications or to comply with
governmental regulations, provided neither party shall use the other party's
Information (i.e., for MEGABIOS the LILLY Information and Project Information
owned solely by LILLY under Section 4.2, and for LILLY the MEGABIOS Information
and Project Information owned solely by MEGABIOS under Section 4.2) in any
patent application without written approval from the other party.
This obligation of confidentiality and non-use shall not apply to
information which (i) is in the public domain, (ii) comes into the public domain
through no fault of the receiving party, (iii) was known by the receiving party
prior to disclosure under this Agreement or under the prior confidentiality
agreement between LILLY and MEGABIOS, (iv) is disclosed to the receiving party
without an obligation of confidentiality by a third party having a lawful right
to make the disclosure, or (v) is independently developed by either party
outside of the Project and without use of the other party's Information.
<PAGE>
-21-
In furtherance of the objectives of the Project and with the approval of
the other party, either party may disclose Information of the other party or any
Project Information to a third party who has agreed in writing to be bound by
the same or similar obligations of confidence set forth in this Section,
provided the third party agrees not to use the Information without authorization
from the party owning the Information, except that such authorization shall not
be required in connection with the exercise of the rights granted under licenses
under Sections 5.1 and 5.2. This paragraph shall not apply to MEGABIOS
Information transferred to LILLY pursuant to Section 4.3 and disclosed by LILLY
to a third party, which such disclosure shall be governed by Section 2.10.
All obligations of confidentiality and non-use imposed upon the parties
under this Agreement shall expire on the later of (i) the date five (5) years
from the termination of the Project; or (ii) the expiration of all obligations
to pay royalties under Article VI, subject to Section 4.3 (ten (10) years for
Manufacturing Information).
LILLY agrees to mark all LILLY Information provided to MEGABIOS in
documentary form as "Confidential". If such LILLY Information is provided to
MEGABIOS in oral form, LILLY shall thereafter summarize the disclosure in
writing, mark it as "Confidential," and provide a copy to MEGABIOS within thirty
(30) days of the oral disclosure. In the same manner, MEGABIOS agrees to mark
all MEGABIOS Information provided to LILLY in documentary form as
"Confidential." If such MEGABIOS Information is provided to LILLY in oral form,
MEGABIOS shall thereafter summarize the disclosure in writing, mark it
"Confidential," and provide a copy to LILLY within thirty (30) days of the oral
discussion.
Article VIII
------------
Term and Termination
--------------------
Section 8.1 Term. This Agreement shall become effective on the Effective
----------- ----
Date and shall remain in effect until the expiration of all obligations of
Confidentiality under Article VII.
Section 8.2 Term and Extension of Project. Unless terminated early under
----------- -----------------------------
this Article VIII or extended by mutual agreement or extended in accordance with
Section 8.3, the obligation to fund and conduct research shall terminate after
two (2) years after the Effective Date (the "Initial Term").
Section 8.3 Project Extension. LILLY, at its sole discretion, may extend
----------- -----------------
the Initial Term for an additional term of at least one (1) year but not to
exceed two (2) years as it deems appropriate under the same terms and conditions
described herein, provided LILLY notifies MEGABIOS of its decision to extend the
Project (including the term of such extension) at least ninety (90) days prior
to expiration of the Initial Term of the Project. The activities to be
undertaken by the parties during any Project extension shall be as agreed by the
parties and the Research Plan will be amended to provide for such additional
activities.
<PAGE>
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Section 8.4. Voluntary Termination of Project. LILLY may voluntarily
------------ --------------------------------
terminate the Project at any time after twenty-one (21) months after the
Effective Date, upon providing ninety (90) days advance written notice to
MEGABIOS of its intention to terminate. In the event that LILLY terminates under
this Section 8.4, LILLY's license (including any royalty obligations related
thereto) granted under Section 5.1 shall terminate. The rights granted MEGABIOS
under Section 5.2 shall survive any voluntary termination of the Project by
LILLY under this Section 8.4.
Section 8.5. Termination for Default. If either party is in material breach
------------ -----------------------
of its obligations under this Agreement and fails to remedy that breach within
ninety (90) days after the other party sends written notice of the breach
(thirty (30) days in the event of failure to pay monies when due) the party not
in breach may terminate the Project or this Agreement immediately by giving
written notice of the termination. The termination date shall be the date of the
notice of termination. If MEGABIOS has defaulted, the licenses to LILLY
specified in Section 5.1 shall survive (subject to all payment and other
applicable obligations as provided in Section 8.8) and the licenses to MEGABIOS
in Section 5.2 shall terminate upon termination for default. If LILLY has
defaulted, the licenses to MEGABIOS specified in Section 5.2 shall survive and
the licenses to LILLY in Section 5.1 shall terminate upon termination for
default.
Section 8.6. Termination Due to Assignment. In the event MEGABIOS assigns
------------ -----------------------------
this Agreement, pursuant to Section 14.6, to an acquiring third-party which is a
pharmaceutical or biotechnology company, LILLY may terminate the Project upon
thirty (30) days written notice. In the event LILLY terminates the Project under
this Section 8.6, LILLY's license under Section 5.1 shall remain in effect and
MEGABIOS' license under Section 5.2(b) shall remain in effect.
Section 8.7. Key Personnel. During the term of the Project, if [ * ]
------------ -------------
leaves the employ of MEGABIOS, for any reason, or is otherwise unavailable [ * ]
LILLY may voluntarily terminate the Project upon thirty (30) days' written
notice to MEGABIOS if within [ * ] following his departure MEGABIOS is unable to
select a replacement that is [ * ] If the Project is voluntarily terminated
under this Section 8.7, all rights and obligations under this Agreement
concerning the making, using or selling of Products already produced during the
Project, and any future Products arising therefrom, shall not be affected by the
termination of the Project, nor shall MEGABIOS' rights under Section 5.2(b).
Section 8.8. Residual Rights. Upon expiration or termination of the Project
------------ ---------------
or this Agreement, except as provided herein to the contrary, all rights and
obligations of the parties shall cease, except as follows:
a) Obligations to pay royalties and other sums accruing hereunder up to
the date of termination;
b) The right to complete the manufacture and sale of Products, which
qualify as "work in process" under generally accepted cost accounting standards
or which are in stock at the date of termination, and the obligation to pay
royalties on Net Sales of such Products;
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-23-
c) The obligation to pay milestones as achieved and royalties with
respect to Products;
d) All provisions regarding confidentiality shall continue in full force
and effect;
e) Obligations for record keeping and accounting reports for so long as
Products are sold, plus three (3) years. At such time after termination of this
Agreement when sales or other dispositions of Products have ceased, LILLY or
MEGABIOS, as the case may be, shall render a final report along with any royalty
payment due;
f) The parties' rights to inspect books and records as described in
Article VI;
g) Obligations of defense and indemnity under Articles XI and XII;
h) Obligations set forth in Article XI, but only with respect to those
causes of action which accrued prior to such termination;
i) Any cause of action or claim of MEGABIOS or LILLY accrued or to accrue
because of any breach or default by the other party hereunder;
j) All other terms, provisions, representations, rights and obligations
contained in this Agreement that by their sense and context are intended to
survive until performance thereof by either or both parties.
Article IX
----------
Disclosure of Agreement
-----------------------
Section 9.1. Disclosure of Agreement. Except as provided below, neither
----------- -----------------------
MEGABIOS nor LILLY shall release any information to any third party with respect
to the terms of this Agreement without the prior written consent of the other,
which shall not be unreasonably withheld. This prohibition includes, but is not
limited to, press releases, educational and scientific conferences, promotional
materials, governmental filings, and discussions with public officials, and the
media. In connection with the execution of this Agreement, the parties shall
mutually agree on the text of a joint press release regarding this Agreement.
Notwithstanding the terms and provisions of this Article IX, each party
shall be allowed to disclose the terms, and provide a copy of this Agreement to
its respective tax authorities if so requested. Furthermore, MEGABIOS
acknowledges receipt of a redacted copy of the Agreement to Myriad.
Section 9.2. Releases Required by Law. If either party determines a release
----------- -----------------------
of further information is required by law or governmental regulation, it shall
notify the other in writing as soon as practical (where possible 30 days) before
the time of the proposed release. The notice shall include the exact text of the
proposed release and the time and manner of the release.
<PAGE>
-24-
At the other party's request, and before the release, the party desiring to
release further information and its legal counsel shall consult with the other
party on the necessity for the disclosure and the text of the proposed further
release. In no event shall a release under this Section 9.2 include further
information regarding the existence or terms of this Agreement than is required
by law or governmental regulation. Promptly following the Effective Date the
parties shall prepare and mutually agree upon a redacted form of this Agreement
suitable for LILLY to provide to Myriad, Inc. and for MEGABIOS to file with the
Securities and Exchange Commission pursuant to federal securities laws. Once a
redacted version of the Agreement has been made publicly available, each party
shall be free to disclose any information that is not redacted in such agreement
without the consent of the other party.
Section 9.3. Other Releases. Notwithstanding these restrictions, LILLY
------------ --------------
recognizes MEGABIOS may need to disclose the terms of this Agreement to its
attorneys, bankers and their attorneys, accountants, and other MEGABOIS business
associates. LILLY hereby consents to such disclosures in accordance with this
Section 9.3. Furthermore, LILLY recognizes that MEGABIOS may need to disclose
previously undisclosed terms of this Agreement to prospective (sub) licensees or
other parties to commercial transactions. LILLY shall respond promptly to
requests from MEGABIOS to make such disclosures and shall not unreasonably
withhold its authorization. Any such disclosure under this Section 9.3 shall
include an obligation on the party receiving any confidential information to
maintain the same in confidence.
Article X
---------
Representations, Warranties and Acknowledgments
-----------------------------------------------
Section 10.1. Warranty of Title. MEGABIOS hereby warrants that it has the
------------- -----------------
unencumbered right to enter into this Agreement and to grant the license(s)
contained herein. LILLY hereby warrants that it has the unencumbered right to
enter into this Agreement and to grant the license(s) contained herein.
Section 10.2. Patents, Prior Art. Each party to this Agreement represents
------------- ------------------
and warrants that to the best of its knowledge, it has sufficient legal and/or
beneficial title, ownership or license rights under its intellectual property
rights necessary for its business as now conducted and as currently proposed to
be conducted under the Project contemplated herein. Each party is not aware of
any communications alleging that it has violated or, by conducting its business
as currently proposed under the Project contemplated herein, would violate any
of the intellectual property rights of any other person or entity relating to
the research to be carried out under the Agreement. To the best of each party's
knowledge, there is no material unauthorized use, infringement or
misappropriation of any of its intellectual property rights by any third party.
As used herein, the term "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 any
Products.
Section 10.3. Employee Obligations. MEGABIOS represents and warrants that
------------- --------------------
all of its employees, officers, and consultants have executed agreements
requiring assignment to MEGABIOS of all inventions made during the course of
<PAGE>
-25-
and as the result of their association with MEGABIOS and obligating the
individual to maintain as confidential MEGABIOS' confidential information as
well as confidential information of a third party which MEGABIOS may receive.
LILLY represents and warrants that all of its consultants have executed
agreements requiring assignment to LILLY of all inventions made during the
course of and as the result of their association with LILLY and obligating the
individual to maintain as confidential LILLY's confidential information as well
as confidential information of a third party which LILLY may receive.
LILLY also represents and warrants that all of its employees and officers
are under a legal obligation of assignment to LILLY of all inventions made
during the course of and as the result of their association with LILLY and
obligating the individual to maintain as confidential LILLY's confidential
information as well as confidential information of a third party which LILLY may
receive.
Section 10.4. Acknowledgment of Other Research. MEGABIOS acknowledges and
------------- ---------------------------------
agrees that LILLY has substantial existing technology relating to other types of
compounds that may or may not be reactive with the BRCA1 Gene and that LILLY,
subject to Section 5.3, will continue to: a) maintain an ongoing independent
research effort in those other areas; b) contract with other parties for
technology and biological materials; and c) develop drugs useful in treating
disease states relating to the BRCA1 Gene. LILLY acknowledges and agrees that
MEGABIOS has substantial technology relating to non-viral gene delivery systems
that may or may not be useful with genes other that BRCA1 and that MEGABIOS,
subject to Section 5.3, will continue to: a) maintain ongoing research and
development efforts in those areas independently and in collaboration with third
parties; and b) develop products incorporating genes other than BRCA1 for use in
any disease state, including potentially disease states relating to the BRCA1
gene.
Article XI
----------
Infringement of Third Party's Rights
------------------------------------
Section 11.1. Third Party Intellectual Property.
------------- ---------------------------------
(a) During the Project term, MEGABIOS and LILLY shall each promptly notify
each other of any and all third party technology, patents or information which
either may be valuable in connection with the Project or which may be infringed
by either party by the conduct of the Project or the use of MEGABIOS
Information, LILLY Information, LILLY Patent Rights, MEGABIOS Patent Rights, or
Project Information in the Project. LILLY and MEGABIOS shall decide if such
rights or technology should be acquired in connection with the Project and, if
so, whether by MEGABIOS, LILLY or both, and how the cost of acquiring such
technology should be borne by the parties.
(b) If third party patent or other proprietary rights are infringed or
misappropriated by the practice of the inventions claimed in the MEGABIOS Patent
Rights or the use of MEGABIOS Information or Project Information owned solely by
MEGABIOS, in the Field, and if LILLY acquires the rights necessary to practice
such technology in the Field, then LILLY may offset payments made in
<PAGE>
-26-
consideration for such rights against royalties due to MEGABIOS pursuant to
Section 11.3.
If the parties agree to acquire such technology as part of the Project,
such technology or rights shall become part of the acquiring party's Information
or Patent Rights, whichever is appropriate, or, if jointly acquired, part of the
Project Information. If the parties do not agree on how to allocate the costs or
whether to acquire such technology or rights, either party may acquire such
technology or rights at its own expense and such technology or rights shall not
become part of the Information or Patent Rights of such party, or of the Project
Information.
Section 11.2. Litigation. If a third party asserts that a patent or other
------------- -----------
right owned by it is infringed or misappropriated by the practice of the
inventions claimed in the MEGABIOS Patent Rights or the use of MEGABIOS
Information or Project Information owned solely by MEGABIOS, in the Field, and
such assertion results in a claim against LILLY, the party to this Agreement
first having notice of that claim shall promptly notify the other party in
writing. The notice shall set forth the facts of the claim in reasonable detail
. MEGABIOS shall have the primary right, but not the obligation, to defend
against such claim. LILLY shall cooperate with MEGABIOS at MEGABIOS' request and
expense in such defense and shall have the right to be represented by counsel of
its own choice and at LILLY's expense. IF MEGABIOS shall fail to defend against
such claim within a period of one hundred twenty (120) days after receiving
written notice from LILLY or otherwise of such claim, LILLY shall have the right
to so defend by counsel of LILLY's own choice and MEGABIOS shall have the right,
at its own expense, to be represented by counsel of its own choice.
Section 11.3. Royalty Reduction. If, as a result of acquisition of third
------------- ------------------
party technology or rights under Section 11.1(b) or litigation (including
settlement thereof) under Section 11.2, LILLY is required to pay a third party a
royalty or make any payment of any kind as compensation for such rights, in a
particular country, then LILLY may deduct, from the amount of royalties owed to
MEGABIOS in connection with Net Sales in such country [ * ] of the amount of the
third party royalty or such other amount, including any initial payment, if any,
payable to the third party, up to, but no more than, [ * ] of the amounts
otherwise payable to MEGABIOS in connection with Net Sales in such country,
however the royalty payable to MEGABIOS shall not be less than [ * ]
Section 11.4. Third Party Infringement. If any patent in the MEGABIOS
------------- -------------------------
Patent Rights in the Field is infringed by a third party, the party to this
Agreement first having knowledge of such infringement shall promptly notify the
other in writing. The notice shall set forth the facts of that infringement in
reasonable detail. MEGABIOS shall have the primary right, but not the
obligation, to institute, prosecute, and control any action or proceeding with
respect to such infringement of the MEGABIOS Patent Rights, by counsel of its
own choice, and LILLY shall have the right, at its own expense, to be
represented in that action by counsel of its own choice. IF MEGABIOS fails to
bring an action or proceeding within a period of one hundred twenty (120) days
after receiving written notice from LILLY or otherwise having knowledge of that
infringement, LILLY shall have the right to bring and control any such action by
counsel of its own choice, and MEGABIOS shall have the right to be represented
in any such action by counsel of its own choice at its own expense.
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-27-
If one party brings any such action or proceeding, the second party agrees
to be joined as a party plaintiff and to give the first party reasonable
assistance and authority to file and prosecute the suit. The costs and expenses
(including reasonable attorney's fees) of all suits brought by MEGABIOS or LILLY
under this Section shall be reimbursed on a pro-rata basis to both parties out
of any damages or other monetary awards recovered therein in favor of MEGABIOS
and/or LILLY. Any remaining damages shall split [ * ] to the party initiating
and prosecuting the action to completion and [ * ] to the other party.
No settlement or consent judgment or other voluntary final disposition of a
suit under this Section may be entered into without the joint consent of
MEGABIOS and LILLY (which consent shall not be withheld unreasonably).
Notwithstanding anything to the contrary herein, this Section 11.4 shall
not apply to the extent it is inconsistent with the License Agreement dated May
9, 1996 between MEGABIOS and UC.
Section 11.5. Warranty and Indemnification. MEGABIOS shall defend,
------------- ----------------------------
indemnify and hold harmless LILLY against any direct loss or injury by reason of
any third party action in which it is determined or alleged that LILLY's
practice of the inventions claimed in the MEGABIOS Patent Rights, or the use of
MEGABIOS Information, or Project Information generated or developed by MEGABIOS,
in the Field misappropriates that third party's rights arising out of any
contractual obligation on the part of MEGABIOS to such third party. If MEGABIOS
is required to pay any such third party a royalty or make any payment of any
kind for LILLY's right to use MEGABIOS Patent Rights, MEGABIOS Information, or
Project Information in the Field, in a particular country, MEGABIOS shall be
solely responsible for the payment of such royalty or other payment.
In the event that LILLY is seeking indemnification under this Section 11.5,
it shall inform MEGABIOS of a claim as soon as reasonably practicable after it
receives notice of the claim, shall permit MEGABIOS to assume direction and
control of the defense of the claim (including the right to settle the claim
solely for monetary consideration to be paid by or on behalf of MEGABIOS), and
shall cooperate as requested (at the expense of MEGABIOS) in the defense of the
claim. LILLY may elect at any time to acquire the third party rights and offset
payments due to the third party for such rights against royalties due to
MEGABIOS pursuant to Sections 11.1 and 11.3, in lieu of the indemnification
provided for in this Section 11.5.
If, prior to or during the pendency of any action described in the first
paragraph of this Section 11.5 LILLY reasonably believes the indemnification
provided by MEGABIOS under this Section 11.5 is inadequate due to bankruptcy,
insolvency or otherwise, LILLY may withhold payment to MEGABIOS of [ * ] of
royalties owed to MEGABIOS in connection with Net Sales in the country(ies)
where such third party claims misappropriated rights. Such royalties shall be
paid to MEGABIOS upon conclusion of such action, or offset against any
outstanding obligation of MEGABIOS to indemnify LILLY, at LILLY's election.
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
<PAGE>
-28-
Article XII
-----------
Indemnification
---------------
Section 12.1. Product Liability Indemnification. LILLY hereby agrees to
------------- ---------------------------------
defend, indemnify and hold MEGABIOS and its agents and employees harmless from
and against any and all suits, claims, actions, demands, liabilities, expenses
and/or loss, including reasonable legal expense and attorneys' fees, other than
claims for infringement as provided in Section 11.2, claims as described in
Section 12.2 or otherwise due to MEGABIOS' negligence, resulting directly or
indirectly from the manufacture, use, handling, storage, sale or other
disposition of chemical agents or Products by LILLY, its Affiliates, agents or
sublicensees.
In the event that MEGABIOS is seeking indemnification under this Section
12.1, it shall inform LILLY of a claim as soon as reasonably practicable after
it receives notice of the claim, shall permit LILLY to assume direction and
control of the defense of the claim (including the right to settle the claim
solely for monetary consideration), and shall cooperate as requested (at the
expense of LILLY) in the defense of the claim.
Section 12.2. Indemnification of LILLY. MEGABIOS hereby agrees to defend,
------------- ------------------------
indemnify and hold LILLY and its agents and employees harmless from and against
any and all suits, claims, actions, demands, liabilities, expenses and/or loss,
including reasonable legal expense and attorneys' fees resulting directly or
indirectly from negligence by MEGABIOS, its employees or agents in the conduct
of preclinical toxicology studies pertaining to Products.
In the event that LILLY is seeking indemnification under this Section 12.2,
it shall inform MEGABIOS of a claim as soon as reasonably practicable after it
receives notice of the claim, shall permit MEGABIOS to assume direction and
control of the defense of the claim (including the right to settle the claim
solely for monetary consideration), and shall cooperate as requested (at the
expense of MEGABIOS) in the defense of the claim.
Article XIII
------------
Government Control
------------------
Section 13.1. Authority. This Agreement is made subject to any
------------- ---------
restrictions concerning the export of products or technical information from the
United States of America which may be imposed upon or related to MEGABIOS or
LILLY from time to time by the government of the United States of America.
Article XIV
-----------
Miscellaneous Provisions
------------------------
Section 14.1. No Agency. It is understood and agreed that MEGABIOS shall
------------- ---------
have the status of an independent contractor under this Agreement and that
nothing in this Agreement shall be construed as authorization for either LILLY
or MEGABIOS to act as agent for the other. Members of the Committee shall be,
and
<PAGE>
-29-
shall remain, employees of MEGABIOS or LILLY, as the case may be. LILLY shall
not incur any liability for any act or failure to act by employees of MEGABIOS,
including members of the Committee who are employees of MEGABIOS. MEGABIOS shall
not incur any liability for any act or failure to act by employees of LILLY,
including members of the Committee who are employees of LILLY.
Section 14.2. Force Majeure. Both parties to the Agreement shall be
------------- -------------
excused from the performance of their obligations under this Agreement if such
performance is prevented by Force Majeure and the nonperforming party promptly
provides notice of the prevention to the other party. Such excuse shall be
continued so long as the condition constituting Force Majeure continues and the
nonperforming party takes reasonable efforts to remove the condition.
For purposes of this Agreement, Force Majeure shall include conditions
beyond the control of the parties, including without limitation, an act of God,
voluntary or involuntary compliance with any regulation, law or order of any
government, war, civil commotion, epidemic, failure or default of public
utilities or common carries, destruction of production facilities or materials
by fire, earthquake, storm or like catastrophe.
Section 14.3. Amendment. This Agreement may not be amended, supplemented,
------------ ---------
or otherwise modified except by an instrument in writing signed by both parties.
Section 14.4. Notices. Any notice required or permitted to be given under
------------- -------
this Agreement shall be in writing and shall be deemed to have been sufficiently
given for all purposes if mailed by first class certified or registered mail,
postage prepaid. Unless otherwise specified in writing, the mailing addresses of
the parties shall be as described below.
For MEGABIOS: Megabios Corp.
863A Mitten Road
Burlingame, California 94010
Attention: Chief Executive Officer
For LILLY: Eli Lilly and Company
Lilly Corporation Center
Indianapolis, Indiana 46285
Attention: Vice President, Oncology Discovery and
Clinical Development Research
Copy to: General Counsel
Section 14.5. Governing Law. This Agreement shall be governed by, and
------------- -------------
construed in accordance with, the laws of the State of Indiana, excluding any
choice of law rules which may direct the application of the law of any other
jurisdiction. Questions effecting the construction and effect of any Patent
Rights shall be determined by the laws of the country in which the Patent Right
has been applied for and granted.
<PAGE>
-30-
Section 14.6. Assignment. Neither party may assign its rights and
------------- ----------
obligations under this Agreement without the prior written consent of the other,
except a party may make such an assignment without the other party's consent in
connection with any merger, reorganization or sale of all or substantially all
of its assets to which this Agreement relates. This Agreement shall be binding
upon and shall inure to the benefit of the successors and permitted assigns of
the parties.
Section 14.7. Consents Not Unreasonably Withheld. Whenever provision is
------------- ----------------------------------
made in this Agreement for either party to secure the consent or approval of the
other, that consent or approval shall not unreasonably be withheld, and whenever
in this Agreement provisions are made for one party to object to or disapprove a
matter, such objection or disapproval shall not unreasonably be exercised.
Section 14.8. No Strict Construction. This Agreement has been prepared
------------- ----------------------
jointly and shall not be strictly construed against either party.
Section 14.9. Headings. The captions or headings of the Sections or other
------------- --------
subdivisions hereof are inserted only as a matter of convenience or for
reference and shall have no effect on the meaning of the provisions hereof.
Section 14.10. Severance of Clauses/Insolvency. Each party agrees that
-------------- ------------------------------
should any provision of this Agreement be determined by a court of competent
jurisdiction to violate or contravene any applicable law or policy, such
provision will be severed or modified by the court to the extent necessary to
comply with the applicable law or policy, and such modified provision and the
remainder of the provisions hereof will continue in full force and effect. In
addition the parties hereto intend that the Agreement shall not be deemed an
executory contract under the Bankruptcy/Insolvency laws of the United States.
Section 14.11. No Waiver. The waiver of a breach hereunder may be
-------------- ---------
effected only by a writing signed by the waiving party and shall not constitute
a waiver of any other breach.
Section 14.12. 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
other obligations hereunder of any party.
Section 14.13. Entire Agreement. The Agreement institutes the entire
-------------- ----------------
agreement of the parties relating to the subject matter, and may not be amended,
modified or canceled except by written instrument executed by both MEGABIOS and
LILLY.
Section 14.14. Counterparts. This Agreement has been executed in two (2)
-------------- ------------
counterparts, all of which shall constitute and original, but which together
shall constitute are and the same instrument.
<PAGE>
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IN WITNESS WHEREOF, the parties by their respective authorized officers,
have executed this Agreement.
MEGABIOS CORP. ELI LILLY AND COMPANY
By: /s/ Benjamin F.McGraw III By: /s/ August M. Watanabe
--------------------------- -------------------------
Benjamin F.McGraw III August M. Watanabe
Title: President and CEO Title: Executive Vice President
Date: 23 May 1997 Date: May 23, 1997
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APPENDIX I
Potentially relevant Megabios Patent Rights existing as of the Effective Date
include the following U.S. patent applications, related U.S. applications, and
foreign counterparts.
Title Serial Number Status
[ * ]
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
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APPENDIX II
MANUFACTURING REQUIREMENTS DOCUMENT
ELI LILLY AND COMPANY/MEGABIOS PHARMACEUTICALS, INC.
1.0 INTRODUCTION
The Manufacturing Requirements Document (MRD) shall be a manual containing
certain specifications, procedures, assay methods and personnel contacts
relating to the manufacturing and supplying of Product (Attachment __) by
MEGABIOS CORP. (MEGABIOS) to Eli Lilly and Company (LILLY). The following
elements of an MRD (Section 3.0 below) will be developed and understood by
both MEGABIOS and LILLY prior to the first manufacture of Phase I Clinical
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Trial material.
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2.0 ADMINISTRATION
The MRD will be considered a "living document". Sections of the MRD may be
added, deleted, or otherwise modified from time to time through the
issuance of a revised section incorporating the modification and stating
the effective date of the modification. Initial development, as well as
periodic review and revision, should be coordinated by one LILLY
representative and one MEGABIOS representative, yet to be determined. Each
revision shall be signed on behalf of LILLY and MEGABIOS by their
respective representatives, or by an authorized representative of equal
or greater management level.
3.0 MANUFACTURING REQUIREMENTS DOCUMENT ELEMENTS
MEGABIOS and LILLY will mutually agree on responsibilities and procedures
for the following:
3.1 QUALITY ASSURANCE/REGULATORY REQUIREMENT
3.1.0 Product Specifications
3.1.1 Incoming Component Inspections/Testing
3.1.2 Stability
3.1.3 Batch Documentation and Quality Records
3.1.4 Change Control
3.1.5 Reserve Samples
3.1.6 Material Storage/Control/Accountability
3.1.7 Laboratory Analysis
3.1.8 Regulatory Responsibility
3.1.9 Batch Release Responsibility
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3.2 SHIPMENT OF FINISHED GOODS
3.2.1 Packaging, Labeling
3.2.2 Transportation
3.3.3 Warehousing
3.3 KEY CONTACTS
3.3.1 Key Contact List
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Example 2
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1. Assume two Products are marketed by Lilly, one in ovarian cancer ("Product
O"), one in breast cancer ("Product B"). Assume also that the calculation
relates to the [ * ] year of commercial sale of each Product. Assume further
that [ * ]
2. Calculate annual worldwide Net Sales for Product O, calculate annual
worldwide Net Sales for Product B. Assume that worldwide Net Sales of Product
O were $250 million, and worldwide Net Sales of Product B were $800 million.
3. Add together Net Sales for Product O and Net Sales of Product B to calculate
aggregate worldwide Product Net Sales ("Annual Net Sales"). In this case, Annual
Net Sales = $1050 million.
4.[ * ]
5. Determine aggregate royalty amounts due for the entire year as follows,
[ * ] In this instance, Lilly would owe:
(i) [ * ]
(ii) [ * ]
(iii) [ * ]
Accordingly, Lilly would owe to Megabios for the year a total of [ * ] on
aggregate worldwide Annual Net Sales of $1050 million during the [ * ] year of
commercial sale of the Products.
Example 3
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1. Assume one Product is marketed by Lilly, and that it was launched on a
worldwide basis [ * ]
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
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2. [ * ] Assume Net Sales are reported on a monthly basis. Assume that worldwide
Net Sales of the Product in January were $45 million, in February were $50
million and in March were $55 million. [ * ]
3. [ * ] Assume that worldwide Net Sales of the Product for April
through December are $450 million. [ * ]
4. Determine aggregate royalty amounts due for the entire year as follows,
[ * ] In this instance, Lilly would owe:
(i) [ * ]
Accordingly, Lilly would owe to Megabios for the year a total of [ * ]
on aggregate worldwide Annual Net Sales of $600 million during the [ * ]
of commercial sale of the Product, where [ * ]
NOTE : MORE COMPLEXITY WOULD BE INTRODUCED WHERE THE PRODUCTS ARE APPROVED IN
DIFFERENT YEARS, AND, IN ADDITION, WHERE THE WORLDWIDE ROLL-OUT HAPPENS OVER
SEVERAL YEARS, RESULTING IN THE "FIRST YEAR FROM COMMERCIAL SALE" VARYING ON A
PRODUCT-BY PRODUCT [ * ] THE SAME LOGIC OF ALLOCATING NET SALES,
HOWEVER, WOULD APPLY, DEPENDING UPON [ * ]
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
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Appendix III
MEGABIOS/LILLY ROYALTY SCHEME
Royalty Rates
[ * ]
Procedure:
Example 1
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1. Assume two Products are marketed by Lilly, one in ovarian cancer ("Product
O"), one in breast cancer ("Product B"). Assume further that the calculation
relates to the second year of commercial sale of each Product [ * ]
2. Calculate annual worldwide Net Sales for Product O, calculate annual
worldwide Net Sales for Product B. Assume that worldwide Net Sales of Product O
were $250 million, and worldwide Net Sales of Product B were $800 million.
3. Add together Net Sales for Product O and Net Sales of Product B to
calculate aggregate worldwide Product Net Sales ("Annual Net Sales"). In this
case, Annual Net Sales = $1050 million.
4. Determine marginal royalty rates. In this instance, Lilly would owe:
(i) [ * ]
Accordingly, Lilly would owe to Megabios for such year a total of [ * ]
on the Annual Net Sales of $1050 million.
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
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Appendix IV
METHODOLOGY FOR CONVERTING FOREIGN SALES TO US DOLLARS
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The following is a description of how Eli Lilly and Company converts sales in
foreign countries to US dollars for external reporting:
Sales are transmitted directly to our corporate headquarters at the end of every
month. Our sales in several countries are made in US dollars, but most are made
in local currency. These sales are converted to US dollars [ * ]
[ * ] Certain information on this page has been omitted and filed separately
with the Commission. Confidential Treatment has been requested with
respect to the omitted portions.
