Table of Contents
| Delaware | 2834 | 03-0491827 | ||
| (State or Other Jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer | ||
| Incorporation or Organization) | Classification Code Number) | Identification Number) |
| Jay K. Hachigian, Esq. | Richard D. Truesdell, Jr., Esq. | |
| Gregg A. Griner, Esq. | Davis Polk & Wardwell | |
| Gunderson Dettmer Stough | 450 Lexington Avenue | |
| Villeneuve Franklin & Hachigian, LLP | New York, NY 10017 | |
| 610 Lincoln Street | (212) 450-4000 | |
|
Waltham, MA 02451 (781) 890-8800 |
| Proposed Maximum | Proposed Maximum | Amount of | ||||||||||
| Title of Each Class of | Amount to be | Offering Price | Aggregate Offering | Registration | ||||||||
| Securities to be Registered | Registered(1) | Per Share | Price(2) | Fee(3) | ||||||||
|
Common stock, $0.001 par value
|
6,612,500 | $14.00 | $92,575,000 | $0 | ||||||||
| (1) | Includes 862,500 shares of common stock that may be purchased by the underwriters to cover over-allotments, if any. |
| (2) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. |
| (3) | A registration fee of $9,905.53 has been paid previously based on an estimate of the aggregate offering price. |
Table of Contents
The information in this prospectus is not
complete and may be changed. We may not sell these securities
until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an
offer to sell these securities, and we are not soliciting an
offer to buy these securities in any state where the offer or
sale is not permitted.
| Per share | Total | |||||||
|
Initial public offering price
|
$ | $ | ||||||
|
Underwriting discounts and
commissions
|
$ | $ | ||||||
|
Proceeds to us, before expenses
|
$ | $ | ||||||
| JPMorgan | Banc of America Securities LLC |
| Page | ||||||||
| 1 | ||||||||
|
The offering
|
5 | |||||||
|
Summary consolidated financial data
|
6 | |||||||
| 8 | ||||||||
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| 26 | ||||||||
| 27 | ||||||||
| 28 | ||||||||
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| 103 | ||||||||
| 109 | ||||||||
| 109 | ||||||||
| 109 | ||||||||
| F-1 | ||||||||
| EX-4.1: 2004 SECURITYHOLDER AGREEMENT | ||||||||
| EX-10.2: SUBLICENSE AGREEMENT | ||||||||
| EX-10.3: AMENDED AND RESTATED LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT | ||||||||
| EX-10.4: NDD-094 LICENSE AGREEMENT | ||||||||
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1
•
iloperidone, a compound for the treatment of schizophrenia and
bipolar disorder, which we are currently evaluating in a
Phase III trial for schizophrenia that we anticipate will
be completed in the first half of 2007
•
VEC-162, a compound for the treatment of insomnia and
depression, which we are currently evaluating in a
Phase III trial for insomnia and which is also ready for
Phase II trials for depression
•
VSF-173, a compound for the treatment of excessive sleepiness,
for which we expect to begin a Phase II trial in the second
half of 2006
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4
•
pursue the clinical development of our current product candidates
•
develop a focused commercialization capability in the United
States
•
enter into strategic partnerships to extend our commercial reach
•
apply our pharmacogenomics and pharmacogenetics expertise to
differentiate our products from other available products
•
expand our product portfolio through the acquisition of
additional clinical compounds
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5
Common stock we are offering:
5,750,000 shares
Common stock to be outstanding after this offering:
21,643,577 shares
•
1,532,540 shares of common stock issuable upon the exercise
of stock options outstanding as of December 31, 2005, with
a weighted-average exercise price of $1.39 per share
•
50,335 shares of common stock issuable upon exercise of
outstanding warrants as of December 31, 2005 with an
exercise price of $1.32 per share
•
an additional 153,044 shares reserved as of
December 31, 2005 for future stock option grants and
purchases under our equity compensation plans. (see note 10
of the notes to our consolidated financial statements)
•
the conversion of all our outstanding preferred stock as of
December 31, 2005 into 15,794,632 shares of common
stock which will occur upon completion of this offering
•
the adoption of our restated certificate of incorporation and
restated bylaws to be effective upon the closing of this
offering
•
no exercise of the underwriter’s over-allotment
option
•
a 1-for-3.309755 reverse split of our common stock to be
effected prior to this offering
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| Period from | |||||||||||||
| March 13, 2003 | |||||||||||||
| (inception) to | Year ended December 31, | ||||||||||||
| December 31, | |||||||||||||
| 2003 | 2004 | 2005 | |||||||||||
|
Statements of operations
data
|
|||||||||||||
|
Revenue
|
$ | 47,565 | $ | 33,980 | $ | — | |||||||
|
Operating expenses:
|
|||||||||||||
|
Research and development
|
2,010,532 | 7,442,983 | 16,890,615 | ||||||||||
|
General and administrative
|
1,052,659 | 2,119,394 | 7,396,038 | ||||||||||
|
Total operating expenses
|
3,063,191 | 9,562,377 | 24,286,653 | ||||||||||
|
Loss from operations
|
(3,015,626 | ) | (9,528,397 | ) | (24,286,653 | ) | |||||||
|
Interest and other income, net
|
44,805 | 59,060 | 410,001 | ||||||||||
|
Net loss before tax expense
|
(2,970,821 | ) | (9,469,337 | ) | (23,876,652 | ) | |||||||
|
Tax expense
|
— | 4,949 | 7,649 | ||||||||||
|
Net loss
|
(2,970,821 | ) | (9,474,286 | ) | (23,884,301 | ) | |||||||
|
Beneficial conversion feature—
deemed dividend to preferred stockholders(1)
|
— | — | (33,486,623 | ) | |||||||||
|
Net loss attributable to common
stockholders
|
$ | (2,970,821 | ) | $ | (9,474,286 | ) | $ | (57,370,924 | ) | ||||
|
Net loss per share applicable to
common stockholders, basic and diluted
|
$ | (983.72 | ) | $ | (3,137.18 | ) | $ | (3,374.33 | ) | ||||
|
Pro Forma net loss per share
applicable to common stockholders, basic and diluted
|
$ | (6.40 | ) | ||||||||||
|
Weighted-average number of shares
used in computing net loss per share, basic and diluted
|
3,020 | 3,020 | 17,002 | ||||||||||
|
Weighted-average number of shares
used in computing pro forma net loss per share, basic and
diluted(2)
|
8,965,017 | ||||||||||||
6
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| Pro forma as | ||||||||||||
| December 31, 2005 | Actual | Pro forma | adjusted(1) | |||||||||
| ) | ||||||||||||
| (unaudited | (unaudited | |||||||||||
|
Balance sheet data
|
||||||||||||
|
Cash and cash equivalents and
restricted cash
|
$ | 21,443,045 | $ | 21,443,045 | $ | 88,595,882 | ||||||
|
Working capital
|
28,308,434 | 28,308,434 | 95,461,271 | |||||||||
|
Total assets
|
35,752,770 | 35,752,770 | 102,905,607 | |||||||||
|
Total liabilities
|
5,087,963 | 5,087,963 | 5,087,963 | |||||||||
|
Convertible preferred stock
|
61,795,187 | — | — | |||||||||
|
Deficit accumulated during the
development stage
|
(36,329,408 | ) | (36,329,408 | ) | (36,329,408 | ) | ||||||
|
Total stockholders’ equity
|
30,664,807 | 30,664,807 | 97,817,644 | |||||||||
7
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8
•
our inability to manufacture or obtain from third parties
materials sufficient for use in pre-clinical studies and
clinical trials
•
delays in patient enrollment and variability in the number and
types of patients available for clinical trials
•
difficulty in maintaining contact with patients after treatment,
resulting in incomplete data
•
poor effectiveness of product candidates during clinical trials
•
unforeseen safety issues or side effects
•
governmental or regulatory delays and changes in regulatory
requirements and guidelines
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9
•
a drug candidate may not be safe or effective
•
they may interpret data from pre-clinical and clinical testing
in different ways than we do
•
they may not approve our manufacturing process
•
they may change their approval policies or adopt new regulations
•
warning letters
•
fines
•
civil penalties
•
injunctions
•
recall or seizure of products
•
total or partial suspension of production
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10
•
refusal of the government to grant approvals
•
withdrawal of approvals and criminal prosecution
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11
•
regulatory authorities may require the addition of labeling
statements, such as a “black box” warning or a
contraindication
•
regulatory authorities may withdraw their approval of the product
•
we may be required to change the way the product is
administered, conduct additional clinical trials or change the
labeling of the product
•
our reputation may suffer
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14
•
the manufacturing processes for
VEC-162 and
VSF-173 have not been
tested in quantities needed for continued clinical trials or
commercial sales, and delays in
scale-up to commercial
quantities could delay clinical trials, regulatory submissions
and commercialization of our compounds
•
because most of our third-party manufacturers and formulators
are located outside of the United States, there may be
difficulties in importing our compounds or their components into
the United States as a result of, among other things, FDA import
inspections, incomplete or inaccurate import documentation or
defective packaging
•
because of the complex nature of our compounds, our
manufacturers may not be able to successfully manufacture our
compounds in a cost effective and/or timely manner
•
developing products
•
undertaking pre-clinical testing and clinical trials
•
obtaining FDA and other regulatory approvals of products
•
manufacturing and marketing products
•
For iloperidone in the treatment of schizophrenia, the atypical
antipsychotics
Risperdal®
(risperidone) by Johnson & Johnson (including the
depot formulation
Risperdal®
Consta®),
Zyprexa®
(olanzapine) by Eli Lilly and Company,
Seroquel®
(quetiapine) by AstraZeneca PLC,
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15
Abilify®
(aripiprazole) by Bristol-Myers Squibb Company/Otsuka
Pharmaceutical Co., Ltd., and
Geodon®
(ziprasidone) by Pfizer Inc., and generic clozapine, as
well as the typical antipsychotics haloperidol, chlorpromazine,
thioridazine and sulpiride (all of which are generic). In
addition to the approved products, compounds in Phase III
trials for the treatment of schizophrenia include bifeprunox
(Wyeth/ Solvay S.A./ Lundbeck A/S), paliperidone
(Johnson & Johnson), and asenapine (Pfizer).
•
For VEC-162 in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda Pharmaceuticals Company Limited,
hypnotics such as
Ambien®
(zolpidem) by Sanofi-Aventis (including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor Inc. and
Sonata®
(zaleplon) by King Pharmaceuticals, Inc., generic
benzodiazepines such as trazodone and doxepin, and
over-the-counter
remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials for insomnia include indiplon (Pfizer/
Neurocrine Biosciences, Inc.) gaboxadol (Merck & Co.,
Inc./ Lundbeck), and low-dose doxepin
(Silenortm,
Somaxon Pharmaceuticals, Inc.).
•
For VEC-162 in the treatment of depression, agomelatine (Les
Laboratoires Servier), antidepressants such as
Paxil®
(paroxetine) by GSK,
Zoloft®
(sertraline) by Pfizer,
Prozac®
(fluoxetine) by Eli Lilly, and Lexapro
(escitalopram) by Lundbeck/ Forest Pharmaceuticals Inc.,
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Wellbutrin®
(buproprion) by GlaxoSmithKline (GSK) and
Cymbalta®
(duloxetine) by Eli Lilly.
•
For VSF-173 in the treatment of excessive sleepiness,
Provigil®
(modafinil) by Cephalon Inc. and
Xyrem®
(sodium oxybate) by Jazz Pharmaceuticals, Inc.
•
our inability to recruit and retain adequate numbers of
effective sales and marketing personnel
•
the inability of sales personnel to obtain access to or persuade
adequate numbers of physicians to prescribe our products
•
the lack of complementary products to be offered by our sales
personnel, which may put us at a competitive disadvantage
against companies with broader product lines
•
unforeseen costs associated with creating our own sales and
marketing team or with entering into a partnering agreement with
an independent sales and marketing organization
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16
•
manage our clinical trials effectively
•
manage our internal development efforts effectively
•
improve our operational, financial, accounting and management
controls, reporting systems and procedures
•
attract and retain sufficient numbers of talented employees
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18
•
our addition or termination of development programs
•
variations in the level of expenses related to our existing
three product candidates or future development programs
•
our execution of collaborative, licensing or other arrangements,
and the timing of payments we may make or receive under these
arrangements
•
any intellectual property infringement lawsuit in which we may
become involved
•
regulatory developments affecting our product candidates or
those of our competitors
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22
•
publicity regarding actual or potential testing or trial results
or the outcome of regulatory review relating to products under
development by us or our competitors
•
regulatory developments in the United States and foreign
countries
•
developments concerning any collaboration we may undertake
•
announcements of patent issuances or denials, technological
innovations or new commercial products by us or our competitors
•
economic and other external factors beyond our control
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23
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24
•
authorize the issuance of “blank check” preferred
stock that could be issued by our board of directors to thwart a
takeover attempt
•
do not provide for cumulative voting in the election of
directors, which would allow holders of less than a majority of
the stock to elect some directors
•
establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election
•
require that directors only be removed from office for cause
•
provide that vacancies on the board of directors, including
newly-created directorships, may be filled only by a majority
vote of directors then in office
•
limit who may call special meetings of stockholders
•
prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders
•
establish advance notice requirements for nominating candidates
for election to the board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings
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25
•
a failure of our product candidates to be demonstrably safe and
effective
•
a failure to obtain regulatory approval for our products or to
comply with ongoing regulatory requirements
•
a lack of acceptance of our product candidates in the
marketplace, or a failure to become or remain profitable
•
our inability to obtain the capital necessary to fund our
research and development activities
•
our failure to identify or obtain rights to new product
candidates
•
a failure to develop or obtain sales, marketing and distribution
resources and expertise or to otherwise manage our growth
•
a loss of any of our key scientists or management personnel
•
losses incurred from product liability claims made against us
•
a loss of rights to develop and commercialize our products under
our license and sublicense agreements
•
the increased expenses and administrative workload associated
with being a public company
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26
•
Approximately $25.0 million to complete our ongoing
Phase III trial for iloperidone in schizophrenia, which we
currently anticipate will be completed in the first half of 2007
•
Approximately $10.0 million to complete our current
Phase III trial for
VEC-162 in insomnia
•
Approximately $5.0 million to complete a Phase II
trial for VSF-173 in excessive sleepiness
•
Approximately $20.0 million to pursue our other ongoing
research and development activities, which may include the
further development of our extended-release injectable
formulation of iloperidone in schizophrenia, additional
Phase III clinical trials for
VEC-162 in insomnia,
the initiation of a Phase II clinical trial for
VEC-162 in depression,
and additional Phase II and Phase III clinical trials
for VSF-173 in
excessive sleepiness.
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27
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•
our actual capitalization as of December 31, 2005
•
our pro forma capitalization after giving effect to the
conversion of all outstanding shares of preferred stock into
common stock upon the completion of this offering
•
our pro forma as adjusted capitalization to reflect our receipt
of the estimated net proceeds from our sale of
5,750,000 shares of common stock in this offering, after
deducting the underwriting discounts and commissions and
estimated offering expenses, the filing of a new certificate of
incorporation after the closing of this offering and the
application of our proceeds from this offering
•
1,685,584 shares of common stock available as of
December 31, 2005 for issuance under our Second Amended and
Restated Management Equity Plan and agreements entered into
pursuant to such Plan
•
50,335 shares of common stock available for issuance upon
the exercise of outstanding warrants
| Pro forma | |||||||||||||
| Actual | Pro forma | as adjusted | |||||||||||
|
Stockholders’ equity:
|
|||||||||||||
|
Convertible Preferred stock,
$0.001 par value; 52,276,437 shares authorized,
52,276,437 shares issued and outstanding;
52,276,437 shares authorized, no shares outstanding on a
pro forma basis; 20,000,000 shares authorized, no shares
outstanding on a pro forma as adjusted basis, respectively
|
$ | 61,795,187 | $ | — | $ | — | |||||||
|
Common stock, $0.001 par
value; 70,000,000 shares authorized, 98,945 shares
issued and outstanding; 70,000,000 shares authorized,
15,893,577 shares issued and outstanding on a pro forma
basis, and 21,643,577 shares issued and outstanding on a
pro forma as adjusted basis, respectively
|
99 | 15,894 | 21,644 | ||||||||||
|
Additional paid-in capital(1)
|
23,982,981 | 85,762,373 | 152,909,460 | ||||||||||
|
Deferred stock-based compensation
|
(18,766,443 | ) | (18,766,443 | ) | (18,766,443 | ) | |||||||
|
Accumulated other comprehensive loss
|
(17,609 | ) | (17,609 | ) | (17,609 | ) | |||||||
|
Deficit accumulated during the
development stage
|
(36,329,408 | ) | (36,329,408 | ) | (36,329,408 | ) | |||||||
| Total stockholders’ equity(1) | 30,664,807 | 30,664,807 | 97,817,644 | ||||||||||
| Total capitalization(1) | $ | 30,664,807 | $ | 30,664,807 | $ | 97,817,644 | |||||||
28
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|
Assumed initial public offering
price per share
|
$ | 13.00 | |||||||
|
Net tangible book value per share
applicable to common stockholders as of December 31, 2005
|
$ | 309.92 | |||||||
|
Pro forma decrease in net tangible
book value per share attributable to conversion of preferred
stock outstanding at December 31, 2005
|
(307.99 | ) | |||||||
|
Pro forma net tangible book value
per share applicable to common stockholders as of
December 31, 2005
|
1.93 | ||||||||
|
Increase in pro forma net tangible
book value per share attributable to investors purchasing shares
in this offering
|
2.59 | ||||||||
|
Pro forma net tangible book value
per share after giving effect to this offering
|
4.52 | ||||||||
|
Dilution in pro forma net tangible
book value per share to investors purchasing shares in this
offering
|
$ | 8.48 | |||||||
29
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| Shares purchased | Total consideration | Average | |||||||||||||||||||
| price per | |||||||||||||||||||||
| Number | Percent | Amount | Percent | share | |||||||||||||||||
|
Existing stockholders
|
15,893,577 | 73.4% | $ | 62,035,772 | 45.4% | $ | 3.90 | ||||||||||||||
|
New investors(1)
|
5,750,000 | 26.6% | 74,750,000 | 54.6% | 13.00 | ||||||||||||||||
|
Total
|
21,643,577 | 100.0% | $ | 136,785,772 | 100.0% | $ | 6.32 | ||||||||||||||
| • | 1,532,540 shares of common stock issuable upon exercise of outstanding options, with a weighted-average exercise price of $1.39 per share |
| • | 50,335 shares of common stock issuable upon exercise of outstanding warrants with an exercise price of $1.32 per share |
| • | an additional 153,044 shares reserved for future stock option grants and purchases under our existing equity compensation plans |
| • | the percentage of shares of common stock held by existing stockholders will decrease to approximately 70.6% of the total number of shares of our common stock outstanding after this offering |
| • | the number of shares held by new investors will be increased to 6,612,500 or approximately 29.4% of the total number of shares of our common stock outstanding after this offering |
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| Period from | |||||||||||||
| March 13, 2003 | |||||||||||||
| (inception) to | Year ended December 31, | ||||||||||||
| December 31, | |||||||||||||
| 2003 | 2004 | 2005 | |||||||||||
|
Statements of operations
data
|
|||||||||||||
|
Revenue
|
$ | 47,565 | $ | 33,980 | $ | — | |||||||
|
Operating expenses:
|
|||||||||||||
|
Research and development
|
2,010,532 | 7,442,983 | 16,980,615 | ||||||||||
|
General and administrative
|
1,052,659 | 2,119,394 | 7,396,038 | ||||||||||
|
Total operating expenses
|
3,063,191 | 9,562,377 | 24,286,653 | ||||||||||
|
Loss from operations
|
(3,015,626 | ) | (9,528,397 | ) | (24,286,653 | ) | |||||||
|
Interest and other income, net
|
44,805 | 59,060 | 410,001 | ||||||||||
|
Net loss before tax expense
|
(2,970,821 | ) | (9,469,337 | ) | (23,876,652 | ) | |||||||
|
Tax expense
|
— | 4,949 | 7,649 | ||||||||||
|
Net loss
|
(2,970,821 | ) | (9,474,286 | ) | (23,884,301 | ) | |||||||
|
Beneficial conversion
feature—deemed dividend to preferred stockholders(1)
|
— | — | (33,486,623 | ) | |||||||||
|
Net loss attributable to common
stockholders
|
$ | (2,970,821 | ) | $ | (9,474,286 | ) | $ | (57,370,924 | ) | ||||
|
Net loss per share applicable to
common stockholders, basic and diluted
|
$ | (983.72 | ) | $ | (3,137.18 | ) | $ | (3,374.33 | ) | ||||
|
Weighted average number of shares
used in computing net loss per share, basic and diluted
|
3,020 | 3,020 | 17,002 | ||||||||||
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| As of December 31, | ||||||||||||
| 2003 | 2004 | 2005 | ||||||||||
|
Balance sheet data
|
||||||||||||
|
Cash and cash equivalents and
restricted cash
|
$ | 7,165,722 | $ | 16,259,770 | $ | 21,443,045 | ||||||
|
Working capital
|
6,204,248 | 14,827,621 | 28,308,434 | |||||||||
|
Total assets
|
8,385,913 | 17,752,241 | 35,752,770 | |||||||||
|
Total liabilities
|
1,378,880 | 1,808,654 | 5,087,963 | |||||||||
|
Convertible preferred stock
|
9,963,541 | 28,308,564 | 61,795,187 | |||||||||
|
Deficit accumulated during the
development stage
|
(2,970,821 | ) | (12,445,107 | ) | (36,329,408 | ) | ||||||
|
Total stockholders’ equity
|
7,007,033 | 15,943,587 | 30,664,807 | |||||||||
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| March 13, 2003 | March 13, 2003 | ||||||||||||||||
| (inception) to | Year ended | Year ended | (inception) to | ||||||||||||||
| December 31, | December 31, | December 31, | December 31, | ||||||||||||||
| 2003(2) | 2004 | 2005 | 2005 | ||||||||||||||
| Direct Project Costs(1) | |||||||||||||||||
| Iloperidone | $ | 1,123,000 | $ | 7,798,000 | $ | 8,921,000 | |||||||||||
| VEC-162 | 3,221,000 | 6,133,000 | 9,354,000 | ||||||||||||||
| VSF-173 | 568,000 | 943,000 | 1,511,000 | ||||||||||||||
| Other Product Candidates | 1,037,000 | 899,000 | 1,936,000 | ||||||||||||||
| Total Direct Product Costs | — | 5,949,000 | 15,773,000 | 21,722,000 | |||||||||||||
| Indirect Project Costs(1) | |||||||||||||||||
| Facility(3) | 259,000 | 247,000 | 506,000 | ||||||||||||||
| Depreciation | $ | 69,000 | 345,000 | 375,000 | 789,000 | ||||||||||||
| Other Indirect Overhead | 1,941,000 | 890,000 | 496,000 | 3,327,000 | |||||||||||||
| Total Indirect Expenses | 2,010,000 | 1,494,000 | 1,118,000 | 4,622,000 | |||||||||||||
|
Total Research &
Development Expenses
|
$ | 2,010,000 | $ | 7,443,000 | $ | 16,891,000 | $ | 26,344,000 | |||||||||
| • | lack of efficacy during the clinical trials |
| • | unforeseen safety issues |
| • | slower-than-expected rate of patient recruitment |
| • | manufacturing delays |
| • | government or regulatory delays |
36
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37
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| Stock based | ||||||||||||||||||||||||
| compensation | ||||||||||||||||||||||||
| from March 31, | ||||||||||||||||||||||||
| 2003 (inception) | Future stock-based compensation(2) | |||||||||||||||||||||||
| to December 31, | ||||||||||||||||||||||||
| 2005(1) | Total | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Stock options granted through
December 31, 2005 that were below fair value
|
$ | 1,299 | $ | 18,730 | $ | 5,024 | $ | 5,026 | $ | 4,978 | $ | 3,702 | ||||||||||||
|
Modification to an employee’s
stock option awards
|
15 | — | — | — | — | — | ||||||||||||||||||
|
Remeasurement of stock options
modified in February 2005
|
3,826 | 948 | 621 | 266 | 61 | — | ||||||||||||||||||
|
Total stock based compensation
|
$ | 5,140 | $ | 19,678 | $ | 5,645 | $ | 5,292 | $ | 5,039 | $ | 3,702 | ||||||||||||
38
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39
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| Year ended | |||||||||
| December 31, | |||||||||
| Research and development expenses | 2004 | 2005 | |||||||
|
Direct project costs:
|
|||||||||
|
Personnel, benefits and related
costs
|
$ | 1,155,000 | $ | 1,962,000 | |||||
|
Stock-based compensation
|
2,000 | 789,000 | |||||||
|
Contract research and development,
consultants, materials and other costs
|
3,876,000 | 6,747,000 | |||||||
|
Clinical trials
|
916,000 | 6,305,000 | |||||||
|
Total direct costs
|
5,949,000 | 15,803,000 | |||||||
|
Indirect project costs
|
1,494,000 | 1,088,000 | |||||||
|
Total
|
$ | 7,443,000 | $ | 16,891,000 | |||||
40
Table of Contents
| Year ended | ||||||||
| December 31, | ||||||||
| General and administrative expenses | 2004 | 2005 | ||||||
|
Salaries, benefits and related costs
|
$ | 906,000 | $ | 1,411,000 | ||||
|
Stock-based compensation
|
36,000 | 4,313,000 | ||||||
|
Legal and consulting expenses
|
690,000 | 899,000 | ||||||
|
Other expenses
|
487,000 | 773,000 | ||||||
|
Total
|
$ | 2,119,000 | $ | 7,396,000 | ||||
| Year ended December 31, | ||||||||
| 2004 | 2005 | |||||||
|
Interest income
|
$ | 101,000 | $ | 436,000 | ||||
|
Interest expense
|
(42,000 | ) | (26,000 | ) | ||||
|
Total, net
|
$ | 59,000 | $ | 410,000 | ||||
41
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| Period from | |||||||||
| March 13, 2003 | |||||||||
| (inception) to | Year ended | ||||||||
| December 31, | December 31, | ||||||||
| Research and development expenses | 2003 | 2004 | |||||||
|
Direct project costs:
|
|||||||||
|
Personnel, benefits and related
costs
|
$ | — | $ | 1,155,000 | |||||
|
Stock-based compensation
|
— | 2,000 | |||||||
|
Contract R&D, consultants,
materials and other costs
|
— | 3,876,000 | |||||||
|
Clinical trials
|
— | 916,000 | |||||||
|
Total direct costs
|
— | 5,949,000 | |||||||
|
Indirect project costs
|
2,010,000 | 1,494,000 | |||||||
|
Total
|
$ | 2,010,000 | $ | 7,443,000 | |||||
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| Period from | ||||||||
| March 13, 2003 | ||||||||
| (inception) to | Year ended | |||||||
| December 31, | December 31, | |||||||
| General and administrative expenses | 2003 | 2004 | ||||||
|
Salaries, benefits and related costs
|
$ | 21,000 | $ | 906,000 | ||||
|
Stock-based compensation
|
— | 36,000 | ||||||
|
Legal and consulting expenses
|
620,000 | 690,000 | ||||||
|
Other expenses
|
412,000 | 487,000 | ||||||
|
Total
|
$ | 1,053,000 | $ | 2,119,000 | ||||
| Period from | ||||||||
| March 13, 2003 | ||||||||
| (inception) to | Year ended | |||||||
| December 31, | December 31, | |||||||
| 2003 | 2004 | |||||||
|
Interest income
|
$ | 53,000 | $ | 101,000 | ||||
|
Interest expense
|
(8,000 | ) | (42,000 | ) | ||||
|
Total, net
|
$ | 45,000 | $ | 59,000 | ||||
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| Price per | Approximate | |||||||||||||||
| Issue | Year | No. shares | share | amount | ||||||||||||
| (in millions) | ||||||||||||||||
|
Preferred stock, Series A
|
March, 2003 | 10,000,000 | $ | 1.00 | $ | 10.0 | ||||||||||
|
Preferred stock, Series B
|
September, 2004 | 15,040,654 | 1.23 | 18.5 | ||||||||||||
|
Preferred stock, Series B
|
September, 2005 | 15,040,654 | 1.23 | 18.5 | ||||||||||||
|
Preferred stock, Series B
|
December, 2005 | 12,195,129 | 1.23 | 15.0 | ||||||||||||
|
Total
|
52,276,437 | $ | 62.0 | |||||||||||||
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| Contractual obligations | After | |||||||||||||||||||||||||||
| (in thousands) | Total | 2006 | 2007 | 2008 | 2009 | 2010 | 2010 | |||||||||||||||||||||
|
Operating lease obligations
|
$ | 5,218 | $ | 503 | $ | 642 | $ | 536 | $ | 427 | $ | 440 | $ | 2,670 | ||||||||||||||
|
Short and long-term debt
|
147 | 147 | — | — | — | — | — | |||||||||||||||||||||
|
Total contractual cash obligations
|
$ | 5,365 | $ | 650 | $ | 642 | $ | 536 | $ | 427 | $ | 440 | $ | 2,670 | ||||||||||||||
45
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50
Table of Contents
| Fair market | ||||||||||||||||||||||
| Number | value estimate | |||||||||||||||||||||
| Date of | of options | Exercise | per common | Intrinsic value | ||||||||||||||||||
| issuance | Type of equity issuance | granted | price(1) | share | per share | |||||||||||||||||
| 06/15/04 | Employee Options | 3,443 | $ | 0.33 | $ | 3.21 | $ | 2.88 | ||||||||||||||
| 09/01/04 | Employee Options | 91,668 | 0.33 | 4.07 | 3.74 | |||||||||||||||||
| 12/06/04 | Employee Options | 777 | 0.33 | 5.69 | 5.36 | |||||||||||||||||
| 02/10/05 | Employee Options | 209,893 | 0.33 | 10.52 | 10.19 | |||||||||||||||||
| 04/05/05 | Employee Options | 27,974 | 0.33 | 15.99 | 15.66 | |||||||||||||||||
| 08/15/05 | Employee Options | 15,559 | 0.33 | 16.85 | 16.52 | |||||||||||||||||
| 09/28/05 | Employee Options | 620,973 | 0.33 | 16.85 | 16.52 | |||||||||||||||||
| 10/03/05 | Employee Options | 906 | 0.33 | 17.18 | 16.85 | |||||||||||||||||
| 11/14/05 | Employee Options | 83,087 | 0.83 | 17.18 | 16.35 | |||||||||||||||||
| 12/29/05 | Employee Options | 358,847 | 4.73 | 17.18 | 12.45 | |||||||||||||||||
| • | Pricing of private sales of our preferred stock to third-party investors |
| • | Prior valuations of stock grants and preferred stock sales and the effect of events, including the progression of our product candidates that have occurred between the time of the stock grants or stock sales |
51
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52
•
Comparative rights and preferences of the security being granted
compared to the rights and preferences of our other outstanding
equity
•
The perspectives provided by our underwriters when we initiated
our discussions with them, including the likelihood of an
initial public offering
•
General industry or economic trends
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53
•
License agreements: Given the importance of our current
license agreements to develop our iloperidone and VEC-162
compounds into drugs for commercial sale, the value for each
license agreement increased from the period the agreements were
first entered through the end of 2005.
•
Clinical trials: We believe that our success in our
clinical development programs for iloperidone and VEC-162 has
created additional value. Our iloperidone product candidate
entered Phase III clinical trials in 2005 for the treatment
of schizophrenia. Our VEC-162 product candidate completed a
successful phase II clinical trial in 2005 and initiated a
phase III clinical trial in February 2006 for the treatment
of insomnia. Our clinical trial development programs have
resulted in the increase in value of the Company for the period
beginning June 2004 through the end of 2005.
•
Strong management and infrastructure: The collection of a
team of expert scientists and the Chief Executive Officer, along
with other key personnel, such as the Chief Business Officer, VP
of Regulatory Affairs, VP of Manufacturing, and Chief Financial
Officer, has provided an increase in value to the Company at
each hire date, beginning at the inception of the Company
through the end of 2005.
During the quarter ending June 30, 2004, the Company
in-licensed it’s first product candidate,
VEC-162 and formally
commenced a Phase II clinical development program in
insomnia.
During the quarter ending September 30, 2004, the Company
in-licensed two additional product candidates; iloperidone for
the treatment of schizophrenia and bipolar disorder, and
VSF-173 for the
treatment of excessive sleepiness. The Company also initiated a
clinical development program for iloperidone in preparation for
a Phase III clinical trial in schizophrenia. In addition, the
Company completed its first closing of Series B Preferred
Stock for $18.5 million and added key executive management
personnel.
During the quarter ending December 31, 2004, the Company
conducted an initial guidance meeting with the FDA regarding its
planned clinical trial for
VEC-162 in insomnia.
The Company also further defined its pharmacogenetic strategy
for a future Phase III iloperidone clinical trail in
schizophrenia.
During the quarter ending March 31, 2005, the Company
developed additional insight regarding the previous clinical
trials conducted by the licensor for its iloperidone product
candidate. This review will result in improvements to the design
and execution of the future Phase III iloperidone clinical
trial in schizophrenia. In addition, the Company added key
scientific staff and added to its executive management group.
During the quarter ending June 30, 2005, the Company
conducted a guidance meeting with the FDA regarding its planned
Phase III clinical trial for iloperidone in schizophrenia
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54
and the related pharmacogenetic elements of the study. The
Company also completed a successful Phase II clinical trial
for its VEC-162 product
candidate in insomnia.
During the quarter ending September 30, 2005, the Company
conducted a Phase II (b) and statistical guidance
meeting with the FDA regarding its planned Phase III
clinical trail for iloperidone in schizophrenia. In addition,
the Company initiated clinical development activities in
preparation for a Phase III clinical trial for
VEC-162 in insomnia.
The Company also completed the second closing of the
Series B Preferred Stock financing for $18.5 million.
During the quarter ending December 31, 2005, the Company
began its Phase III clinical trial for iloperidone in
schizophrenia. In addition, the Company added to its executive
management group.
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55
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56
•
Pursue the clinical development of our current product
candidates. We believe that our ongoing Phase III trial
for iloperidone will complete the development work required to
file an NDA to market and sell the drug commercially. We also
believe that the Phase III trial we plan to start in early
2006 for VEC-162 will
be pivotal for regulatory approval of the compound. We intend to
initiate a Phase II trial for
VSF-173 in the second
half of 2006. We have committed, and will continue to commit,
substantial resources towards completing the development of, and
obtaining regulatory approvals for, our product candidates.
•
Develop a focused commercialization capability in the United
States. Because we believe that the number of physicians
accounting for the majority of prescriptions in the United
States for schizophrenia and excessive sleepiness is relatively
small, we believe that we can cost-effectively develop our own
sales force to market and sell iloperidone and
VSF-173.
•
Enter into strategic partnerships to extend our commercial
reach. Given the large number of physicians treating
insomnia and depression, we intend to enter into a global
strategic partnership with a large pharmaceutical company to
market, distribute and sell
VEC-162. Additionally,
we intend to seek commercial partners for iloperidone and
VSF-173 outside of the
United States.
•
Apply our pharmacogenetics and pharmacogenomics expertise to
differentiate our products. We believe that our
pharmacogenetics and pharmacogenomics expertise will yield new
insights into our product candidates. These insights may enable
us to target our products to certain patient populations and to
identify unexpected conditions for our product candidates to
treat. We believe this expertise will enable us to differentiate
and extend the lifecycle of each of our product candidates. This
may also include the development of companion diagnostic tests
to help physicians identify patient populations that will
realize greater benefits from our compounds.
•
Expand our product portfolio through the acquisition of
additional compounds. We intend to continue to draw upon our
clinical development expertise and pharmacogenetics and
pharmacogenomics expertise to identify and pursue the
acquisition of additional clinical-stage compounds.
Table of Contents
| Product candidate | Target indications | Clinical status | ||
| Iloperidone (Oral) | Schizophrenia | In Phase III trial | ||
| Bipolar Disorder | Ready for Phase II trial | |||
| Iloperidone (Depot) | Schizophrenia | Ready for Phase II trial | ||
|
VEC-162
|
Insomnia | In Phase III trial | ||
| Depression | Ready for Phase II trial | |||
|
VSF-173
|
Excessive Sleepiness | Ready for Phase II trial | ||
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58
•
Safety. Short- and long-term safety trials have shown
that patients who used iloperidone had reduced side effects
relative to currently available antipsychotics, including low
weight gain, no induction of diabetes, low extrapyramidal
symptoms, including no akathisia (inability to sit still), no
hyperprolactinemia, low incidence of sleepiness and low negative
effects on cognition relative to placebo. Like other atypical
antipsychotics, iloperidone is associated with a prolongation of
the heart’s QTc interval, but in no instance did any
patient taking iloperidone in the controlled portion of a
clinical trial have an interval exceeding a 500-millisecond
threshold that the FDA has identified as being of particular
concern. Two patients experienced a prolongation of 500
milliseconds or more during the open-label extension of one
trial. We believe that the safety profile of iloperidone may
result in improved patient compliance with their treatment
regimen.
•
Extended-release injectable formulation. We are
developing an extended-release injectable formulation for
iloperidone, which only needs to be administered once every four
weeks and which we believe will be a compelling complement to
our oral formulation for both physicians and patients. Novartis
conducted a two-month Phase I/ IIa safety trial of this
formulation in schizophrenia patients, in which it demonstrated
the benefit of consistent release over a
four-week time period
with no greater side effects relative to oral dosing. Further
development of this formulation will be an immediate priority
for us following the completion of the ongoing Phase III
trial of the oral formulation. The commercial potential for our
extended-release injectable formulation has been demonstrated by
the success of the injectable formulation for risperidone,
Risperdal®
Consta®,
which achieved worldwide sales of $310 million in 2004, its
first full year on the market. We believe that our
four-week formulation
for iloperidone will be an attractive alternative to Risperdal
Consta, which is injected once every two weeks.
•
Pharmacogenetic evaluation of iloperidone’s
efficacy. Based on our retrospective analysis of prior
clinical data, we have determined that certain patients may be
more likely to respond
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59
to iloperidone and to enjoy better treatment results relative to
the general schizophrenia patient population. These patients
have a common mutation of a gene linked to central nervous
system function, that is estimated to occur in approximately 70%
of schizophrenia patients. We have developed a genetic test
which we are using in our current Phase III trial to
confirm this correlation. According to market research conducted
by LEK Consulting, physicians treating schizophrenia patients
would enthusiastically welcome a genetic test that would enable
them to identify likely responders to iloperidone, given the
unpredictable efficacy and serious side effects currently
associated with atypical antipsychotics, and be more likely to
prescribe iloperidone as a result.
•
Pharmacogenetic evaluation of iloperidone’s safety.
We have also discovered that patients with an uncommon mutation
of a well understood gene affecting drug metabolism experience
higher levels of iloperidone in their blood and may experience
longer QTc intervals while taking iloperidone. We estimate that
this genetic attribute is found in approximately 5-10% of
schizophrenia patients. We believe that certain physicians may
choose to test patients for this mutation if they have a concern
about QTc interval prolongation with respect to a particular
patient.
Table of Contents
| Positive and negative | ||||||||||||||||
| Number of | symptom scale | |||||||||||||||
| Trial number | patients | Doses(1) | improvement(2) | Significance vs. placebo(3) | ||||||||||||
|
ILP 3000
|
621 | placebo | -4.6 | n/a | ||||||||||||
| 4 mg/day | -9.0 | Not significant | ||||||||||||||
| 8 mg/day(4 | ) | -7.8 | Not significant | |||||||||||||
| 12 mg/day(4 | ) | -9.9 | p < 0.05 | |||||||||||||
|
ILP 3004
|
616 | placebo | -3.5 | n/a | ||||||||||||
| 4-8 mg/day | -9.4 | p< 0.02 | ||||||||||||||
| 10-16 mg/day | -11.1 | p< 0.001 | ||||||||||||||
|
ILP 3005
|
710 | placebo | -7.6 | n/a | ||||||||||||
| 12-16 mg/day | -11.0 | Not significant | ||||||||||||||
| 20-24 mg/day | -14.0 | p< 0.01 | ||||||||||||||
| • | Patients who took the drug at our target dose improved significantly. At the dose for which we intend to seek approval (24 mg/day), iloperidone achieved statistically significant efficacy in the ILP 3005 trial. This gives us confidence that we can replicate that success in our ongoing Phase III trial. |
| • | Low doses partially explain the mixed efficacy results of the ILP 3000 trial. We believe that this trial failed principally because the doses of iloperidone administered were too low. This is supported by the efficacy of iloperidone that was observed at higher doses in the other trials. |
| • | Patient drop-outs explain the mixed efficacy results of the ILP 3005 trial. An exceptionally high number of patients dropped out of this study early and before they had the chance of achieving therapeutic blood levels of the drug. While high drop-out rates are common in studies of schizophrenia drugs, two issues may have exacerbated the drop-out problem in this trial: first, the trial was primarily on an outpatient basis, which is unusual for clinical trials of antipsychotic therapies, and second, the patients in the trial had to take the drug in a four-pill, twice-daily regimen. Both factors had a negative effect on patient compliance and led to a very high drop-out rate. We retrospectively analyzed the data from the Novartis trials and determined that, overall, the drop-outs were not due to other problems with iloperidone, and we have further demonstrated that iloperidone achieved statistically significant efficacy among those patients who remained enrolled long enough to achieve therapeutic blood levels of the drug. |
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61
•
The FDA has agreed that we may analyze the data generated
from the trials in a way that more appropriately addresses early
drop-outs. Under a standard “last observation carried
forward” statistical model used by Novartis to analyze the
prior trial data, experts in the field of clinical trial
statistical analysis have noted that results may be
significantly biased in certain circumstances by the presence of
early patient drop-outs. To correct for this, these experts
recommend models such as a “mixed-method repeated
measures” statistical model to analyze data from clinical
trials with early patient drop-outs. While the FDA has not
previously approved a drug on the basis of efficacy measured
with a “mixed-method repeated measures” model, we
discussed our intent to use it with the FDA in an August 2005
guidance meeting, and they have agreed that the “last
observation carried forward” method may be biased under
these circumstances and that a “mixed-method repeated
measures” model approach may be more appropriate for our
ongoing Phase III trial. We retrospectively analyzed
Novartis’ Phase III data using a “mixed-method
repeated measures” model and determined that iloperidone
demonstrated statistically significant efficacy at
Novartis’ declared dose in two of three previous trials
(trials ILP 3004 and ILP 3005), versus just one trial under a
“last observation carried forward” model (trial ILP
3004).
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63
•
Many of the products prescribed commonly for sleep disorders,
including Ambien, Lunesta, and Sonata, are classified as
Schedule IV controlled substances by the DEA due to their
potential for abuse, tolerance and withdrawal symptoms. Drugs
that are classified as Schedule IV controlled substances
are subject to restrictions on how such drugs are prescribed and
dispensed.
•
Many drugs approved for and used in sleep disorders also induce
a number of nuisance side effects beyond the more serious abuse
and addiction effects associated with most approved products.
These side effects include next-day grogginess, memory loss,
unpleasant taste, dry mouth and hormonal changes.
•
We believe that none of the drugs used and approved for sleep,
other than Rozerem, work through the body’s natural
sleep/wake cycle, which is governed by melatonin. We believe
that, for patients whose sleep disruption is due to a
misalignment of this sleep/wake cycle and the patients’
need to sleep (as is the case in circadian rhythm sleep
disorders), a drug
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64
that naturally modulates the sleep/wake cycle would be an
attractive new alternative because it would be addressing the
underlying cause of the sleeplessness, rather than merely
addressing its symptoms.
•
Circadian rhythm shift. There was a statistically
significant (p < 0.025) shift in circadian rhythm at
100 mg of up to five hours on the first night, and a
statistically significant dose-response curve. This finding
confirmed that the drug acts through the sleep/wake cycle, and
shows further that the drug can modulate this cycle to address
the underlying cause of sleeplessness in patients with circadian
rhythm sleep disorders.
•
Reduced duration of wake after sleep onset. “Wake
after sleep onset” is defined as the number of minutes
awake from the time the participant falls asleep to the end of
the evaluation period. There was a statistically significant
(p < 0.05) reduction in wake after sleep onset at
100 mg of 68.5 minutes, and a reduction in the
duration of wake after sleep onset versus placebo of at least 36
minutes was observed at all doses. The effects were 36 minutes
(10 mg) and 45 minutes (20 and 50 mg).
•
Improved sleep efficiency. Sleep efficiency is defined as
time asleep divided by time in bed.
VEC-162 achieved
statistically significant improvements in sleep efficiency vs.
placebo at 50 mg (p < 0.05) and 100 mg
(p < 0.02). Absolute improvement occurred at all doses
with at least 12.5% greater sleep efficiency vs. placebo.
Specific improvements were 12.5% (10 mg), 13.5%
(20 mg), 15.4% (50 mg) and 18.1% (100 mg).
•
Improved time to achieve persistent sleep. All patients
experienced a reduction in time it took to achieve persistent
sleep (otherwise known as latency). The 10 mg dose improved
23.4 minutes vs. placebo (p < 0.004), the
20 mg improved 10.1 minutes (not significant), the
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65
50 mg improved 18.8 minutes (p < 0.02), and
the 100 mg dose improved 19.3 minutes
(p < 0.03).
•
A placebo-like side effect profile. VEC-162 also
demonstrated a strong safety profile, with no statistically
significant side effects versus placebo and no impairment of
next-day performance or mood.
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67
•
were initially developed by a well-established biopharmaceutical
company
•
have already completed Phase I trials
•
are free of significant formulation issues
•
have potential for strong patent protection through composition
of matter patents, new doses or new formulations
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69
•
pre-clinical laboratory tests, animal studies and formulation
studies under cGLP
•
submission to the FDA of an investigational new drug
application, or IND, which must become effective before human
clinical trials may begin
•
execution of adequate and well-controlled clinical trials to
establish the safety and efficacy of the product for each
indication for which approval is sought
•
submission to the FDA of an NDA
•
satisfactory completion of an FDA inspection of the
manufacturing facility or facilities at which the product is
produced to assess compliance with cGMP
•
FDA review and approval of the NDA
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70
•
Phase I: refers typically to closely-monitored clinical
trials and includes the initial introduction of an
investigational new drug into human patients or health volunteer
subjects. Phase I trials are designed to determine the
safety, metabolism and pharmacologic actions of a drug in
humans, the potential side effects associated with increasing
drug doses and, if possible, to gain early evidence of the
product candidate’s effectiveness. Phase I trials also
include the study of structure-activity relationships and
mechanism of action in humans, as well as studies in which
investigational drugs are used as research tools to explore
biological phenomena or disease processes. During Phase I
trials, sufficient information about a drug’s
pharmacokinetics and pharmacological effects should be obtained
to permit the design of well-controlled, scientifically valid
Phase II studies. The total number of subjects and patients
included in Phase I trials varies, but is generally in the
range of 20 to 80 people.
•
Phase II: refers to controlled clinical trials conducted to
evaluate appropriate dosage and the effectiveness of a drug for
a particular indication or indications in patients with a
disease or condition under study and to determine the common
short-term side effects and risks associated with the drug.
These trials are typically well controlled, closely monitored
and conducted in a relatively small number of patients, usually
involving no more than several hundred subjects.
•
Phase III: refers to expanded controlled and uncontrolled
clinical trials. These trials are performed after preliminary
evidence suggesting effectiveness of a drug has been obtained.
Phase III trials are intended to gather additional
information about the effectiveness and safety that is needed to
evaluate the overall benefit-risk relationship of the drug and
to provide an adequate basis for physician labeling.
Phase III trials usually include from several hundred to
several thousand subjects.
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75
•
For iloperidone in the treatment of schizophrenia, the atypical
antipsychotics
Risperdal®
(risperidone) by Johnson & Johnson (including the
depot formulation
Risperdal®
Consta®),
Zyprexa®
(olanzapine) by Eli Lilly,
Seroquel®
(quetiapine) by AstraZeneca,
Abilify®
(aripiprazole) by BMS/Otsuka, and
Geodon®
(ziprasidone) by Pfizer, and generic clozapine, as well as
the typical antipsychotics haloperidol, chlorpromazine,
thioridazine and sulpiride (all of which are generic). In
addition to the approved products, compounds in Phase III
trials for the treatment of schizophrenia include bifeprunox
(Wyeth/ Solvay/ Lundbeck), paliperidone (Johnson &
Johnson), and asenapine (Pfizer).
•
For VEC-162 in the treatment of insomnia,
Rozeremtm
(ramelteon) by Takeda, hypnotics such as
Ambien®
(zolpidem) by Sanofi-Aventis (including Ambien
CR®),
Lunesta®
(eszopiclone) by Sepracor and
Sonata®
(zaleplon) by King Pharmaceuticals, generic benzodiazepines
such as trazodone and doxepin, and
over-the-counter
remedies such as
Benadryl®
and Tylenol
PM®.
In addition to the approved products, compounds in
Phase III trials for insomnia include indiplon (Pfizer/
Neurocrine Biosciences) gaboxadol (Merck/ Lundbeck), and
low-dose doxepin
(Silenortm,
Somaxon).
•
For VEC-162 in the treatment of depression, agomelatine (Les
Laboratoires Servier), antidepressant drugs such as
Paxil®
(paroxetine) by GSK,
Zoloft®
(sertraline) by Pfizer,
Prozac®
(fluoxetine) by Eli Lilly, and Lexapro
(escitalopram) by Lundbeck/ Forest Pharmaceuticals Inc.,
Effexor®
(venlafaxine) by Wyeth as well as other compounds such as
Wellbutrin®
(buproprion) by GSK and
Cymbalta®
(duloxetine) by Eli Lilly.
•
For VSF-173 in the treatment of excessive sleepiness,
Provigil®
(modafinil) by Cephalon and
Xyrem®
(sodium oxybate) by Jazz Pharmaceuticals, Inc.
Table of Contents
76
Table of Contents
| Name | Age | Position | ||||
|
Mihael H. Polymeropoulos, M.D.
|
45 | President and Chief Executive Officer, Director | ||||
|
William D. “Chip” Clark
|
37 | Senior Vice President, Chief Business Officer and Secretary | ||||
|
Steven A. Shallcross
|
44 | Senior Vice President, Chief Financial Officer and Treasurer | ||||
|
Thomas Copmann, Ph.D.
|
53 | Vice President of Regulatory Affairs | ||||
|
Deepak Phadke, Ph.D.
|
55 | Vice President of Manufacturing | ||||
|
Argeris N.
Karabelas, Ph.D.(1),(3)
|
53 | Director and Chairman of the Board | ||||
|
Richard W. Dugan(2)
|
63 | Director | ||||
|
Brian K. Halak, Ph.D.(2),(3)
|
34 | Director | ||||
|
Wayne T.
Hockmeyer, Ph.D.(1),(3)
|
61 | Director | ||||
|
David Ramsay(2)
|
42 | Director | ||||
|
James B. Tananbaum, M.D.(1)
|
42 | Director | ||||
77
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78
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79
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80
•
appoints a firm to serve as independent accountant to audit our
financial statements
•
discusses the scope and results of the audit with the
independent accountant, and reviews with management and the
independent accountant our interim and year-end operating results
•
considers the adequacy of our internal accounting controls and
audit procedures
•
approves (or, as permitted, pre-approves) all audit and
non-audit services to be performed by the independent accountant
•
reviewing and recommending approval of compensation of our
executive officers
•
administering our equity compensation plans
•
reviewing and making recommendations to our board with respect
to incentive compensation and equity plans
Table of Contents
81
Table of Contents
| Long-term | |||||||||||||||||||||
| compensation | |||||||||||||||||||||
| awards | |||||||||||||||||||||
| Securities | |||||||||||||||||||||
| underlying | All other | ||||||||||||||||||||
| Name and principal position | Year | Salary($) | Bonus($)(7) | options | compensation | ||||||||||||||||
|
Mihael H. Polymeropoulos, M.D.
|
2005 | $ | 360,719 | $ | 181,100 | 732,401 | $ | 7,000 | (5) | ||||||||||||
|
President and Chief
|
2004 | 350,000 | 140,000 | — | 4,667 | (5) | |||||||||||||||
|
Executive Officer
|
|||||||||||||||||||||
|
William D. “Chip” Clark
|
2005 | 227,297 | 62,600 | 293,789 | 2,100 | (5) | |||||||||||||||
|
Senior Vice President,
|
2004 | 75,000 | (1) | 18,750 | 91,668 | 3,564 | (6) | ||||||||||||||
|
Chief Business Officer and Secretary
|
|||||||||||||||||||||
|
Steven A. Shallcross
|
2005 | 32,921 | (2) | 62,500 | 151,067 | — | |||||||||||||||
|
Senior Vice President,
|
2004 | — | — | — | — | ||||||||||||||||
|
Chief Financial Officer and
Treasurer
|
|||||||||||||||||||||
|
Thomas Copmann, Ph.D.
|
2005 | 147,218 | (3) | 42,000 | 35,349 | 4,000 | (5) | ||||||||||||||
|
Vice President of
|
2004 | — | — | — | — | ||||||||||||||||
|
Regulatory Affairs
|
|||||||||||||||||||||
|
Deepak Phadke, Ph.D.
|
2005 | 79,892 | (4) | 10,500 | 28,206 | — | |||||||||||||||
|
Vice President of
|
2004 | — | — | — | — | ||||||||||||||||
|
Manufacturing
|
|||||||||||||||||||||
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| Individual grants | Potential realizable | |||||||||||||||||||||||
| value at assumed | ||||||||||||||||||||||||
| Number of | Percent of | annual rates of stock | ||||||||||||||||||||||
| securities | total options | price appreciation for | ||||||||||||||||||||||
| underlying | granted to | option term(3) | ||||||||||||||||||||||
| options | employees in | Exercise | Expiration | |||||||||||||||||||||
| Name | granted | fiscal year(1) | price(2) | date | 5% | 10% | ||||||||||||||||||
|
Mihael H.
Polymeropoulos, M.D.
|
128,408 | 9.7% | $ | 0.33 | 2/10/2015 | $ | 2,676,746 | $ | 4,287,370 | |||||||||||||||
| 413,620 | 31.4% | 0.33 | 9/28/2015 | 8,622,170 | 13,810,214 | |||||||||||||||||||
| 190,373 | 14.4% | 4.73 | 12/29/2015 | 3,130,804 | 5,518,657 | |||||||||||||||||||
| 732,401 | 55.5% | 14,429,720 | 23,616,241 | |||||||||||||||||||||
|
William D. “Chip” Clark
|
48,341 | 3.7% | 0.33 | 2/10/2015 | 1,007,699 | 1,614,041 | ||||||||||||||||||
| 205,541 | 15.6% | 0.33 | 9/28/2015 | 4,284,632 | 6,862,737 | |||||||||||||||||||
| 39,907 | 3.0% | 4.73 | 12/29/2015 | 656,296 | 1,156,850 | |||||||||||||||||||
| 293,789 | 22.3% | 5,948,627 | 9,633,628 | |||||||||||||||||||||
|
Steven A. Shallcross
|
83,087 | 6.3% | 0.83 | 11/14/2015 | 1,690,457 | 2,732,619 | ||||||||||||||||||
| 67,980 | 5.2% | 4.73 | 12/29/2015 | 1,117,974 | 1,970,649 | |||||||||||||||||||
| 151,067 | 11.5% | 2,808,431 | 4,703,268 | |||||||||||||||||||||
|
Thomas Copmann, Ph.D.
|
22,660 | 1.7% | 0.33 | 4/5/2015 | 472,362 | 756,589 | ||||||||||||||||||
| 12,689 | 1.0% | 4.73 | 12/29/2015 | 208,679 | 367,837 | |||||||||||||||||||
| 35,349 | 2.7% | 681,041 | 1,124,426 | |||||||||||||||||||||
|
Deepak Phadke, Ph.D.
|
15,106 | 1.1% | 0.33 | 8/15/2015 | 314,894 | 504,369 | ||||||||||||||||||
| 13,100 | 1.0% | 4.73 | 12/29/2015 | 215,438 | 379,751 | |||||||||||||||||||
| 28,206 | 2.1% | 530,332 | 884,120 | |||||||||||||||||||||
| • | Multiplying the number of shares of stock subject to a given stock option by the mid-point of the initial public offering price range of $13.00 per share |
| • | Assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire term of the option |
| • | Subtracting from that result the aggregate option exercise price |
83
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| Number of securities | Value of unexercised | |||||||||||||||
| underlying unexercised | in-the-money options at | |||||||||||||||
| options at December 31, 2005 | December 31, 2005(1) | |||||||||||||||
| Name | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||
|
Mihael H.
Polymeropoulos, M.D.
|
96,277 | 785,198 | $ | 1,219,735 | $ | 9,109,676 | ||||||||||
|
William D. “Chip” Clark
|
28,646 | 356,811 | 362,920 | 4,344,775 | ||||||||||||
|
Steven A. Shallcross
|
— | 151,067 | 1,573,376 | |||||||||||||
|
Thomas
Copmann, Ph.D.
|
— | 12,689 | 104,901 | |||||||||||||
|
Deepak
Phadke, Ph.D.
|
— | 28,206 | 299,677 | |||||||||||||
84
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85
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86
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87
•
employees
•
members of our board of directors who are not employees
•
consultants
•
options to purchase shares of our common stock
•
stock appreciation rights
•
restricted shares of our common stock
•
stock units (sometimes called phantom shares)
Table of Contents
88
•
cash
•
shares of common stock that the optionee already owns
•
an immediate sale of the option shares through a broker
designated by us
•
a full-recourse promissory note
•
cash
•
a full-recourse promissory note
•
services
•
a merger of Vanda after which our own stockholders own 50% or
less of the surviving corporation
•
a sale of all or substantially all of our assets
•
a proxy contest that results in the replacement of 50% or more
of our directors over a
24-month period
•
an acquisition of 50% or more of our outstanding stock by any
person or group, other than a person related to Vanda (such as a
holding company owned by our stockholders)
Table of Contents
89
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90
•
rights to demand the registration of our common stock and to
participate in other public offerings of our common stock (for
more information regarding the registration rights granted
pursuant to the 2004 Securityholder Agreement, see
“Description of capital stock— Registration
rights”)
•
rights to purchase certain new issuances of our securities
(which rights do not apply with respect to, and will terminate
upon the completion of, this offering)
•
rights to information regarding us (which rights will terminate
upon the conversion of our preferred stock into common stock
upon completion of this offering)
•
rights to inspect our facilities, books, records and to discuss
our affairs, finances and accounts with its officers (which
rights will terminate upon the conversion of our preferred stock
into common stock upon completion of this offering)
Table of Contents
91
•
each person known by us to be the beneficial owner of more than
5% of our common stock
•
our named executive officers
•
each of our directors
•
all executive officers and directors as a group
Table of Contents
| Percentage of shares | |||||||||||||
| beneficially owned | |||||||||||||
| Number of shares | Before | After | |||||||||||
| Name and address of beneficial owner(1) | beneficially owned | offering | offering | ||||||||||
|
5% Stockholders
|
|||||||||||||
|
Care Capital Investments II,
LP(2)
|
3,614,205 | 22.74% | 16.70% | ||||||||||
|
47 Hulfish St., Ste 310 Princeton, NJ 08542 |
|||||||||||||
|
Domain Partners VI, L.P.(3)
|
3,203,594 | 20.16% | 14.80% | ||||||||||
|
One Palmer Square, Suite 515 Princeton, NJ 08542 |
|||||||||||||
|
Biomedical Sciences Investment
Fund Pte Ltd.(4)
|
2,572,668 | 16.19% | 11.89% | ||||||||||
|
20 Biopolis Way #09-01 Centros, Singapore 138668 |
|||||||||||||
|
Prospect Venture Partners II,
L.P.(5)
|
2,402,695 | 15.12% | 11.10% | ||||||||||
|
435 Tasso St., Ste. 200 Palo Alto, CA 94301 |
|||||||||||||
|
Rho Ventures(6)
|
2,402,692 | 15.12% | 11.10% | ||||||||||
|
Carnegie Hall Tower 152 West 57th Street 23rd Floor New York, NY 10019 |
|||||||||||||
|
MedImmune Ventures, Inc.(7)
|
1,601,798 | 10.08% | 7.40% | ||||||||||
|
c/o MedImmune, Inc. One MedImmune Way Gaithersburg, MD 20878 |
|||||||||||||
|
Executive Officers and
Directors
|
|||||||||||||
|
Mihael H.
Polymeropoulos, M.D.(8)
|
102,487 | * | * | ||||||||||
|
William D. “Chip” Clark(9)
|
32,464 | * | |||||||||||
|
Steven A. Shallcross(10)
|
— | * | * | ||||||||||
|
Argeris N. Karabelas, Ph.D.(11)
|
3,614,205 | 22.74% | 16.70% | ||||||||||
|
Richard W. Dugan(12)
|
440 | * | * | ||||||||||
|
Brian K. Halak, Ph.D.(13)
|
— | * | * | ||||||||||
|
Wayne T. Hockmeyer, Ph.D.(14)
|
1,601,798 | 10.08% | 7.40% | ||||||||||
|
David Ramsay(15)
|
3,614,205 | 22.74% | 16.70% | ||||||||||
|
James B. Tananbaum, M.D.(16)
|
2,402,695 | 15.12% | 11.10% | ||||||||||
|
Deepak Phadke, Ph.D.(17)
|
— | * | * | ||||||||||
|
Thomas Copmann, Ph.D.(18)
|
22,660 | * | * | ||||||||||
|
All executive officers and
directors as a group
|
7,776,749 | 48.93% | 35.93% | ||||||||||
92
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93
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94
•
150,000,000 shares are designated as common stock
•
20,000,000 shares are designated as preferred stock
Table of Contents
95
•
our acquisition by means of a tender offer
•
our acquisition by means of a proxy contest or otherwise
•
removal of our incumbent officers and directors
Table of Contents
96
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97
Table of Contents
| Approximate additional | ||||||
| number of shares | ||||||
| Days after date | becoming eligible for | |||||
| of this prospectus | future sale | Comment | ||||
|
On Effectiveness
|
5,750,000 | Freely tradable shares sold in offering; shares salable under Rule 144(k) that are not locked up or subject to our rights of repurchase | ||||
|
90 Days
|
0 | Shares eligible on effectiveness; vested options for shares salable under Rule 144 and 701 that are not locked up; additional shares no longer subject to our rights of repurchase | ||||
|
180 Days
|
12,208,983 | Lock-up released; shares and vested options for shares salable under Rule 144, 144(k) and 701; additional shares no longer subject to our rights of repurchase | ||||
|
Thereafter
|
3,684,594 | Restricted securities held for 1 year or less | ||||
98
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99
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100
•
the holders of at least 25% of the then outstanding registrable
securities may require, on two occasions beginning six months
after the date of this prospectus, that we use our best efforts
to register the registrable securities for public resale
•
if we register any common stock, either for our own account or
for the account of other security holders, the holders of
registrable securities are entitled to include their shares of
common stock in the registration, subject to the ability of the
underwriters to limit the number of shares included in the
offering in view of market conditions
•
the holders of at least 25% of the then outstanding registrable
securities may require us to register all or a portion of their
registrable securities on
Form S-3 once in
any twelve-month period when use of that form becomes available
to us, provided that the proposed aggregate selling price is at
least $1,000,000 before underwriting discounts and commissions
Table of Contents
101
•
non-resident alien individual, other than certain former
citizens and residents of the United States subject to tax as
expatriates,
•
foreign corporation or
•
foreign estate or trust.
Table of Contents
102
•
the gain is effectively connected with a trade or business of
the non-U.S. holder in the United States, subject to an
applicable treaty providing otherwise,
•
the company is or has been a U.S. real property holding
corporation, as defined below, at any time within the five-year
period preceding the disposition or the non-U.S. holder’s
holding period, whichever period is shorter, and its common
stock has ceased to be traded on an established securities
market prior to the beginning of the calendar year in which the
sale or disposition occurs.
Table of Contents
| Underwriters | Number of shares | |||
|
J.P. Morgan Securities
Inc.
|
||||
|
Banc of America Securities LLC
|
||||
|
Thomas Weisel Partners LLC
|
||||
| Total | 5,750,000 | |||
103
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104
•
offer, pledge, announce the intention to sell, sell, contract to
sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant
to purchase of or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock
•
enter into any swap or other agreement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock
•
in the case of a corporation, the transfer of shares of our
common stock or any shares convertible into common stock to any
wholly-owned subsidiary of such corporation, provided that in
such case, the transferee will execute an agreement stating that
the transferee is subject to the restrictions described above
•
transactions relating to shares of common stock or other
securities acquired in open market transactions after the
completion of the offering of the shares, provided that no
filing or other public announcement by any party under the
Exchange Act shall be required or made in connection with
subsequent sales of common stock or other securities acquired in
such open market transactions (other than a filing on a
Form 5 made after the expiration of the 180-day period
referred to above)
•
transfers of any shares of common stock or other securities
convertible into common stock made as a gift, to a trust, to
limited partners, limited liability company members or
stockholders of our executive officers, directors, or holders of
substantially all of our stock, or to immediate family members,
provided that the transferee agrees to be bound by the
restrictions described above and if the donor or transferor is a
reporting person subject to Section 16(a) of the Exchange
Act, any gifts or transfers made in accordance with this
paragraph will not require such person to and such person will
not voluntarily, file a report of such transaction on
Form 4 under the Exchange Act.
Table of Contents
| Paid by Vanda | No exercise | Full exercise | ||||||
|
Per Share
|
$ | $ | ||||||
|
Total
|
$ | $ | ||||||
105
Table of Contents
106
•
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities
•
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than
€43,000,000 and
(3) an annual net turnover of more than
€
50,000,000, as shown in its last annual or consolidated
accounts
•
to fewer than 100 natural or legal persons (other than qualified
investors as defined in the EU Prospectus Directive) subject to
obtaining the prior consent of the book-running manger(s) for
any such offer
•
in any other circumstances which do not require the publication
by the Issuer of a prospectus pursuant to Article 3 of the
EU Prospectus Directive
Table of Contents
107
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108
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109
Table of Contents
| Page(s) | |||||
|
Report of Independent Registered
Public Accounting Firm
|
F-2 | ||||
|
Consolidated financial statements
|
|||||
|
Balance sheets
|
F-3 | ||||
|
Statements of operations
|
F-4 | ||||
|
Statements of changes in
stockholders’ equity
|
F-5 | ||||
|
Statements of cash flows
|
F-8 | ||||
|
Notes to financial statements
|
F-9 | ||||
F-1
Table of Contents
F-2
“In our opinion, the accompanying consolidated balance
sheets and the related consolidated statements of operations,
changes in stockholders’ equity and cash flows present
fairly, in all material respects, the financial position of
Vanda Pharmaceuticals Inc. and its subsidiary (a development
stage company) at December 31, 2004 and 2005, and the
results of operations and cash flows for the period from
March 13, 2003 (date of inception) to December 31,
2003 and the years ended December 31, 2004 and 2005 and for
the period from March 13, 2003 (date of inception) to
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). 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,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.”
Table of Contents
| December 31, | ||||||||||||||
| 2005 | ||||||||||||||
| 2004 | Actual | Pro forma | ||||||||||||
| (unaudited) | ||||||||||||||
| Assets | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | 16,259,770 | $ | 21,012,815 | ||||||||||
| Short-term investments | — | 10,141,189 | ||||||||||||
| Prepaid expenses and other current assets | 190,604 | 2,217,960 | ||||||||||||
| Total current assets | 16,450,374 | 33,371,964 | ||||||||||||
| Property and equipment, net | 1,251,867 | 1,110,576 | ||||||||||||
| Deposits | 50,000 | 840,000 | ||||||||||||
| Restricted cash | — | 430,230 | ||||||||||||
| Total assets | $ | 17,752,241 | $ | 35,752,770 | ||||||||||
| Liabilities and stockholders’ equity | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | 718,606 | $ | 2,254,897 | ||||||||||
| Accrued liabilities | 689,428 | 2,528,091 | ||||||||||||
|
Deferred rent and credit on lease
concession, current
|
3,549 | 8,131 | ||||||||||||
| Current portion of long-term debt | 173,929 | 142,461 | ||||||||||||
| Current portion of capital lease | 37,241 | — | ||||||||||||
| Deferred grant revenue | — | 129,950 | ||||||||||||
| Total current liabilities | 1,622,753 | 5,063,530 | ||||||||||||
| Deferred rent and credit on lease concession, less current portion | 30,371 | 24,433 | ||||||||||||
| Long-term debt, less current portion | 142,487 | — | ||||||||||||
| Capital lease, less current portion | 13,043 | — | ||||||||||||
| Total liabilities | 1,808,654 | 5,087,963 | ||||||||||||
| Commitments | ||||||||||||||
| Stockholders’ equity | ||||||||||||||
|
Series A Preferred Stock,
$0.001 par value; 10,000,000 shares authorized, issued
and outstanding at December 31, 2004 and 2005,
respectively; liquidation preference of $10,000,000
|
9,963,541 | 9,963,541 | $ | — | ||||||||||
|
Series B Preferred Stock,
$0.001 par value; 42,276,437 shares authorized;
15,040,654 and 42,276,437 shares issued and outstanding at
December 31, 2004 and 2005, respectively; liquidation
preference of $52,000,018
|
18,345,023 | 51,831,646 | — | |||||||||||
|
Common stock, $0.001 par
value; 50,000,000 and 70,000,000 shares authorized and
3,020 and 98,945 shares issued and outstanding at
December 31, 2004 and 2005, respectively, and
15,893,577 shares issued and outstanding pro forma
(unaudited)
|
3 | 99 | 15,894 | |||||||||||
| Additional paid-in capital | 340,637 | 23,982,981 | 85,762,373 | |||||||||||
| Deferred stock-based compensation | (257,934 | ) | (18,766,443 | ) | (18,766,443 | ) | ||||||||
| Accumulated other comprehensive loss | (2,576 | ) | (17,609 | ) | (17,609 | ) | ||||||||
| Deficit accumulated during the development stage | (12,445,107 | ) | (36,329,408 | ) | (36,329,408 | ) | ||||||||
| Total stockholders’ equity | $ | 15,943,587 | $ | 30,664,807 | $ | 30,664,807 | ||||||||
| Total liabilities and stockholders’ equity | $ | 17,752,241 | $ | 35,752,770 | ||||||||||
F-3
Table of Contents
| Period from | |||||||||||||||||
| March 13, 2003 | Period from | ||||||||||||||||
| (inception) to | Year ended December 31, | March 13, 2003 | |||||||||||||||
| December 31, | (inception) to | ||||||||||||||||
| 2003 | 2004 | 2005 | December 31, 2005 | ||||||||||||||
| Revenues from services | $ | 47,565 | $ | 33,980 | $ | — | $ | 81,545 | |||||||||
| Operating expenses: | |||||||||||||||||
|
Research and development
|
2,010,532 | 7,442,983 | 16,890,615 | 26,344,130 | |||||||||||||
|
General and administrative
|
1,052,659 | 2,119,394 | 7,396,038 | 10,568,091 | |||||||||||||
| Total operating expenses | 3,063,191 | 9,562,377 | 24,286,653 | 36,912,221 | |||||||||||||
| Loss from operations | (3,015,626 | ) | (9,528,397 | ) | (24,286,653 | ) | (36,830,676 | ) | |||||||||
| Other income (expense): | |||||||||||||||||
| Interest income | 52,595 | 100,785 | 435,537 | 588,917 | |||||||||||||
| Interest expense | (8,090 | ) | (41,934 | ) | (25,629 | ) | (75,653 | ) | |||||||||
| Other income | 300 | 209 | 93 | 602 | |||||||||||||
| Total other income | 44,805 | 59,060 | 410,001 | 513,866 | |||||||||||||
| Loss before tax expense | (2,970,821 | ) | (9,469,337 | ) | (23,876,652 | ) | (36,316,810 | ) | |||||||||
| Tax expense | — | 4,949 | 7,649 | 12,598 | |||||||||||||
| Net loss | (2,970,821 | ) | (9,474,286 | ) | (23,884,301 | ) | (36,329,408 | ) | |||||||||
|
Beneficial conversion feature—
deemed dividend to preferred stockholders
|
— | — | (33,486,623 | ) | (33,486,623 | ) | |||||||||||
|
Net loss attributable to common
stockholders
|
$ | (2,970,821 | ) | $ | (9,474,286 | ) | $ | (57,370,924 | ) | $ | (69,816,031 | ) | |||||
|
Basic and diluted net loss per
share applicable to common stockholders
|
$ | (983.72 | ) | $ | (3,137.18 | ) | $ | (3,374.33 | ) | ||||||||
|
Shares used in calculation of basic
and diluted net loss per share applicable to common stockholders
|
3,020 | 3,020 | 17,002 | ||||||||||||||
|
Pro forma net loss per share
applicable to common stockholders (see Note 2) (unaudited)
|
$ | (6.40 | ) | ||||||||||||||
|
Shares used in calculation of pro
forma net loss per share applicable to common stockholders (see
Note 2) (unaudited)
|
8,965,017 | ||||||||||||||||
F-4
Table of Contents
| Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Accumulated | accumulated | ||||||||||||||||||||||||||||||||||||||||||||||
| preferred stock | preferred stock | Common stock | Additional | Deferred | other | during the | |||||||||||||||||||||||||||||||||||||||||||
| paid-in | stock-based | comprehensive | development | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par value | Shares | Par value | Shares | Par value | capital | compensation | loss | stage | loss | Total | ||||||||||||||||||||||||||||||||||||||
|
Balances at March 13, 2003
(Inception)
|
— | $ | — | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||
|
Issuance of Series A Preferred
Stock, net of issuance costs of $36,459
|
10,000,000 | 9,963,541 | — | — | — | — | — | — | — | — | — | 9,963,541 | |||||||||||||||||||||||||||||||||||||
|
Issuance of Class A Common
Stock
|
— | — | — | — | 3,020 | 3 | 3,997 | — | — | — | — | 4,000 | |||||||||||||||||||||||||||||||||||||
|
Issuance of warrants in connection
with capital lease
|
— | — | — | — | — | — | 12,628 | — | — | — | — | 12,628 | |||||||||||||||||||||||||||||||||||||
|
Comprehensive loss:
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | — | — | — | (2,970,821 | ) | (2,970,821 | ) | ||||||||||||||||||||||||||||||||||||
|
Cumulative translation adjustment
|
— | — | — | — | — | — | — | — | (2,315 | ) | — | (2,315 | ) | ||||||||||||||||||||||||||||||||||||
|
Comprehensive loss
|
(2,973,136 | ) | (2,973,136 | ) | |||||||||||||||||||||||||||||||||||||||||||||
|
Balances at December 31,
2003
|
10,000,000 | 9,963,541 | — | — | 3,020 | 3 | 16,625 | — | (2,315 | ) | (2,970,821 | ) | — | 7,007,033 | |||||||||||||||||||||||||||||||||||
|
Issuance of Series B Preferred
Stock, net of issuance costs of $154,982
|
— | — | 15,040,654 | 18,345,023 | — | — | — | — | — | — | — | 18,345,023 | |||||||||||||||||||||||||||||||||||||
|
Issuance of warrants in connection
with consulting services
|
— | — | — | — | — | — | 27,945 | — | — | — | — | 27,945 | |||||||||||||||||||||||||||||||||||||
|
Deferred compensation associated
with stock options grants
|
— | — | — | — | — | — | 281,130 | (281,130 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Amortization of deferred
stock-based compensation
|
— | — | — | — | — | — | — | 23,196 | — | — | — | 23,196 | |||||||||||||||||||||||||||||||||||||
F-5
Table of Contents
| Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Accumulated | accumulated | ||||||||||||||||||||||||||||||||||||||||||||||
| preferred stock | preferred stock | Common stock | Additional | Deferred | other | during the | |||||||||||||||||||||||||||||||||||||||||||
| paid-in | stock-based | comprehensive | development | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par value | Shares | Par value | Shares | Par value | capital | compensation | loss | stage | loss | Total | ||||||||||||||||||||||||||||||||||||||
|
Expense related to accelerated
unvested stock options
|
— | — | — | — | — | — | 14,937 | — | — | — | — | 14,937 | |||||||||||||||||||||||||||||||||||||
|
Comprehensive loss:
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | (9,474,286 | ) | (9,474,286 | ) | ||||||||||||||||||||||||||||||||||||
|
Cumulative translation adjustment
|
— | — | — | — | — | — | — | — | (261 | ) | — | (261 | ) | ||||||||||||||||||||||||||||||||||||
|
Comprehensive loss
|
(9,474,547 | ) | (9,474,547 | ) | |||||||||||||||||||||||||||||||||||||||||||||
|
Balances at December 31,
2004
|
10,000,000 | 9,963,541 | 15,040,654 | 18,345,023 | 3,020 | 3 | 340,637 | (257,934 | ) | (2,576 | ) | (12,445,107 | ) | — | 15,943,587 | ||||||||||||||||||||||||||||||||||
|
Issuance of Series B Preferred
Stock net of issuance costs of $13,391
|
— | — | 27,235,783 | 33,486,623 | — | — | — | — | — | — | — | 33,486,623 | |||||||||||||||||||||||||||||||||||||
|
Issuance of common stock from
exercised stock options
|
— | — | — | — | 95,925 | 96 | 31,658 | — | — | — | — | 31,754 | |||||||||||||||||||||||||||||||||||||
|
Deferred compensation associated
with stock options grants
|
— | — | — | — | — | — | 18,788,385 | (18,788,385 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Deferred compensation associated
with remeasurement of unvested stock grants
|
— | — | — | — | — | — | 1,702,625 | (1,702,625 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
F-6
Table of Contents
| Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Accumulated | accumulated | ||||||||||||||||||||||||||||||||||||||||||||||
| preferred stock | preferred stock | Common stock | Additional | Deferred | other | during the | |||||||||||||||||||||||||||||||||||||||||||
| paid-in | stock-based | comprehensive | development | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par value | Shares | Par value | Shares | Par value | capital | compensation | loss | stage | loss | Total | ||||||||||||||||||||||||||||||||||||||
|
Expense related to remeasurement of
stock options
|
— | — | — | — | — | — | 3,119,676 | — | — | — | — | 3,119,676 | |||||||||||||||||||||||||||||||||||||
|
Amortization of deferred
stock-based compensation
|
— | — | — | — | — | — | — | 1,982,501 | — | — | — | 1,982,501 | |||||||||||||||||||||||||||||||||||||
|
Beneficial conversion feature—
deemed dividend on issuance of Series B Preferred Stock
|
— | — | — | — | — | — | 33,486,623 | — | — | — | — | 33,486,623 | |||||||||||||||||||||||||||||||||||||
|
Beneficial conversion feature—
accretion of beneficial conversion feature for Series B
Preferred Stock
|
— | — | — | — | — | — | (33,486,623 | ) | — | — | — | — | (33,486,623 | ) | |||||||||||||||||||||||||||||||||||
|
Comprehensive loss:
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | — | — | — | (23,884,301 | ) | (23,884,301 | ) | ||||||||||||||||||||||||||||||||||||
|
Cumulative translation adjustment
|
— | — | — | — | — | — | — | — | (17,711 | ) | — | (17,711 | ) | ||||||||||||||||||||||||||||||||||||
|
Unrealized gains on short-term
investments
|
— | — | — | — | — | — | — | — | 2,678 | — | 2,678 | ||||||||||||||||||||||||||||||||||||||
|
Comprehensive loss
|
(23,899,334 | ) | (23,899,334 | ) | |||||||||||||||||||||||||||||||||||||||||||||
|
Balances at December 31,
2005
|
10,000,000 | $ | 9,963,541 | 42,276,437 | $ | 51,831,646 | 98,945 | $ | 99 | $ | 23,982,981 | $ | (18,766,443 | ) | $ | (17,609 | ) | $ | (36,329,408 | ) | — | $ | 30,664,807 | ||||||||||||||||||||||||||
F-7
Table of Contents
| Period from | Period from | ||||||||||||||||||
| March 13, 2003 | March 13, 2003 | ||||||||||||||||||
| (inception) to | Year ended December 31, | (inception) to | |||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||
| 2003 | 2004 | 2005 | 2005 | ||||||||||||||||
| Cash flows from operating activities | |||||||||||||||||||
| Net loss | $ | (2,970,821 | ) | $ | (9,474,286 | ) | $ | (23,884,301 | ) | $ | (36,329,408 | ) | |||||||
|
Adjustments to reconcile net loss
to net cash used in operating activities
|
|||||||||||||||||||
| Depreciation and amortization | 79,891 | 376,709 | 423,828 | 880,428 | |||||||||||||||
| Stock-based compensation | — | 66,078 | 5,102,177 | 5,168,255 | |||||||||||||||
| Accretion of discount on investments | — | — | (42,335 | ) | (42,335 | ) | |||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||||
| Accounts receivable | (28,489 | ) | 28,489 | — | — | ||||||||||||||
| Prepaid expenses and other current assets | (97,044 | ) | (93,024 | ) | (2,027,544 | ) | (2,217,960 | ) | |||||||||||
| Deposits | — | (50,000 | ) | (790,000 | ) | (840,000 | ) | ||||||||||||
| Accounts payable | 458,608 | 415,506 | 1,514,868 | 2,254,897 | |||||||||||||||
| Accrued expenses | 432,474 | 99,335 | 1,860,539 | 2,528,091 | |||||||||||||||
| Deferred grant revenue | — | — | 129,950 | 129,950 | |||||||||||||||
|
Deferred rent and credit on lease
concession
|
17,661 | 16,259 | (1,356 | ) | 32,564 | ||||||||||||||
| Net cash used in operating activities | (2,107,720 | ) | (8,614,934 | ) | (17,714,174 | ) | (28,435,518 | ) | |||||||||||
| Cash flows from investing activities | |||||||||||||||||||
| Purchases of property and equipment | (1,161,921 | ) | (414,531 | ) | (291,978 | ) | (1,868,430 | ) | |||||||||||
| Purchases of short-term investments | — | — | (11,846,176 | ) | (11,846,176 | ) | |||||||||||||
| Maturities of short-term investments | — | — | 1,750,000 | 1,750,000 | |||||||||||||||
| Investments in restricted cash | — | — | (430,230 | ) | (430,230 | ) | |||||||||||||
| Net cash used in investing activities | (1,161,921 | ) | (414,531 | ) | (10,818,384 | ) | (12,394,836 | ) | |||||||||||
| Cash flows from financing activities | |||||||||||||||||||
| Proceeds from borrowings on note payable | 515,147 | — | — | 515,147 | |||||||||||||||
| Principal payments on obligations under capital lease | — | (42,887 | ) | (51,569 | ) | (94,456 | ) | ||||||||||||
| Principal payments on note payable | (45,010 | ) | (156,446 | ) | (172,617 | ) | (374,073 | ) | |||||||||||
|
Proceeds from the issuance of
preferred stock, net of issuance costs
|
9,963,541 | 18,345,023 | 33,486,623 | 61,795,187 | |||||||||||||||
| Proceeds from exercise of stock options | — | — | 31,754 | 31,754 | |||||||||||||||
| Proceeds from issuance of common stock | 4,000 | — | — | 4,000 | |||||||||||||||
| Net cash provided by financing activities | 10,437,678 | 18,145,690 | 33,294,191 | 61,877,559 | |||||||||||||||
| Effect of foreign currency translation | (2,315 | ) | (22,177 | ) | (8,588 | ) | (34,390 | ) | |||||||||||
| Net increase in cash and cash equivalents | 7,165,722 | 9,094,048 | 4,753,045 | 21,012,815 | |||||||||||||||
| Cash and cash equivalents | |||||||||||||||||||
| Beginning of period | — | 7,165,722 | 16,259,770 | — | |||||||||||||||
| End of period | $ | 7,165,722 | $ | 16,259,770 | $ | 21,012,815 | $ | 21,012,815 | |||||||||||
| Supplemental disclosure | |||||||||||||||||||
| Cash payments for interest | $ | 4,221 | $ | 41,354 | $ | 25,043 | $ | 70,618 | |||||||||||
| Supplemental disclosure of noncash financing activities | |||||||||||||||||||
|
Equipment acquired through
obligation under capital lease
|
$ | — | $ | 95,305 | $ | — | $ | 95,305 | |||||||||||
F-8
Table of Contents
F-9
Table of Contents
F-10
Table of Contents
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Fair market | |||||||||||||
| cost | gains | losses | value | |||||||||||||
|
U.S. government agencies
|
$ | 6,054,023 | $ | 847 | $ | — | $ | 6,054,870 | ||||||||
|
U.S. corporate debt
|
4,084,488 | 1,831 | — | 4,086,319 | ||||||||||||
| $ | 10,138,511 | $ | 2,678 | $ | — | $ | 10,141,189 | |||||||||
F-11
Table of Contents
F-12
Table of Contents
F-13
Table of Contents
| Period from | |||||||||||||
| March 13, 2003 | |||||||||||||
| (inception) to | Year ended December 31, | ||||||||||||
| December 31, | |||||||||||||
| 2003 | 2004 | 2005 | |||||||||||
|
Net loss attributable to common
stockholders
|
$ | (2,970,821 | ) | $ | (9,474,286 | ) | $ | (57,370,924 | ) | ||||
|
Add: Stock based employee
compensation expense included in net loss
|
— | 38,133 | 5,102,177 | ||||||||||
|
Less: Stock-based employee
compensation expense determined under SFAS 123
|
(33,160 | ) | (57,954 | ) | (5,167,246 | ) | |||||||
|
Pro forma net loss applicable to
common stockholders
|
$ | (3,003,981 | ) | $ | (9,494,107 | ) | $ | (57,435,993 | ) | ||||
| Net loss per share: | |||||||||||||
|
Basic and diluted, net loss
attributed to common stockholders as reported
|
$ | (983.72 | ) | $ | (3,137.18 | ) | $ | (3,374.33 | ) | ||||
|
Pro forma basic and diluted, net
loss attributed to common stockholders
|
$ | (994.70 | ) | $ | (3,143.74 | ) | $ | (3,378.15 | ) | ||||
F-14
Table of Contents
| Period from | ||||||||||||
| March 13, 2003 | Year ended | |||||||||||
| (inception) to | December 31, | |||||||||||
| December 31, | ||||||||||||
| 2003 | 2004 | 2005 | ||||||||||
| Expected dividend yield | 0% | 0% | 0% | |||||||||
| Expected volatility | 0% | 67% | 67%-68% | |||||||||
| Expected term (years) | 10 | 5 | 5 | |||||||||
| Weighted average risk-free interest rate | 3.65% | 3.42% | 4.00% | |||||||||
| Fair market | ||||||||||||||||||||
| value estimate | ||||||||||||||||||||
| Date of | Number of | Exercise | per common | Intrinsic value | ||||||||||||||||
| Issuance | Type of equity issuance | options granted | price(1) | share | per share | |||||||||||||||
| 06/15/04 | Employee Options | 3,443 | $ | 0.33 | $ | 3.21 | $ | 2.88 | ||||||||||||
| 09/01/04 | Employee Options | 91,668 | 0.33 | 4.07 | 3.74 | |||||||||||||||
| 12/06/04 | Employee Options | 777 | 0.33 | 5.69 | 5.36 | |||||||||||||||
| 02/10/05 | Employee Options | 209,893 | 0.33 | 10.52 | 10.19 | |||||||||||||||
| 04/05/05 | Employee Options | 27,974 | 0.33 | 15.99 | 15.66 | |||||||||||||||
| 08/15/05 | Employee Options | 15,559 | 0.33 | 16.85 | 16.52 | |||||||||||||||
| 09/28/05 | Employee Options | 620,973 | 0.33 | 16.85 | 16.52 | |||||||||||||||
| 10/03/05 | Employee Options | 906 | 0.33 | 17.18 | 16.85 | |||||||||||||||
| 11/14/05 | Employee Options | 83,087 | 0.83 | 17.18 | 16.35 | |||||||||||||||
| 12/29/05 | Employee Options | 358,847 | 4.73 | 17.18 | 12.45 | |||||||||||||||
F-15
Table of Contents
F-16
Table of Contents
| Period from | |||||||||||||
| March 13, 2003 | |||||||||||||
| (inception) to | Year ended December 31, | ||||||||||||
| December 31, | |||||||||||||
| 2003 | 2004 | 2005 | |||||||||||
| Historical: | |||||||||||||
| Numerator: | |||||||||||||
|
Net loss
|
$ | (2,970,821 | ) | $ | (9,474,286 | ) | $ | (23,884,301 | ) | ||||
|
Beneficial conversion feature—
deemed dividend to preferred stockholders
|
— | — | (33,486,623 | ) | |||||||||
|
Net loss attributable to common
stockholders
|
$ | (2,970,821 | ) | $ | (9,474,286 | ) | $ | (57,370,924 | ) | ||||
| Denominator: | |||||||||||||
|
Weighted average common shares
outstanding
|
3,020 | 3,020 | 30,346 | ||||||||||
|
Weighted average unvested common
shares subject to repurchase
|
— | — | (13,344 | ) | |||||||||
|
Denominator for basic and diluted
net loss per share
|
3,020 | 3,020 | 17,002 | ||||||||||
|
Basic and diluted net loss per
share applicable to common stockholders
|
$ | (983.72 | ) | $ | (3,137.18 | ) | $ | (3,374.33 | ) | ||||
|
Historical outstanding
anti-dilutive securities not included in diluted net loss per
share calculation:
|
|||||||||||||
|
Series A and B Preferred
Stock(1)
|
3,021,368 | 7,565,703 | 15,794,632 | ||||||||||
|
Options to purchase common stock
|
236,204 | 314,961 | 1,532,540 | ||||||||||
|
Warrants to purchase common stock
|
13,626 | 50,335 | 50,335 | ||||||||||
| 3,271,198 | 7,930,999 | 17,377,507 | |||||||||||
F-17
Table of Contents
| Year ended | |||||
| December 31, | |||||
| 2005 | |||||
| Pro forma (unaudited): | |||||
| Numerator: | |||||
|
Pro forma net loss attributable to
common stockholders
|
$ | (57,370,924 | ) | ||
| Denominator: | |||||
|
Weighted average common shares
outstanding
|
17,002 | ||||
|
Pro forma adjustments to reflect
assumed weighted average effect on conversion of preferred stock
|
8,948,015 | ||||
|
Pro forma shares used to compute
basic and diluted net loss per share
|
8,965,017 | ||||
| Basic and diluted pro forma net loss per share applicable to common stockholders | $ | (6.40 | ) | ||
F-18
Table of Contents
F-19
Table of Contents
| December 31, | ||||||||
| 2004 | 2005 | |||||||
|
Computer equipment
|
$ | 698,405 | $ | 739,001 | ||||
|
Laboratory equipment
|
681,455 | 730,232 | ||||||
|
Furniture and fixtures
|
29,309 | 101,556 | ||||||
|
Leasehold improvements
|
304,972 | 302,228 | ||||||
|
Construction in progress
|
— | 120,851 | ||||||
| 1,714,141 | 1,993,868 | |||||||
|
Less— accumulated depreciation
and amortization
|
(462,274 | ) | (883,292 | ) | ||||
| $ | 1,251,867 | $ | 1,110,576 | |||||
F-20
Table of Contents
| December 31, | ||||||||
| 2004 | 2005 | |||||||
|
Bonus accrual
|
$ | 284,143 | $ | 530,311 | ||||
|
Accrued professional fees
|
192,977 | 71,000 | ||||||
|
Accrued research and development
expenses
|
172,730 | 1,862,288 | ||||||
|
Employee benefits
|
33,680 | 46,063 | ||||||
|
Other accrued expenses
|
5,898 | 18,429 | ||||||
|
Total accrued expenses
|
$ | 689,428 | $ | 2,528,091 | ||||
|
2006
|
$ | 146,944 | |||
|
Less: Portion representing interest
|
4,483 | ||||
|
Current portion
|
$ | 142,461 | |||
F-21
Table of Contents
|
2006
|
$ | 503,064 | ||
|
2007
|
642,347 | |||
|
2008
|
536,404 | |||
|
2009
|
427,260 | |||
|
2010
|
440,182 | |||
|
Thereafter
|
2,669,569 | |||
| $ | 5,218,826 | |||
F-22
Table of Contents
F-23
Table of Contents
F-24
Table of Contents
F-25
Table of Contents
F-26
(a)
Each share of Series A Preferred Stock shall be convertible
into the number of shares of common stock which results from
dividing the Series A Conversion Price (as defined herein)
per share in effect at the time into the Original Series A
Purchase Price; and
(b)
Each share of Series B Preferred Stock shall be convertible
into the number of shares of common stock which results from
dividing the Series B Conversion Price (as defined herein)
per share in effect at the time into the Original Series B
Purchase Price.
Table of Contents
F-27
(a)
The close of business of the day immediately preceding the
closing of the sale of its common stock in connection with a
Qualified Public Offering (as defined in the Company’s
Second Amended and Restated Certificate of
Incorporation); or
(b)
The consent of the holders of at least a majority of the
outstanding shares of preferred stock voting or consenting
together as a single class and to the exclusion of all other
classes of capital stock of the Company.
Table of Contents
F-28
Table of Contents
F-29
Table of Contents
| Weighted | |||||||||
| average | |||||||||
| exercise | |||||||||
| Number of | price at | ||||||||
| shares | grant date | ||||||||
|
March 13, 2003 (inception)
|
— | $ | — | ||||||
|
Granted
|
236,204 | $ | 0.33 | ||||||
|
Outstanding at December 31,
2003
|
236,204 | 0.33 | |||||||
|
Granted
|
97,398 | 0.33 | |||||||
|
Cancelled or expired
|
(18,641 | ) | 0.33 | ||||||
|
Outstanding at December 31,
2004
|
314,961 | 0.33 | |||||||
|
Granted
|
1,318,753 | 1.52 | |||||||
|
Cancelled or expired
|
(5,249 | ) | 0.33 | ||||||
|
Exercised
|
(95,925 | ) | 0.33 | ||||||
|
Outstanding at December 31,
2005
|
1,532,540 | 1.39 | |||||||
|
Exercisable at December 31,
2005
|
132,413 | 0.33 | |||||||
| Options outstanding | Options exercisable | |||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||
| average | average | average | ||||||||||||||||||
| Number of | exercise | remaining | Number of | exercise | ||||||||||||||||
| underlying | price per | contractual | underlying | price per | ||||||||||||||||
| Exercise price | shares | share | life (years) | shares | share | |||||||||||||||
|
$0.33
|
1,090,606 | $ | 0.33 | 9 | .2 | 132,413 | $ | 0.33 | ||||||||||||
|
$0.83
|
83,087 | 0.83 | 9 | .9 | — | — | ||||||||||||||
|
$4.73
|
358,847 | 4.73 | 10 | .0 | — | — | ||||||||||||||
| 1,532,540 | 132,413 | |||||||||||||||||||
F-30
Table of Contents
| Lender | Consultant | |||||||
|
Expected dividend yield
|
0% | 0% | ||||||
|
Expected volatility
|
67% | 67% | ||||||
|
Expected term (years)
|
8 | 5 | ||||||
|
Risk-free interest rate
|
3.65% | 3.08% | ||||||
| Period from | ||||||||||||
| March 13, 2003 | December 31, | |||||||||||
| (inception) to | ||||||||||||
| December 31, 2003 | 2004 | 2005 | ||||||||||
|
Current federal tax expense
|
$ | — | $ | — | $ | — | ||||||
|
Current state tax expense
|
— | — | — | |||||||||
|
Current foreign expense
|
— | 4,949 | 7,649 | |||||||||
|
Deferred tax expense
|
— | — | — | |||||||||
| — | — | — | ||||||||||
|
Total tax expense
|
$ | — | $ | 4,949 | $ | 7,649 | ||||||
F-31
Table of Contents
| December 31, | |||||||||
| 2004 | 2005 | ||||||||
|
Deferred Tax Asset
(Liability)
|
|||||||||
|
Net operating loss carryforwards
|
$ | 3,863,758 | $ | 8,340,222 | |||||
|
Start-up costs
|
869,656 | 3,717,820 | |||||||
|
Stock-based compensation
|
— | 1,683,454 | |||||||
|
Research and development credit
|
365,134 | 769,019 | |||||||
|
Depreciation and amortization
|
(52,549 | ) | (57,340 | ) | |||||
|
Amortization of warrants
|
26,878 | 12,156 | |||||||
|
Accrued and deferred expenses
|
74,870 | 19,359 | |||||||
|
Net deferred tax assets
|
5,147,747 | 14,484,690 | |||||||
|
Deferred tax asset valuation
allowance
|
(5,147,747 | ) | (14,484,690 | ) | |||||
| $ | — | $ | — | ||||||
| December 31, | ||||||||
| 2004 | 2005 | |||||||
|
Federal tax at statutory rate
|
34.0% | 34.0% | ||||||
|
State taxes
|
4.6% | 4.5% | ||||||
|
Change in valuation allowance
|
(42.5% | ) | (39.1% | ) | ||||
|
Research and development credit
|
4.0% | 1.7% | ||||||
|
Meals, entertainment and other
nondeductable items
|
(0.1% | ) | (1.1% | ) | ||||
|
Effective tax rate
|
0.0% | 0.0% | ||||||
F-32
Table of Contents
F-33
Table of Contents
JPMorgan
Banc of America Securities LLC
Table of Contents
|
SEC registration fee
|
$ | 9,905.52 | ||
|
NASD filing fee
|
9,757.50 | |||
|
Nasdaq National Market listing fee
|
105,000.00 | |||
|
Blue Sky qualification fees and
expenses
|
10,000.00 | |||
|
Printing and engraving expenses
|
250,000.00 | |||
|
Legal fees and expenses
|
1,250,000.00 | |||
|
Accounting fees and expenses
|
500,000.00 | |||
|
Transfer agent and registrar fees
and expenses
|
30,000.00 | |||
|
Miscellaneous
|
200,000.00 | |||
|
Total
|
$ | 2,364,663.02 | ||
II-1
Table of Contents
II-2
Table of Contents
Item 16.
Exhibits and financial statement schedules.
| Exhibit no. | Exhibit index | |||
| 1 | .1* | Form of Underwriting Agreement | ||
| 3 | .1* | Second Restated Certificate of Incorporation of the registrant | ||
| 3 | .2* | Certificate of Amendment of the Second Restated Certificate of Incorporation of the registrant dated March 22, 2005 | ||
| 3 | .3* | Certificate of Amendment of the Second Restated Certificate of Incorporation of the registrant dated December 9, 2005 | ||
| 3 | .4* | Certificate of Correction to the Certificate of Amendment of the Second Restated Certificate of Incorporation of the registrant dated December 9, 2005 | ||
| 3 | .5* | Bylaws of the registrant | ||
II-3
Table of Contents
| Exhibit no. | Exhibit index | |||
| 3 | .6* | Form of Amended and Restated Bylaws to take effect as of the closing of the offering | ||
| 3 | .7* | Certificate of Amendment to the Second Restated Certificate of Incorporation of the registrant to take effect as of the effectiveness of this registration statement | ||
| 3 | .8* | Form of Amended and Restated Certificate of Incorporation of the registrant to take effect as of the closing of the offering | ||
| 4 | .1 | 2004 Securityholder Agreement (as amended) | ||
| 4 | .2* | Class A Common Stock Purchase Warrant dated February 20, 2004 issued to Investment Opportunities I, LLC | ||
| 4 | .3* | Class A Common Stock Purchase Warrant dated October 28, 2003 issued to Oxford Finance Corporation | ||
| 4 | .4* | Specimen certificate representing the common stock of the registrant | ||
| 5 | .1* | Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP | ||
| 10 | .1* | Registrant’s Second Amended and Restated Management Equity Plan | ||
| 10 | .2# | Sublicense Agreement between the registrant and Novartis Pharma AG dated June 4, 2004 (as amended) (relating to iloperidone) | ||
| 10 | .3# | Amended and Restated License, Development and Commercialization Agreement by and between Bristol-Myers Squibb Company and the registrant dated July 24, 2005 (relating to VEC-162) | ||
| 10 | .4# | NDD-094 License Agreement between Novartis Pharma AG, Novartis AG and the registrant dated June 4, 2004 (relating to VSF-173) | ||
| 10 | .5 | [Omitted.] | ||
| 10 | .6 | [Omitted.] | ||
| 10 | .7* | Lease Agreement between the registrant and Red Gate III LLC dated June 25, 2003 (lease of Rockville, MD office space) | ||
| 10 | .8* | Amendment to Lease Agreement between the registrant and Red Gate III LLC dated September 27, 2003 | ||
| 10 | .9* | Lease Agreement between the registrant and MCC3 LLC (by Spaulding and Slye LLC) dated August 4, 2005 (for lease of space beginning January 1, 2006) | ||
| 10 | .10* | Summary Plan Description provided for the registrant’s 401(k) Profit Sharing Plan & Trust | ||
| 10 | .11* | Form of Indemnification Agreement entered into by directors | ||
| 10 | .12* | Employment Agreement for Mihael H. Polymeropoulos dated February 10, 2005 | ||
| 10 | .13* | Employment Agreement for William D. Clark dated February 10, 2005 | ||
| 10 | .14* | Employment Agreement for Steven A. Shallcross dated October 18, 2005 | ||
| 10 | .15* | Employment Agreement for Deepak Phadke dated August 15, 2005 | ||
| 10 | .16* | Employment Agreement for Thomas Copmann dated May 27, 2005 | ||
| 10 | .17* | Form of 2006 Equity Incentive Plan to take effect as of the closing of the offering | ||
| 21 | .1* | List of Subsidiaries | ||
| 23 | .1* | Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (included in Exhibit 5.1) | ||
| 23 | .2* | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | ||
| 23 | .3* | Consent of LEK Consulting | ||
| 24 | .1* | Power of Attorney (included on page II-6) | ||
II-4
Table of Contents
II-5
Table of Contents
Vanda Pharmaceuticals Inc.
By:
/s/ Mihael H.
Polymeropoulos, M.D.
Mihael H. Polymeropoulos, M.D.
Chief Executive Officer
| Name | Title | |||||
| Date | ||||||
|
/s/
Mihael H. Polymeropoulos,
M.D. Mihael H. Polymeropoulos, M.D. |
President and Chief Executive Officer and Director (principal executive officer) | April 7, 2006 | ||||
|
/s/
Steven A. Shallcross Steven A. Shallcross |
Senior Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer) | April 7, 2006 | ||||
|
* Argeris N. Karabelas, Ph.D. |
Director | April 7, 2006 | ||||
|
* Brian K. Halak, Ph.D. |
Director | April 7, 2006 | ||||
|
* Wayne T. Hockmeyer, Ph.D. |
Director | April 7, 2006 | ||||
|
* David Ramsay |
Director | April 7, 2006 | ||||
II-6
Table of Contents
| Name | Title | |||||
| Date | ||||||
|
* James B. Tananbaum, M.D. |
Director | March 28, 2006 | ||||
|
* Richard W. Dugan |
Director | March 28, 2006 | ||||
| *By: |
/s/
Mihael H. Polymeropoulos,
M.D. Mihael H. Polymeropoulos, M.D. Attorney-in-Fact |
|||||
II-7
Table of Contents
| Exhibit no. | Exhibit index | |||
| 1 | .1* | Form of Underwriting Agreement | ||
| 3 | .1* | Second Restated Certificate of Incorporation of the registrant | ||
| 3 | .2* | Certificate of Amendment of the Second Restated Certificate of Incorporation of the registrant dated March 22, 2005 | ||
| 3 | .3* | Certificate of Amendment of the Second Restated Certificate of Incorporation of the registrant dated December 9, 2005 | ||
| 3 | .4* | Certificate of Correction to the Certificate of Amendment of the Second Restated Certificate of Incorporation of the registrant dated December 9, 2005 | ||
| 3 | .5* | Bylaws of the registrant | ||
| 3 | .6* | Form of Amended and Restated Bylaws to take effect as of the closing of the offering | ||
| 3 | .7* | Certificate of Amendment to the Second Restated Certificate of Incorporation of the registrant to take effect as of the effectiveness of this registration statement | ||
| 3 | .8* | Form of Amended and Restated Certificate of Incorporation of the registrant to take effect as of the closing of the offering | ||
| 4 | .1 | 2004 Securityholder Agreement (as amended) | ||
| 4 | .2* | Class A Common Stock Purchase Warrant dated February 20, 2004 issued to Investment Opportunities I, LLC | ||
| 4 | .3* | Class A Common Stock Purchase Warrant dated October 28, 2003 issued to Oxford Finance Corporation | ||
| 4 | .4* | Specimen certificate representing the common stock of the registrant | ||
| 5 | .1* | Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP | ||
| 10 | .1* | Registrant’s Second Amended and Restated Management Equity Plan | ||
| 10 | .2# | Sublicense Agreement between the registrant and Novartis Pharma AG dated June 4, 2004 (as amended) (relating to iloperidone) | ||
| 10 | .3# | Amended and Restated License, Development and Commercialization Agreement by and between Bristol-Myers Squibb Company and the registrant dated July 24, 2005 (relating to VEC-162) | ||
| 10 | .4# | NDD-094 License Agreement between Novartis Pharma AG, Novartis AG and the registrant dated June 4, 2004 (relating to VSF-173) | ||
| 10 | .5 | [Omitted.] | ||
| 10 | .6 | [Omitted.] | ||
| 10 | .7* | Lease Agreement between the registrant and Red Gate III LLC dated June 25, 2003 (lease of Rockville, MD office space) | ||
| 10 | .8* | Amendment to Lease Agreement between the registrant and Red Gate III LLC dated September 27, 2003 | ||
| 10 | .9* | Lease Agreement between the registrant and MCC3 LLC (by Spaulding and Slye LLC) dated August 4, 2005 (for lease of space beginning January 1, 2006) | ||
| 10 | .10* | Summary Plan Description provided for the registrant’s 401(k) Profit Sharing Plan & Trust | ||
| 10 | .11* | Form of Indemnification Agreement entered into by directors | ||
| 10 | .12* | Employment Agreement for Mihael H. Polymeropoulos dated February 10, 2005 | ||
| 10 | .13* | Employment Agreement for William D. Clark dated February 10, 2005 | ||
| 10 | .14* | Employment Agreement for Steven A. Shallcross dated October 18, 2005 | ||
Table of Contents
| Exhibit no. | Exhibit index | |||
| 10 | .15* | Employment Agreement for Deepak Phadke dated August 15, 2005 | ||
| 10 | .16* | Employment Agreement for Thomas Copmann dated May 27, 2005 | ||
| 10 | .17* | Form of 2006 Equity Incentive Plan to take effect as of the closing of the offering | ||
| 21 | .1* | List of Subsidiaries | ||
| 23 | .1* | Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (included in Exhibit 5.1) | ||
| 23 | .2* | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | ||
| 23 | .3* | Consent of LEK Consulting | ||
| 24 | .1* | Power of Attorney (included on page II-6) | ||
EXHIBIT 4.1 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT THIS 2004 SECURITYHOLDER AGREEMENT (the "AGREEMENT") is entered into as of September 28, 2004 among VANDA PHARMACEUTICALS INC., a Delaware corporation (the "COMPANY"), and each of the other parties signatory hereto. RECITALS A. The Company, the Care Capital Securityholder and the EDB Securityholder previously entered into that certain Securityholder Agreement dated as of March 12, 2003 (the "ORIGINAL SECURITYHOLDER AGREEMENT"). B. The Securityholders are purchasing shares of the Company's Series B Preferred Stock pursuant to that certain Series B Preferred Stock Purchase Agreement dated as of September 28, 2004 (the "2004 PURCHASE AGREEMENT"). C. The obligations in the 2004 Purchase Agreement are conditioned upon the execution and delivery of this Agreement. D. The Company and the Securityholders now desire to amend and restate the Original Securityholder Agreement in its entirety. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the parties hereto agree: SECTION 1. CERTAIN DEFINITIONS. 1.1 DEFINITIONS. For the purposes of this Agreement, the following terms have the following meanings: "AFFILIATE", with respect to any Person, means any other Person directly or indirectly controlling, controlled by or under common control with, such Person. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by" or "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "AFFILIATED GROUP", with respect to any Person, means such Person and each Affiliate and Associate of such Person and each other Person with whom such Person is acting "as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of" Shares (within the meaning of Section 13(d)(3) of the 1934 Act, regardless of whether the Company shall at any time be subject to the requirements of the 1934 Act). "ASSOCIATE" has the meaning given such term in Rule 12b-2 under the 1934 Act. "BENEFICIAL OWNER" or "BENEFICIALLY OWN" has the meaning given such term in Rule 13d- 3 under the 1934 Act, and, with respect to any options or rights to acquire any Security, shall be determined without regard to whether any such Security is "in the money."
"BOARD OF DIRECTORS" means the Board of Directors of the Company. "BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which commercial banks are authorized or obligated to be closed in New York City. "CARE CAPITAL SECURITYHOLDER" means Care Capital Investments II, LP, a Delaware limited partnership, and Care Capital Offshore Investments II, LP, a Cayman Islands exempted limited partnership. "CAUSE" means, with respect to any individual, (i) any willful violation of any federal, state, foreign or other law or regulation applicable to the business or affairs of the Company or any of its subsidiaries or Affiliates, or the commission of any felony or other crime involving moral turpitude, or any willful perpetration of a common law fraud; or (ii) any other misconduct that is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or any of its subsidiaries or Affiliates. "CERTIFICATE" means the Certificate of Incorporation of the Company, as amended from time to time. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMISSION" means the Securities and Exchange Commission, and any successor commission or agency having similar powers. "COMMON SHARE" means any share of Common Stock. "COMMON STOCK" means the Common Stock, par value $.01 per share, of the Company. "COMPANY" means Vanda Pharmaceuticals Inc., a Delaware corporation, and any successor thereto, whether by merger or otherwise. "EDB SECURITYHOLDER" means BioMedical Sciences Investment Fund Pte Ltd. "ENCUMBRANCE" means any lien, security interest, pledge, claim, option, right of first refusal, marital right or other encumbrance with respect to any Share. "IPO" means the initial Public Offering of Shares after the date hereof. "LAW" means any federal, state, local or foreign statute, law, ordinance, regulation, rule, code, order, other requirement or rule of law. "MEDI GROUP" shall mean (i) MEDI Ventures, (ii) MedImmune, and (iii) any successors or permitted assignees of any of the foregoing. "MEDI VENTURES" shall mean MedImmune Ventures, Inc., a Delaware corporation, including any successor thereto or any permitted assignee of the interest, in whole or in part, of MEDI Ventures under this Agreement. "MEDIMMUNE" shall mean MedImmune, Inc., a Delaware corporation, including any of its successors or permitted assigns. 2
"MEP" means the Management Equity Plan of the Company, as amended, from time to time. "1933 ACT" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "1934 ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "OUTSTANDING," with respect to any Shares, means, as of any date of determination, all Shares that have been issued on or prior to such date, other than Shares repurchased or otherwise reacquired by the Company, or any controlled Affiliate thereof, on or prior to such date. "PARTICIPANT" has the meaning assigned in the MEP. "PERMITTED TRANSFEREE" means: (a) any Securityholder's Affiliate (including, without limitation, in the case of MEDI Ventures, any member of the MEDI Group); (b) in the case of any Securityholder who is a natural person, (i) the spouse, parents and lineal descendants (in each case, whether natural or adopted) of such Securityholder, (ii) a Person to whom Shares are transferred by such Securityholder by will or the laws of descent and distribution, or (iii) a trust administered and controlled by such Securityholder that is established for the exclusive benefit of such Securityholder or his or her Permitted Transferees; (c) the Company or any subsidiary thereof; (d) in the case of any Securityholder which is a grantor trust, its grantor; or (e) any Person with respect to which the Board of Directors shall have adopted a resolution by a vote of 66-2/3% of its members stating that the Board of Directors has no objection if a Sale of Shares is made to such Person. "PERSON" means an individual, a partnership, a joint venture, a corporation, an association, a trust, an individual retirement account or any other entity or organization, including a government or any department or agency thereof. "PREFERRED SECURITYHOLDER" means each Securityholder that owns shares of Preferred Stock. "PREFERRED SECURITYHOLDER RESTRICTED PERSON" means any Preferred Securityholder or any Affiliate thereof, or the general partner, managing partner, managing member or investment manager of any thereof, or any officer, director or private equity professional thereof. "PREFERRED SHARE" means any share of Preferred Stock. "PREFERRED STOCK" means any of the Company's Series A Preferred Stock or Series B Preferred Stock. "PUBLIC COMPANY" means a company as to which the aggregate number of Common Shares that have been sold in Public Offerings shall equal not less than 25% of the Common Shares then outstanding. "PUBLIC OFFERING" means an underwritten public offering of equity securities of the Company pursuant to an effective registration statement under the 1933 Act. 3
"REGISTRABLE SHARES" means (a) Common Shares issued pursuant to the Care Capital Securityholder and the EDB Securityholder pursuant to the 2003 Stock Subscription Agreements; (b) Common Shares issued upon the conversion of Preferred Shares; (c) any other Common Shares issued to a Securityholder after the date hereof, whether or not upon conversion of any Preferred Share, so long as the Board of Directors shall have determined prior to such issuance that such Common Shares shall be "Registrable Shares"; and (d) any Shares issued or issuable in respect of Shares referred to in clauses (a), (b) or (c) above by way of a stock dividend or a stock split or in connection with a combination or subdivision of shares, reclassification, recapitalization, merger, consolidation or other reorganization of the Company. As to any particular Registrable Shares that have been issued, such securities shall cease to be Registrable Shares when (i) a registration statement with respect to the sale of such securities shall have become effective under the 1933 Act and such securities shall have been disposed of under such registration statement, (ii) they shall have been distributed to the public pursuant to Rule 144, (iii) they shall have been otherwise transferred or disposed of, and new certificates, in the case of certificated shares, therefor not bearing a legend to the effect set forth in the first paragraph of the form of legend required by Section 4.2(a) restricting further transfer shall have been delivered by the Company, and subsequent transfer or disposition of them shall not require their registration or qualification under the 1933 Act or any similar state law then in force or (iv) they shall have ceased to be outstanding. "REGISTRATION EXPENSES" means all out-of-pocket expenses incident to the Company's performance of or compliance with Section 5, including, without limitation, all registration and filing fees (including filing fees with respect to the National Association of Securities Dealers, Inc.), all fees and expenses of complying with state securities or "blue sky" laws (including reasonable fees and disbursements of underwriters' counsel in connection with any "blue sky" memorandum or survey), all printing expenses, all listing fees, all registrars' and transfer agents' fees, all "road show" expenses of the Company and the underwriters, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, the reasonable fees and disbursements of one outside counsel retained by the holders of Registrable Shares being registered (which counsel shall be satisfactory to the holders of a majority of the shares of Registrable Shares being registered), but excluding underwriting discounts and commissions and applicable transfer taxes, if any, which shall be borne by the sellers of the Registrable Shares being registered in all cases. "RESTRICTED SHARES" means all Shares other than (a) Shares that have been registered under a registration statement pursuant to the 1933 Act, (b) Shares with respect to which a Sale has been made in reliance on and in accordance with Rule 144 or other applicable exemption from registration under the 1933 Act or (c) Shares with respect to which the holder thereof shall have delivered to the Company either (i) an opinion, in form and substance satisfactory to the Company, of counsel, who shall be satisfactory to the Company, or (ii) a "no action" letter from the Commission, to the effect that subsequent transfers of such Shares may be effected without registration under the 1933 Act. "RESTRICTED TRANSFEREE" means any Person described in the most recent list, if any, of Persons (which list will be entitled "LIST OF RESTRICTED TRANSFEREES") that shall have been approved by the Board of Directors and delivered by the Company to a Prospective Seller (as defined for purposes of Section 4.4) not later than ten Business Days after receipt by each Other Stockholder (as therein defined) and the Company of an Offer Notice (as therein defined). "RULE 144" means Rule 144 (or any successor provision) under the 1933 Act. 4
"SALE" means (including with correlative meanings, the terms "SELL" or "SOLD") any sale, assignment, transfer, distribution (whether by a partnership to any of its partners or otherwise) or other disposition of Shares or of a participation therein. "SECURITYHOLDER" means each Person (other than the Company) holding Shares that is a party to this Agreement, so long as such Person shall beneficially own any Shares (whether or not any such Person owns any Shares on the date hereof). "SERIES A PREFERRED STOCK" means Series A Preferred Stock, par value $.01 per share, of the Company. "SERIES B PREFERRED STOCK" means Series B Preferred Stock, par value $.01 per share, of the Company. "SERIES B PREFERRED DIRECTOR" means the three members of the Board of Directors designated by holders of the outstanding shares of Series B Preferred Stock, voting together as a class and to the exclusion of all other classes of capital stock of the Company. "SHARE" means any share of Common Stock or Preferred Stock. "THIRD PARTY" means, with respect to any Securityholder, any other Person, other than the Company and its subsidiaries or any Affiliate of such Securityholder. SECTION 2. CERTAIN GOVERNANCE MATTERS 2.1 Board of Directors Meetings; Director Compensation. The Company agrees to use its best efforts to ensure that each committee of the Board of Directors shall include at least one designee of the Series B Preferred Directors. The Company agrees that the Board of Directors shall meet at least quarterly, unless otherwise agreed by the Board of Directors. In the event that any non-employee director receives any compensation for serving on the Board of Directors, all non-employee directors shall be entitled to receive compensation therefor at the same rate and on the same terms. The Company shall reimburse the non-employee directors for their customary and reasonable expenses incurred in attending meetings of the Board of Directors (or meetings of committees thereof) in accordance with the Company's policy on reimbursement of such expenses. 2.2 Insurance. The Company shall maintain a directors' and officers' liability insurance policy upon such terms as may be determined by the Board of Directors. 2.3 Employee Stock Options. With respect to any Shares issued or options or rights granted to employees and consultants after the date hereof, unless otherwise approved by the Board of Directors, the Company shall cause each employee and consultant of the Company to enter into an agreement providing for vesting of such Shares or options or rights in accordance with the MEP, as in effect on the date hereof. No Shares or options or rights shall vest in the 12 months following the date of commencement of the employee's or consultant's services in the case of new hires, or the date of issuance or grant in the case of subsequent stock or option grants. Immediately after the Initial Closing (as such term is defined in the Purchase Agreement), the Company shall reserve an additional 3,337,114 Shares for issuance under the MEP. 2.4 Qualified Small Business Stock. The Company agrees to use its Best Efforts (as defined below) to cause its capital stock to be characterized as "qualified small business stock" as defined in Section 1202(c) of the Code ("QUALIFIED SMALL BUSINESS STOCK"), unless the Board of Directors 5
determines that such a characterization is not in the best interests of the Company. "Best efforts" shall mean only that the Company: (i) complies with any applicable filing or reporting requirements imposed by the Code on issuers of Qualified Small Business Stock; (ii) executes and delivers to each Securityholder, from time to time, such forms, documents, schedules and other instruments as may be reasonably requested thereby to cause the Securityholder's Shares of the Company to be characterized as Qualified Small Business Stock; and (iii) submits to the Securityholders and to the Internal Revenue Service any reports that may be required under Section 1202(d)(l)(C) of the Code and any related Treasury Regulations. The Company further agrees that, within 10 days after any Securityholder has delivered to the Company a written request therefor, the Company shall deliver to such Securityholder a written statement informing the Securityholder whether, in the Company's good-faith judgment after a reasonable investigation, such Securityholder's interest in the Company constitutes "qualified small business stock" as defined in Section 1202(c) of the Code, or would constitute "qualified small business stock," if determination of whether stock constitutes "qualified small business stock" were made by taking into account the modifications set forth in Section 1045(b)(4) of the Code. The Company's obligation to furnish a written statement pursuant to this Section 2.4 shall continue notwithstanding the fact that a class of the Company's stock may be traded on an established securities market. 2.5 Financial Statements and Reports to Stockholders; Budget. The Company agrees to deliver to each Preferred Securityholder: (a) as soon as practicable after the end of each month, and in any event within 30 days (45 days in the case of the month ending each fiscal quarter) thereafter, consolidated balance sheets of the Company and its subsidiaries as of the end of each such month and consolidated statements of income and cash flow for such month and for the current fiscal year to date and which shall show an analysis of variances from the budget and the prior month (with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made); (b) as soon as practicable after the end of each fiscal quarter of the Company, and in any event within 45 days thereafter, unaudited financial statements of the Company on a quarterly basis prepared in accordance with generally accepted accounting principles and fairly reflecting the fiscal affairs of the Company for such quarterly period and analyzing variances from the budget and the prior fiscal quarter (with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made); (c) as soon as practicable after the end of each fiscal year of the Company, and in any event within 120 days thereafter, an audited consolidated balance sheet of the Company as of the end of such year and audited consolidated statements of income, stockholders' equity and cash flows for such year, which year-end financial reports shall be (i) in reasonable detail, (ii) prepared in accordance with generally accepted accounting principles, and (iii) accompanied by the opinion of independent public accountants of recognized standing selected by the Company; and (d) within 30 days prior to the end of each fiscal year, an operating budget and plan respecting the next fiscal year that will be subject to the approval of the Board of Directors. 2.6 Right of First Refusal, Co-Sale and Drag-Along Provisions. Following the Initial Closing, the Company shall require all purchasers (other than purchasers under the 2004 Purchase Agreement) from the Company of shares of Common Stock who, following such purchase, shall hold greater than 1 % of Common Stock (calculated on a fully-diluted basis), to agree to the terms and conditions set forth in the attached Exhibit 2.6. 6
2.7 Inspection. The Company shall permit each Preferred Securityholder, at such Securityholder's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by each such Securityholder; provided, however, that the Company shall not be obligated to provide access (i) to a competitor of the Company, any information which it reasonably considers to be a trade secret or confidential information; or (ii) to MEDI Ventures, any trade secret or confidential information if the Board of Directors determines in good faith that it would be contrary the Company's best interests to share such information with MEDI Ventures. The rights of a Preferred Securityholder under this Section 2.7 may not be assigned as part of such Securityholder's sale of any of the Registrable Securities except with the consent of the Company, which consent shall not be unreasonably withheld; provided, however, that notwithstanding the foregoing, (i) MEDI Ventures may assign these rights to any member of the MEDI Group and (ii) any Securityholder which is a grantor trust may transfer its rights to its grantor. 2.8 Employee Confidentiality Agreement. The Company shall require that each employee and consultant hired or engaged by the Company following the date hereof signs an employee confidentiality agreement, substantially in the form attached hereto as Exhibit 2.8 (unless such agreement shall be modified by the Company upon the approval of the Board of Directors (including a majority of the Series B Directors)). Further, within 15 days of the Initial Closing, the Company shall require that each of its current employees and consultants signs such an employee confidentiality agreement, substantially in the form attached hereto as Exhibit 2.8. 2.9 Securityholder Matters. (a) This Agreement shall not impose any fiduciary duty on any Securityholder or its Affiliates in any such Securityholder's capacity as a Securityholder. To the maximum extent permitted by Law, each Securityholder hereby waives all fiduciary duties that, absent such waiver, may be implied by Law, and, in doing so, recognizes, acknowledges and agrees that its duties and obligations to each other Securityholder and to the Company are only as expressly set forth herein. (b) Each Securityholder acknowledges that the other Securityholders and their Affiliates may own interests in and/or manage other businesses, including businesses that may compete with the Company or the other Securityholders. Each Securityholder and its Affiliates, and their respective officers, directors, Securityholders, partners, members, agents and employees, and each member of the Board of Directors (or observer thereon) designated by such Securityholder (collectively, a "CORPORATE OPPORTUNITIES GROUP"), shall not be prohibited or restricted from engaging or investing in, independently or with others, any business opportunity of any type or description, including, without limitation, those business opportunities that might be the same or similar to the Company's business. None of the Company, any Securityholder or such Securityholder's Corporate Opportunities Group shall have any right in or to such other business opportunities of any other Securityholder or such other Securityholder's Corporate Opportunities Group or to the income or proceeds derived therefrom. No Securityholder or its Corporate Opportunities Group shall be obligated to present any business opportunity to the Company or any other Securityholder or such other Securityholder's Corporate Opportunities Group, even if the opportunity is of the character that, if presented to the Company, could be undertaken by the Company or, if presented to any other Securityholder or other Securityholder Corporate Opportunities Group, could be undertaken by such Persons. Each Securityholder and its Corporate Opportunities Group shall have the right to hold any such business opportunity for its own account or to recommend such opportunity to Persons other than the Company, any other Securityholder or any Person in such other Securityholder's Corporate Opportunities Group. 7
(c) Notwithstanding the foregoing, nothing in this Section 2.9 shall relieve, limit, alter or otherwise change the fiduciary duty owed to the Company by any officer, director or stockholder who is not a Securityholder. SECTION 3. PREEMPTIVE RIGHTS 3.1 Offer to Sell. Except in the case of Excluded Securities, the Company shall not issue, sell or exchange, or agree to issue, sell or exchange (i) any Common Shares, (ii) any Preferred Shares of the Company that by their terms are convertible into or exchangeable for Common Shares, or (iii) any option, warrant or other right to subscribe for, purchase or otherwise acquire any equity security of the Company specified in the foregoing clause (i) or (ii), in each such case for the purpose of financing the business of the Company (an "EQUITY FINANCING"), unless in each case the Company shall have first offered to sell to the Securityholders (for purposes of this Section 3, each an "OFFEREE" and, together, the "OFFEREES") such Offeree's Section 3 Proportionate Percentage of such securities (for purposes of this Section 3, the "OFFERED SECURITIES"), at a price and on such other material terms and conditions as are generally applicable to such Equity Financing and which shall have been specified by the Company in writing and delivered to each Offeree (for purposes of this Section 3, the "OFFER"). The Offer shall by its terms remain open and irrevocable for a period of 20 Business Days from the date it is delivered by the Company to the Offerees. For purposes of this Section 3, the "SECTION 3 PROPORTIONATE PERCENTAGE" means, as of any date of determination, the percentage figure equal to the ratio between the number of Common Shares beneficially owned by an Offeree of the Company and the aggregate number of Common Shares outstanding (and issuable upon the exercise of all convertible securities outstanding). 3.2 Acceptance of Offer. Each Offeree shall have the right and option, for a period of 20 Business Days after delivery by the Company of the Offer, to accept any or all its Offered Securities on the terms stated in the Offer. Acceptance shall be made by delivering, within the 20 Business Day period of the Offer, a written notice (for purposes of this Section 3, a "NOTICE OF ACCEPTANCE") to the Company, which notice shall set forth the portion of the Offered Securities that such Offeree elects to purchase. Such Offer, or any portion thereof, may be irrevocably rejected at any time within such 20 Business Day period by written notice to the Company by the Offeror. 3.3 Overallotment Securities. If any Offeree fails to properly accept all of its Offered Securities, then such unaccepted Offered Securities shall become the "OVERALLOTMENT SECURITIES." Each Offeree that properly accepts all of its Offered Securities (a "FULLY-EXERCISING OFFEREE") shall have the right, at the time it accepts and for a period of 10 days thereafter (collectively, the "OVERALLOTMENT PERIODS"), to purchase a portion of the Overallotment Securities on a pro rata basis according to such Fully-Exercising Offeree's Section 3 Proportionate Percentage. 3.4 Remaining Securities. Upon expiration of the Overallotment Periods, the Company shall have 90 days to sell all or any part of the remaining Overallotment Securities (the "REMAINING SECURITIES") to any other Person or Persons, upon terms and conditions in all material respects, including, without limitation, price, which are not materially more favorable, in the aggregate, to such other Person or Persons and not materially less favorable to the Company than those set forth in the Offer. Upon the closing of the sale to such other Person or Persons of all the Remaining Securities, which closing shall include full payment to the Company, (i) the Offerees shall purchase from the Company, and the Company shall sell to the Offerees, the Offered Securities with respect to which Notices of Acceptance were delivered to the Company by the Offerees for the price and at the terms specified in the Offer, and (ii) the Fully-Exercising Offerees shall purchase from the Company, and the Company shall sell to the Fully-Exercising Offerees, the Overallotment Securities. 8
3.5 Excluded Securities. The rights of the Offerees under this Section 3 shall not apply to the following securities (the "EXCLUDED SECURITIES"): (a) securities issued in connection with a Public Offering or securities issued in a Rule 144A offering; (b) Common Shares issued, or stock options granted, or Common Shares issuable upon exercise of stock options granted, pursuant to the MEP; (c) securities issued as a stock dividend or upon any stock split or other subdivision or combination of Shares; (d) the issuance of any Common Shares upon the exercise, conversion or exchange of any option, warrant, convertible or exchangeable security or other right to subscribe for, purchase or otherwise acquire any security of the Company; (e) securities issued (i) in connection with any acquisition of the stock, assets or business of a Person, or (ii) in respect of the initiation of a joint venture or strategic alliance with another Person, in each case, which has been approved by the Board of Directors; and (f) any securities offered or sold after an IPO. 3.4 Board of Directors Determination. The Board of Directors shall be entitled to make any determination required or permitted to be made under this Section 3, including any determination of compliance with the provisions hereof by any Person, and any such determination shall be final and binding on the Company and all stockholders. SECTION 4. RESTRICTIONS ON TRANSFER. 4.1 General Restriction. Each Securityholder agrees that it will not, directly or indirectly, offer, sell, assign, transfer, grant or sell a participation in, pledge or otherwise dispose of any Shares (or solicit any offers to buy or otherwise acquire, or take a pledge of, any Shares) in any manner that would conflict with or violate the 1933 Act or this Agreement. 4.2 Legends. (a) To the extent required by, or advisable to comply with, the 1933 Act or other applicable law, the Company shall affix to each certificate evidencing outstanding Shares that is issued to any Securityholder a legend in substantially the following form: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER UNLESS SUCH TRANSFER IS MADE IN CONNECTION WITH AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH ACT DOES NOT APPLY. THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN A SECURITYHOLDER AGREEMENT DATED AS OF SEPTEMBER 28, 2004, A COPY OF WHICH IS ON FILE AT 9
THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER. NO REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER UNLESS AND UNTIL SUCH RESTRICTIONS SHALL HAVE BEEN COMPLIED WITH." (b) In the event that any Shares shall cease to be Restricted Shares, the Company shall, upon the written request of the holder thereof, issue to such holder a new certificate evidencing such Shares without the first paragraph of the legend required by Section 4.2(a) endorsed thereon. In the event that any Shares shall cease to be subject to the restrictions on transfer set forth in this Agreement, the Company shall, upon the written request of the holder thereof, issue to such holder a new certificate evidencing such Shares without the second paragraph of the legend required by Section 4.2(a). 4.3 Certain Restrictions on Transfer. Each Securityholder agrees that it will not, directly or indirectly, make any Sale or create, incur or assume any consensual Encumbrance with respect to any Shares held by such Securityholder, other than: (a) any Sale that is made in compliance with the procedures, and subject to the limitations, set forth in Section 4.4; (b) any Sale that is made in compliance with the procedures, and subject to the limitations, set forth in Section 4.5; (c) any Sale pursuant to a Public Offering in accordance with Section 5; or (d) any Sale to a Permitted Transferee. Notwithstanding the foregoing, except as otherwise expressly provided herein, all Sales permitted by the foregoing clauses (a) through (d) shall be subject to, and shall not be made other than in compliance with, the provisions of Sections 4.1, 4.2, 4.6 and 4.7. 4.4 Right of First Refusal. (a) If any Securityholder receives from or otherwise negotiates with a Third Party a bona fide financed offer to purchase (for purposes of Sections 4.4 and 4.5, an "OFFER") any of the Shares owned or held by such Securityholder, and such Securityholder intends to pursue a sale of such Shares to such Third Party, such Securityholder (for purposes of Sections 4.4 and 4.5, the "PROSPECTIVE SELLER") shall provide the Company and each Securityholder that owns Shares (for purposes of Sections 4.4 and 4.5, the "OTHER SECURITYHOLDERS") written notice of such Offer (for purposes of Sections 4.4 and 4.5, an "OFFER NOTICE"). The Offer Notice shall identify the Third Party making the Offer, the number of Shares with respect to which the Prospective Seller has such an Offer (for purposes of Sections 4.4 and 4.5, the "OFFERED SHARES"), the price per Share at which a sale is proposed to be made (for purposes of Sections 4.4 and 4.5, the "OFFER PRICE"), the form of consideration to be paid and all the other material terms and conditions of the Offer. (b) The receipt of an Offer Notice by each Other Securityholder and the Company from a Prospective Seller shall constitute an offer by such Prospective Seller to sell to each Other Securityholder (other than the Prospective Seller and its Affiliates) and the Company the Offered Shares at the Offer Price in cash (in an amount equal to the cash consideration specified in such Offer Notice or, if such consideration is not cash, an amount equal to the fair market value of such noncash consideration as determined in good faith by the Board of Directors). Such offer shall be irrevocable for 20 Business Days after receipt of such Offer Notice (for purposes of Sections 4.4 and 4.5, the "NOTICE PERIOD") by each such Other Securityholder and the Company. During the Notice Period, each such Other Securityholder and the Company shall, subject to the priorities set forth in the next succeeding paragraph, have the right to accept such offer as to all or a portion of the Offered Shares by giving a written notice of acceptance (for purposes of this Section 4.4, the "NOTICE OF ACCEPTANCE") to the Prospective Seller prior to the expiration of the Notice Period (for the purposes of this Section 4.4, any such Other Securityholder or the Company so accepting such offer, an "ACCEPTING PARTY"). In the event that within five Business Days prior to the expiration of the Notice Period, the Prospective Seller shall not have received Notices of Acceptance for all the Offered Shares, the Prospective Seller shall notify each such Other Securityholder 10
of such fact and shall provide each thereof an opportunity to submit an additional Notice of Acceptance of any such Offered Shares. Each such Other Securityholder and the Company shall be entitled to accept such offer from the Prospective Seller in the following order of priority: First, the Company shall be entitled to accept such offer for any or all of the Offered Shares; second, if the Company shall not have accepted such offer for all the Offered Shares, each such Other Securityholder shall be entitled to accept such offer for not more than the portion of the remaining Offered Shares determined on a pro rata basis based on the ratio of the number of Common Shares then beneficially owned by such Other Securityholder to the number of Common Shares then beneficially owned by all such Other Securityholders; and third, if one or more such Other Securityholders and the Company have not accepted such offer for all the Offered Shares, each such Other Securityholder shall then be entitled to accept such offer for not more than the portion of the remaining Offered Shares determined on a pro rata basis based on the ratio of (i) the number of Offered Shares specified in such Other Securityholder's Notice of Acceptance in respect of which such Other Securityholder shall not be entitled to accept the Prospective Seller's offer as a result of the application of clause second above to (ii) the number of Offered Shares specified in all such Other Securityholders' Notices of Acceptance in respect of which such Other Securityholders shall not be entitled to accept the Prospective Seller's offer as a result of the application of clause second above (it being understood that each such Other Securityholder shall be entitled to indicate its interest in accepting more than its pro rata share of the remaining Offered Shares and to accept the Prospective Seller's offer with respect to such additional Offered Shares if all the Offered Shares are not otherwise accepted pursuant to clause first, second and third). If the Company or any such Other Securityholder so accepts the Prospective Seller's offer, such Person will purchase for cash from the Prospective Seller, and the Prospective Seller will sell to such Accepting Party, such number of Offered Shares as to which such Accepting Party shall have accepted the Prospective Seller's offer. The price per Share to be paid by such Accepting Party shall be the Offer Price specified in the Offer Notice. The Notice of Acceptance shall specify (i) such Accepting Party's acceptance of the Prospective Seller's offer and (ii) the number of Offered Shares to be purchased by such Accepting Party. (c) The consummation of any such purchase by and sale to any Accepting Party shall take place on such date, not later than 30 Business Days after receipt of the Notice of Acceptance from such Accepting Party by the Prospective Seller, as such Accepting Party and the Prospective Seller shall select. Upon the consummation of such purchase and sale, the Prospective Seller shall (i) deliver to the Accepting Party certificates (in the case of certificated shares) evidencing the Offered Shares purchased and sold duly endorsed in blank or accompanied by written instruments of transfer in form satisfactory to such Accepting Party duly executed by the Prospective Seller, or an instruction (in the case of uncertificated shares) to register such Offered Shares purchased and sold in a manner satisfactory to the Accepting Party, and (ii) shall assign all its rights under this Agreement with respect to the Offered Shares purchased and sold pursuant to an instrument of assignment reasonably satisfactory to such Accepting Party. (d) In the event that (i) each such Other Securityholder and the Company shall have received an Offer Notice from a Prospective Seller but the Prospective Seller shall not have received from the Company and one or more Other Securityholders Notices of Acceptance as to all the Offered Shares prior to the expiration of the Notice Period or (ii) an Accepting Party shall have given a Notice of Acceptance to the Prospective Seller but shall have failed to consummate, other than as a result of the fault of the Prospective Seller, a purchase of the Offered Shares with respect to which such Notice of Acceptance was given within 45 days after receipt of the Notice of Acceptance by the Prospective Seller, such Prospective Seller shall have the right to reject any or all Notices of Acceptance theretofore received from the Other Securityholders and the Company, and nothing in this Section 4.4 shall limit the right of the Prospective Seller to make a sale of the Offered Shares so long as all the Offered Shares that are sold 11
or otherwise disposed of by the Prospective Seller (which number of Offered Shares shall be not less than the number of Offered Shares specified in such Offer Notice) are sold for the consideration specified in such Offer Notice (A) within 60 days after the date of receipt of such Offer Notice by each such Other Securityholder and the Company, (B) at an amount not less than the Offer Price included in such Offer Notice and (C) to the Third Party making the Offer (so long as none of such Third Parties is a Restricted Transferee). (e) In the event that each such Other Securityholder and the Company shall have received an Offer Notice from a Prospective Seller but shall not have given a Notice of Acceptance for all the Offered Shares to the Prospective Seller prior to the expiration of the Notice Period following receipt of such Offer Notice and such Prospective Seller shall not have sold the remaining Offered Shares before the expiration of the 60 day period in accordance with paragraph (d) above, then such Prospective Seller shall not give another Offer Notice for a period of 90 days from the last day of such 60 day period. (f) Anything in this Section 4.4 or in Section 4.3 to the contrary notwithstanding, the provisions of this Section 4.4 will not be applicable to any Sale or Encumbrance described in clauses (b) through (e) of Section 4.3. 4.5 Right to Participate in Certain Dispositions. (a) So long as any Securityholder (and its Affiliates) shall beneficially own, in the aggregate, at least 10% of the Common Shares outstanding or issuable upon the exercise or conversion of any outstanding options or other rights to acquire Common Shares, no such Securityholder shall in any transaction or series of related transactions, directly or indirectly, sell or otherwise dispose of for value any Shares held by it to any Third Party or Parties, unless the terms and conditions of such sale or other disposition shall include an offer to include, at the option of each of the Other Securityholders, in such sale or other disposition to the Third Party or Third Parties, such Other Securityholder's Pro Rata Portion (as hereinafter defined) of the Offered Shares on the terms set forth in this Section 4.5. (b) If, so long as any Securityholder (and its Affiliates) shall beneficially own, in the aggregate, at least 10% of the Common Shares outstanding or issuable upon the exercise or conversion of any outstanding options to acquire Common Share, any such Securityholder receives from a Third Party or Parties an Offer to acquire the Offered Shares, thus becoming a Prospective Seller in accordance with the definition of Section 4.4, and such Prospective Seller intends to pursue a sale of such Shares to such Third Party or Parties, the Prospective Seller shall send the Offer Notice to each of the Other Securityholders not later than the 20th Business Day prior to the consummation of the sale or other disposition contemplated by the Offer. The Offer Notice shall identify the Offered Shares, the price offered for such Offered Shares, all other material terms and conditions of the Offer and, in the case of an Offer in which the consideration payable for Shares consists in whole or in part of consideration other than cash, such information relating to such other consideration as the Company may reasonably determine. During the Notice Period, each Other Securityholder shall have the right and option to notify the Prospective Seller of such Other Securityholder's interest in selling or otherwise disposing of up to its Pro Rata Portion of the Offered Shares pursuant to the Offer. Each Other Securityholder desiring to exercise such option shall, prior to the expiration of the Notice Period, provide the Prospective Seller with a written notice specifying the number of Shares as to which such Other Securityholder has an interest in selling or otherwise disposing of pursuant to the Offer (for purposes of this Section 4.5, a "NOTICE OF INTEREST"), and shall deliver to the Prospective Seller (A) the certificate or certificates (in the case of certificated shares) evidencing the Shares to be sold or otherwise disposed of pursuant to such Offer by such Other Securityholder duly endorsed in blank or accompanied by written instruments of transfer in form satisfactory to the Prospective Seller executed by such Other Securityholder, or an instruction (in the case of uncertificated shares) to register the transfer of the Shares or be sold or otherwise disposed of 12
pursuant to such Offer by such Other Securityholders in a form satisfactory to the Prospective Seller executed by such Other Securityholder, (B) an instrument of assignment reasonably satisfactory to the Prospective Seller assigning, as of the consummation of the sale or other disposition to the Third Party or Parties, all such Other Securityholder's rights hereunder with respect to the Shares to be sold or otherwise disposed of, and (C) a special irrevocable power-of-attorney authorizing the Prospective Seller to sell or otherwise dispose of such Shares pursuant to the terms of the Offer and to take all such actions as shall be necessary or appropriate in order to consummate such sale or other disposition. Delivery of such certificate or certificates evidencing the Shares to be sold (or such instruction), the instrument of assignment and the special irrevocable power-of-attorney authorizing the Prospective Seller to sell or otherwise dispose of such Shares shall constitute an irrevocable election by such Other Securityholder to authorize and permit the Prospective Seller to sell such Shares pursuant to the Offer. (c) Promptly after the consummation of the sale or other disposition of the Shares of the Prospective Seller and the Other Securityholders to the Third Party or Parties pursuant to the Offer, the Prospective Seller shall remit to each of the Other Securityholders the total sales price of the Shares of such Other Securityholders sold or otherwise disposed of pursuant thereto. (d) If at the end of the Notice Period, any Other Securityholder shall not have given a Notice of Interest (and delivered all other required documents) with respect to some or all of its Pro Rata Portion of the Offered Shares, such Other Securityholder will be deemed to have waived all its rights under this Section 4.5 with respect to the sale or other disposition pursuant to the Offer of the portion of its Pro Rata Portion of the Offered Shares with respect to which a Notice of Interest shall not have been given. If, at the end of the 60 day period following the giving of the Offer Notice, the Prospective Seller has not completed the sale of all the Offered Shares and the Shares with respect to which Other Securityholders shall have given Notices of Interest pursuant to this Section 4.5, the Prospective Seller shall return to such Other Securityholders all certificates evidencing the unsold Shares that such Other Securityholders delivered for sale or other disposition pursuant to this Section 4.5 (or any such instructions) and such Other Securityholders' related instruments of assignment and powers-of-attorney. (e) Except as expressly provided in this Section 4.5, the Prospective Seller shall have no obligation to any Other Securityholder with respect to the sale or other disposition of any Shares owned by such Other Securityholder in connection with this Section 4.5. Anything herein to the contrary notwithstanding and irrespective of whether any Notice of Interest shall have been given, the Prospective Seller shall have no obligation to any Other Securityholder to sell or otherwise dispose of any offered Shares pursuant to this 4.5 or as a result of any decision by the Prospective Seller not to accept or consummate any Offer or sale or other disposition with respect to the offered Shares (it being understood that any and all such decisions shall be made by the Prospective Seller in its sole discretion). No Other Securityholder shall be entitled to sell or otherwise dispose of Shares directly to any Third Party or Parties pursuant to an Offer (it being understood that all such sales and other dispositions shall be made only on the terms and pursuant to the procedures set forth in this Section 4.5). (f) For purposes of this Section 4.5, "PRO RATA PORTION" means, with respect to each Other Securityholder, a number of Shares of the same class, series or type as the Offered Shares (subject to the next succeeding sentence) equal to the product of (a) the total number of Offered Shares, times (b) a fraction, the numerator of which shall be the fair market value (as determined by the Board of Directors in good faith)of the total number of Shares owned by such Other Securityholder, and the denominator of which shall be the fair market value (as determined by the Board of Directors in good faith) of the total number of Shares outstanding. Anything in this Section 4.5 to the contrary notwithstanding, in the event any such Other Securityholder shall have an insufficient number of Shares of the class, series or type of the Offered Shares necessary to exercise its rights under this Section 4.5 in full, such Other Securityholder may substitute therefor Shares of any other class, series or type with an aggregate fair market value that, 13
when added to the fair market value of the number of Shares of the same class, series or type as the Offered Shares owned by such Other Securityholder, shall permit such Other Securityholder to dispose of its entire Pro Rata Portion in the Offer pursuant to this Section 4.5. (g) Anything in this Section 4.5 or in Section 4.3 to the contrary notwithstanding, the provisions of this Section 4.5 will not be applicable to any Sale of Shares described in clause (c) or (e) of Section 4.3. Nothing in this Section 4.5 shall affect any of the obligations of any of the Securityholders under any other provision of this Agreement. 4.6 Certain Persons to Execute Agreement. (a) Each Securityholder agrees that it will not make any Sale or create, incur or assume any Encumbrance with respect to any Shares held by such Securityholder, unless, prior to the consummation of any such Sale or the creation, incurrence or assumption of any such Encumbrance, the Person to whom such Sale is proposed to be made or the Person in whose favor such Encumbrance is proposed to be created, incurred or assumed (for purposes of this Section 4.6, a "PROSPECTIVE TRANSFEREE") (i) executes and delivers to the Company an agreement, in form and substance satisfactory to the Company, whereby such Prospective Transferee confirms that, with respect to the Shares that are the subject of such Sale or Encumbrance, it shall be deemed to be a "Securityholder" for the purposes of this Agreement and agrees to be bound by all the terms of this Agreement to which the transferor Securityholder is a party and (ii) unless such Prospective Transferee is a recognized institutional investor, delivers to the Company an opinion of counsel, satisfactory in form and substance to the Company, to the effect that the agreement referred to above that is delivered by such Prospective Transferee is a legal, valid and binding obligation of such Prospective Transferee enforceable against such Prospective Transferee in accordance with its terms. Upon the execution and delivery by such Prospective Transferee of the agreement referred to in clause (i) of the next preceding sentence and, if required, the delivery of the opinion of counsel referred to in clause (ii) of the next preceding sentence, such Prospective Transferee shall be deemed a "Securityholder" for the purposes of this Agreement, and shall have the rights and be subject to the obligations of a Securityholder hereunder with respect to the Shares held by such Prospective Transferee or in respect of which such Encumbrance shall have been created, incurred or assumed. (b) In the event that the Company shall issue any Shares, or make a Sale of any issued Shares, to any Person, the Company shall require such Person to execute and deliver to the Company an agreement, in form and substance satisfactory to the Company, whereby such Person confirms that, with respect to the Shares that are the subject of such Sale, it shall be deemed to be a "Securityholder" for purposes of this Agreement and agrees to be bound by all the terms of this Agreement, such Person shall thereupon be deemed a "Securityholder" for purposes of this Agreement, and shall have the rights and be subject to the obligations of a Securityholder hereunder with respect to the Shares held by such Person. (c) Anything in this Section 4.6 or in Section 4.3 or 4.4 to the contrary notwithstanding, the provisions of this Section 4.6 will not be applicable to any Sale of Shares pursuant to and in accordance with Section 5. 4.7 Improper Transfer. Any attempt to sell, assign, transfer, grant or sell a participation in, pledge or otherwise dispose of any Shares not in compliance with this Agreement shall be null and void and neither the Company nor any transfer agent shall give any effect in the Company's stock records to such attempted sale, assignment, transfer, grant or sale of a participation, pledge or other disposition. 14
SECTION 5. REGISTRATION RIGHTS. 5.1 Registration Upon Request. (a) Upon the written request of the holder or holders of at least 25% of the Registrable Shares then outstanding requesting that the Company effect the registration under the 1933 Act of all or part of the Registrable Shares held by such holder or holders and specifying the intended method or methods of disposition of such Registrable Shares, the Company will promptly give written notice of such requested registration to all holders of Registrable Shares and thereupon will use its best efforts to effect the registration under the 1933 Act, as expeditiously as is reasonable, of: (i) the Registrable Shares that the Company has been so requested to register by such holder or holders, for disposition in accordance with the intended method of disposition stated in such request; and (ii) all other Registrable Shares that the Company has been requested to register by the holders of Registrable Shares by written request delivered to the Company within 20 Business Days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Shares), all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Shares so to be registered; provided, however, that: (A) the Company shall not be required to effect any registration pursuant to this Section 5.1, unless it shall already be a Public Company; (B) the Company shall not at any time be required to effect any registration pursuant to this Section 5.1 unless the requests from holders of Registrable Shares for such registration cover an aggregate number of Registrable Shares with an aggregate market value on the date of the initial request for such registration of at least $5 million; (C) the Company shall not be required to effect a registration pursuant to this Section 5.1, other than with a registration statement on Form S-3 or a similar short-form registration statement, within a period of 12 months after the effective date of any other registration statement relating to any registration request under this Section 5.1 or to any registration of which prior notice shall have been given to all holders of outstanding Registrable Shares pursuant to Section 5.3 that was not effected with a registration statement on Form S-3 or a similar short-form registration statement; (D) if the Company shall have previously effected a registration pursuant to this Section 5.1 or shall have previously effected a registration of which prior notice shall have been given to all holders of outstanding Registrable Shares pursuant to Section 5.3, the Company shall not be required to effect a registration pursuant to this Section 5.1 until a period of 6 months shall have elapsed from the effective date of the most recent such registration; and (E) with respect to any registration statement filed, or to be filed, pursuant to this Section 5.1, if the Board of Directors determines that, in its judgment, it would (because of the existence of plans or negotiations regarding any material acquisition involving, or the sale or recapitalization of, the Company or any of its subsidiaries or any material financing activity, or the existence of material non-public 15
information about the Company, or the unavailability of any required financial statements, or any other event or condition of similar significance to the Company and its subsidiaries, taken as a whole) be significantly disadvantageous (a "DISADVANTAGEOUS CONDITION") to the Company and its Affiliates, taken as a whole, for such a registration statement to become effective, or to be maintained effective, the Company shall, notwithstanding any other provision of this Section 5, be entitled, upon the giving of a written notice (a "DELAY NOTICE") to such effect to each holder of Registrable Shares included or to be included in such registration statement, to cause such registration statement to be withdrawn and the effectiveness of such registration statement terminated, or, in the event no registration statement has yet been filed, shall be entitled not to file any such registration statement, until, in the judgment of the Board of Directors, such Disadvantageous Condition no longer exists (notice of which the Company shall promptly deliver to the holders of Registrable Shares with respect to which any such registration statement has been filed, or was to have been filed), but in no event for longer than 90 days after the date of the Delay Notice. Upon receipt of any notice of the existence of a Disadvantageous Condition, such holders of Registrable Shares selling securities pursuant to an effective registration statement will forthwith discontinue use of the prospectus contained in such registration statement and, if so directed by the Company, each such holder of Registrable Shares will deliver to the Company all copies of the prospectus then covering such Registrable Shares current at the time of receipt of such notice, and, in the event no registration statement has yet been filed, all drafts of the prospectus covering such Registrable Shares. Notwithstanding the foregoing provisions of this subparagraph (E), no registration statement filed and subsequently withdrawn by reason of any existing or anticipated Disadvantageous Condition as hereinabove provided shall count as one of the two (2) registration statements referred to in the limitation in Section 5.1 (b), or count against the limitation in Section 5.1(a)(ii)(C) or 5.1(a)(ii)(D). The Company may not give a Delay Notice more than once in any period of 12 consecutive months. (b) Anything herein to the contrary notwithstanding, the Company shall not be obligated to file more than two registration statements pursuant to this Section 5.1 that are initiated by the Securityholders. (c) The Company shall pay all Registration Expenses in connection with two registrations of Registrable Shares effected by it that are initiated by the Securityholders in each case pursuant to this 5.1. (d) In connection with any firm commitment underwriting pursuant to this Section 5.1, the Company will not register securities for sale for the account of any Persons other than the Company and holders of Registrable Shares. (e) In connection with any underwritten offering with respect to which holders of Registrable Shares shall have requested registration pursuant to this Section 5.1, the holders of a majority of the Registrable Shares participating in such offering shall have the right to select the managing underwriter with respect to such offering. 5.2 Request for Registration on Form S-3. Subject to the terms of this Agreement, in the event that the Company receives from the holder or holders of at least 25% of the Registrable Shares then outstanding, a written request that the Company effect any registration on Form S-3 (or any successor form to Form S-3 regardless of its designation) under the 1933 Act at a time when the Company is eligible to register securities on Form S-3 (or any successor form to Form S-3 regardless of 16
its designation) for an offering of Registrable Shares which such holder or holders in their good faith discretion determine would have an anticipated offering price of at least $ 1 million, the Company will promptly give written notice of the proposed registration to the holder or holders and will as soon as practicable use its best efforts to effect registration of the Registrable Shares specified in such request, together with all or such portion of the Registrable Shares of any holder or holders joining in such request as are specified in a written request delivered to the Company within 20 days after written notice from the Company of the proposed registration. There shall be no limit to the number of occasions on which the Company shall be obligated to effect registration under this Section 5.2, but the Company shall not be obligated to effect more than one such registrations in any 12 month period. The Company agrees to keep a registration made pursuant to the provisions of this Section 5.2 effective until the earlier to occur of 90 days following the date such registration becomes effective or until the holder or holders have completed the distribution described in the registration statement relating thereto. Notwithstanding the foregoing, the Company shall not be obligated to effect any registration pursuant to this Section 5.2: (a) if Form S-3 is not available for such offering by the holder or holders; (b) if the holder or holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Shares and such other securities (if any) at an aggregate price to the public of less than $ 1 million before deduction of underwriting discounts and selling commissions; (c) if within 30 days of receipt of a written request from any holder or holders pursuant to this Section 5.2, the Company gives notice to such holder or holders of the Company's intention to make a public offering within 90 days; (d) if the Company shall furnish to the holder or holders a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company for any registration to be effected as requested under this Section 5.2, the Company shall have the right to defer the filing of a registration statement with respect to such offering for a period of not more than 90 days from delivery of the request of the holder or holders requesting such registration; provided, however, that the Company may not utilize this right more than once in any twelve (12)-month period; or (e) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. 5.3 Incidental Registration. (a) If, at any time after the Company has completed an IPO, the Company proposes to register (other than pursuant to Section 5.1) any of its authorized but unissued Common Shares under the 1933 Act on a form and in a manner that would permit registration of Registrable Shares for sale to the public under the 1933 Act, it will each such time give prompt written notice to all holders of Registrable Shares of its intention to do so, describing such securities and specifying the form and manner and the other relevant facts involved in such proposed registration (including, without limitation, whether or not such registration will be in connection with an underwritten offering of its Common Stock and, if so, the identity of the managing underwriter and whether such offering will be pursuant to a "best efforts" or "firm commitment" underwriting). Upon the written request of any such holder of Registrable Shares delivered to the Company within 20 Business Days after such notice shall have been given to such holder (which request shall specify the Registrable Shares intended to be disposed of by such holder and the intended method of disposition thereof), the Company will use its best efforts to effect the registration 17
under the 1933 Act, as expeditiously as is reasonable, of all Registrable Shares that the Company has been so requested to register by the holders of Registrable Shares, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Shares so to be registered; provided, however, that: (i) if, at any time after giving such written notice of its intention to register any of such securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to each holder of Registrable Shares that has requested to register Registrable Shares and thereupon the Company shall be relieved of its obligation to register any Registrable Shares in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith to the extent provided in Section 5.3(b)), without prejudice, however, to the rights of any one or more holders to request such registration be effected as a registration under Section 5.1; (ii) if (A) the registration so proposed by the Company involves an underwritten offering of the securities so to be registered, to be distributed by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, and (B) the managing underwriter of such underwritten offering selected by the Company shall advise the Company that, in its judgment, the number of securities proposed to be included in such offering by the Company (for purposes of this Section 5.3(a), "Company Securities") and the number of shares of Registrable Shares held by all Securityholders proposed to be included in such offering by the holder or holders thereof should be limited, then the Company will promptly advise each such holder of Registrable Shares thereof and the number of Shares proposed to be included in such registration shall be included in the following order of priority: (i) first, the Company Securities; (ii) second, the Registrable Shares requested to be included in such registration that are held by the Securityholders (or, if necessary, such Registrable Shares pro rata among the holders thereof based upon the number of Registrable Shares owned by each such holder); and (iii) third, any other Registrable Shares. (iii) the Company shall not be obligated to effect any registration of Registrable Shares under this Section 5.3 that is incidental to the registration of any of its securities in connection with any merger, acquisition, exchange offer, dividend reinvestment plan or stock option or other employee benefit plan. (b) No registration of Registrable Shares effected under this Section 5.3 shall relieve the Company of its obligation to effect registrations of Registrable Shares upon the request of one or more holders pursuant to Section 5.1. (c) The Company will pay all Registration Expenses in connection with each registration of Registrable Shares effected by it pursuant to this Section 5.3. (d) In the event that the managing underwriter advises the Securityholders requesting the registration of Registrable Shares pursuant to Section this 5.3 in writing that in its judgment, the 18
number of shares of Registrable Shares proposed to be included in such offering by the holder or holders thereof should be limited, the managing underwriter (subject to the allocation priority set forth in Section 5.3(a)) may: i. in the case of an IPO, exclude some or all Registrable Shares from such Registration and underwriting; and ii. in the case of any subsequent registered public offering of the Company's securities, limit the number of shares of Registrable Shares to be included in such registration and underwriting to not less than twenty-five percent (25%) of the securities included in such registration (based on aggregate market values). 5.4 Registration Procedures. (a) If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Shares under the 1933 Act as provided in Section 5.1 or 5.3, the Company will as expeditiously as is reasonable: (i) prepare and file with the Commission on any appropriate form a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective; (ii) prepare and file with the Commission such amendments (including post-effective amendments) and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Shares and other securities covered by such registration statement until the earlier of (A) such time as all such Registrable Shares and other securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (B) the expiration of 20 Business Days from the date such registration statement first becomes effective as may be determined by the holders of Registrable Shares covered by such registration statement by notice to the Company prior to the date such registration statement becomes effective; (iii) furnish to each seller of such Registrable Shares such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the 1933 Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents, as such seller may reasonably request in order to facilitate the sale or disposition of such Registrable Shares; (iv) use its best efforts to register or qualify all Registrable Shares and other securities covered by such registration statement under such other securities or "blue sky" laws of such jurisdictions as each seller shall reasonably request, and do any and all other acts and things that may be necessary to enable such seller to consummate the disposition in such jurisdictions of its Registrable Shares covered by such registration statement, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject itself to taxation in respect of doing business in any such jurisdiction, or to consent to general service of process in any such jurisdiction; 19
(v) furnish to each seller of Registrable Shares a signed counterpart, addressed to such seller, of (A) an opinion of counsel for the Company, dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), and (B) if available, a "cold comfort" letter signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters as such seller may reasonably request; (vi) immediately notify each seller of Registrable Shares covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing or if it is necessary to amend or supplement such prospectus to comply with law, and at the request of any such seller prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing and shall otherwise comply in all material respects with law and so that such prospectus, as amended or supplemented, will comply with law; (vii) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, beginning with the first month of the first fiscal quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act; (viii) use its best efforts to list such securities on each securities exchange on which Common Shares are then listed, if such securities are not already so listed and if such listing is then permitted under the rules of such exchange, and provide a transfer agent and registrar for such Registrable Shares not later than the effective date of such registration statement; and (ix) issue to any underwriter to which any holder of Registrable Shares may sell such Registrable Shares in connection with any such registration (and to any direct or indirect transferee of any such underwriter) certificates evidencing shares of Class A Common Stock without the legends described in Section 4.2(a). The Company may require each seller of Registrable Shares as to which any registration being effected to furnish the Company with such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing and as shall be required by law or by the Commission in connection therewith. (b) Whenever a registration requested by one or more holders pursuant to Section 5.1 for an underwritten offering, only shares constituting Registrable Shares that are to be distributed by the 20
underwriters and such unissued securities of the Company as the Company may elect to include in such offering may be included in such registration. If (i) the registration so requested by holders of Registrable Shares pursuant to Section 5.1 involves an underwritten offering of such securities, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, and (ii) the managing underwriter of such offering shall advise the Company that, in its judgment, the number of shares of Registrable Shares held by all Securityholders proposed to be included in such offering by the holder or holders thereof (for purposes of Section 5.4(b), "COMPANY SECURITIES") should be limited, then the Company will promptly advise each such holder of Registrable Shares thereof, and the number of Shares proposed to be included in such registration shall be included in the following order of priority: (i) first, the Registrable Shares requested to be included in such registration that are held by the Securityholders (or, if necessary, such Registrable Shares pro rata among the holders thereof based upon the number of Registrable Shares owned by each such holder); (ii) second, the Company Securities; and (iii) third, any other Registrable Shares. (c) Whenever a registration requested by one or more holders pursuant to Section 5.1 is for an underwritten offering, only shares constituting Registrable Shares that are to be distributed by the underwriters and such unissued securities of the Company as the Company may elect to include in such offering may be included in such registration. (d) If requested by the underwriters for any underwritten offering of Registrable Shares on behalf of a holder or holders of Registrable Shares pursuant to a registration requested under Section 5.1, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and conditions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities to the effect and to the extent provided in Section 5.6. (e) If any registration pursuant to Section 5.1 or 5.3 shall be in connection with an underwritten public offering, each holder of Registrable Shares agrees by acquisition of such Registrable Shares, if so required by the managing underwriters, not to effect any public sale or distribution (including any sale pursuant to Rule 144) of Registrable Shares (other than as part of such underwritten public offering) within 10 days prior to the effective date of the registration statement with respect to such underwritten public offering or 180 days after the effective date of such registration statement. (f) The Company agrees, if so required by the managing underwriters in connection with an underwritten offering of Registrable Shares pursuant to Section 5.1 or 5.3, not to effect any public sale or distribution of any of its equity securities or securities convertible into or exchangeable or exercisable for any of such equity securities during the 10 days prior to and the 180 days after the effective date of any registration statement with respect to such underwritten public offering, except as part of such underwritten offering or except in connection with a stock option plan, stock purchase plan, savings or similar plan, or an acquisition, merger or exchange offer. 5.5 Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement registering Registrable Shares under the 1933 Act, the Company will give the holders of Registrable Shares on whose behalf such Registrable Shares are to be so registered and their underwriters, if any, and their respective counsel and accountants, the opportunity to participate 21
in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have issued a report on its financial statements as shall be necessary, in the opinion of such holders and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the 1933 Act. 5.6 Indemnification. (a) In the event of any registration of any equity securities of the Company under the 1933 Act, the Company will indemnify and hold harmless, in the case of any registration statement filed pursuant to Section 5.1, 5.2 or 5.3, the seller of any Registrable Shares covered by such registration statement, its directors and officers, general and limited partners, members and Affiliates (and directors and officers thereof and, if such seller is a portfolio or investment fund, its investment advisors), each other Person who participates as an underwriter in the offering or sale of such securities, each officer and director of each such underwriter, and each other Person, if any, who controls such seller or any such underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act (collectively, the "Indemnified Persons"), against any losses, claims, damages, liabilities and expenses, joint or several, to which such Indemnified Persons may become subject under the 1933 Act or otherwise (collectively, "Losses"), insofar as such Losses (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the 1933 Act, any preliminary prospectus, final prospectus or summary prospectus included therein, or any amendment or supplement thereto, or any document incorporated by reference therein, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such Indemnified Persons for any legal, accounting, consulting, expert or any other expenses reasonably incurred by them in connection with investigating or defending any such Loss; provided, however, that the Company shall not be liable in any such case to the extent that any such Loss (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company for use in the preparation thereof by such Indemnified Persons, as the case may be. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Persons and shall survive the transfer of such securities by such seller. (b) The Company may require, as a condition to including any Registrable Shares in any registration statement filed pursuant to Section 5.1, 5.2 or 5.3, that the Company shall have received an undertaking satisfactory to it from (i) the prospective seller of such securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in 5.6(a), except that any such prospective seller shall not in any event be liable to the Company pursuant thereto for an amount in excess of the net proceeds of sale of such prospective seller's Registrable Shares so to be sold) the Company, each such underwriter of such securities, each officer and director of each such underwriter and each other Person, if any, who controls the Company or any such underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and (ii) each such underwriter of such securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in 5.6(a)) the Company, each officer and director of the Company, each prospective seller, each officer and director of each prospective seller and each other Person, if any, who controls the Company or any such prospective seller within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, with respect to any statement in or omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus included therein, or any amendment or supplement thereto, if such 22
statement or omission was made in reliance upon and in conformity with written information furnished by such prospective seller or such underwriter, as the case may be, to the Company for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling Person and shall survive the transfer of such securities by such seller. (c) Promptly after receipt by an Indemnified Person of notice of the commencement of any action or proceeding (including any governmental investigation) involving a claim referred to in Section 5.6(a) or (b), such Indemnified Person will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any Indemnified Person to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding provisions of this Section 5.6, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an Indemnified Person, unless in such Indemnified Person's reasonable judgment a conflict of interest between such Indemnified Person and such indemnifying party may exist in respect of such claim (in which case, the indemnifying party shall not be liable for the fees and expenses of more than one counsel for all sellers of Registrable Shares, or more than one counsel for the underwriters in connection with any one action or separate but similar or related actions), the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish with counsel reasonably satisfactory to such Indemnified Person, and after notice from the indemnifying party to such Indemnified Person of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof. 5.7 Contribution. (a) If the indemnification provided for in Section 5.6 is unavailable to the Indemnified Person or indemnifying parties in respect of any Losses referred to therein, then each such Indemnified Person and the Company shall contribute to the amount of such Losses (a) as between the Company and the holders of Registrable Shares covered by a registration statement, on the one hand, and the underwriters, on the other, in such proportion as is appropriate to reflect the relative benefits received by the Company and such holders, on the one hand, and the underwriters, on the other, from the offering of the Registrable Shares, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Company and such holders, on the one hand, and of the underwriters, on the other, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations, and (b) as between the Company, on the one hand, and each holder of Registrable Shares covered by a registration statement, on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of each such holder in connection with such statements or omissions, as well as any other relevant equitable considerations; provided, however, that in no instance shall the maximum contribution of any holder of Registrable Shares exceed the net proceeds received by such holder of Registrable Shares in the transaction which subjects such holder of Registrable Shares to the provisions of this Section 5.7. The relative benefits received by the Company and such holders, on the one hand, and the underwriters, on the other, shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and such holders bear to the total underwriting discounts and commissions received by the underwriters. The relative fault of the Company and such holders, on the one hand, and of the underwriters, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to 23
state a material fact relates to information supplied by the Company and such holders or by the underwriters. The relative fault of the Company, on the one hand, and of each such holder, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (b) The Company and the holders of Registrable Shares agree that it would not be just and equitable if contribution pursuant to this Section 5.7 were determined by pro rata allocation (even if the underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the next preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages or liabilities referred to in the next preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this 5.7, no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no holder of Registrable Shares shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Shares of such holder were offered to the public exceeds the amount of any damages that such holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Each Securityholder's obligation to contribute pursuant to this Section 5.7 is several in the proportion that the proceeds of the offering received by such Securityholder bears to the total proceeds of the offering received by all the Securityholders and not joint. 5.8 Holdback Agreement. (a) If the Company at any time shall register Registrable Shares under the 1933 Act (including any registration pursuant to Sections 5.1 or 5.3) for sale to the public, the Securityholders shall not sell publicly or privately, make any short sale of, grant any option for the purchase of, or otherwise dispose publicly of, any Registrable Shares (other than those Registrable Shares included in such registration pursuant to Sections 5.1 or 5.3) without the prior written consent of the Company, for a period as shall be determined by the relevant managing underwriter, which period shall begin not more than 10 days prior to the initial filing of the registration statement pursuant to which such public offering shall be made and shall not last more than 180 days after the effective date of such registration statement. (b) The selling restrictions of this Section 5.8 shall apply (i) only in the event of an IPO, and (ii) only to the extent that the similar selling restrictions apply equally to all of the Company's directors, officers and 1% stockholders. 5.9 Nominees of Beneficial Owners. In the event that any Registrable Shares are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election, be treated as the holder of such Registrable Shares for purposes of any request or other action by any holder or holders of Registrable Shares pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Shares held by any holder or holders of Registrable Shares contemplated by this Agreement. If the beneficial owner of any Registrable Shares so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Shares. 24
SECTION 6. MISCELLANEOUS. 6.1 Termination. (a) This Agreement shall terminate on the later of the 10th anniversary of the execution and delivery hereof or 5 years after an IPO; provided, however, that, notwithstanding the foregoing, Sections 4.6 and 6.9 shall terminate upon an IPO, so long as thereafter the Company shall be a Public Company. (b) Subject to Section 6.1(a), at any time within 2 years prior to the tenth anniversary of the date hereof, or the expiration of any extension of such initial term of this Agreement, the parties hereto may, by written agreement, extend the duration of Section 2.1 for an additional period not exceeding 10 years from the expiration date of this Agreement as originally fixed or as last extended, as the case may be. 6.2 Certain Representations. Each of the parties hereto represents that this Agreement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. Such representation shall survive the execution and delivery hereof, regardless of any investigation made by any party hereto or on such party's behalf. 6.3 Certain Remedies. Without intending to limit the remedies available to any of the parties hereto, each of the parties hereto agrees that damages at law will be an insufficient remedy in the event such party violates the terms hereof and each of the parties hereto further agrees that each of the other parties hereto may apply for and have injunctive or other equitable relief in any court of competent jurisdiction to restrain the breach or threatened breach of, or otherwise specifically to enforce, any of such party's agreements set forth herein. 6.4 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any such term may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of (i) the Company (by an affirmative vote of 66-2/3% of the members of the Board of Directors), and (ii) Preferred Securityholders holding a majority of the Shares held by the Preferred Securityholders. Each Securityholder shall be bound by any amendment or waiver authorized by this Section 6.4, whether or not such Securityholder shall have consented thereto. 6.5 Notice. Any notice required or permitted hereunder shall be given in writing and shall be conclusively deemed effectively given upon personal delivery, or 5 days after deposit in the United States mail, by registered or certified mail, postage prepaid, addressed (i) if to the Company, to the address as set forth below the Company's name on the signature page of this Agreement, and (ii) if to a Securityholder, to the address set forth below the Securityholder's name on the signature page of this Agreement, or at such other address as the Company or Securityholder may designate by 3 days' advance written notice to the other parties hereto. 6.6 Benefit; Successors and Assigns. Except as otherwise provided herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. No Securityholder may assign any of its rights under Sections 2.1, 2.5, 2.7, 3, 4.4, 5.1, or 5.3 without the prior written consent of the Company; provided, however, that MEDI Ventures may assign any of its rights under this Agreement to any member of the MEDI Group without the prior written consent of the Company; and provided, further, that without the prior written consent of the Company, (i) any Securityholder which is a partnership may transfer such Securityholder's rights 25
under this Agreement to such Securityholder's Affiliates, partners and/or limited partners; (ii) any Securityholder which is a limited liability company may transfer such Securityholder's rights under this Agreement to such Securityholder's Affiliates and/or constituent members; and (iii) any Securityholder which is a grantor trust may transfer its rights to its grantor provided that, in each of (i), (ii) and (iii) the transferee of such rights agrees to be bound by the rights and restrictions of this Agreement. This Agreement shall not inure to the benefit of any Prospective Transferee unless such Prospective Transferee shall have complied with the terms of Section 4.6. Except as expressly provided in Sections 5.7 and 5.8, nothing in this Agreement either express or implied is intended to confer on any person other than the parties hereto and their respective successors and permitted assigns, any rights, remedies or obligations under or by reason of this Agreement. 6.7 Aggregation of Stock. All Restricted Shares and Registrable Shares held or acquired by affiliated Persons shall be aggregated for the purpose of determining the availability of any rights under this Agreement. 6.8 Miscellaneous. This Agreement amends and restates in its entirety the Original Securityholder Agreement, which agreement shall be of no further force or effect. Further, this Agreement sets forth the entire agreement and understanding among the parties hereto, and supersedes all prior agreements and understandings, relating to the subject matter hereof. The parties hereto acknowledge that each of them has been represented by counsel in connection herewith and the transactions contemplated hereby. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguity herein against the party that drafted it has no application and is expressly waived. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement. 6.9 Investor Ownership Level. Each of the Securityholders and the Company hereby agree that in the event that the Outstanding Securities (as defined below) represent greater than 17.99% of the Company's outstanding capital stock on a fully-diluted basis (the "THRESHOLD LEVEL") as a result of any adjustment to the Conversion Price (as such term is defined in the Certificate) or otherwise, the Company and each such Securityholder shall take all necessary or desirable actions within its or their control to allow MEDI Ventures to receive, in lieu of any such Outstanding Securities which would cause such MEDI Venture's aggregate holdings to exceed the Threshold Level or in exchange for any such Outstanding Securities which exceed the Threshold Level if and to the extent that such Outstanding Securities are then beneficially owned by MEDI Ventures, Non-Voting Preferred Shares as described below. As used in this Section 6.9, "OUTSTANDING SECURITIES" shall mean the aggregate number of shares of Common Stock held by MEDI Ventures on a fully diluted basis assuming the exercise, exchange or conversion of (i) any and all options, warrants or other rights requiring the Company to issue to MEDI Ventures any shares of Common Stock and (ii) any other securities (including the Series B Preferred Stock or any other series of Preferred Stock) of the Company held by MEDI Ventures exercisable or exchangeable for, or convertible into, shares of Common Stock. In such event, the Company shall authorize a new series of non-voting Preferred Stock, the rights and preferences of which shall be substantially identical to those of the shares held by MEDI Ventures, except that such shares shall have no voting rights and except that such shares shall be automatically converted into shares of Non-Voting Common Stock (as defined below) upon the conversion of all outstanding shares of Series B Preferred Stock (the "NON-VOTING PREFERRED SHARES"). The Non-Voting Preferred Shares shall be convertible upon the same terms as other preferred stock into a new series of Common Stock the rights and preferences of which shall be substantially identical to those of the Common Stock, except that such shares shall have no voting rights (the "NON-VOTING COMMON STOCK"). Each share of Non-Voting Common Stock shall convert into one share of Common Stock upon an initial public offering by the 26
Company of its Common Stock. MEDI Ventures will agree that in any instance that applicable law provides a right of the Non-Voting Common Stock to vote as a class or any matter, MEDI Ventures will vote its shares of Non-Voting Common Stock in accordance with the vote of a majority in interest of the Series B Preferred Stock, subject in all respects to the provisions of this Agreement. It is hereby agreed and acknowledged that the rights of MEDI Ventures and the obligations of the Company and each other Securityholder set forth herein shall be exercisable solely at the discretion of MEDI Ventures. The Company agrees that it shall use its best efforts to obtain the consent of any future holder of 1% or more of any of the Company's outstanding capital stock to the provisions set forth herein. [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY] 27
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. COMPANY: VANDA PHARMACEUTICALS INC. By: /s/ Mihael Polymeropoulos ----------------------------------------- Name: Chief Executive Officer Title: Address: VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SECURITYHOLDER: DOMAIN PARTNERS VI, L.P. By: One Palmer Square Associates VI, L.L.C., its General Partner By: /s/ Kathleen K. Schoemaker ------------------------------------ Kathleen K. Schoemaker Managing Member Address: c/o Domain Associates, L.L.C. One Palmer Square, Suite 515 Princeton, New Jersey 08542 Attn: Jesse I. Treu Fax No.: (609)683-9789 With a copy to: Domain Associates, L.L.C. One Palmer Square, Suite 515 Princeton, New Jersey 08542 Attn: Kathleen K. Schoemaker Fax No.: (609)683-9789 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SECURITYHOLDER: DP VI ASSOCIATES, L.P. By: One Palmer Square Associates VI, L.L.C., its General Partner By: /s/ Kathleen K. Schoemaker ------------------------------------ Kathleen K. Schoemaker Managing Member Address: c/o Domain Associates, L.L.C. One Palmer Square, Suite 515 Princeton, New Jersey 08542 Attn: Jesse I. Treu Fax No.: (609)683-9789 With a copy to: Domain Associates, L.L.C. One Palmer Square, Suite 515 Princeton, New Jersey 08542 Attn: Kathleen K. Schoemaker Fax No.: (609)683-9789 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SECURITYHOLDER: PROSPECT VENTURE PARTNERS II, L.P. By: Prospect Management Co. II, LLC, its General Partner By: /s/ Jim Tananbaum ____________________________________ Jim Tananbaum Managing Member Address: 435 Tasso Street, Suite 200 Palo Alto, CA 94301 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SECURITYHOLDER: PROSPECT ASSOCIATES II, L.P. By: Prospect Management Co. II, LLC, its General Partner By: /s/ Jim Tananbaum ____________________________________ Jim Tananbaum Managing Member Address: 435 Tasso Street, Suite 200 Palo Alto, CA 94301 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SECURITYHOLDER: RHO VENTURES IV (QP), L.P. By: Rho Management Ventures IV, L.L.C., its General Partner By: /s/ Mark Leschly ____________________________________ Name: Mark Leschly Title: Managing Member Address: 152 West 57th Street New York, NY 10019 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SECURITYHOLDER: RHO VENTURES IV GMBH & CO. BETEILIGUNGS KG By: Rho Capital Partners Verwaltungs GmbH, its General Partner By: /s/ Mark Leschly ------------------------------------ Name: Mark Leschly Title: Managing Member Address: 152 West 57th Street New York, NY 10019 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SECURITYHOLDER: RHO VENTURES IV, L.P. By: Rho Management Ventures IV, L.L.C., its General Partner By: /s/ Mark Leschly ------------------------------------ Name: Mark Leschly Title: Managing Member Address: 152 West 57th Street New York, NY 10019 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SECURITYHOLDER: RHO MANAGEMENT TRUST I By: Rho Capital Partners, Inc., as Investment Adviser By: /s/ Mark Leschly ------------------------------------ Name: Mark Leschly Title: Address: 152 West 57th Street New York, NY 10019 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SECURITYHOLDER: MEDIMMUNE VENTURES, INC. By: /s/ Edward T. Mathers ________________________________________ Name: Edward T. Mathers Title: V.P., Corporate Development Address: One MedImmune Way Gaithersburg, MD 20878 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SECURITYHOLDERS: CARE CAPITAL INVESTMENTS II, LP By: Care Capital, LLC, as general partner of Care Capital Investments II, LP By: /s/ David Ramsay ____________________________________ Name: David Ramsay Its: Address: 47 Hulfish Street, Suite 310 Princeton, NJ 08542 Fax No.: (609)683-5787 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. SECURITYHOLDERS: CARE CAPITAL OFFSHORE INVESTMENTS II, LP By: Care Capital, LLC, as general partner of Care Capital Offshore Investments II, LP By: /s/ David Ramsay ------------------------------------ Name: David Ramsay Its: Address: 47 Hulfish Street, Suite 310 Princeton, NJ 08542 Fax No.: (609)683-5787 VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written SECURITYHOLDER: BIOMEDICAL SCIENCES INVESTMENT FUND PTE LTD By: /s/ Chu Suee Yeok ---------------------------------------- Name: Chu Suee Yeok Title: Director Address: 20 Biopolis Way #09-01 Centros Singapore 138668 Fax No.: 65-63957796 Attn: Lily Chan, PhD, General Manager VANDA PHARMACEUTICALS INC. 2004 SECURITYHOLDER AGREEMENT COUNTERPART SIGNATURE PAGE
AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT This AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT is dated as of April 5, 2006 (this "Amendment") by and among Vanda Pharmaceuticals Inc., a Delaware corporation (the "Company") and each of the other parties who are signatories thereto (the "Securityholders"). WHEREAS, the Company and the Securityholders have entered into that certain 2004 Securityholders Agreement dated as of September 28, 2004 (the "Agreement"); WHEREAS, the Company and the Securityholders wish to amend the Agreement to confirm, for the avoidance of doubt, that all of the Securityholders' rights under Section 2 and Section 4 of the Agreement shall terminate and be of no further force or effect as of and following the closing of the Company's contemplated initial public offering of its Common Stock on Form S-1; and WHEREAS, this Amendment has been approved by the Company's directors in accordance with Section 6.4 of the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Amendment. Section 6.1(a) of the Agreement is hereby stricken in its entirety and replaced with the following (a) This Agreement shall terminate and on the later of the 10th anniversary of the execution and delivery hereof or 5 years after an IPO; provided, however that notwithstanding the foregoing, Sections 2, 4 and 6.9 shall terminate and be of no further force or effect upon and following the closing of the IPO. 2. Other Terms of Agreement. Except as expressly provided in this Section 1, the Agreement shall remain in full force and effect in the form originally executed. 3. Miscellaneous. (a) Amendment and Waiver. Neither this Amendment nor any part hereof may be changed, waived, or amended except by an instrument signed by the parties required to amend the Agreement pursuant to Section 6.4 of the Agreement. (b) Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of, the successors and assigns of the parties hereto. (c) Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
(d) Titles and Subtitles. The titles and subtitles used in this Amendment are used for convenience only and are not to be considered in construing or interpreting this Amendment. (e) Severability. If one or more provisions of this Amendment are held to be unenforceable under applicable law, such provision shall be excluded from this Amendment and the balance of the Amendment shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 2
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first above written. COMPANY: VANDA PHARMACEUTICALS INC. By: /s/ Mihael Polymeropoulos, M.D. ------------------------------------ Name: Mihael Polymeropoulos, M.D. Title: Director and Chief Executive Officer AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT SIGNATURE PAGE
SECURITYHOLDERS: CARE CAPITAL INVESTMENTS II, LP By: /s/ David Ramsay ------------------------------------ Name: David Ramsay Title: Managing Member of Care Capital II, LLC, its General Partner CARE CAPITAL OFFSHORE INVESTMENTS II, LP By: /s/ David Ramsay ------------------------------------ Name: David Ramsay Title: Managing Member of Care Capital II, LLC, its General Partner AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT SIGNATURE PAGE
SECURITYHOLDERS: BIOMEDICAL SCIENCES INVESTMENT FUND PTE LTD By: /s/ Chu Swee Yeok ------------------------------------ Name: Chu Swee Yeok Title: Director AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT SIGNATURE PAGE
SECURITYHOLDERS: DOMAIN PARTNERS VI, LP By: One Palmer Square Associates VI, L.L.C., its general partner By: /s/ Lisa A. Kraeutler ------------------------------------ Name: Lisa A. Kraeutler Title: Attorney-in-fact DP VI ASSOCIATES, L.P. By: One Palmer Square Associates VI, L.L.C., its general partner By: /s/ Lisa A. Kraeutler ------------------------------------ Name: Lisa A. Kraeutler Title: Attorney-in-fact AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT SIGNATURE PAGE
SECURITYHOLDERS: PROSPECT VENTURE PARTNERS II, L.P. By: /s/ James. B. Tananbaum ------------------------------------ Name: James. B. Tananbaum Title: Managing Member, Prospect Management Co. II, LLC, its General Partner PROSPECT ASSOCIATES II, L.P. By: /s/ James. B. Tananbaum ------------------------------------ Name: James. B. Tananbaum Title: Managing Member, Prospect Management Co. II, LLC, its General Partner AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT SIGNATURE PAGE
SECURITYHOLDERS: RHO VENTURES IV, L.P. By: Rho Management Ventures IV, L.L.C. General Partner By: /s/ Jeffrey I. Martin ------------------------------------ Name: Jeffrey I. Martin Title: Attorney in Fact RHO VENTURES IV GMBH & CO. BETEILIGUNGS KG By: Rho Management Ventures IV, L.L.C. General Partner By: /s/ Jeffrey I. Martin ------------------------------------ Name: Jeffrey I. Martin Title: Attorney in Fact AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT SIGNATURE PAGE
SECURITYHOLDERS: RHO VENTURES IV (QP), L.P. By: Rho Management Ventures IV, L.L.C. General Partner By: /s/ Jeffrey I. Martin ------------------------------------ Name: Jeffrey I. Martin Title: Attorney in Fact RHO MANAGEMENT TRUST I By: Rho Management Ventures IV, L.L.C. General Partner By: /s/ Jeffrey I. Martin ------------------------------------ Name: Jeffrey I. Martin Title: Attorney in Fact AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT SIGNATURE PAGE
SECURITYHOLDERS: MEDIMMUNE VENTURES, INC. By: /s/ Wayne T. Hockmeyer ------------------------------------ Name: Wayne T. Hockmeyer Title: President AMENDMENT TO 2004 SECURITYHOLDERS AGREEMENT SIGNATURE PAGE
Exhibit 10.2 SUBLICENSE AGREEMENT between Novartis Pharma AG and Vanda Pharmaceuticals, Inc. - ---------- CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
SUBLICENSE AGREEMENT THIS SUBLICENSE AGREEMENT effective as of the 4th day of June, 2004, ("Effective Date") between Vanda Pharmaceuticals, Inc., a corporation organized and existing under the laws of the State of Delaware and having its principal office at 47 Hulfish Street, Suite 310, Princeton, NJ 08542, The United States ("Vanda") and Novartis Pharma AG, a corporation organized under the laws of Switzerland and having its principal office at Lichtstrasse 35, CH-4056 Basel, Switzerland ("Novartis") WITNESSETH THAT: WHEREAS Novartis is the exclusive worldwide licensee of Titan Pharmaceuticals, Inc. ("Titan") under a sublicense agreement between Novartis and Titan having an Effective Date of 20th November, 1997 and as amended by two Amendments between the parties dated 30th November 1998 and 10th April, 2001 (the "Titan Agreement"); and WHEREAS Titan is the exclusive worldwide licensee of Hoechst Marion Roussel Inc. ("HMRI") under a license agreement between Titan and HMRI having an Effective Date of 31st December, 1996 (the "HMRI Agreement"); and WHEREAS as a result of corporate restructuring, Aventis Pharmaceuticals Inc., a corporation organized under the laws of the State of Delaware and with offices at 200 Crossing Boulevard, Bridgewater, NJ 08807-0890 ("Aventis") acquired substantially all of the tangible operating assets of HMRI and, as a result, the HMRI Agreement has been assigned to Aventis; and WHEREAS under such Titan Agreement and the Novartis Patents, Novartis has rights with respect to certain patents and patent applications, identified in APPENDIX A hereto, and know-how relating to a compound known as Iloperidone; and WHEREAS Vanda desires to obtain certain exclusive licenses from Novartis under the Titan Agreement and the Novartis Patents, and Novartis is willing to grant to Vanda such licenses; NOW, THEREFORE, in consideration of the covenants and obligations expressed herein, and intending to be legally bound, the parties agree as follows: Page 2 of 56
1. DEFINITIONS 1.1 "Affiliate" shall mean any corporation, firm, partnership or other entity, whether de jure or de facto, which directly or indirectly owns, is owned by or is under common ownership with a party to this Sublicense Agreement, to the extent of more than fifty percent (50%) of the equity (or such lesser percentage which is the maximum allowed to be owned by a foreign corporation in a particular jurisdiction) having the power to direct the affairs of the entity and any person, firm, partnership, corporation or other entity actually controlled by, controlling or under common control with a party to this Sublicense Agreement. 1.2 "Commercially Reasonable Efforts" shall mean efforts and resources customarily used in the pharmaceutical business for a product of a market potential similar to the market potential of Product under evaluation, at a similar stage of its product life, taking into account the establishment of the product in the marketplace, the competitiveness of the marketplace, the proprietary position of the product, regulatory status involved, and the profitability of the product. 1.3 "Competitive Industry Standard Level" shall mean the level to which the Product shall be marketed by or on behalf of Vanda, its Affiliates or Sublicensees in the countries of the Territory where Patents are issued and enforced with at least the same diligence that Vanda would use in marketing its own products in such countries, in a manner consistent with the effort devoted by the pharmaceutical industry to products having the same or similar potential value of the Product in those countries when the Product is launched. 1.4 "Compound" shall mean the chemical compound known as Iloperidone, whose specific chemical name is [*], including any salts, hydrates, solvates, and/or stereoisomers thereof, and only the metabolites listed in APPENDIX B hereto, including any salts, hydrates, solvates and/or stereoisomers of such metabolites. 1.5 "EEA" shall mean the European Economic Area, which consists of the European Union and Iceland, Liechtenstein and Norway. - ---------- 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 of 56
1.6 "European Union" shall mean the member states of the European Union, as may exist from time to time, which as of the date hereof include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom and all other countries which accede to the European Union during the term of this Sublicense Agreement. 1.7 "Exclusive" shall have the meaning specified in Section 2.1 hereof. 1.8 "FDA" shall mean the United States Food and Drug Administration. 1.9 "FD&C Act" shall mean the Federal Food, Drug and Cosmetic Act (21 U.S.C. 301ff), as amended from time to time. 1.10 "Field" shall mean application to all conditions, disorders and diseases in humans. 1.11 "IND" shall mean an Investigational New Drug Application. 1.12 "Know-How" shall mean all technical information and know-how: (a) presently developed and owned or controlled by HMRI or Titan and their Affiliates and made available to Novartis, (b) developed and owned or controlled by Novartis and its Affiliates after the date of the Titan Agreement, and (c) developed and owned or controlled by HMRI, Titan or Novartis and their respective Affiliates, after the date hereof and included within this definition of "Know-How" by operation of Section 2.3 hereof, which relates to the Compound or Product in the Field and which constitutes a proprietary "trade secret" or other valid intellectual property right under U.S. or other applicable law which is substantial, secret and identifiable, including, without limitation, all biological, chemical, pharmacological, toxicological, clinical, regulatory, analytical, quality control and manufacturing data and any other information (whether technical or commercial) relating to the Compound or Product that may be useful for the development, regulatory approval, manufacture and commercialization of the Compound or Product. 1.13 "Major Market Country" shall mean each of France, Germany, Italy, Spain and the United Kingdom. Page 4 of 56
1.14 "NDA" shall mean any and all applications (new drug applications) submitted to the FDA under Sections 505, 507 or 512 of the FD&C Act and applicable regulations related to the Product, including without limitation, full NDAs, "paper" NDAs and abbreviated NDAs (ANDAs) and all amendments and supplements thereto or equivalent applications in the European Union. 1.15 "Net Sales" shall be calculated as follows: From the gross invoice price of the Product sold by Vanda or its Affiliates or Sub-licensees to independent third parties in bona fide, arms-length transactions there shall be subtracted, if not previously deducted in the amount invoiced or received, (i) quantity and cash discounts actually allowed or taken, (ii) freight, postage and shipping insurance allocated in accordance with Vanda's standard allocation procedure, (iii) customs duties and taxes, if any, directly related to the sale, (iv) amounts repaid or credited by reason of rejections, return of goods and retroactive price reductions mandated by or granted in response to state, provincial or federal law or regulation and specifically identifiable as relating to the Product, (v) amounts incurred as a result of governmental (or governmental agency) mandated rebate programmes, (vi) third party rebates and wholesale chargebacks related to the sale of the Product to the extent actually allowed and (vii) as agreed by the parties in writing, any other specifically identifiable amounts included in the Product's gross sales that were or ultimately will be credited and that are substantially similar to those listed above. The computation of Net Sales shall not include sales between or among a party and its Affiliates or Sub-licensees, except where such Affiliates or Sub-licensees are end users. For the purposes of this Sublicense Agreement, sales of the Product to independent distributors, wholesalers or other parties who purchase and take title to the Product are considered to be sales to third parties. If the Product is sold through intermediaries such as agents or co-promoters who do not purchase and take title to the Product, royalties shall be due on Net Sales to third parties who purchase the Product through such intermediaries. It is agreed that there shall be no sales of the Compound to Third Parties by or on behalf of Vanda, its Affiliates or Sub-licensees. In the event there are sales of Compound to Third Parties by or on behalf of Vanda, its Affiliates or Sub-licensees, such sales shall be subject to the payment of royalties by Vanda to Novartis (as the case may be) to the same extent as payments of royalties are due on sales of the Product pursuant to this Sublicense Agreement. In the event that the Product is sold as part of a combination product, the Net Sales of the Product, for the purposes of determining royalty payments, shall be determined by Page 5 of 56
multiplying the Net Sales (as defined above in this Section) of the combination product by the fraction A/(A+B), where A is the weighted (by sales volume) average sale price of Product when sold separately in finished form and B is the weighted average sale price of the other product(s) sold separately in finished form. In the event that such average sale price cannot be determined for both Product and the other product(s) in combination, Net Sales for purposes of determining royalty payments shall be mutually agreed by the parties within a reasonable period of time prior to the first commercial sale of such combination product based on all relevant factors including relative cost and the relative value contributed by each component, and such agreement shall not be unreasonably withheld. 1.16 "Patents" shall mean all patents and patent applications set forth in APPENDIX A, including continuations, continuations-in-part, divisions, patents of addition, reissues, re-examinations, renewals or extensions thereof, along with supplementary protection certificates and other administrative protection of any kind in the Territory owned by or licensed to Novartis or its Affiliates to the extent that such patents claim the Compound or Product, or use, formulations or manufacture thereof, for use in the Field, but not any other compound or use outside of the Field disclosed or claimed in those patents or patent applications. Any Patent having claims covering the Compound or Product or its use formulation and manufacture thereof for use in the Field which is issued during the term of this Sublicense Agreement in any Country of the Territory shall automatically be deemed as of the date of such issuance to be included in the Patent, as defined hereunder. 1.17 "Product" shall mean any bulk or finished pharmaceutical composition containing the Compound as a pharmaceutically active ingredient for use in the Field, whether as a sole active ingredient or in combination with another active ingredient. 1.18 "SEC" shall mean the United States Securities and Exchange Commission. 1.19 "Sub-licensee" shall mean a Third Party (as defined below) to whom a party sublicenses rights to manufacture and sell (or have manufactured and sold) the Compound under Patents, but shall not include any Third Parties to whom rights to manufacture the Compound have not been granted. Unless such party grants to such Third Party the right to manufacture Compound, the following Third Parties shall not be considered Sublicensees under this Sublicense Agreement: agents, distributors, wholesalers, subcontractors, co-marketers, Page 6 of 56
co-promoters, partners or joint venturers. Sub-licensees shall not include compulsory licensees as described in Section 4.1(a). 1.20 "Territory" shall mean all countries and territories of the world provided that any country(ies) in which this Sublicense Agreement is terminated shall be removed from the scope of this definition. 1.21 "Third Party" shall mean any party other than a party to this Sublicense Agreement, HMRI, Titan or an Affiliate of any of these. 2. GRANT 2.1 Novartis hereby grants to Vanda an Exclusive sublicense in the Field under the Patents (to the extent, but only to the extent, that such patents or patent applications claim the Compound or Product or the manufacture, formulation, or use thereof) and Know-How to develop, have developed, make, have made, use, import, sell, offer for sale and have sold the Compound and Product in the Territory, subject to the terms and conditions of this Sublicense Agreement. All rights granted by Novartis to Vanda in this Sublicense Agreement shall remain subject to the rights and obligations of HMRI and Titan within the HMRI Agreement. The sublicense granted to Vanda by Novartis shall include the right of Vanda to sublicense its rights under this Sublicense Agreement, but only upon Novartis', HMRI's and Titan's prior written consent, which consent shall not be unreasonably withheld. Any such sublicensee(s) shall impose upon a Sublicencee(s) of Vanda substantially the same terms and conditions as Vanda assumes in this Sublicense Agreement. As used in this Sublicense Agreement, the term "Exclusive" shall mean that neither Novartis, nor its Affiliates shall grant any other license to, nor themselves exploit, the Patents and Know-How with respect to the Compound and Product in the Field (unless otherwise specified herein) and be limited as follows: (a) With respect to all geographic areas outside of the EEA, such sublicense shall be exclusive for the duration and validity of the intellectual property rights constituting the Patents and/or Know-How. (b) With respect to all geographic areas within the EEA, such sublicense shall be exclusive for the following time periods: Page 7 of 56
(i) For each of the countries within the EEA where only Patents (and not Know-How) exist and are sublicensed to Vanda hereunder, the period of exclusivity for each such country shall be limited to the duration of the relevant Patents in such country, provided that "Patents" for the purposes of the interpretation of this paragraph shall be limited to patents existing, and patents issuing from patent applications existing, and patents issuing from patent applications covering inventions existing as of the date of the Titan Agreement; (ii) For each of the countries within the EEA where Patents and Know-How exist and are sublicensed to Vanda hereunder, the period of exclusivity for each such country shall be limited to the duration of the relevant Patents in such Country, provided that "Patents" for purposes of the interpretation of this paragraph shall be limited to patents existing, and patents issuing from patent applications existing, as of the date of the Titan Agreement and, provided, further, that if the duration of such Patents is less than ten (10) years from the date of first marketing of the Product in the EEA but the Know-How continues to be sublicensed hereunder, the duration of exclusivity shall be for ten (10) years from the date of first marketing of the Product in the EEA; and (iii) For each of the countries within the EEA where Know-How (and not Patents) exists and is sublicensed to Vanda hereunder, the period of exclusivity for each such country shall be limited to ten (10) years from the date of first marketing of the Product in the EEA. Thereafter, such sublicense within the EEA shall be on a non-exclusive basis. (c) deleted (d) Novartis and its Affiliates and licensed Third Parties and Sub-licensees shall also be entitled to utilise the Patents and Know-How in the Field within the Territory for the development and manufacture of the Compound and Product for marketing, distribution and sale where Vanda's rights under this Sublicense Agreement have been terminated. The duration of the sublicense granted by this Section 2.1 shall be limited to the duration, on a country-by-country basis, of the intellectual property rights which comprise the Patents and Know-How with respect to a relevant country, provided that the termination of any portion of any sublicense shall be without prejudice to the requirement of Vanda to pay royalties pursuant to the terms of this Sublicense Agreement. Notwithstanding the foregoing but subject to Sections 3.4 and 3.5 hereof, Novartis acknowledges and agrees that Vanda shall have the right to continue to use on a royalty-free, non-exclusive basis the information which Page 8 of 56
constitutes the Patents and Know-How on a country-by-country basis in the Territory for the Field after the Patents expire or cease to be valid or enforceable and/or Know-How has entered into the public domain. 2.2 deleted 2.3 deleted. 2.4 Novartis grants to Vanda a non-exclusive, worldwide sublicense to make or use any analytical reference standards, intermediate or metabolite of the Compound or Product not listed in Appendix B hereto which may be claimed in Patents limited solely to making or using the Compound or Product. The foregoing sublicense shall include the right to sublicense, but only upon the prior written consent of each of HMRI, Titan and Novartis which consent shall not be unreasonably withheld. Any such sublicense shall impose upon the Sublicensee(s) substantially the same terms and conditions as Vanda assumes in this Sublicense Agreement. 2.5 Vanda shall promote, market and sell the Product under a registered trademark(s) approved by HMRI, Titan and Novartis. Vanda will promptly inform HMRI, Titan and Novartis of the selected trademark(s) and each of the three parties will have twenty (20) business days in which to either approve or reject the selection(s). Vanda shall be responsible for the selection and registration of such trademark(s) in all countries of the Territory at its own cost. In the event the sublicense granted hereunder is terminated in a particular country, other than pursuant to Section 10.3 or as a result of Vanda's termination of this Sublicense Agreement for breach pursuant to Section 10.5, and Novatis exercises the right to promote, market or sell the Product in such country then upon Novartis' request (a) Vanda shall grant to Novartis or its designee(s) a trademark license at a royalty to be negotiated in good faith (which royalty shall not be less than [*] percent ([*]%) and no more than [*] percent ([*]%) on Net Sales of the Product by Novartis and/or its designees) at such time to use such trademark in connection with marketing the Product in such country, subject to reasonable quality control by Vanda with respect to the Product sold under this Section 2.5(a), or (b) Novartis or its designee(s) shall select and register at Novartis' cost a trademark of its own in connection with the marketing of the Product in such country, provided such Novartis trademark is not in any way confusingly similar to the Vanda trademark. Novartis shall use the trademark that - ---------- 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 of 56
that party acting alone has chosen as a trademark (rather than a Vanda trademark) in promoting, marketing or selling the Product in any country that is a member of a free trade union or other economic grouping (e.g., the European Union, EEA, NAFTA, ASEAN and ANDEAN Pact countries) where Vanda is promoting, marketing or selling the Product under a Vanda trademark. 2.6 If Vanda notifies Novartis in writing that Vanda (and/or its Affiliate(s)) is not willing or does not have the capability itself or cannot enter into a Sublicense or other agreement (providing the necessary expertise and resources) in country(ies) outside those covered by NAFTA and the European Union to:(a) develop the Compound or Product (as the case may warrant), and (b) manufacture the Compound and/or market the Product (as the case may warrant) at a Competitive Industry Standard Level at the date of Product approval in such country(ies), then Novartis shall have the right to terminate the sublicense granted by this Sublicense Agreement but only with respect to such country(ies), unless the parties agree in writing to extend such time frame. 2.7 If the Product is not launched in the United States or a Major Market Country at a Competitive Industry Standard Level by Vanda, its Affiliate and/or Sublicensee within [*] after the date of receiving the approvals necessary to commercialise the Product in the United States or a Major Market Country Vanda and Novartis shall review the progress of launch efforts, it being understood that the parties, at the request of a party, may review the progress of launch efforts prior to the end of such [*] period, and Vanda shall keep Novartis and HMRI informed on a regular basis of the status of its launch efforts after receiving the approvals necessary to commercialize the Product in the United States or a Major Market Country until such time that launch is achieved in the United States or a Major Market Country. If launch in the United States or a Major Market Country is not achieved within one (1) year after the date of receiving the approvals necessary to commercialize the Product in such country(ies) (circumstances shall not include events of force majeure as defined in Section 13), or in any event within two (2) years after Product approval then the sublicense granted by this Sublicense Agreement shall terminate, but only with respect to the particular country where launch was not achieved within such one (1) year or two (2) year time frame, as the case may be, unless the parties agree in writing to extend such time frame (the parties shall discuss in such event, factors including but not limited to the necessity to obtain approval of Product for its target indication(s)). - ---------- 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 of 56
2.8 If an NDA or equivalent ex-U.S. regulatory approval in the European Union (Marketing Authorization Application via the Centralized Procedure or marketing approvals for the member countries of the European Union via the mutual recognition procedure) for the Product not obtained within three (3) years of Vanda's or its Affiliate's or Sub-licensee's filing of an NDA or such other equivalent ex-U.S. filing, and such failure is solely due to circumstances within Vanda's reasonable control, then the parties shall discuss the reasons and proposed remedies (or such failure in good faith; provided, however, that if the parties are unable to agree on any such remedies, Novartis shall have the right to terminate the sublicense granted by this Sublicense Agreement, but only with respect to the United States or the European Union where such approval was not obtained, unless the parties agree in writing to extend such time frame. If, however, Novartis determines that such failure is due to circumstances beyond the reasonable control of Vanda (including without limitation delays on the part of the regulatory agencies), the three (3) year period shall be extended to take into account such circumstances, the duration of any such extension to be mutually agreed. 2.9 Subject to the provisions of Section 2.9(d), Novartis shall not be obligated to refund any up front license fees and milestone payments paid by Vanda with respect to any country(ies) which cease to be included within the Territory, and in the event that (i) Novartis or its Affiliate(s) or Sub-licensee(s) elects to commercialise the Product or Compound in such country(ies) and (ii) Vanda, its Affiliate(s) or Sublicensee(s) has an NDA filing in the United States or an equivalent filing in the European Union, then in consideration for the use of any IND, NDA or other governmental approval or associated developmental work held or owned by Vanda related to the Compound or Product: (a) At Novartis' request, and subject to Sections 6.3 and 11.5 hereof, Vanda shall license or otherwise make available under applicable law the benefit of such approvals or work to Novartis or an Affiliate or Third Party designated by Novartis (which third party could be HMRI or Titan), who shall thereafter have the rights to develop, register, manufacture, market and sell the Compound and Product in such country(ies) utilizing such approvals or work, and Novartis (or such Affiliate or Third Party) shall pay to Vanda a royalty to be negotiated in good faith at the time that Novartis exercises such option, on Net Sales of the Product by Novartis or its designees in such country to equitably recognize the value added by Vanda to the Compound and/or Product through its development efforts. Such royalty shall not be greater than [*] percent ([*]%) on net sales of Product by Novartis or its - ---------- 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 of 56
designees. Upon expiration of the Patent in such country, only the royalty paid to Vanda for the use of the Vanda trademark under Section 2.5 shall be paid to Vanda for so long as such trademark is utilized. If a trademark license has not been granted to HMRI, Titan or Novartis in such country, no royalty shall be paid to Vanda upon the expiration of the Patent. (b) Novartis shall share [*] with Vanda any up front license fees, milestone payments or other payments such as prepaid royalties received from a Third Party in connection with the exercise of such option only. If Vanda has not paid to Novartis the up front license fee and all of the milestone payments provided for in Sections 3.1(a) through (c), then Vanda's share of the amount shall be multiplied by a fraction, the numerator of which is equal to the total of the payments that have been made by Vanda to Novartis under Sections 3.1(a) through (c), and the denominator of which is equal to the total of the payments that Vanda otherwise would have been required to pay to Novartis under Sections 3.1(a) through (c) had the sublicense not been terminated. (c) Notwithstanding anything contained herein to the contrary, Novartis shall not be required to pay to Vanda a royalty on sales of the Product that, when added to the royalty payments for a license under the Vanda trademark payable under Section 2.5, exceeds in the aggregate [*] percent ([*]%). (d) If the circumstances leading up to the termination of the Sublicense Agreement pursuant to Section 2.8 are due to any misrepresentations, omissions (of information owned or controlled by Novartis or its Affiliates; as of the date hereof) or falsifications with respect to such Know-How, information or data or fraud by Novartis or its Affiliates, then subject to the following sentence, Novartis shall repay to Vanda, within ninety-five (95) days of such termination, that portion of the up front license fee and milestone payments Novartis had received from Vanda up to the date of such termination. In the case of misrepresentations, omissions (of information owned or controlled by HMRI, Titan or their Affiliates as of the date hereof) or falsifications with respect to such Know-How, information or data or fraud only by HMRI, Titan or their Affiliates, and a termination of the HMRI Agreement pursuant to Section 2.5 of the HMRI Agreement, Novartis shall be obligated to make the foregoing repayments to Vanda if, and only if, Titan has repaid the up front license fee and milestone payments to Novartis under Section 2.9(d) of the Titan Agreement. - ---------- 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 of 56
2.10 In the event that Vanda or a Sublicensee intends to seek a co-promotion or co-marketing partner for the Product in the United States, Vanda shall notify Novartis thereof in writing. Novartis shall then notify Titan thereof, and HMRI shall have a right of first negotiation with Vanda or the Sublicensee on such a collaboration. If HMRI exercises its right of first negotiation, then HMRI and Vanda or the Sublicensee shall negotiate in good faith for a period of ninety (90) days from the date of notification by Novartis to HMRI. If the negotiating parties are unable to enter into a separate definitive written agreement regarding such collaboration by the end of such ninety (90) day period, first Novartis and then Titan will have the right to negotiate with Vanda in good faith for a single period of ninety (90) days. In the event that Vanda or its Sublicensee is unable to enter into a separate definitive written agreement regarding such collaboration by the end of such ninety (90) day period with Novartis or Titan, Vanda or the Sublicensee shall be free to enter into a collaboration with any Third Party subject to all other terms of this Sublicense Agreement and shall have no further obligation to negotiate with HMRI. For the purposes of this Section 2.10, the term "co-promotion or co-marketing partner" will not include an independent contract field sales force that may be engaged by Vanda or a Sublicensee. 3. PAYMENTS AND ROYALTIES. 3.1 As consideration for the sublicenses granted to Vanda by Novartis under this Sublicense Agreement, Vanda shall make the following payments to Novartis: (a) An up front license fee of Five Hundred Thousand United States Dollars (U.S.$500,000) shall be paid by Vanda to Novartis in cash within ten (10) business days of both parties' execution of this Sublicense Agreement. (b) A first development milestone payment of [*] be payable by Vanda to Novartis one time only upon [*] for the Product in the Field [*]. As used in 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 13 of 56
Such milestone payment shall be paid in cash by Vanda directly to Novartis within seven (7) business days of the date of [*]. The [*] payment provided for herein shall, unless otherwise expressly provided for herein, be non-refundable. (c) A second development milestone payment of [*] which shall be payable one time only by Vanda to Novartis on [*]. (d) Vanda shall notify Novartis in writing thirty (30) business days prior to Vanda's estimated achievement of each milestone event described in Sections 3.1(b) and 3.1(c)(i) above and Vanda shall make each such payment within seven (7) business days of the achievement of the milestone event for which such payment is due. 3.2 (a) Unless Novartis instructs Vanda in writing otherwise, all cash payments by Vanda to Novartis (including, without limitation, up front payments, milestone payments, and royalties) shall be made by bank wire transfer as follows: Bank: [*] Swift: [*] Correspondent Bank for USD: [*] USD Account Novartis AG, Basel / Switzerland: [*] USD Account Novartis Pharma AG, Basel / Switzerland: [*] (b) At least two (2) business days prior to the planned wire transfer to either of the above accounts, Vanda shall notify Novartis of the amount and date the cash shall be transferred. (c) In the event of a late payment hereunder by Vanda to Novartis, Vanda shall pay to Novartis interest [*] ([*]%) on the outstanding balance until such balance, including interest, is paid in full to Novartis. The acceptance of such late - ---------- 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 14 of 56
payment shall act as a waiver of any rights Novartis may have hereunder due to a breach by Vanda relating solely to such payment being made late. 3.3 As consideration for the sublicense granted to Vanda in this Sublicense Agreement, Vanda shall pay to Novartis, in those countries where, and for the period, Patents claiming a priority date of May 19, 1989 and December 29, 1989 or Patents owned by Novartis AG in a particular country in the Territory for which a patent had been granted validly claiming Iloperidone or the manufacture, formulation or the use thereof for use in the Field: (a) [*] per cent ([*]%) royalty on annual Net Sales of the Product of Vanda, its Affiliates' and Sublicensees' annual Net Sales of the Product in the Territory. (b) Vanda shall also pay to Novartis the following milestone payments: Net Sales Milestone Milestone payment from Vanda to Novartis - ------------------- ---------------------------------------- (A) Achievement of [*] [*] (B) [*] [*] (C) [*] [*] No [*] shall be payable by Vanda within one calendar year. In the event that a [*] becomes due and payable [*]. Milestone (C) shall be payable at the earliest on [*]. 3.4 (a) In order to spread royalty payments hereunder over a sufficient period of time, in each of those countries in the Territory where the Patents claiming a priority date of May 19, 1989 and December 29, 1989 or Patents owned by Novartis AG in a particular country for which a patent had been granted validly claiming Iloperidone or the manufacture, formulation or use hereof for use in the Field have expired, Vanda's obligations to pay royalties for use of Patents in such country shall cease, and Vanda and/or any of its Sublicensees shall pay - ---------- 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 of 56
directly to HMRI a royalty for Know-How not relating to manufacturing (whether or not such Know-How continues as a valid intellectual property right or is in the public domain) of [*] percent ([*]%) on Vanda's, its Affiliates' and any Sublicensees' annual Net Sales of the Product in each such country for a period of ten (10) years after the expiration of the final remaining Patent claiming a priority date of May 19, 1989 and December 29, 1989 or Patents owned by Novartis AG in each such country. After the end of such ten (10) year period, no further royalties arising from sales of the Product in such country shall be due to HMRI and Vanda shall be entitled to continue to use the Know-How on a fully-paid, irrevocable basis in accordance with Section 10.3. (b) In the event that a Third Party's generic version of Iloperidone is actively marketed in a process patent country (that is, any country in which the only protection in relation to processes for the manufacture of Iloperidone has been obtained and not protection for Iloperidone as a new chemical entity per se) in the Territory where a Patent(s) has been granted validly claiming Iloperidone or the manufacture, formulation or use thereof for use in the Field exists, then subject to Sections 3.4(c) and (d) below, the royalty rate that Vanda shall pay to Novartis on Vanda's or its Affiliate's or Sublicensees annual Net Sales of the Product in that process patent country shall be [*] percent ([*]%) until such Patent(s) expires, provided; (i) Vanda has obtained, or has made every effort to obtain, the maximum allowable period of exclusivity to which it is entitled based on the Product's registration data in that process patent country to the extent such exclusivity in available; and (ii) The parties in accordance with Article 8 of this Sublicense Agreement, will implement an appropriate strategy for addressing the commercialization of Iloperidone by said Third Party. Unless otherwise agreed to by the parties, Vanda shall at its sole cost be obligated to diligently enforce the Patent(s) until there is a binding, unappealable judicial determination as to whether the manufacture, formulation or use of such generic version of Iloperidone infringes Patent(s) or until it is demonstrated to the satisfaction of both Parties that such Patent(s) are not being infringed in such country. (c) If it is demonstrated to the satisfaction of both Parties or the binding unappealable judicial determination under Section 3.4(b)(ii) holds that Patent(s) are not being infringed in such process patent country, the royalty rate that Vanda shall pay to Novartis on Vanda's or its Affiliate's or Sublicensee's annual Net Sales of Product in that process patent country shall continue to be [*] percent ([*]%) until such Patent(s) expires. - ---------- 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 of 56
(d) If the binding, unappealable judicial determination under Section 3.4(b)(ii) holds that Patent(s) are being infringed in such process patent country, Vanda shall take reasonable steps to have enforced such determination. If as a result, the commercialization of Iloperidone by the Third Party in that country is discontinued: (i) the royalty rate(s) that Vanda shall pay to Novartis on Vanda's or its Affiliate's or Sublicensee's annual Net Sales of the Product in that process patent country shall be, commencing on the later of: (A) the date such binding, unappealable judicial determination is rendered, and (B) the date (if any) specified in such determination that commercialization of such Third Party generic version of the Product is to be discontinued, those royalty rates provided for in Section 3.3 until such Patent(s) expires; and (ii) Vanda shall repay to Novartis, within thirty (30) days after the later of: (A) the date such binding, unappealable judicial determination was rendered, and (B) the date (if any) specified in such determination that commercialization of such Third Party generic version of the Product is to be discontinued, an amount equal to the difference between the royalties that Vanda would have paid to Novartis under Section 3.3, and the amount of royalties that Vanda actually paid to Novartis at the [*] percent ([*]%) rate, for the period commencing on the date the royalty rate for that process patent country was reduced to [*] percent ([*]%) pursuant to Section 3.4(b), and ending on the later of: (A) the date such binding, unappealable judicial determination was rendered, and (B) the date (if any) specified in such determination that commercialization of such Third Party generic version of the Product is to be discontinued. (e) After a Patent(s) in any process patent country expires, Vanda and/or its Sublicensee shall pay directly to Novartis royalties as provided for in Section 3.4(a). 3.5 As consideration for the sublicense granted to Vanda under this Sublicense Agreement in those countries in the Territory for which (a) a Patent application for the Compound or Product is pending or (b) no Patent application has been filed or (c) Patents have been abandoned or been held invalid or unenforceable by a decision of a court or tribunal of competent jurisdiction from which no appeal is or can be taken (collectively, "Non-Patent Countries"), Vanda shall pay to Novartis, on a country-by-country basis, a [*] percent - ---------- 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 of 56
([*]%) royalty for Know-How not relating to manufacturing (whether or not such Know-How continues as a valid intellectual property right or is in the public domain) on Vanda's, its Affiliates' and any Sublicensees' annual Net Sales of the Product in the Non-Patent Countries for a period of five (5) years from the date of the first commercial sale of the Product in each such country by Vanda, its Affiliates or Sublicensees. After the end of such five (5) year period, no further royalties arising from the sales of the Product in such country shall be due. However, with respect to Section 3.5(a) or (b), if at any time during or after such five (5) year period a Patent for Compound or Product is issued in such country, subject to Section 3.4, Vanda shall pay to Novartis, from the date the Patent was issued, the same royalties as provided for in Sections 3.3(a) and (b) above. Upon expiration of Vanda's obligation to pay a royalty under such Patent, notwithstanding Section 3.4, a [*] percent ([*]%) royalty for Know-How not relating to manufacturing (whether or not such Know-How continues as a valid intellectual property right or is in the public domain), on Net Sales of the Product in such country, shall be paid by Vanda and/or any of its Sublicensees directly to HMRI for a period of five (5) years after which Vanda shall be entitled to continue to use the Know-How on a fully-paid, irrevocable basis in accordance with Section 10.3. 4. COMPULSORY LICENSES AND THIRD PARTY LICENSES 4.1. (a) in the event that during the term of this Sublicense Agreement a governmental agency in the Territory grants or compels HMRI and/or Titan and/or Novartis to grant a license to any Third Party for the Compound or Product in a country(ies), it is the intent of the parties that Vanda not be placed at a competitive disadvantage as a result of a lower royalty rate being granted to a Third Party compulsory licensee. Therefore, in the event that Novartis, Titan or HMRI is compelled to grant a license to a Third Party, Novartis, Titan and HMRI will meet to discuss in good faith equitable arrangements, which could include adjustments to Vanda's original royalty rates in Section 3.3 of this Sublicense Agreement which are to be paid on Net Sales of Product in such country, to accomplish the intent of Novartis and Vanda set forth above. In such discussions, consideration will be given to Novartis' obligations to HMRI and Titan under Section 4.l (d) of the Titan Agreement. (b) If a governmental authority in a country in the Territory imposes a maximum royalty rate, such that lower royalty rates than would otherwise apply under this Sublicense Agreement are mandated in such country, then the royalty rates provided for herein shall be reduced 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 18 of 56
equal such lower rates for sales of the Product in such country for the period such lower royalty rate is required by any governmental authority and shall cease when Vanda's royalty payment obligations cease under this Sublicense Agreement. 4.2 If, during the term of this Sublicense Agreement, HMRI and Vanda agree that patent(s) of a Third Party exists in the Territory covering the manufacture, use or sale of the Compound or Product, and if it should prove, in the reasonable judgment of Vanda and HMRI, impractical or impossible for Vanda or its Affiliates or Sublicensees to continue the activity or activities sublicensed hereunder in the Field without obtaining a royalty-bearing license from such Third Party under such patent(s) or if Vanda and HMRI otherwise agree it is desirable for HMRI to acquire any Third Party patent or license in connection with the development or manufacture of Compound or Product covered by Patents in the Territory, then in either case the provisions of Section 8.8(c) shall apply. 4.3 If, after attempting in good faith to resolve the issue relating to licensing Third Party patents in Section 4.2 between themselves, Vanda and HMRI are unable to agree within ninety (90) days as to whether it is impracticable or impossible for Vanda, its Affiliates or Sublicensees to continue the activity or activities sublicensed hereunder without obtaining a royalty-bearing license from a Third Party, the issue shall be submitted to a disinterested, competent and experienced patent attorney reasonably acceptable to both Vanda and HMRI for resolution. If Vanda and HMRI cannot agree on the selection of such patent attorney, then each party shall select a patent attorney and the selected patent attorneys shall select a mutually acceptable patent attorney who will determine whether such Third Party rights materially inhibit Vanda's ability to manufacture, distribute or sell the Compound or Product. The compensation to, and expense of such patent attorney shall be borne by the party whose position is not upheld by such patent attorney (that is, for example, if the patent attorney determines that such Third Party rights do not materially inhibit Vanda's ability to manufacture, distribute or sell the Compound or Product, then the costs of such patent attorney shall be borne by Vanda). 5. DEVELOPMENT 5.1 Upon the signing of this Sublicense Agreement, Vanda shall have full legal and financial responsibility for all costs that are incurred and all activities that are undertaken after the Page 19 of 56
signing of this Sublicense Agreement, which are related to development, safety and required periodic reporting to the FDA and equivalent ex-U.S. regulatory agencies, marketing, regulatory approvals, price registrations, and other activities required by Vanda or its Sublicensee(s) (or their respective agents or distributors) to obtain appropriate government approvals for, and to commercialize, the Compound and Product in the Territory. Other than as expressly provided for in Section 5.4, Vanda shall not assume, nor shall Vande be liable for, any costs or activities (whether scientific, financial or otherwise) relating to the Compound or Product that were incurred or undertaken prior to the signing of this Sublicense Agreement (including without limitation any costs, expenses, damages, losses, fines, penalties or the like that may be awarded or assessed after the signing of this Sublicense Agreement, but which arise out of events and activities that occurred prior to the signing of this Sublicense Agreement). 5.2 Provided that the Affiliates, Sublicensees and other Third Parties agree to substantially the same terms of confidentiality in Section 6.4 hereof, Vanda may appoint such Affiliates, Sublicensees(s) and other Third Parties to perform any and all development activities necessary to obtain government approvals for the Product in the Territory. The appointment of any Sublicensee shall require HMRI's prior written consent, which consent shall not be unreasonably withheld. 5.3 Vanda shall, in a manner consistent with the effort Vanda devotes to its own products having the same or similar potential value as Product, exercise its Commercially Reasonable Efforts and diligence in conducting clinical trials and commercializing the Product alone or in collaboration with a Third Party, and in undertaking those investigations and actions required to obtain appropriate governmental approvals to manufacture the Compound and market the Product in the Territory. All such activity shall be undertaken at Vanda's expense. Novartis shall arrange with HMRI to provide assistance or consultation at Vanda's expense in support of the development of the Compound or Product, but HMRI in its discretion may limit such assistance and consultation. 5.4 The parties further agree that: (a) Novartis will be informed by Vanda on a timely and regular basis of the development, registration and commercialisation of the Compound and Product in the Territory, and will Page 20 of 56
have an opportunity to regularly meet with Vanda and provide input into the development and registration process, and (b) all of Novartis' contractual obligations to Third Parties involved in the development and registration process for the Compound and Product (including Contract Research Organizations (CROs) existing as of the date of this Sublicense Agreement, which CROs are identified in APPENDIX E), will be considered by Vanda to the extent they are not inconsistent with Vanda's Standard Operating Procedures. (c) Vanda shall be solely responsible for the negotiation of contracts with any CROs and other organisations it desires to work on development activities relating to the Compound and/or Product and Vanda shall bear all legal and financial responsibility under such contracts. 5.5 Any inventions or discoveries or improvements which arise from Vanda's, its Affiliates' or Sublicensees work relating to the development and/or manufacture of the Compound and/or Product shall be owned by Vanda, but shall be licensed to HMRI, Titan and Novartis at their option on a worldwide, non-exclusive, perpetual basis, at a license fee and/or royalty to be negotiated at such time. In the case of any inventions or discoveries or improvements arising in areas outside of the original field, which was defined in the HMRI Agreement and the Titan Agreement, shall be owned by Vanda, but shall only be licensed to HMRI, at HMRI's option on a worldwide, non-exclusive, perpetual basis, at a license fee and/or royalty to be negotiated at such time. Notwithstanding anything to the contrary in this Sublicense Agreement, in the event that this Sublicense Agreement between Novartis Pharma AG and Vanda Pharmaceuticals, Inc. expires or terminates, in its entirety or with respect to any country, (except as a result of material breach of the Agreement by Novartis), any inventions or discoveries or improvements which arise from Vanda's, its Affiliates' or Sublicensees' work relating to development and/or manufacture of the Compound and/or Product (the "Vanda IP") shall be disclosed to HMRI and be owned by and become the property of HMRI (or assignees or successors, as the case may be), but shall be licensed to Titan under Section 2.1(a) of the HMRI- Agreement and subsequently to Novartis under the Titan Agreement. Vanda shall promptly undertake any and all actions necessary to effectuate such ownership in and assignment to HMRI. If the Vanda Sublicense Agreement expires or terminates with Page 21 of 56
respect to a particular country, then the requirements of this Section 5.5 and Aventis' rights to the Vanda IP shall be limited to such country. 5.6 deleted. 5.7 In addition to that which is required under Section 5.4(a), Vanda shall provide to Novartis regular written reports at least every six (6) months setting forth significant developments and improvements, including the status and progress of the development and/or registration activities, that affect the Compound or Product. 5.8 Vanda, or its Sublicensees, shall promptly advise Novartis in writing upon the submission and filing for government regulatory approval to manufacture and market the Product, and upon the receipt of government regulatory approval to market the Product, in each case in each country in the Territory, and shall commence marketing the Product in such country in accordance with Section 5.3. 5.9 Subject to applicable laws and regulations, labeling on all Product sold by or on behalf of Vanda pursuant to this Sublicense Agreement, and all advertising, marketing and promotional materials used in connection therewith, will identify Novartis as the licensor of the Product. 5.10 If at any time during the term hereof a product is developed by Vanda or any of its Affiliates or Sublicensees, which product contains the Compound and one or more other pharmaceutically active ingredients for use in the Field (a "Combination Product"), Novartis shall negotiate in good faith with Titan an amendment to the Titan Agreement, which amendment will provide, inter alia for how royalties to be paid by Novartis to Titan for Net Sales of such Combination Product will be calculated and for how long such royalties shall be paid. After such amendment to the Titan Agreement has been executed by Novartis and Titan, this Sublicense Agreement shall be similarly amended by Novartis and Vanda to provide for such Combination Product. 6. EXCHANGE OF INFORMATION AND CONFIDENTIALITY. 6.1 Upon the signing of this Sublicense Agreement, Novartis shall deliver to Vanda, all available Know-How, documents, information and data which is owned or controlled by Novartis and its Affiliates, which may be reasonably expected to assist Vanda in developing, registering, manufacturing and marketing the Compound and Product in the Territory. After the execution of this Sublicense Agreement, there shall be a sixty (60) day transition period Page 22 of 56
during which Novartis shall provide, at its own cost, reasonable resources, expertise, and documents to effectively transfer the Know-How and development activity to Vanda. Banked DNA samples and or animal tissues treated with the compound will only be made available to Vanda for further studies in accordance with the protocols and informed consents set forth at the time of sample acquisition provided however that no human tissue samples with identifiable patient data will be transferred to Vanda. All raw data and individual clinical and genetic data will be transferred to Vanda under a mutually agreed coding schema, in order to protect patient confidentiality. All original identifiable patient data will, however be provided to the FDA as part of the submission package. If Vanda requires additional genotyping on existing samples, Novartis will contract this work out, in accordance with the informed consents, on Vanda's behalf and at Vanda's cost. If further DNA samples from past study patients are desired, Vanda will revisit the sites and try to consent or reconsent these patients for additional DNA sampling. Upon Novartis' receipt of the up front license fee referred to in Section 3.1(a) hereof, Vanda and Novartis each shall promptly provide written notification to the FDA that Novartis assigns and that Vanda assumes sponsorship of the U.S. IND No. 36,827 (as specified in 21 CFR 314.72). Within ten (10) days after the date of such written notification, Novartis shall transfer the U.S. IND for the Compound or Product to Vanda. Until such transfer is made, Vanda shall have the right to make reference to such Compound or Product owned or controlled by Novartis or its Affiliates. Furthermore, upon Novartis' receipt of the upfront license fee referred to in Section 3.1(a), Novartis shall arrange for the transfer to Vanda of Canadian IND Control No. 27740. 6.2 Vanda shall have Exclusive use, subject to the terms of this Sublicense Agreement and in particular Section 2.3, of all Know-How, documents, information, data and material for the development, registration, manufacture and marketing of the Compound and the Product for use in the Field in the Territory. Novartis and its respective Affiliates shall keep confidential all Know-How, documents, information and data in their possession or received from or generated by or on behalf of Vanda that is not already in the public domain relating to the Compound and Product regarding the use in the Field with the same level of care that Novartis and its respective Affiliates use for their own confidential information. Upon Novartis' request during the term of this Sublicense Agreement, Vanda shall deliver to Novartis a copy of all such information and data in a form to be mutually agreed upon, within thirty (30) days after Novartis' request, it being understood and agreed that any and all such information and data will be made available by Novartis to Titan, upon Titan's request. 6.3 Subject to the confidentiality obligations of this Article 6, Vanda shall make available and HMRI, Titan and Novartis shall be able to freely use Know-How and documents, information and data relating to the Compound and/or Product disclosed or generated by Vanda, its Affiliates and Sublicensees and applications for government approvals (United States or Page 23 of 56
European Union or Japan), reports on the status and progress of the development of the Compound or the Product and the like in any country(ies) deleted from the Territory and to which this Sublicense Agreement has been terminated pursuant to the terms hereof. 6.4 During the period of time during which Vanda is obligated to pay royalties hereunder, irrespective of any termination with respect to a particular country or countries in the Territory, Vanda shall not reveal or disclose to a Third Party or use for any purpose other than to perform its obligations herein any Confidential Information (as defined below) without first obtaining the written consent of Novartis, except as may be otherwise provided herein, or for securing essential or desirable authorizations, privileges, licenses, registration or rights from governmental agencies, or is required to be disclosed to a governmental agency or is necessary to file or prosecute Patent applications concerning the Compound or Product or to carry out any litigation concerning the Compound or Product provided, however, that Vanda notifies Novartis in writing in a reasonably sufficient time frame prior to making such disclosure that Vanda intends to make such disclosures and the details thereof, and Vanda seeks confidential treatment where available of such Confidential Information from such governmental agencies. This confidentiality obligation shall not apply to such information which is or becomes a matter or public knowledge through no fault of Novartis, or is already in the possession of Novartis as evidenced by written records, or is disclosed to Vanda by a Third Party having the right to do so, or is subsequently and independently developed by employees of Novartis or its Affiliates who had no knowledge of the Confidential Information. Vanda shall take reasonable measures to assure that no unauthorised use or disclosure is made by others to whore access to such information is granted. As used herein, "Confidential Information" means, any confidential or proprietary information of HMRI, Titan or Novartis or their Affiliates, including any present or future formulas, research project, work in process, inventions, procedures, development, scientific, engineering, manufacturing, marketing, business or financial plan or records, products, sales, suppliers, customers, or investors, whether such confidential or proprietary information is in oral, written, graphic or electronic form (including all copies in whole or in part of any of the foregoing) and which derives value from being known to the disclosure or owner. 6.5 After transfer of the United States and Canadian INDs to Vanda under Section 6.1, Novartis and Vanda shall co-operate with respect to the exchange of adverse event and safety information associated with Compound and Product, and such information shall be coordinated by Vanda central clinical, safety and epidemiology organisation. Details of the obligations of the parties with respect to reporting such information to each other, and processing of this data shall be covered in an addendum following execution of this Sublicense Agreement. Page 24 of 56
6.6 Nothing herein shall be construed as preventing Vanda from disclosing any information received from Novartis to an Affiliate, Sublicensee, distributor, contractor, agent, consultant, legal counselor other Third Party involved in the development, manufacture, marketing, promotion or sale of the Compound or Product, provided that such Affiliate or Sublicensee or other Third Party has undertaken a similar obligation of confidentiality with respect to the Confidential Information. 6.7 In the event that a court or other legal or administrative tribunal, directly or through an appointed master, trustee or receiver, assumes partial or complete control over the assets of Vanda based on the insolvency or bankruptcy of Vanda, Vanda shall promptly notify the court or other tribunal (i) that Confidential Information received from Novartis remains the property of HMRI, Titan or Novartis, or their respective Affiliates, as the case may be, and (ii) of the confidentiality obligations under this Sublicense Agreement. In addition, Vanda shall, to the extent permitted by law, take all steps reasonably necessary or desirable to maintain the confidentiality of the Confidential Information of HMRI, Titan or Novartis, as the case may be, and to ensure that the court, other tribunal or appointee maintains such information in confidence in accordance with the terms of this Sublicense Agreement. 6.8 No public announcement or other disclosure to a Third Party concerning the existence of or terms of this Sublicense Agreement shall be made, either directly or indirectly by either party to this Sublicense Agreement, except as may be legally required, without first obtaining the approval of the other party, which approval shall not be unreasonably withheld, and shall be given within a reasonable time. The party desiring to make any such public announcement or other disclosure shall provide the other party with a written copy of the proposed announcement or disclosure in sufficient time prior to the proposed public release, to allow such other party to comment upon the nature, content and timing of such announcement or disclosure, prior to the proposed public release. Notwithstanding the foregoing, Vanda shall be permitted to refer to this Sublicense Agreement in presentation to prospective investors. 6.9 Neither party shall submit for written or oral publication any manuscript, abstract or the like which includes Know-How, data or other information generated and/or provided by Novartis or Vanda pursuant to this Sublicense Agreement without first obtaining the prior written consent of the party generating or providing such information, which consent shall not be unreasonably withheld. The contribution of each party shall be noted in all publications or presentations by acknowledgment or co-authorship, whichever is appropriate. 7. NOVARTIS SUPPLY OF COMPOUND AND PRODUCT TO VANDA. 7.1 Novartis shall supply Compound and Product to Vanda under the following conditions: Page 25 of 56
(a) Within sixty (60) days after the Effective Date of this Sublicense Agreement as agreed to by the parties in good faith, Novartis will, at Vanda's cost, arrange for the transfer to Vanda, to a single site to be designated by Vanda, all quantities of milled Compound available to it as of the Effective Date of this Sublicense Agreement. (b) Title to, and risk of loss with respect to, all Compound and the Product supplied by Novartis to Vanda under this Section 7.1 shall pass to Vanda upon the receipt of such Compound and Product by Vanda or its designee at its point of delivery. Novartis shall not be liable for any loss of such Compound and/or Product except where such loss is the result of Novartis negligence or willful misconduct. (c) Novartis shall provide to Vanda the most recent certificate of analysis for any shipment of Compound or Product. (d) Novartis makes no representation or warranty that Compound and Product supplied by it to Vanda for clinical trials will conform to the IND specifications therefore as well as all laws and regulatory requirements, including current Good Manufacturing Practices applicable to the Compound and Product when used in clinical trials in accordance with the IND. 7.2 Novartis shall provide information and assistance to Vanda with respect to the Compound and Product as follows: (a) Within sixty (60) days after the full execution and delivery of this Sublicense Agreement, Novartis shall deliver to Vanda any and all Know-How, documentation, data and other information owned or controlled by Novartis and its Affiliates, that Vanda may reasonably require for the manufacture of the Compound and Product. Such information shall include without limitation the specifications for the Compound and Product and methods of analysis for testing the Compound and Product, as currently described within the IND regulatory documentation, including Chemistry-Manufacturing/Controls (CMC) information amendments and the technology transfer file. (b) Novartis shall make reasonable commercial efforts to arrange for HMRI to provide to Vanda or its designated Third Party assistance for the transfer of manufacturing technology, through documentation, consultation and face-to-face meetings, to enable Vanda or such Third Party to proceed with development of commercial-scale manufacturing. If requested by Vanda or such Third Party, Novartis shall visit the designated commercial manufacturing facility, with the limitation of three (3) visits, not to exceed a total of ten (10) business days, Page 26 of 56
for which Vanda shall bear all the costs of reasonable travel and other out-of-pocket expenses. 7.3 Novartis represents and warrants that the specifications for the Compound and Product are consistent with those set out in the INDs sponsored by Novartis. 7.4 Upon expiration or termination of this agreement, Vanda shall return to Novartis, all unused Compound or Product supplied by Novartis hereunder. 8. PATENT PROSECUTION; MAINTENANCE AND EXTENSION; INFRINGEMENT 8.1 HMRI shall be responsible for the filing, prosecution (including oppositions) and maintenance of the Patents excluding Novartis Patents (hereinafter "HMRI-Patents") at HMRI's expense. For so long as the-license grants set forth in Article 2 remain in effect, HMRI agrees to file and prosecute and maintain the HMRI-Patents in the Territory, provided that the foregoing is subject to HMRI's reasonable business judgment. Novartis shall keep Vanda informed, to the same extent HMRI and/or Titan keep Novartis informed, of important issues relating to the preparation, filing, prosecution and maintenance of such HMRI-Patent applications and HMRI-Patents. Vanda, through Novartis, shall have the right to comment on HMRI's preparation, filing, prosecution and maintenance of HMRI-Patent applications and HMRI-Patents, and HMRI shall give due consideration to Vanda's comments, but HMRI shall make all decisions regarding the same. 8.2 If HMRI elects not to seek patent protection in countries listed in APPENDIX F or to maintain patent protection on HMRI-Patents listed in APPENDIX A in any country in the Territory to the extent that HMRI-Patents claim the Compound or the Product (or formulations, use or manufacture thereof), Vanda shall have the right, at its option and at HMRI's expense, which expense must be approved in advance by HMRI (approval which shall not be unreasonably withheld), to file, prosecute (including oppositions) and maintain any such HMRI-Patent applications and HMRI-Patents in HMRI's name, and any HMRI-Patent issued therefrom shall be owned by HMRI. Novartis shall advise Vanda of HMRI's decision) not to seek or maintain patent protection in a reasonably timely manner. In the event that a HMRI-Patent is issued covering the Compound or Product in any country in Territory under the conditions of this Section 8.2, Vanda shall pay directly to HMRI a [*] percent ([*]%) royalty on Net Sales of Product in such country, for a period of five (5) years from the date of such patent issuance in such country, in recognition of HMRI's Know-How and manufacturing rights and the right to make and sell the Compound or Product in such - ---------- 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 of 56
country. Legal fees and expenses, as confirmed by HMRI, incurred by Vanda shall be deducted from the royalty paid to HMRI. 8.3 Vanda shall be responsible for the filing, prosecution (including oppositions) and maintenance of the Patents owned by Novartis (hereinafter "Novartis-Patents") at Vanda's expense. Vanda agrees to file and prosecute and maintain the Novartis-Patents in the Territory, provided that the foregoing is subject to Vanda's reasonable business judgment. Novartis, shall have the right to comment on Vanda's preparation, filing, prosecution and maintenance of Novartis-Patent applications and Novartis-Patents, and Vanda shall give due consideration to Novartis' comments. If Vanda elects not to maintain patent protection on Novartis-Patents in any country, Novartis shall have the right, at its option, to file, prosecute and maintain any such Novartis-Patent. Vanda shall have the right but not the obligation to enforce Novartis-Patents against Third Parties at its cost, and if Vanda does not act, Novartis may in its sole discretion take such enforcement action as Novartis deems necessary. 8.4 Each of HMRI, Titan, Novartis and Vanda shall make available to the other, its employees, agents, subcontractors or consultants (including its authorized attorneys) to the extent reasonably necessary or appropriate to enable the appropriate party to file, prosecute and maintain patent applications and resulting patents subject to this Sublicense Agreement to the extent that Patents claim the Compound or Product (or formulations, use or manufacture thereof). Where appropriate, each of HMRI, Titan, Novartis and Vanda shall sign or cause to have signed all documents relating to said patent applications or patents at no charge to the other. 8.5 Novartis shall obtain all assignments or licenses, as applicable from the patent holder of the Patents, to the same extent as Novartis is entitled to receive such assignments or licenses from HMRI and Titan under the HMRI Agreement as applicable, to provide Vanda with the same degree of exclusivity in the Territory under the Patents as Novartis is granted by HMRI and Titan under the Titan Agreement. 8.6 Promptly after it is notified by HMRI and Titan, Novartis shall notify Vanda in writing of (a) the issuance of each HMRI-Patent, giving the date of issue and patent number for each patent, and (b) each notice pertaining to any HMRI-Patent which HMRI receives as patent owner pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984, or other similar laws now or hereafter in effect which extend the Patent life, or pursuant to comparable laws or regulations in other countries in the Territory. At HMRI's expense, HMRI, Titan, Novartis and Vanda shall co-operate with each other in applying for patent term extensions (including Supplementary Protection Certificates in European Union member states) where applicable in any country of the Territory. HMRI shall have full Page 28 of 56
responsibility and authority in the decisions regarding filing for the foregoing HMRI-Patent extensions at its own expense although Vanda, through Novartis, shall be consulted and its opinions given due consideration in such decision-making process. If HMRI elects not to pursue extension of any HMRI-Patents, Vanda shall have the right (but not the obligation) to apply for such extension in HMRI's name and at Vanda's expense, and HMRI shall reasonably co-operate in the filing and procurement thereof. 8.7 Except as otherwise expressly provided in this Sublicense Agreement, under no circumstances shall a party hereto, as a result of this Sublicense Agreement, obtain any ownership interest in or other right to any technology, Know-How, Patents, pending Patent applications, products, or biological material of the other party, Titan or HMRI, including items owned, controlled, discovered, invented or developed by the other party, Titan or HMRI, or transferred by the other party, Titan or HMRI to that party, at anytime pursuant to this Sublicense Agreement which is not a direct result of the study, Know-How and experimentation of the Compound and Product. 8.8 Each of Vanda, Novartis, Titan and HMRI shall promptly, but in any event no later than ten (10) business days after receipt of notice of such action, notify the other in writing of any Patent nullity actions, any declaratory judgment actions or any alleged or threatened infringement of Patents or misappropriation of intellectual property comprising Patents, or if Vanda, HMRI, Titan or Novartis, or any of their respective Affiliates or Sublicensees, shall be individually named as a defendant in a legal proceeding by a Third Party alleging infringement of a patent or other intellectual property right of such Third Party as a result of the manufacture, production, use, development, marketing, selling or distribution of the Compound or Product, or of any information or notification regarding the Patents. 8.9 HMRI shall have the first right to respond to, defend or prosecute any actions, challenges, infringements, misappropriations or proceedings by a Third Party alleging infringement described in Section 8.8. In the event HMRI elects to do so, Vanda will co-operate with HMRI and its legal counsel, join in such suits as may be brought by HMRI, and be available at HMRI's reasonable request to be an expert witness or otherwise to assist in such proceedings and at HMRI's expense. HMRI will co-operate with Vanda and its legal counsel and keep Vanda and its counsel reasonably informed at all times as to the status of HMRI's response or defense. 8.10 In the event that HMRI elects to respond to, defend or prosecute any actions, challenges, infringements, misappropriations or proceedings by a Third Party claiming infringement described in Section 8.8 hereof, then: (a) legal fees and other costs and expenses of HMRI associated with such response or defense shall be paid by HMRI; (b) legal fees and other Page 29 of 56
costs and expenses associated with such response or defense incurred by Vanda at HMRI's request, shall be paid by HMRI; (c) the costs of acquiring Third Party patents or licenses and any settlement, court award, judgment or other damages shall be paid by HMRI to such Third Parties out of royalties projected to be received from Vanda (through Titan or Novartis); provided, however, HMRI shall not be obligated to pay for any patents or licenses for uses of the Compound or Products not disclosed in the Patents as of the date of the execution of the HMRI Agreement; and (d) any amounts recovered from Third Parties in connection with such response or defense shall be applied [*] percent ([*]%) to Vanda (through Titan and Novartis), and [*] percent ([*]%) to HMRI, subject first to reimbursement of expenses of HMRI, Novartis, Vanda and Titan. 8.11 In the event that HMRI elects not to respond to, defend or prosecute any actions, challenges, infringements, misappropriations or proceedings by a Third Party alleging infringement described in Section. 8.8 hereof or HMRI abandons any such action, Novartis shall notify Vanda promptly after receiving notification from HMRI or Titan of such actions, challenges, infringements, misappropriations, proceeding or HMRI's decision to abandon any such action. In such event, Vanda shall have the option to respond, defend or prosecute such action at Vanda' sole cost, provided that HMRI shall co-operate with and provide assistance to Vanda at HMRI's expense. All amounts recovered from any Third Party shall be applied [*] percent ([*]%) to Vanda and [*] percent ([*]%) to HMRI, subject first to reimbursement of expenses of HMRI, Vanda, Novartis and Titan. 8.12 In the event that HMRI and Vanda mutually agree that it is desirable for HMRI to acquire any Third Party patent or license in connection with the development or manufacture of the Compound or Product covered by the HMRI-Patents in the Territory then the costs of acquiring such Third Party patent or license shall be paid by HMRI to such Third Parties out of royalties received from Vanda (either directly or through Titan and Novartis). 8.13 Vanda recognises that HMRI has reserved certain rights in the HMRI-Patents set forth in APPENDIX A and that there may be a legitimate dispute between the parties whether a legal action should be brought against a Third Party which could affect HMRI's reserved rights under those HMRI-Patents and Vanda's sublicense rights under this Sublicense Agreement. In the event that there is a dispute between Vanda and HMRI regarding whether there is an infringement of HMRI-Patents by a Third Party and therefore whether a legal action should be initiated, Vanda and HMRI shall submit the issue to a disinterested, competent and experienced patent attorney reasonably acceptable to Vanda and HMRI to determine whether or not there is an infringement and legal actions should be taken. If Vanda and HMRI cannot agree on the selection of such a patent attorney, then Vanda and HMRI shall each select a patent attorney and those selected patent attorneys shall select a mutually acceptable patent - ---------- 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 30 of 56
attorney. That selected patent attorney shall determine whether or not there is an infringement and legal action should be taken and then Vanda and HMRI may decide whether or not to initiate a legal action as described by this Article 8. The compensation to, and expenses of, such patent attorney shall be borne by the losing party. 9. STATEMENTS AND REMITTANCES. 9.1 Vanda shall keep, and require its Affiliates and Sublicensees to keep complete and accurate records of all Net Sales of the Product under the sublicenses granted herein. HMRI and Novartis shall have the right, at their expense, through a certified public accountant or like independent person reasonably acceptable to Vanda, and following reasonable notice, to examine such records under conditions of confidentiality during regular business hours during the period of time during which royalties are due and payable hereunder and for [*] thereafter; provided, however, that such examination shall not take place more often than once a year and shall not cover such records for more than the preceding [*]; and provided further, that such accountant shall report to Novartis only as to the accuracy of the Net Sales computation and royalty statements and payments. It is agreed that if this Sublicense Agreement is terminated with respect to a particular country(ies), then Novartis' examination rights shall continue with respect to sales of the Product in such country(ies) only for a period of [*] after the termination of sublicense rights in that country. Copies of all such accountant's reports shall be supplied to Vanda. 9.2 Within forty-five (45) days after the close of each calendar quarter, Vanda shall deliver to Novartis a true accounting of all Product sold by Vanda, its Affiliates and Sublicensees during such quarter and shall at the same time pay all earned royalties due. Such accounting shall show Net Sales of Product on a country-by-country and product-by-product basis and such other particulars as are reasonably necessary for accounting of the royalties payable hereunder. 9.3 Any tax paid or required to be withheld by Vanda on account of royalties payable by Vanda under this Sublicense Agreement shall be indicated on the accounting described in Section 9.2 hereof and deducted from the amount of royalties otherwise due. Vanda shall secure and send to Novartis or HMRI, as the case may be, proof of any such taxes withheld and paid by Vanda. Any withholding or other tax arising on or following permitted assignment of this Sublicense Agreement by Vanda or a Sublicensee shall be for the account of and paid by Vanda. - ---------- 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 31 of 56
9.4 Unless otherwise indicated herein, and subject to foreign exchange regulations then prevailing, to the extent free conversion from local currency to United States dollars is permitted, all payments and royalties payable under this Sublicense Agreement shall be paid in cash in U.S. dollars by wire transfer in accordance with Section 3.2 hereof. If governmental regulations prevent remittances from a foreign country with respect to sales made in that country, the obligation of Vanda to pay royalties on sales in that country shall be suspended until such remittances are possible, but such royalties shall accrue as accounts payable by Vanda to Novartis or HMRI, as the case may be. Novartis or HMRI, as the case may be, shall have the right, upon giving written notice to Vanda, to receive payment in that country in local currency. 9.5 Royalty payments and Net Sales shall be calculated on the basis of Vanda's quarterly standard account of internal sales which represents the conversion of all local currency sales for a calendar quarter into Swiss francs at the average exchange rate: (as routinely derived via Vanda's' standard methodology) for such calendar quarter in which the sales are recorded. The exchange rate between the Swiss franc and the U.S. dollar for the quarterly royalty payments to Novartis or HMRI (as the case may be) shall be the exchange rates published in the Foreign Exchange column of The Wall Street Journal, New York edition, or other qualified source mutually acceptable to the parties on the last business day of the calendar quarter for which the royalties are being paid. Notwithstanding the foregoing, if there is a difference between any amount that Vanda pays to Novartis or HMRI (as the case may be) under Sections 3.3, 3.4 or 3.5, and the amount that Novartis is required to pay to Titan under the Titan Agreement (which difference arises as a result of using the method for calculating royalties that are due and payable under this Section 9.5, and the method for calculating such royalties under Section 9.5 of the Titan Agreement), the shortfall or excess (as the case may be) in royalty payments made by Vanda under this Section 9.5 shall be paid by Vanda to HMRI or Novartis (as the case may be) in the case of a shortfall, and by Novartis to Vanda in the case of an excess payment by Vanda to Novartis under Section 3.3 or 3.5. 10. TERM AND TERMINATION 10.1 (a) Vanda will have the right to terminate the sublicense for the Territory or on a country-by-country basis for major problems associated with the Product as reasonably determined by Vanda. For this purpose "major problems" are ones which would substantially negatively impact the Product's chances for successful development, registration and/or commercialization in the Territory or such country, as applicable; and would include, but not be limited to, major safety issues, lack of efficacy, unacceptable pharmaceutical properties or extraordinary unforeseen competitive developments which, in each case, would have the substantial negative impact referred to above. Page 32 of 56
(b) In the event of termination in the entire Territory by Vanda pursuant to this Section 10.1, Vanda shall, within thirty (30) days of such termination, return to Novartis any and all information and data (including new information and data) relating to the Compound and Product, whether generated by or on behalf of Titan, Novartis, HMRI or Vanda, and make no further use thereof. Additionally, in such event, this Sublicense Agreement shall terminate in its entirety and the sublicense granted hereunder shall revert back to Novartis. Novartis shall retain all up front license fees and milestone payments it had received up to the date of termination if, and only if, termination was not due to any fraud, misrepresentations, omissions or falsifications of information with respect to such Know-How, information or data owned or controlled by HMRI, Titan, Novartis or their Affiliates as of the date hereof in which case, to the extent that Novartis has for its own part perpetrated a fraud, misrepresentation, omission or falsification of information with respect to such Know-How, information or data owned or controlled by it, Novartis shall repay to Vanda, within ninety-five (95) days of such termination, that portion of the up front license fee and milestone payments Novartis had received from Vanda up to the date of such termination. In no event shall Novartis be liable to Vanda for any misrepresentation, omission or falsification of information owned or controlled by HMRI or Titan or their Affiliates. (c) Novartis may terminate this Sublicense Agreement by giving Vanda three months prior written notice in the event that the time period elapsing between patient dosing in clinical trials is greater than eighteen (18) months or more than twelve (12) months elapses between the grant of first marketing authorization in the United States or a Major Market Country and the commercial launch of the Product in that country. 10.2 In the event the development of the Compound and Product is terminated altogether by Vanda on or before January 1, 2006, for reasons other than those described in Section 10.1, then this Sublicense Agreement shall terminate in its entirety and the sublicense granted hereunder shall revert back to Novartis. Novartis shall retain all up front license fees it had received up to the date of termination and Vanda shall also pay a [*] penalty payment to Novartis if, and only if, termination was not due to any fraud, misrepresentations, omissions or falsifications (of information owned or controlled by HMRI, Titan, Novartis or their Affiliates with respect to Know-How, information or data). 10.3 Unless otherwise terminated, this Sublicense Agreement shall expire on a country-by-country basis upon the expiration of Vanda's obligation to pay royalties under this Sublicense Agreement in each such country. Expiration of this Sublicense Agreement under this provision shall not preclude Vanda, its Affiliates and Sublicensees from continuing directly - ---------- 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 33 of 56
or indirectly to manufacture the Compound and market and sell Product and to use Know-How without further royalty payments. 10.4 In the event there is a change in the control of Vanda, Vanda shall give Novartis thirty (30) days written notice of such event and that the development and commercialisation of COMPOUND and PRODUCT will continue per the terms of this Sublicense Agreement. 10.5 (a) If either party materially defaults in its performance of this Sublicense Agreement and if such default is not corrected or if the party in default is not exercising reasonably diligent efforts to cure such default within ninety (90) days after receiving written notice from the other party with respect to such default, or if such default is not correctable within ninety (90) days then such other party shall have the right to terminate this Sublicense Agreement at the end of such period in its entirety by giving written notice to the party in default. In the event Vanda. materially defaults in its performance under this Sublicense Agreement with respect to a particular country, then, subject to Section 11.4 hereof, Novartis' right to terminate shall be limited to termination of the sublicense granted hereunder in such country only. (b) if Novartis materially defaults in its performance of the Sublicense Agreement, then Vanda shall have the right but not the obligation to correct or cure such default in the place of Novartis at Vanda's' own cost and expense within the ninety (90) day period provided for in Section 10.5 of the Titan Agreement without prejudice to any other rights Vanda may have under this Sublicense Agreement (including the right to recover amounts paid to Novartis), provided that (i) Vanda notifies Novartis in writing of Vanda's election to do so, and (ii) Vanda's correction or cure of such default does not increase Novartis' liability under the Sublicense Agreement. (c) It is agreed that a material default by Novartis under the Titan Agreement shall be a material default by Novartis under this Sublicense Agreement. 10.6 Subject to applicable bankruptcy laws; either party may terminate this Sublicense Agreement if, at any time, the other party shall file in any court pursuant to any statute of the United States or of any individual state or foreign country, a voluntary petition in bankruptcy or insolvency or for reorganisation in bankruptcy or for an arrangement or the appointment of a receiver or trustee of the party or of its assets, or if the other party shall be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within ninety (90) days after the filing thereof, or if the other party shall propose or be a party to any dissolution, or if the other party shall make an assignment for the benefit of creditors. Page 34 of 56
(a) Without limitation, Vanda's rights under this Sublicense Agreement shall include those rights afforded by 11 U.S.C. Section 365(n) of the United States Bankruptcy Code and any successor thereto (the "Code"). If the bankruptcy trustee of Novartis as a debtor or debtor-in-possession rejects this Sublicense Agreement under 11 U.S.C. Section 365(n) of the Code, Vanda may elect to retain its rights sublicensed from Novartis hereunder (and any other supplementary agreements hereto) for the duration of this Sublicense Agreement and avail itself of all rights and remedies to the full extent contemplated by this Sublicense Agreement and 11 U.S.C. Section 365(n) of the Code, and any other relevant sections of the Code and other relevant non-bankruptcy law. 11. RIGHTS AND DUTIES UPON TERMINATION. 11.1 Upon termination of this Sublicense Agreement (other than for Novartis' breach), Novartis shall have the right to retain any suns already paid by Vanda hereunder, and Vanda shall pay all sums accrued hereunder which are then due except as otherwise defined in this Sublicense Agreement. 11.2 Upon early termination of this Sublicense Agreement in its entirety or with respect to any country, under Sections 10.1 or 11.6 or due to a breach hereof by Vanda, Vanda shall notify Novartis of the amount of Product that Vanda, its Affiliates and Sublicensees then have on hand for sale in each country, the sale of which would, but for the termination, be subject to royalty, and Vanda, its Affiliates and Sublicensees shall thereupon be permitted to sell that amount of Product, provided that Vanda shall pay the royalty thereon to Novartis, or HMRI, as the case may be, at the time provided for. 11.3 Expiration or termination of this Sublicense Agreement or termination on a country-by-country basis shall terminate all outstanding obligations and liabilities between the parties arising from this Sublicense Agreement except those described in Sections 6.2 (with sole respect to Novartis confidentiality) 6.3, 6.4, 6.5, 6.6, 6.8, 9.1, 9.2, 10.1, 10.2, 10.3, 11.1, 11.2, 11.4, 11.5, 11.6, 12.5, 12.6, 12.7, 14.1 and 14.2, which sections shall survive such termination. In addition, any other provision required to interpret and enforce the parties' rights and obligations under this Sublicense Agreement shall also survive, but only to the extent required for the full observation and performance of the surviving obligations under this Sublicense Agreement. 11.4 Except as otherwise specifically provided for herein, termination, in whole or in part, of the Sublicense Agreement in accordance with the provisions hereof shall not limit remedies to the parties which may be otherwise available in law or equity, including consequential, Page 35 of 56
incidental or indirect damages (such as loss of sales, profits, or goodwill) arising out of a party's performance or nonperformance under this Sublicense Agreement. 11.5 Subject to Section 11.2 and other express provisions hereof, upon early termination of this Sublicense Agreement in its entirety due to breach hereof by Vanda or pursuant to Sections 10.1, 10.2 or 11.6, Vanda's rights in the Compound and Product shall cease, Vanda, its Affiliates and Sublicensees shall cease manufacture, development, marketing and sale of the Compound and Product in the Territory, and all originals and copies of Know-How, data, results and other information collected and/or generated by Vanda, its Affiliates and Sublicensees relating to the Compound or Product prior to termination shall be delivered to Novartis within thirty (30) days thereafter, except for one copy thereof which may be retained in Vanda's legal or other appropriately restricted files solely for the purpose of establishing the extent of its obligations hereunder. Any IND or other regulatory filing effected prior to termination shall be assigned by Vanda to Novartis (or its designee(s), which designee may be HMRI or Titan), at Novartis' request and expense, if not already assigned to Novartis. Vanda shall provide to Novartis, within thirty (30) days of Novartis' request, copies of all regulatory correspondence, including, but not limited to, IND Information Amendments, IND Reports, IND Safety Reports, NDA submission, NDA Postmarketing Reports, and reports of written/phone contacts to and from regulatory agencies, as well as the safety database for the Product. 11.6 If (a) Vanda is precluded from selling the Product in a particular country in the Territory by virtue of infringement of Third Party patent rights, or (b) there is a holding of invalidity or unenforceability of any Patent, from which no further appeal can be taken, that materially affects Vanda's ability to commercialise the Product in a particular country in the Territory, Vanda shall have the right but not the obligation to terminate this Sublicense Agreement in such country. At Vanda's option, this Sublicense Agreement may be terminated in its entirety if the events described in subsection (a) or (b) of this Section 11.6 occur in either the United States or two of the Major Market Countries. Within ninety-five (95) days of any such termination, subject to the following sentence, Novartis shall repay to Vanda if the Sublicense Agreement has been terminated in its entirety, that portion of the up front license fee and milestone payments it has received from Vanda up to the date of termination. In the event that the Sublicense Agreement is terminated pursuant to Section 11.6 of the Sublicense Agreement, Novartis shall be obligated to make the foregoing repayments to Vanda, but only to the extent that it has been repaid its own up-front license fee and milestone payments due to Novartis under Section 11.6 of the Titan Agreement. If this Sublicense Agreement has been terminated only with respect to certain country(ies), the parties shall negotiate in good faith a smaller portion of the upfront license fee and milestone payments Novartis has received from Vanda up to such date which shall be repaid to Vanda; provided, however, if Page 36 of 56
the Titan Agreement has been terminated only with respect to such certain countries under Section 11.6 of the Titan Agreement, Novartis shall be obligated to make such repayments to Vanda but only to the extent Novartis has been repaid the corresponding portion of the up front license fee and milestone payments owed to it pursuant to Section 11.6 of the Titan Agreement. If the parties are unable to agree on such smaller portions within ninety (90) days, the issue shall be submitted for determination by arbitration in accordance with Section 14.2. 12. WARRANTIES INDEMNIFICATIONS AND REPRESENTATIONS 12.1 Novartis represents and warrants that to the best of its knowledge at the date of this Sublicense Agreement: (a) all currently issued or pending patents and patent applications owned or controlled by HMRI or its Affiliates or its Sublicensees claiming the Compound or Product, are listed in APPENDIX A; (b) HMRI or its Affiliates or its Sublicensees own or control the entire right, title and interest in Patents and Know-How. If Novartis becomes aware of any patents or patent applications owned or controlled by HMRI or its Affiliates or Sublicensees claiming the Compound or Product or manufacture, formulation or use thereof, not listed in Appendix A-and is within the rights granted to Vanda in this Sublicense Agreement, such patents and patent applications shall be added to APPENDIX A at no cost to Vanda. Novartis further represents and warrants that to the best of its knowledge as of the date of this Sublicense Agreement; (c) the Titan Agreement is in full force and effect and neither HMRI nor Titan nor Novartis is in default of any of their obligations thereunder; (d) subject to obtaining HMRI's and Titan's prior written consent, each of which has been obtained, Novartis has the legal power, right and authority to enter into this Sublicense Agreement; and (e) Novartis has not previously assigned, transferred, conveyed or otherwise encumbered its right, title and interest in the Patents or Know-How. Vanda represents and warrants that it has the legal power, right and authority to enter into this Sublicense Agreement. 12.2 Nothing in this Sublicense Agreement shall be construed as a warranty that the Patents are valid or enforceable or that their exercise does not infringe any patent rights of Third Parties. Novartis hereby represents and warrants that it has no present knowledge (except as disclosed to Vanda or as available to Vanda from public information) that (i) the Patents are invalid or unenforceable, (ii) the exercise of Patents infringes any patent rights of Third Parties, and (iii) Third Party licenses are necessary for the development, manufacture or commercialization of the Compound or Product. A holding of invalidity or unenforceability Page 37 of 56
of any Patent, from which no further appeal is or can be taken, shall not affect any obligation already accrued hereunder, but shall only eliminate future royalties otherwise due under such Patent from the date such holding becomes final. 12.3 Each party represents and warrants to the other that it is not currently debarred, suspended or otherwise excluded by any U.S. Government agencies from receiving federal contracts. 12.4 Vanda represents and warrants that during the term of this Sublicense Agreement, neither it, an Affiliate or a Sublicensee shall license, develop, have developed, manufacture, have manufactured, sell or have sold any of the following compounds or products classified as an atypical antipsychotic [*]. In the event that Vanda or a Sublicensee undertakes any of the foregoing actions within the EEA, then Novartis may not terminate this Sublicense Agreement or seek damages or equitable remedies for such actions, but may at its option by notice to Vanda (i) terminate the Exclusive nature of the licenses granted pursuant to Article 2 hereof in the EEA, so that all use of Patents and Know-How in the EEA will thereafter be on a non-exclusive basis at a reduced royalty rate to be negotiated at time of change in exclusivity; (ii) cease providing improvements to Vanda pursuant to Section 2.3; and/or (iii) require Vanda to prove to Novartis' reasonable satisfaction that the Know-How is not being used for such activities. Notwithstanding the foregoing, Novartis and Vanda agree that in the event Vanda acquires rights to one or more of the [*] compounds or products listed in the first paragraph of this Section 12.4 (the "Acquired Compounds or Products") as part of a corporate transaction Novartis shall use its good faith efforts to cause HMRI and Titan to waive any rights that it may have against Vanda or Novartis under this Section 12.4 and Section 12.4 of the Titan Agreement. To assist Novartis in obtaining such waiver from HMRI, Vanda will provide Novartis with arguments supporting how Vanda intends to prevent the Products from being negatively impacted by the Acquired Compounds or Products. In the event that HMRI or Titan will not waive such rights and Vanda does not agree to divest the Acquired Compounds or Products or, alternatively, sublicense the Product to a mutually acceptable Third Party (which third party must also be acceptable to HMRI and Titan), Novartis agrees that its sole and exclusive remedy against Vanda shall be to terminate the Exclusive nature of the Sublicense Agreement in the EEA as provided for in this Section 12.4, and to terminate this Sublicense Agreement elsewhere in the Territory. 12.5 Vanda shall indemnify, defend and hold Novartis, HMRI, Titan and their respective Affiliates harmless from and against any and all liabilities, claims, demands, damages, costs, - ---------- 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 38 of 56
expenses, fines, penalties or money judgments including without limitation court costs and reasonable attorney's fees (hereinafter referred to as "Liabilities"), during the term of this Sublicense Agreement and after its expiration or termination, incurred by or rendered against Novartis, Titan, HMRI and their respective Affiliates which arise out of the clinical testing, use or labeling, or the manufacture, processing, packaging, sale or distribution of the Compound or Product (as the case may be) by Vanda, its Affiliates and Sublicensees, or the breach of this Sublicense Agreement by Vanda (including without limitation any breach of Vanda's' representations and warranties under this Sublicense Agreement) or any negligence or misconduct of Vanda, except to the extent that such Liabilities are directly attributable to the breach of this Sublicense Agreement by Novartis or breach of the Titan Agreement by HMRI or Titan (including without limitation any breach of Novartis' representations or warranties under this Sublicense Agreement or any breach of HMRI's or Titan's representations or Warranties under the Titan Agreement) or any negligence or misconduct by Novartis, Titan or HMRI. Vanda shall also indemnify, defend and hold Novartis, Titan, HMRI and their respective Affiliates harmless from and against any and all Liabilities incurred by or rendered against Novartis, Titan, HMRI and their respective Affiliates which arise out of the Compound or Product supplied by Vanda to HMRI, Titan and/or Novartis and for use pursuant to Section 2.3, or which arise out of any contracts or arrangements with Third Parties (including CROs) relating to, the development and/or registration process for the Compound or Product from and after the Effective Date of this Sublicense Agreement, whether such contracts or arrangements with Third Parties were entered into prior to or following the Effective Date of this Sublicense Agreement, except to the extent that such Liabilities are directly attributable to the breach of this Sublicense Agreement by Novartis or breach of the Titan Agreement by HMRI or Titan (including without limitation any breach of Novartis' representations or Warranties under this Sublicense Agreement or any breach of HMRI's or Titan's representations or warranties under the Titan Agreement) or any negligence or misconduct by Novartis, Titan or HMRI. 12.6 Novartis shall indemnify, defend and hold Vanda, its Affiliates and Sublicensees harmless from and against any and all Liabilities (as defined in Section 12.5 hereof), incurred by or rendered against Vanda, its Affiliates and Sublicensees; which arise out of the breach of this Sublicense Agreement by Novartis (including any breach of Novartis' representations or warranties under this Sublicense Agreement), or any negligence or misconduct by Novartis, except to the extent that such Liabilities are directly attributable to the breach of this Sublicense Agreement by a third party (including without limitation any breach of Novartis' representations and warranties under this Sublicense Agreement), or any negligence or misconduct by Vanda, HMRI or Titan. Novartis shall also indemnify, defend and hold Vanda, its Affiliates and Sublicensees harmless from and against any and all Liabilities incurred by or rendered against Vanda, and its Affiliates and Sublicensees which arise out of Page 39 of 56
the manufacture, use or sale of the Compound and Product that has been manufactured or sold by or on behalf of Novartis and its Affiliates or Sublicensees in those countries where Vanda's sublicense rights hereunder have been terminated (including the clinical testing, use and labeling of the Product and the manufacture, processing, packaging, sale or distribution of the Product by Novartis and its Affiliates and Sublicensees) or subject to Section 5.4(b), which arise out of the activities of any CRO which occurred prior to the execution of this Sublicense Agreement and that were undertaken pursuant to a written contract between Novartis and such CRO relating to the Compound or Product. 12.7 Each party shall give the other prompt notice in writing of any claim or demand referred to in Sections 12.5 or 12.6. In addition, the obligations of any indemnifying party shall be subject to the indemnified party fulfilling the following obligations: (a) With respect to third parry claims, indemnified party shall fully cooperate with the indemnifying party in the defense of such claim or demand which defense shall be controlled by the indemnifying party; and (b) With respect to third party claims, indemnified party shall not, except at its own cost, voluntarily make any payment or incur any expense with respect to any claim, demand or suit (including without limitation retaining its own counsel) without the prior written consent of the indemnifying party, which such party shall not be required to give. 13. FORCE MAJEURE. 13.1 If the performance of any part of this Sublicense Agreement by either party, or if any obligation under this Sublicense Agreement, is prevented, restricted, interfered with or delayed by reason of any cause beyond the reasonable control of the party required to perform, the party so affected, upon giving written notice and written evidence of such force majeure to the other party, shall be excused from such performance to the extent of such prevention, restriction, interference or delay, provided that the affected party shall use its reasonable commercial efforts to avoid or remove such causes of non-performance and shall continue performance with the utmost dispatch whenever the force majeure is removed. In the event of a force majeure, the parties shall also discuss whether modification of the terms of this Sublicense Agreement are necessary to alleviate the hardship or loss caused by the force majeure. 14. GOVERNING LAW AND ARBITRATION. 14.1 This Sublicense Agreement shall be deemed to have been made in the State of New York and its form, execution, validity, construction and effect shall be determined in Page 40 of 56
accordance with the laws of the State of New York (without regard to New York's or any other jurisdiction's choice of law principles). 14.2 In the event of any controversy or claim arising out of or relating to any provision of this Sublicense Agreement, the parties shall try to settle their differences amicably between themselves. Any unresolved disputes arising between the parties relating to, arising out of or in any way connected with this Sublicense Agreement or any term or condition hereof, or the performance by either party of its obligations hereunder, whether before or after termination of this Sublicense Agreement, shall be resolved by final and binding arbitration. Whenever a party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other party. Except in the case of a determination to be made where payments are to be made to by one party to the other, the party giving such notice shall refrain from instituting the arbitration proceedings for a period of sixty (60) days following such notice to allow the parties time to further attempt to come to an amicable resolution of the dispute. Arbitration shall be held in New York City, New York according to the commercial rules of the American Arbitration Association ("AAA"). The arbitration will be conducted by a panel of three arbitrators appointed in accordance with AAA rules; provided, however, that each party shall within thirty (30) days after the institution of the arbitration proceedings appoint a party arbitrator, and the party-arbitrators shall select a neutral arbitrator, to be chairman of the arbitration panel, within thirty (30) days thereafter. If the party-arbitrators are unable to select a neutral within such period, the neutral shall be appointed in accordance with AAA rules. All arbitrator(s) eligible to conduct the arbitration must agree to render their opinion(s) within thirty (30) days of the final arbitration hearing. No arbitrator (nor the panel of arbitrators) shall have the power to award punitive damages under this Sublicense Agreement and such award is expressly prohibited. Decisions of the arbitrator(s) shall be final and binding on all of the parties. Judgment on the award so rendered may be entered in a court having jurisdiction thereof. In any arbitration pursuant to this Sublicense Agreement, the arbitrators shall interpret the express terms hereof and apply the laws of the State of New York. The losing party to the arbitration as determined by the arbitrators shall pay the costs of arbitration. Notwithstanding the provisions of this clause, either party may seek preliminary or injunctive measures or relief in. any competent court having jurisdiction. 15. SEPARABILITY 15.1. In the event any portion of this Sublicense Agreement not material to the remaining portions shall be held illegal, void or ineffective, the remaining portions hereof shall remain in full force and effect. Page 41 of 56
15.2 If any of the terms or provisions of this Sublicense Agreement are in conflict with any applicable statute or rule of law, then such terms or provisions shall be deemed inoperative to the extent that they may conflict therewith and shall be deemed to be modified to conform with such statute or rule of law. 15.3 In the event that the terms and conditions of this Sublicense Agreement are materially altered as a result of Sections 15.1 or 15.2, the parties shall renegotiate the terms and conditions of this Sublicense Agreement so as to accomplish as nearly as possible the original intentions of the parties. 16. ENTIRE AGREEMENT 16.1 This Sublicense Agreement and the Appendices attached hereto, entered into as of the date written above, constitutes the entire agreement between the parties relating to the subject matter hereof and supersedes all previous writings and understandings, including the Confidentiality Agreement between the parties dated June 16, 2003 (it being understood and agreed that all Confidential Information of HMRI, Titan and Novartis disclosed to Vanda prior to the Effective Date of this Sublicense Agreement shall be subject to Sections 6.4, 6.6, 6.7 and 6.9 of this Sublicense Agreement). No terms or provisions of this Sublicense Agreement shall be varied or modified by any prior or subsequent statement, conduct or act of either of the parties, except that the parties may amend this Sublicense Agreement by written instruments specifically referring to and executed in the same manner as this Sublicense Agreement. Any amendments to this agreement require the prior written approval of Titan and HMRI, which approval will not be unreasonably withheld. 17. NOTICES 17.1 Any notice required or permitted under this Sublicense Agreement shall be in writing and in English and shall be sent by airmail, postage prepaid, or facsimile or courier to the following address of each party or to such other address as may be designated in writing by the respective parties: If to NOVARTIS: Novartis Pharma AG Legal Services P.O. Box 4002 Basel Switzerland Facsimile: +41 61 324 68 59 Page 42 of 56
Attention: General Counsel Pharma Legal With a copy to: Business Development and Licensing Novartis Pharma AG P.O. Box 4002 Basel Switzerland Attention: Head of Global Partnering If to Vanda: Vanda Pharmaceuticals Inc. 47 Hulfish Street, Suite 310 Princeton, NJ 08542 Attn: Patricia Nasshom 17.2 Any notice required or permitted to be given concerning the Sublicense Agreement or HMRI Agreement shall be effective upon receipt by the party to whom it is addressed. If to TITAN: Titan Pharmaceuticals, Inc. 400 Oyster Point Blvd., Suite 505 South San Francisco, CA 94080 Attention: Louis R. Bucalo, M.D. President & CEO Telephone: (650) 244-4990 Facsimile: (650) 244-4956 With a copy to: Titan Pharmaceuticals, Inc. 400 Oyster Point Blvd., Suite 505 South San Francisco, CA 94080 Attention: Sunil R. Bhonsle Executive V.P & COO Telephone: (650) 244-4990 Facsimile: (650) 244-4956 and Loeb & Loeb LLP Page 43 of 56
345 Park Avenue New York, New York 10154 Attn: Fran Stoller Phone: 212-407-4935 Facsimilie: 212-407-4990 e-mail: fstoller@loeb.com If to HMRI: Aventis Inc. 200 Crossing Boulevard Mail Stop BX2 800D Bridgewater, NJ 08807-0890 Facsimile: 908-231-3619 Attn: Senior Vice President, Corporate Development With copies to: Aventis Inc. 200 Crossing Boulevard Mail Stop BX2 700A Bridgewater, NJ 08807-0890 Facsimile: 908-231-4480 Attn: Vice President, Legal Corporate Development For safety and Adverse Event Reporting: AVENTIS Inc. Global Pharmacovigilance & Epidemiology Suraj Patel License Partner Coordinator 200 Crossing Boulevard PO Box 6890, BX4-400G Bridgewater, NJ 08807-0890 USA Fax: +1 908 231 4229 Phone: +1 908 541 5431 Email: suraj.patel@aventis.com With copies to: AVENTIS Inc. US Regulatory Liaison Kerry Rothschild Page 44 of 56
License Partner Coordinator 200 Crossing Boulevard PO Box 6890, BX2-209G Bridgewater, NJ 08807-0890 USA Phone: +1 908 231 2848 Email: kerry.rothschild@aventis.com And, AVENTIS Inc. US Regulatory Coordination Steve Caffe License Partner Coordinator 200 Crossing Boulevard PO Box 6890, BX2-209G Bridgewater, NJ 08807-0890 USA Fax: +1 908 541 5293 Phone: +1 908 231 5683 Email: steve.caffe@aventis.com 18. ASSIGNMENT 18.1 This Sublicense Agreement or any portions thereof and the sublicenses herein shall be binding upon and inure to the benefit of the successors in interest and assignees of the respective parties. 18.2 Vanda may assign this Sublicense Agreement to an Affiliate without the prior written consent of Novartis, and in such event Vanda will continue to guarantee the obligations of such Affiliate hereunder. Subject to the foregoing, Vanda shall not have the right to assign this Sublicense Agreement to any Third Party without the prior written consent of Novartis, Titan and HMRI, such consent not to be unreasonably withheld; provided, however, that no such consent shall be required in connection with an assignment in connection with any event referred to in Section 18.3 below. 18.3 In the event of a consolidation, merger, acquisition which involves a change in control of Vanda, this Sublicense Agreement shall remain in full force and effect, and Vanda agrees to notify Novartis, Titan and HMRI. Consolidation, mergers and/or acquisitions to which Page 45 of 56
Vanda is a party which do not involve a change in control of Vanda shall not require such notice. 18.4 In order for any assignment by Vanda of this Sublicense Agreement (which is permitted by this Sublicense Agreement) to be valid, the assignee of such assignment shall assume and agree to be bound by the provisions hereof. 19. FAILURE TO ENFORCE 19.1 The failure of either party to enforce at any time any provisions hereof shall not be construed to be a waiver of such provision nor of the right of such party thereafter to enforce each and every such provision. 20. AGENCY 20.1 Except as expressly set forth in this Sublicense Agreement, nothing in this Sublicense Agreement authorizes either party to act as agent for the other or, as to any third party, to indicate or imply the existence of any such agency relationship. The relationship between the parties is that of independent contractors. 21. FURTHER ASSURANCES 21.1 Each party hereto agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Sublicense Agreement. 22. CAPTIONS 22.1 Captions are inserted for convenience only and in no way are to be construed to define, limit or affect the construction or interpretation hereof. 23. MISCELLANEOUS 23.1 Both parties agree to discuss matters arising during the term of this Sublicense Agreement in the spirit of co-operation and good faith and endeavour to resolve any differences by mutual agreement whenever possible. If the parties fail to reach agreement, either party may submit the matter for resolution pursuant to Section 14.2. Page 46 of 56
23.2 HMRI and its Affiliates shall be third party beneficiaries under this Sublicense Agreement to the extent that this Sublicense Agreement inures to the benefit of HMRI, with respect to Sections 2.1(a), 2.4, 2.5, 2.7, 2.9(a), 2.9(d), 2.10, 3.4(a), 3.5, 4.1(a), 4.2, 4.3, 5.2, 5.3, 5.5, 6.3, 6.4, 6.7, 8.1, 8.2, 8.4, 8.5, 8.6, 8.7, 8.9, 8.10, 8.11, 8.12, 8.13, 9.1, 9.3, 9.4, 9.5, 10.1(b), 11.5, 12.5, 17.2, 18.2, 18.3, 18.4, 23.2 and 23.3 with all rights and remedies associated therewith. 23.3 Vanda covenants to Novartis that during the term of this Sublicense Agreement, Vanda, its Affiliates and Sublicensees shall not violate the Federal Foreign Corrupt Practices Act in the performance of its negotiations or obligations hereunder. ***[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK - SIGNATURE PAGE FOLLOWS]*** Page 47 of 56
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. VANDA PHARMACEUTICALS, INC. By: /s/ Mihael Polymeropoulos ------------------------------------ Mihael Polymeropoulos Chief Executive Officer NOVARTIS PHARMA AG By: /s/ Herve Girsault ------------------------------------ Name: Herve Girsault Title: Head, Global Partnering Business Development & Licensing By: /s/ Tom Chakraborti ------------------------------------ Name: Tom Chakraborti Title: Senior Legal Counsel Page 48 of 56
List of Appendices Patents and Patent Applications Appendix A blank Appendix B blank Appendix C blank Appendix D blank Appendix E blank Appendix F Titan Agreement Appendix G Page 49 of 56
APPENDIX A HMRI PATENTS AND PATENT APPLICATIONS [*] - ---------- 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 50 of 56
APPENDIX B BLANK Page 51 of 56
APPENDIX C BLANK Page 52 of 56
APPENDIX D BLANK Page 53 of 56
APPENDIX E CRO CONTRACTS NONE Page 54 of 56
APPENDIX F SPECIAL COUNTRIES Page 55 of 56
APPENDIX G TITAN AGREEMENT [*] - ---------- 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 56 of 56
ADDENDUM TO SUBLICENSE AGREEMENT between NOVARTIS PHARMA AG and VANDA PHARMACEUTICALS, INC. This Addendum is part of the SUBLICENSE AGREEMENT that became effective on the 4th day of June, 2004, between Vanda Pharmaceuticals, Inc., a corporation organized and existing under the laws of the State of Delaware and having its principal office at 47 Hullfish Street, Suite 310, Princeton, NJ 08542 ("Vanda"), and Novartis Pharma AG, a corporation organized under the laws of Switzerland and having its principal office at Lichtstrasse 35, CH-4056, Basel, Switzerland ("Novartis"). EXCHANGE OF INFORMATION AND CONFIDENTIALITY The parties agree to be bound to the following terms, and hereby incorporate them into the Sublicense Agreement. 1.0 Privacy and Security of Pharmacogenetic samples and data Vanda agrees that all pharmacogenetic information that it receives in connection with this agreement, including any DNA samples and/or animal tissues treated with the compound that may be provided for further studies in accordance with the Sublicense Agreement terms, as well as any raw data and individual clinical genetic data and information, will be maintained in a confidential and secure manner, in full compliance with applicable United States (federal and state), European Union, and other country specific regulations for privacy and security of genetic data and samples and personally identifiable health information, and will only be used and/or disclosed in accordance with those regulations. Vanda also agrees to ensure that any of its affiliates, agents, vendors or other business partners who receive any identifiable genetic information or data from Vanda relating to the compound, shall adhere to the same standards of privacy and security mandated by this Addendum and the Sublicense Agreement. Page 1 of 3
2.0 Privacy and Security of Adverse Event information. Vanda agrees that all personally identifiable adverse event information that it receives in connection with this agreement, including spontaneous adverse event report forms from Novartis, will be maintained in a confidential and secure manner, in full compliance with applicable United States (federal and state), European Union, and country specific regulations for privacy and security of personally identifiable health information, including any specific requirements that may apply to adverse event reporting information, and will only be used or disclosed in accordance with those regulations. Vanda also agrees to ensure that any of its affiliates, agents, vendors or other business partners (excluding health authorities) who receive any identifiable adverse event information from Vanda relating to the compound, shall adhere to the same standards of privacy and security mandated by this Addendum and the Sublicense Agreement. 3.0 Compliance with Informed Consents. Vanda will assume all obligations of Novartis contained in the informed consents with the individual participants in the studies transferred to Vanda. In case only the genetic information or study data of such studies is transferred to Vanda, Vanda will comply with any request by Novartis pursuant to a disclosure, deletion or destruction request received by Novartis from an individual participant of such study. 4.0 Indemnification Vanda agrees to indemnify and hold harmless Novartis for damages and legal fees that may result from any breach by vanda of paragraphs 1.0 and 3.0 of this Addendum. Vanda shall also provide written notification to Novartis of any claim against Vanda relating to a privacy or security breach involving data or information provided to Vanda under this Addendum or the Sublicense Agreement, within three (3) business days of receipt of such claim, lawsuit or notification. Vanda agrees that Novartis shall be permitted to select counsel of its own choosing in the event that a claim or lawsuit is filed that impacts Novartis' interests. *** Remainder of page intentionally left blank, signature page to follow *** Page 2 of 3
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. VANDA PHARMACEUTICALS, INC. By: /s/ Chip Clark ------------------------------------ Name: Chip Clark Title: Chief Business Officer NOVARTIS PHARMA AG By: /s/ Herve Girsault ------------------------------------ Name: Herve Girsault Title: Head, Global Partnering Business Development & Licensing By: /s/ Kimberly J. Urdahl ------------------------------------ Name: Kimberly J. Urdahl Title: Head of Legal, Primary Care Page 3 of 3
ADDENDUM NO. 2 TO THE SUBLICENSE AGREEMENT between NOVARTIS PHARMA AG and VANDA PHARMACEUTICALS, INC. Page 1 of 5
This Addendum No.2 ("ADDENDUM") is part of the SUBLICENSE AGREEMENT that became effective on the 4th day of June, 2004 ("AGREEMENT"), between Vanda Pharmaceuticals, Inc., a corporation organized and existing under the laws of the State of Delaware and having its principal office at 9605 Medical Center Drive, Rockville, MD 20850 USA ("VANDA"), and Novartis Pharma AG, a corporation organized under the laws of Switzerland and having its principal office at Lichtstrasse 35, CH-4056, Basel, Switzerland ("NOVARTIS"). Save as expressly stated otherwise, defined terms (to be identified by their first letter in capitals) shall have the same meaning in this Addendum as such term is defined in the Agreement. A. ADDITION TO APPENDIX A OF THE AGREEMENT Novartis has filed a patent application covering additional Compound metabolites as identified hereto in ANNEX 2, which hereby shall be deemed incorporated into Appendix A of the Agreement. B. NON-EXCLUSIVE PATENT LICENSE Novartis hereby grants to Vanda under the patent covering a biomarker as identified hereto in ANNEX 1 a license under the same terms as with respect to the Novartis Patents under the Agreement however such license shall be: a) non-exclusive and b) limited as far as such patent identified in ANNEX 1 covers any aspects of Iloperidone; Contrary to Section 8.3 of the Agreement relating to the other Novartis Patents, Novartis will retain all financial, filing, maintenance and prosecution (including oppositions) responsibility for the patent identified in ANNEX 1 hereto. C. LEGAL EFFECT Other than amended by this Addendum the Agreement shall remain in full force and effect. *** Remainder of page intentionally left blank signature page to follow *** Page 2 of 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicates by their duly authorized representatives as of the date of the last signature set hereto. Rockville, February 16, 2006 VANDA PHARMACEUTICALS, INC. By: /s/ Chip Clark ------------------------------------ Name: Chip Clark Title: CBO Basel, February 20, 2006 NOVARTIS PHARMA AG By: /s/ CHRISTINA ACKERMANN ------------------------------------ Name: CHRISTINA ACKERMANN Title: Head Legal Pharma, General Medicine By: /s/ Peter De Weerd ------------------------------------ Name: Peter De Weerd Title: Authorised Signatory Page 3 of 5
ANNEX 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 4 of 5
ANNEX 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 5 of 5
Exhibit 10.3 ================================================================================ AMENDED AND RESTATED LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT BY AND BETWEEN BRISTOL-MYERS SQUIBB COMPANY (A DELAWARE CORPORATION) AND VANDA PHARMACEUTICALS, INC. (A DELAWARE CORPORATION) ================================================================================ - ---------- CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
TABLE OF CONTENTS PAGE ---- ARTICLE 1 DEFINITIONS .................................................. 1 ARTICLE 2 LICENSE GRANT ................................................ 8 2.1 Exclusive License Grant ......................................... 8 2.2 Non Exclusive License Grant ..................................... 8 2.3 Sublicense ...................................................... 8 2.4 No Trademark License ............................................ 8 2.5 No Implied Licenses ............................................. 8 2.6 Marketing Arrangements .......................................... 9 2.7 Retained Rights ................................................. 9 ARTICLE 3 OPTION GRANTS ................................................ 9 3.1 Vanda's Option: Third Party Development Partners ................ 9 3.2 BMS Option Exercisable Upon Completion of Phase III Clinical Studies: Commercialization ............................. 10 3.3 Right of First Negotiation to Act as a Co-Promotion Partner in Commercialization of a Product By Either Party .................. 11 3.4 Responsibilities Regulatory Affairs ............................. 12 ARTICLE 4 TRANSFER OF BMS KNOW-HOW; .................................... 13 4.1 Transfer of BMS Compound Know-How ............................... 13 4.2 Non-Solicitation ................................................ 14 ARTICLE 5 DEVELOPMENT .................................................. 14 5.1 Program Liaison ................................................. 14 5.2 Development ..................................................... 14 5.3 Development Reports ............................................. 15 5.4 Records ......................................................... 15 5.5 Development Responsibilities and Costs .......................... 15 5.6 Regulatory Responsibilities and Costs ........................... 15 ARTICLE 6 COMMERCIALIZATION ............................................ 18 6.1 Commercializing Party's Responsibilities ........................ 18 ARTICLE 7 MANUFACTURE AND SUPPLY ....................................... 19 i
TABLE OF CONTENTS (continued) PAGE ---- 7.1 Responsibility .................................................. 19 7.2 Provision of Compound ........................................... 19 7.3 Right to Manufacture Commercial Supply .......................... 19 ARTICLE 8 PAYMENTS ..................................................... 20 8.1 Technology Access Fee ........................................... 20 8.2 Milestone Payments .............................................. 20 8.3 Timing .......................................................... 21 8.4 Development Costs ............................................... 21 8.5 Royalty Payment ................................................. 21 8.6 Third Party Royalty Payments .................................... 22 8.7 Royalty Offset for Third Party Royalty Payments ................. 22 8.8 Term for Royalty Payments ....................................... 22 8.9 Sales Reports ................................................... 23 8.10 Currency Exchange ............................................... 24 8.11 Tax Withholding ................................................. 24 8.12 Interest Due .................................................... 24 ARTICLE 9 REPRESENTATIONS AND WARRANTIES; DISCLAIMER; LIMITATION OF LIABILITY ....................................................... 24 9.1 Mutual Warranties ............................................... 24 9.2 BMS Warranties and Covenants .................................... 25 9.3 Vanda Warranties and Covenants .................................. 25 9.4 DISCLAIMER ...................................................... 25 9.5 Limitation of Liability ......................................... 26 ARTICLE 10 PATENT MAINTENANCE; INFRINGEMENT; CONFIDENTIALITY ............ 26 10.1 Inventions ...................................................... 26 10.2 Patent Maintenance; Abandonment ................................. 26 10.3 Enforcement of BMS Patent Rights Against Infringers ............. 27 10.4 Defense of Third Party Claims ................................... 28 ARTICLE 11 NONDISCLOSURE OF CONFIDENTIAL INFORMATION .................... 29 ii
TABLE OF CONTENTS (continued) PAGE ---- 11.1 Nondisclosure .................................................. 29 11.2 Authorized Disclosure .......................................... 29 11.3 Terms of this Agreement ........................................ 30 11.4 Exception for Disclosure of Tax Treatment ...................... 30 ARTICLE 12 INDEMNITY .................................................... 31 12.1 Vanda Indemnity ................................................ 31 12.2 BMS Indemnity .................................................. 31 12.3 Indemnification Procedures ..................................... 32 12.4 Insurance ...................................................... 32 ARTICLE 13 TERM AND TERMINATION ......................................... 33 13.1 Term ........................................................... 33 13.2 Termination By BMS ............................................. 33 13.3 Termination by Vanda ........................................... 34 13.4 Effect of Termination .......................................... 34 13.5 Survival ....................................................... 37 13.6 Bankruptcy ..................................................... 37 ARTICLE 14 MISCELLANEOUS ................................................ 38 14.1 Provisions Contrary to Law ..................................... 38 14.2 Third Party Rights ............................................. 38 14.3 Notices ........................................................ 39 14.4 Force Majeure .................................................. 39 14.5 Use of Names ................................................... 39 14.6 Assignment ..................................................... 40 14.7 Further Assurances ............................................. 40 14.8 Waivers and Modifications ...................................... 40 14.9 Choice of Law and Jurisdiction ................................. 41 14.10 Publicity ...................................................... 41 14.11 Entire Agreement ............................................... 42 14.12 Counterparts ................................................... 42 iii
TABLE OF CONTENTS (continued) PAGE ---- 14.13 Relationship of the Parties .................................... 42 14.14 Headings ....................................................... 42 14.14 Dispute Resolution ............................................. 42 iv
AMENDED AND RESTATED LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT THIS AMENDED AND RESTATED LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT (this "Agreement"), effective as of the Effective Date (defined below), is made and entered into by and between BRISTOL-MYERS SQUIBB COMPANY, a Delaware corporation headquartered at 345 Park Avenue, New York, New York 10154 USA ("BMS") and VANDA PHARMACEUTICALS, INC., a Delaware corporation having its principal place of business at 47 Hulfish Street, Suite 310, Princeton, NJ 08542 ("Vanda"). Each of BMS and Vanda is referred to herein as a "Party" and BMS and Vanda are collectively referred to herein as the "Parties." ARTICLE 1 DEFINITIONS For the purposes of this Agreement, the following definitions shall apply, and the terms defined herein in plural shall include the singular and vice-versa: 1.1 "AFFILIATE" means any corporation, company, partnership, joint venture and/or firm which controls, is controlled by, or is under common control with a specified person or entity. For purposes of this Section 1.1, "control" means the power, direct or indirect, to direct the management and policies of an entity, and shall be presumed to exist if one of the following conditions is met: (a) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares having the right to vote for the election of directors, and (b) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies of such non-corporate entities. The Parties acknowledge that in the case of certain entities organized under the laws of certain countries outside of the United States, the maximum percentage ownership permitted by law for a foreign investor may be less than fifty percent (50%), and that in such cases such lower percentage shall be substituted in the preceding sentence, provided that such foreign investor has the power to direct the management and policies of such entity. Care Capital LLC shall not be considered an Affiliate of Vanda and shall be considered a Third Party if and only if Care Capital LLC (a) is not involved in the Development, manufacture or Commercialization of a Product and (b) does not Control any know-how or patent relating to any composition, formulation, method of use or manufacture of a Compound or a Product that is not Controlled by Vanda and Vanda's Affiliates (i.e., Care Capital does not Control any know-how or patent that would be subject to Section 13.4.1(g) if Care Capital LLC was considered an Affiliate of Vanda). 1.2 "APPROVAL" means Marketing Authorizations with pricing, labeling, and reimbursement approvals and any other similar final approvals from the FDA or an -1-
equivalent Regulatory Authority of another country necessary to manufacture and/or Commercialize a Product. 1.3 "BMS COMPOUND PATENT RIGHTS" means (a) all U.S. patents and patent applications and their foreign counterparts Controlled by BMS as of the Effective Date covering the composition or utility of a Compound; (b) any continuation, continuation-in-part (but only to the extent that such application includes new data in support of claims previously submitted in a prior originally filed application), divisional, and continued-prosecution applications of any such patent applications in (a), and (c) any patents granted on or issuing from any aforesaid applications in (a) and (b), including any renewals, extensions, patents of addition, revivals, re-examinations, and reissues thereof. Such Patent Rights are listed on Schedule 1.3. 1.4 "BMS COMPOUND KNOW-HOW" means all technical information and know-how known to and Controlled by BMS as of the Effective Date (including, without limitation, all biological, chemical, pharmacological, toxicological, clinical, assay, and related know-how and trade secrets) identified by BMS as directly relating to, and are reasonably useful for, the Development and/or Commercialization of a Compound or Product in the manner that the Compound or Product has been Developed and Commercialized by BMS heretofore. 1.5 "BMS KNOW-HOW" means the BMS Compound Know-How and the BMS Manufacturing Know-How. 1.6 "BMS MANUFACTURING KNOW-HOW" means all technical information and know-how known to and Controlled by BMS as of the Effective Date (including, without limitation, all manufacturing data, the percentages and specifications of ingredients, the manufacturing processes, specifications, technology, assays, quality control and testing procedures, and related know-how and trade secrets) identified by BMS as directly relating to, and are reasonably useful for, the manufacture of a Compound or Product in the manner that the Compound or Product has been manufactured by BMS heretofore. 1.7 "BMS MANUFACTURING PATENT RIGHTS" means those U.S. or foreign patents, if any, Controlled by BMS as of the Effective Date, including any renewals, extensions, patents of addition, revivals, re-examinations, and reissues thereof, for which any claim covers the manufacture of a Compound in the same manner that such Compound has heretofore been manufactured by BMS. Such patent rights are listed on Schedule 1.7. 1.8 "BMS PATENT RIGHTS" means the BMS Compound Patent Rights and the BMS Manufacturing Patent Rights. 1.9 "BUSINESS DAY" means a day other than Saturday, Sunday or any day on which commercial banks located in New York are authorized or obligated by law to close. 1.10 "COMBINATION PRODUCT" means a Product including at least one additional active ingredient other than a Compound. For clarity, drug delivery vehicles, adjuvants, -2-
and excipients shall not be deemed to be "active ingredients" the presence of which in a Product would be deemed to create a Combination Product. 1.11 "COMMERCIALIZING PARTY" has the meaning set forth in Section 6.1.1. 1.12 "COMPOUNDS" means the compounds identified as BMS-214778 and BMS-330446 each as specifically described in Schedule 1.3 and including without limitation metabolites or prodrugs thereof, and any hydrates, conjugates, salts, esters, isomers, polymorphs or analogues of any of the foregoing. 1.13 "COMMERCIALLY REASONABLE EFFORTS" means, with respect to a Product, the carrying out of obligations in a diligent and sustained manner (using efforts not less than the efforts a Party devotes to a product of similar market potential, profit potential or strategic value resulting from its own research efforts), based on conditions then prevailing. Commercially Reasonable Efforts requires that each Party: (a) promptly assign responsibility for such obligations to specific employee(s) who are held accountable for progress and monitor such progress on an on-going basis, (b) set and consistently seek to achieve specific and meaningful objectives for carrying out such obligations, (c) consistently make and implement decisions and allocate resources designed to advance progress with respect to such objectives, and (d) employ compensation systems for its employees reasonably calculated to intent such employees to achieve such objectives. 1.14 "COMMERCIALIZATION" or "COMMERCIALIZE" means activities directed to obtaining pricing and reimbursement approvals, marketing, promoting, distributing, importing or selling a product. 1.15 "CONFIDENTIAL INFORMATION" means all trade secrets, processes, formulae, data, know-how, improvements, inventions, chemical or biological materials, techniques, marketing plans, strategies, customer lists, or other information that has been created, discovered, or developed by a Party, or has otherwise become known to a Party, or which proper rights have been assigned to a Party, as well as any other information and materials that are deemed confidential or proprietary to or by a Party (including, without limitation, all information and materials of a Party's customers and any other third party and their consultants), regardless of whether any of the foregoing are marked "confidential" or "proprietary" or communicated to the other by the disclosing Party in oral, written, graphic, or electronic form. In the case of BMS, "Confidential Information" shall include, without limitation, the BMS Know-How. 1.16 "CONTROLLED" or "CONTROLS", when used in reference to intellectual property, shall mean the legal authority or right of a Party hereto (or any of its Affiliates) to grant a license or sublicense of intellectual property rights to another Party, or to otherwise disclose proprietary or trade secret information to such other Party, without breaching the terms of any agreement with a Third Party, infringing upon the intellectual property rights of a Third Party, or misappropriating the proprietary or trade secret information of a Third Party. -3-
1.17 "DEVELOPMENT" means non-clinical and clinical drug development activities reasonably related to the development and submission of information to a Regulatory Authority, including without limitation toxicology, pharmacology and other discovery efforts, test method development and stability testing, process development, formulation development, delivery system development, quality assurance and quality control development, statistical analysis, clinical studies (including pre-and post-approval studies and specifically excluding regulatory activities directed to obtaining pricing and reimbursement approvals). When used as a verb, "Develop" means to engage in Development. 1.18 "DEVELOPMENT COSTS" means costs incurred by each Party that were reasonably necessary for, and that reasonably relate to, the Development of a Product in accordance with this Agreement and the Development Plan for that Product, including, without limitation, (a) all reasonable and documented out-of-pocket costs and expenses incurred, (b) the costs of internal scientific, medical, technical or managerial personnel directly related to implementing the Development Plan for that Product, to be determined based on the applicable FTE Rate, with appropriate allocation in the case of any such personnel devoting less than full time to such activities, unless another basis is otherwise agreed by the Parties in writing, (c) the Manufacturing Costs of clinical supplies for such efforts, (d) direct costs and expenses incurred in connection with manufacturing process development and validation, manufacturing scale-up and improvements, stability testing and quality assurance/quality control development, and qualification and validation of Third Party contract manufacturers, and (e) any other costs explicitly included in the budgets included in the Development Plan for that Product. 1.19 "DEVELOPMENT PLAN" means the drug development plan for a Product mutually agreed to in writing by the Parties, and as it may be amended by mutual written agreement from time to time. It shall include, among other things, budgets for Development of the Product that are planned to be conducted to achieve each step towards preparation of an NDA for use of the Product in the Field. The preliminary Development Plan for a Product containing the Compound identified as BMS-214778 is attached hereto as Schedule 1.19. 1.20 "DOLLAR" means the lawful currency of the United States of America. 1.21 "EFFECTIVE DATE" means February 25, 2004. 1.22 "FDA" means the U.S. Food and Drug Administration or its successor agency. 1.23 "FIELD" means the application to any human disease, disorder or condition, including without limitation sleep disorders such as insomnia and disorders of circadian rhythm. 1.24 "FIRST COMMERCIAL SALE" means, with respect to any Product, the first sale for use or consumption by the general public of such Product in any country in the -4-
Territory after Marketing Authorization has been granted, or otherwise permitted, by the governing health authority of such country. 1.25 "FTE RATE" means the rates set forth in Schedule 1.25, such rate to be annually increased on the anniversary of the Effective Date to reflect adjustment in the CPI, using January 1, 2004 as the base year. 1.26 "IND" means an Investigational New Drug Application, as defined in the United States Federal Food, Drug and Cosmetic Act filed with the FDA or its foreign counterparts. 1.27 "INDEMNIFICATION CLAIM" has the meaning set forth in Section 12.1. 1.28 "JOINT INVENTIONS" has the meaning set forth in Section 10.1. 1.29 "LOSSES AND CLAIMS" has the meaning set forth in Section 12.1. 1.30 "MAJOR MARKET COUNTRY" means the United States, Japan, Germany, the United Kingdom, France, Spain and Italy. 1.31 "MANUFACTURING COST" means (i) where and to the extent a Compound or Product (or any component thereof) is manufactured, finished or packaged by a Party, the direct costs and a reasonable allocation of indirect costs (such as materials, labor and charges in the nature of depreciation, and variable and fixed overhead) that are necessary for the normal operation of a production facility that are incurred by such Party and its Affiliates in connection with the manufacturing, finishing and packaging of the Compound or Product at any facility of such Party where the Product (or such component) is so manufactured, finished and packaged, as determined in accordance with U.S. GAAP, consistently applied from period to period, plus (ii) where and to the extent the Compound or Product (or any component thereof) is manufactured, finished or packaged by a Third Party, the actual cost charged to such Party by such Third Party. Manufacturing overhead (including any idle capacity charges) required to operate the facility will be allocated based on the amount of capacity that such Party is reasonably required to reserve to meet expected demand for the Product. Annual adjustments to variable overhead charges will be based on actual costs, while fixed overhead will be adjusted annually based on changes from the previous year to the Producer Price Index-Commodities Index for Drugs and Pharmaceuticals, as published by U.S. Department of Labor, Bureau of Statistics (or successor governmental authority). As an example of idle capacity charges, if a Parry reserves a capacity of five million capsules and actual demand is three million capsules, then the idle plant for the balance of two million capsules will be included in the Manufacturing Cost; however, if a Party needs five million capsule capacity and BMS were to build a new plant for ten million capsule capacity, then the extra five million capsule idle plant will not be part of the Manufacturing Cost. 1.32 "MARKETING AUTHORIZATION" means, with respect to a country, the regulatory authorization required to market and sell a Product in such country. -5-
1.33 "MGH LICENSE AGREEMENT" means the agreement between The General Hospital Corporation d/b/a Massachusetts General Hospital ("MGH") and Bristol-Myers Squibb Company that is currently being negotiated and that will be entered into after the Effective Date, and as it may be modified or supplemented after being entered into, under which BMS will be obligated to pay MGH a royalty on the sales of Products. 1.34 "NDA" means a New Drug Application, as defined in the United States Federal Food, Drug and Cosmetic Act and applicable regulations promulgated thereunder as amended from time to time. 1.35 "NET SALES" means the gross amounts invoiced by the Royalty Paying Party, its Affiliates or sublicensees for sales of Product in finished package form (ready for use by the ultimate consumer) in the Territory to a Third Party, including, but not limited to, sales to wholesalers or other customers typical in each country in bona fide, arm's length transactions. In determining Net Sales, certain deductions may be taken against the gross amount invoiced to the extent not reimbursed by a Third Party. These allowable deductions are: 1.35.1 (a) discounts, including cash discounts, discounts to managed care or similar organizations or government organizations, administrative fees paid to pharmacy benefits managers, (b) rebates paid or credited, including government rebates such as Medicaid chargebacks or rebates, and (c) retroactive price reductions or allowances actually allowed or granted from the billed amount; 1.35.2 credits or allowances actually granted upon claims, rejections or returns of such sales of Products; 1.35.3 taxes, duties or other governmental charges levied on or measured by the billing amount when included in billing, as adjusted for rebates, charge-backs and refunds; 1.35.4 freight, postage, shipping and insurance charges to the extent included on the same invoice by the Royalty Paying Party or its sublicensee for delivery of such Products; and 1.35.5 the actual amount of any write-offs for bad debt. A "sale" of a Product is deemed to occur upon the invoicing, or if no invoice is issued, upon the earlier of shipment or transfer of title in the Product to a Third Party. With respect to a Combination Product, Net Sales for such Combination Product sold by the Royalty Paying Party shall be determined by the Parties to this Agreement in good faith based on the relative value of the Compound and the additional active ingredients that are included in the Combination Product. 1.36 "PHASE II CLINICAL STUDY" means a clinical study of a Product in human subjects for the purpose of identifying a dose or doses at which there is evidence of -6-
efficacy and acceptable safety and tolerability, which shall be deemed commenced upon the dosing of the first subject in such study. 1.37 "PHASE III CLINICAL STUDY" means a clinical study of a Product in human subjects the results of which could be used to establish safety and efficacy of the Product as a basis for Marketing Authorization of the Product which shall be deemed commenced upon the dosing of the first subject in such study. 1.38 "PRODUCT" means any product or pharmaceutical formulation containing a Compound as one of its active ingredients (or as the sole active ingredient), in all dosage forms, formulations, presentations, line extensions, and package configurations. 1.39 "REGULATORY AUTHORITY" means any regulatory agency or other governmental instrumentality that has regulatory authority, anywhere or at any governmental level, in the Territory over the Development or Commercialization of the Products. 1.40 "ROYALTY PAYING PARTY" has the meaning set forth in Section 8.5. 1.41 "ROYALTY RECEIVING PARTY" has the meaning set forth in Section 8.5. 1.42 "BMS OPTION" has the meaning set forth in Section 3.2.1. 1.43 "BMS OPTION PERIOD" has the meaning set forth in Section 3.2.1. 1.44 "SOLE INVENTIONS" has the meaning set forth in Section 10.1. 1.45 "SUPPLY AGREEMENT" has the meaning set forth in Section 7.3. 1.46 "TERRITORY" means any country in the world. 1.47 "THIRD PARTY" means any business entity other than Vanda, BMS and their respective Affiliates. 1.48 "VALID CLAIM" means a claim of an issued and unexpired patent, or a claim of a pending patent application or a supplementary protection certificate, which claim has not been held invalid or unenforceable by a court or other government agency of competent jurisdiction from which no appeal can be or has been taken and has not been held or admitted to be invalid or unenforceable through re-examination or disclaimer, opposition procedure, nullity suit or otherwise, which claim, but for the licenses granted herein, would be infringed by the sale of a Product; provided, however, that if a claim of a pending patent application shall not have issued within five (5) years after the filing date from which such claim takes priority, such claim shall not constitute a Valid Claim for the purposes of this Agreement unless and until such claim shall issue. 1.49 "VANDA THIRD PARTY DEVELOPMENT OPTION" has the meaning set forth in Section 3.1.1. -7-
1.50 "VANDA THIRD PARTY DEVELOPMENT OPTION PERIOD" has the meaning set forth in Section 3.1.1. ARTICLE 2 LICENSE GRANT 2.1 EXCLUSIVE LICENSE GRANT. Subject to all of the terms and conditions in this Agreement, BMS hereby grants to Vanda a non-transferable, exclusive license, with the limited right to sublicense pursuant to Section 2.3, under the BMS Compound Patent Rights solely to the extent necessary to Develop, make, have made, use, import, offer to sell, and Commercialize the Products in the Field in the Territory. 2.2 NON EXCLUSIVE LICENSE GRANT. Subject to all of the terms and conditions in this Agreement, BMS hereby grants to Vanda a non-transferable, nonexclusive license, with the limited right to sublicense pursuant to Section 2.3, (a) under the BMS Know How solely to the extent necessary to Develop, make, have made, use, import, offer to sell, and Commercialize the Products in the Field in the Territory, and (b) in the event Vanda enters into a Supply Agreement with a Third Party in accordance with Article 7, under the BMS Manufacturing Patents solely to the extent necessary to have made the Products or Compounds in the Field in the Territory for sale to Vanda. 2.3 SUBLICENSE. The rights licensed to Vanda under Sections 2.1, 2.2(a) and 2.2(b) shall be sublicensable only as part of a license of rights to a Product in the Field and only for use with such Product, and only where (i) the sublicensee has agreed first in writing to be bound by the terms and conditions of this Agreement in the same manner as Vanda, (ii) BMS is made an express third party beneficiary of the sublicensee's obligations under such sublicense that relate to compliance with the terms and conditions of this Agreement, and (iii) a copy of the proposed sublicense shall have been provided to BMS for review (financial terms not relating to this Agreement may be redacted). A copy of the sublicense shall be provided to BMS promptly after execution. Vanda shall remain jointly and severally liable with any such sublicensee for any failure by such sublicensee to perform or observe the terms and conditions of this Agreement. Each sublicense granted by Vanda to any right licensed to it hereunder shall terminate immediately upon the termination of the license from BMS to Vanda with respect to such right. 2.4 NO TRADEMARK LICENSE. No right or license, express or implied, is granted to Vanda to use any trademarks, tradenames or trade dress owned or Controlled by BMS and its Affiliates. 2.5 NO IMPLIED LICENSES. Only licenses and rights granted expressly herein shall be of legal force and effect. No license or other right shall be created hereunder by implication, estoppel or otherwise. Vanda represents, covenants and warrants that it will use the rights licensed to it hereunder solely in accordance with the terms and conditions contained in this Agreement. -8-
2.6 MARKETING ARRANGEMENTS. In connection with arrangements with Third Parties whereby such Third Parties would distribute or otherwise Commercialize Products, Vanda agrees to comply and to cause such Third Parties to comply with all terms and conditions of this Agreement. 2.7 RETAINED RIGHTS. All rights not expressly granted hereunder are reserved by BMS and may be used by BMS for any purpose. ARTICLE 3 OPTION GRANTS 3.1 VANDA'S OPTION: THIRD PARTY DEVELOPMENT PARTNERS. 3.1.1 Vanda Development Option Period. Vanda will have the right, anytime prior to filing an NDA for a Product ("Vanda Third Party Development Option Period"), to negotiate an agreement to sublicense Vanda's rights' to Develop and Commercialize a Product (a "Development and Commercialization Agreement") with a Third Party in at least one Major Market Country ("Vanda Third Party Development Option"); provided, however, that with respect to each Product, upon Vanda locking the database for Vanda's first Phase III Clinical Study for the Product, Vanda shall have a limited time in which to exercise the Vanda Third Party Development Option for the Product before the right to exercise such option is suspended. Vanda shall have 120 days from the date Vanda locks the database for Vanda's first phase III Clinical Study for the Product to exercise such option. If Vanda exercises such option during such 120 day period, BMS shall have a right of first negotiation to enter into a Development and Commercialization Agreement for the Product with Vanda. BMS shall have a thirty (30) day review period, from the receipt of Vanda's written notice to seek a Third Party partner, to elect to enter into negotiations with Vanda. During the thirty (30) day review period, Vanda shall timely provide BMS with copies of any reports, data, results or information, material to the Development of the Product that are or may become available, including but not limited to those relating to the first phase III Clinical Study for the Product. Thereafter, BMS will have a ninety (90) day period of exclusivity in which to negotiate and execute a Development and Commercialization Agreement, and Vanda shall negotiate in good faith during such ninety (90) day period. During such thirty (30) day review period and such ninety (90) day period of exclusivity, Vanda shall not approach any Third Party concerning a Development and Commercialization Agreement or disclose any of the Phase III Clinical Study data, results or conclusions to any Third Party that may potentially enter into a Development and Commercialization Agreement for the Product. If, during the thirty (30) day review period BMS does not formally notify Vanda in writing of its intention to enter into a Development and Commercialization Agreement or informs Vanda that it is not interested in entering into such an agreement or if BMS does notify Vanda of its intention to enter into such an agreement but does not enter into a such an agreement for the Product during such ninety (90) day period of exclusivity, then Vanda shall have 120 days from the end of the thirty (30) day review period if BMS does not provide Vanda with notice of its intention to -9-
negotiate during such thirty (30) day period, or 120 days from the date BMS notifies Vanda that it is not interested in entering into a Development and Commercialization Agreement for the Product or 120 days from the end of the ninety (90) day period of exclusivity if BMS does notify Vanda of its intention to enter into such an agreement but the parties do not enter into a such an agreement during such ninety (90) day period, as the case may be, to negotiate and enter into a Development and Commercialization Agreement with a Third Party for the Product. If Vanda does not enter into such an agreement with a Third Party during such 120 day period, then the Vanda Third Party Development Option shall be suspended from the end of such 120 day period (the Option Suspension Date) until the end of the BMS Option Period for the Product. The Vanda Third Party Development Option is exercisable by written notice from Vanda to BMS of Vanda's intention to seek a Third Party partner. Such option shall be exercisable on a Product-by-Product and on a Major Market Country by Major Market Country basis. For the avoidance of doubt, rights to Develop and Commericalize a Product in non-Major Market Countries may be included in the Development and Commercialization Agreement for a Major Market Country. With respect to a Product, the Major Market Countries together with all other countries that are not included in a Development and Commercialization Agreement for the Product shall be referred to as the "Remaining Countries." 3.1.2 Option Exercise. Except as provided in Section 3.1.1 for the period following the locking of the database after the first Phase III Clinical Study for a Product, in the event that Vanda exercises its Vanda Third Party Development Option for a Product in a particular Major Market Country in the Vanda Third Party Development Option Period, BMS shall have a right of first negotiation to enter into a Development and Commercialization Agreement for that Product in that Major Market Country. BMS shall have a thirty (30) day review period, from the receipt of Vanda's written notice to seek a Third Party partner, to elect to enter into negotiations with Vanda. During the thirty (30) day review period, Vanda shall timely provide BMS with copies of any reports, data, results or information, material to the Development of a Product that are or may become available. Thereafter, BMS will have a sixty (60) day period of exclusivity in which to negotiate and execute a Development and Commercialization Agreement for the Product, and Vanda shall negotiate in good faith during such sixty (60) day period. If during the thirty (30) day review period BMS does not formally notify Vanda in writing of its intention to enter into such an agreement or informs Vanda that it is not interested in entering into such an agreement or if BMS does not enter into such an agreement during the sixty (60) day period of exclusivity, then Vanda may enter into a Development and Commercialization Agreement for the Product with a Third Party. The Parties will use reasonable efforts to make decisions earlier than the final day of each period allowed by this section 3.1.2 to the extent practicable. In the event that Vanda enters into one or more Development and Commercialization Agreements for a Product pursuant to the provisions of Section 3.1.1 and/or this Section 3.1.2 prior to the Option Suspension Date, then BMS will surrender the BMS Option with respect to the Product in those countries that are included in such Development and Commercialization Agreements but retain the BMS Option with respect to the Remaining Countries. -10-
3.1.3 Vanda Third Party Development Option Not Exercised. In the event Vanda does not exercise its Vanda Third Party Development Option for a Product or enter into any Development and Commercialization Agreements for the Product prior to the Option Suspension Date for the Product, then BMS will have an opportunity to exercise its BMS Option for the Product in all countries on the terms and conditions described in Section 3.2. 3.2 BMS OPTION EXERCISABLE UPON COMPLETION OF PHASE III CLINICAL STUDIES: COMMERCIALIZATION. 3.2.1 BMS Option Period. The BMS Option Period for a Product will commence for the Remaining Countries (providing Vanda has not entered into one or more Development and Commercialization Agreements for the Product which when taken together include all of the Major Market Countries prior to the Option Suspension Date for the Product) on the date that (1) Vanda provides BMS with a full written report of the Phase III Clinical Studies, including the results and conclusions thereof, on which Vanda intends to rely for filing for Marketing Authorization for the Product in the first Major Market Country and (2) both Parties agree in writing is the commencement date for the BMS Option Period. The BMS Option Period shall terminate ninety (90) days later ("BMS Option Period"). At any time during the BMS Option Period, BMS may provide Vanda with written notice that either: (a) it does not wish to Develop or Commercialize the Product in the Remaining Countries; or (b) it wishes to reacquire all rights to the Product in the Remaining Countries ((b) shall be referred to as the "BMS Option"). Such option shall be exercisable on a Product-by-Product basis. For the avoidance of doubt, if BMS does not exercise the BMS Option for the Remaining Countries within the BMS Option Period, then upon completion of the BMS Option Period, the Vanda Third Party Development Option shall be exercisable for the Remaining Countries for the remainder of the Vanda Third Party Development Option Period. 3.2.2 BMS Option Diligence Materials. Vanda shall provide to BMS on or prior to the commencement of the BMS Option Period, any additional data (including without limitation, copies of all case report forms, if requested by BMS) or information relating to the Development of the Product that is in Vanda's possession which BMS reasonably believes to be necessary or useful for its review of the opportunity. At 30-day intervals during the BMS Option Period, Vanda will promptly provide any reports, data, results or information, material to the Development of a Product that may become available. 3.2.3 Option Exercised. In the event BMS exercises its BMS Option for a Product, then, among other things, (a) LICENSE GRANT. The licenses granted to Vanda pursuant to Section 2.1 and 2.2 will immediately terminate with respect to the Product in the Remaining Countries without further action on the part of either Party, and Vanda shall cease all use of the BMS Patent Rights, and BMS Know-How with respect to the Product in the Remaining Countries; -11-
(b) TRANSFER OF DATA, INFORMATION AND REGULATORY FILINGS. Vanda shall promptly assign to BMS all rights, title and interests in any INDs, Marketing Authorizations, and Approvals that it shall have filed in the Remaining Countries with respect to the Product and the Compound contained in the Product and all data generated by it with respect to the Product and the Compound contained in the Product in the Remaining Countries, and will promptly transfer to BMS originals or copies of all pertinent documents relating to same as requested by BMS. In the event that Vanda fails to effectuate the transfer of the foregoing within thirty (30) days after the date that BMS exercises its BMS Option, then, in addition to any other recourse or remedy that BMS may be entitled to at law or in equity, BMS shall be entitled to specific performance of the foregoing obligation and the Parties acknowledge and agree that BMS may obtain an order for same from any court of competent jurisdiction without posting of bond. BMS will reimburse Vanda for any out-of-pocket expenses incurred in connection with such assignment. Within ninety (90) days following any such assignment to BMS, the Parties will finalize and enter into a Data Safety Exchange covering such matters as adverse event reporting, data safety exchange and response to physician inquiries so that BMS may fulfill its reporting responsibilities on a timely basis to Regulatory Authorities; (c) DEVELOPMENT BMS will thereafter be solely responsible for any further Development activities needed to achieve Approvals in the Remaining Countries for the Product, and will use Commercially Reasonable Efforts to achieve same; (d) COMMERCIALIZATION. Provided the United States is included in the Remaining Countries, as soon as reasonably necessary, and in no event later than six months prior to the anticipated First Commercial Sale of the Product in the United States, BMS will advise Vanda in writing whether it intends to seek a co-promotion partner in the United States for the Product. In the event that BMS seeks a co-promotion partner in the United States, and provided that Vanda is able to meet the requirements established by BMS at that time for a co-promotion partner, the Parties will have ninety days in which to negotiate a mutually acceptable co-promotion agreement in accordance with Section 3.3; and (e) OTHER TERMS. The provisions of Section 13.4.1(e), (g), (h) and (i) shall also apply as though set forth herein. It is understood and agreed that BMS shall be entitled to specific performance as a remedy to enforce the provisions of this Section 3.3.4(e), in addition to any other remedy to which it may be entitled by applicable law. 3.2.4 BMS Option Not Exercised. In the event that BMS does not exercise its BMS Option for a Product with respect to the Remaining Countries, Vanda will, subject to Section 3.3, Develop and Commercialize the Product in the Remaining Countries pursuant to the terms and conditions set forth in this Agreement. 3.3 RIGHT OF FIRST NEGOTIATION TO ACT AS A CO-PROMOTION PARTNER IN COMMERCIALIZATION OF A PRODUCT BY EITHER PARTY. -12-
3.3.1 Vanda's Right to Co-Promote. If BMS is Developing and/or Commercializing a Product in the U.S. pursuant to this Agreement and decides to co-promote the Product with a Third Party marketing partner in the U.S., BMS shall promptly notify Vanda in writing of its intention to co-promote the Product with such Third Party marketing partner in the U.S. Vanda will have sixty (60) days from the date BMS notifies Vanda of its intention to co-promote the Product with such Third Party marketing partner to provide written notice of its intent to exercise its option to co-promote the Product with BMS in the U.S. and demonstrate that it has, or is reasonably likely to have at the time required, the capabilities to undertake such co-promotion effort, including without limitation, sufficient numbers of Vanda employees with sufficient experience as sales representatives and sales and marketing managers and executives to allow it to fulfill the obligations established by BMS for the co-promotion partner (including without limitation minimum number of details, minimum primary detail equivalents, sales force size and training, advertising and promotional spend requirements, etc.). Vanda may not delegate or subcontract such co-promotion responsibilities to a Third Party, unless such Third Party (a) has been an alliance partner of Vanda's for at least twenty-four (24) months prior to the date Vanda receives notice under this Section 3.2.1 from BMS of BMS' intention to co-promote the Product with a Third Party marketing partner, and (b) has the capabilities to undertake such co-promotion effort, including without limitation, sufficient numbers of employees with sufficient experience as sales representatives and sales and marketing managers and executives to allow it to fulfill the obligations established by BMS for the co-promotion partner (including without limitation minimum number of details, minimum primary detail equivalents, sales force size and training, advertising and promotional spend requirements, etc.). If Vanda exercises its option and demonstrates to BMS' satisfaction that it can meet, or is reasonably likely to be able to meet at the necessary time, such capabilities and fulfill such obligations by itself or with such an alliance partner, the Parties will, for a period not longer than ninety (90) days after Vanda's exercise of the option, exclusively negotiate with each other in good faith a Co-Promotion Agreement on commercially reasonable terms and conditions reflective of those used in the contract sales organization industry. If after such ninety (90) day period, the Parties have not entered into a co-promotion agreement, BMS would be free to enter into an arrangement with a Third Party marketing partner. 3.3.2 BMS' Right to Co-Promote. If Vanda is Commercializing a Product pursuant to this Agreement and decides to co-promote the Product with a Third Party marketing partner, Vanda shall promptly notify BMS in writing of its intention to co-promote the Products with such Third Party marketing partner. BMS will have sixty (60) days from the date Vanda notifies BMS of its intention to co-promote the Product with such Third Party marketing partner to provide written notice of its intent to exercise its option to co-promote the Product with Vanda. If BMS exercises its option, the Parties will, for a period not longer than sixty (60) days after BMS' exercise of the option, negotiate exclusively with each other in good faith a co-promotion agreement on commercially reasonable terms and conditions reflective of those used in pharmaceutical partnerships. If after such sixty (60) day period, the Parties have not entered into a co-promotion agreement, Vanda would be free to enter into an arrangement with a Third Party marketing partner. -13-
3.4 RESPONSIBILITIES REGULATORY AFFAIRS. Following the date that the IND, Marketing Authorization or Approval in a given country for a Product has been assigned to BMS, BMS shall have sole responsibility for preparing, all regulatory filings and related submissions with respect to the Product and the Compound contained in the Product in such country and making all final decisions relating thereto. BMS shall be the primary interface with and otherwise handle all interactions with Regulatory Authorities concerning the Product and the Compound contained in the Product. Pursuant to Section 14.7, Vanda shall be obliged to render whatever assistance BMS may reasonably request to allow BMS to fulfill its obligations under this Section 3.4. To the extent not prohibited by law or regulation, in the event that BMS is Developing and Commercializing a Product in the United States, Vanda shall have the right to have one representative participate in all material meetings pertaining to Development of the Product between representatives of BMS and the FDA. BMS will provide Vanda, at least five (5) business days before any such meeting, with copies of all documents, correspondence and other materials in its possession which are relevant to the matters to be addressed at any such meeting. BMS will provide Vanda with draft and final copies (which may be wholly or partly in electronic form) of all material correspondence with the Regulatory Authorities in each of the Major Market Countries relating to the Product, including any draft Marketing Authorizations and Approvals, for Vanda's review and comment within a reasonable time prior to filing with the appropriate Regulatory Authority. BMS shall give due consideration to Vanda's comments, however, BMS shall not be bound thereby. ARTICLE 4 TRANSFER OF BMS KNOW-HOW; 4.1 TRANSFER OF BMS COMPOUND KNOW-HOW. 4.1.1 TRANSFER. During the three (3) month period following the Effective Date, BMS shall provide Vanda with the assistance of certain BMS employees having knowledge relevant to the Compounds to provide Vanda with a reasonable level of technical assistance and consultation in connection with the transfer of BMS Know-How (provided that BMS shall only be required to make a good faith effort to provide the BMS Know How but shall not be in default hereunder for inadvertent failure to disclose all or non-material information). Vanda shall be responsible for ensuring that its personnel who receive such assistance are appropriately qualified and experienced for such purpose. 4.1.2 COPIES OF DOCUMENTS. BMS shall provide Vanda with one copy of all documents, data or other information Controlled by BMS to the extent that such documents, data and information are the subject of the BMS Know-How licenses and are, in BMS' good faith judgment, reasonably necessary for the Development, manufacture or Commercialization of the Compounds and are reasonably available to BMS without undue searching; provided however, the foregoing shall in no event require BMS to provide copies of laboratory notebooks or manufacturing run records required to be maintained by FDA. The BMS Know-How provided by BMS shall not be used by Vanda for any purpose other than Development, manufacture or Commercialization of -14-
the Compounds and Products and is Confidential Information of BMS. Vanda shall assume full responsibility and liability to BMS for any unauthorized use or disclosure of Confidential Information of BMS. BMS shall be responsible for the cost of providing one set of copies only, and in addition to paper and other tangible copies, BMS shall, upon Vanda's request and where already available to BMS, also provide to Vanda electronic copies of such documents, data and other information, provided, that BMS shall have no obligation to reformat or otherwise alter or modify any such materials in order to provide them to Vanda. 4.1.3 ON-SITE CONSULTING. BMS shall not be obligated to provide more than forty (40) hours of consulting advice or on-site consulting advice (including travel time) over the term of this Agreement, as may be requested by Vanda, with respect to the transfer of any BMS Know-How. BMS will be reimbursed by Vanda for its fully-burdened costs (including out-of-pocket costs) incurred to provide such advice or services. In the event that Vanda requires consultation with BMS over and above the forty (40) hours provided here, Vanda will submit its request for consultation to BMS, in writing, stating in sufficient detail the subject matter, and the number of hours required. BMS will consider each such request in good faith, and will inform Vanda in a timely manner if BMS will be able to provide the consulting time requested, with the understanding that BMS shall not obligated to provide more than forty (40) hours of consulting advice or on-site consulting advice (including travel time) over the term of this Agreement. 4.1.4 IND. As soon as reasonable practicable after the Effective Date, BMS will promptly effectuate the assignment of IND 54,776 (the active IND for the Compound currently identified as BMS-214778) to Vanda. Vanda will reimburse BMS for any personnel and other expenses incurred in connection with such assignment. 4.2 NON-SOLICITATION. During the term of this Agreement, and for [*] years thereafter, each Party and its Affiliates shall not solicit, directly or indirectly, any employee of the other Party or of an Affiliate of the other Party, wherever located, who is or was involved in the performance of this Agreement; provided, that the foregoing restriction on solicitation shall not apply to advertisements run in trade journals or other publications or on the Internet that are targeted to qualified individuals generally for the position in question. ARTICLE 5 DEVELOPMENT 5.1 PROGRAM LIAISON. As soon as practicable after the Effective Date, each Party will provide the other, in writing, with the name of its "Program Liaison." The Program Liaison will act as the primary liaison in coordinating the activities under this Agreement. The Program Liaisons will review and agree on the suitability of the Development Plan set forth in Schedule 1.19. Before Vanda begins Development of a Product under a Development Plan other than the Development Plan in Schedule 1.19, the Program Liaisons will prepare such Development Plan, and the Parties must agree 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. -15-
writing upon such Development Plan before Vanda commences Development of the Product under such Development Plan. 5.2 DEVELOPMENT 5.2.1 Vanda shall use good faith Commercially Reasonable Efforts to Develop the Compounds and Products. 5.2.2 As soon as reasonably practicable after the Effective Date, Vanda shall commence Phase II Clinical Studies for the Product in accordance with the Development Plan set forth in Schedule 1.19 and this Agreement. In any event, Vanda (a) shall initiate Phase II Clinical Studies for-the first Product no later than six (6) months after the Effective Date, (b) complete (at least) one-Phase II Clinical Study for the first Product no later than twelve (12) months after commencement of the first Phase II Clinical Study (i.e., the date when the first patient in the study is dosed), (c) shall initiate Phase III Clinical Studies for the first Product no later than twenty-four (24) months after completing the first Phase II Clinical Study, and (d) shall file an NDA for the first Product no later than six (6) years after the Effective Date. In the event that any of such milestones are missed, it shall be deemed a material breach of this Agreement for the purposes of Article 13. BMS' ability to terminate this Agreement pursuant to Section 13.2 shall apply without regard to whether any circumstances falling within Section 14.4 might otherwise excuse (in whole or in part) any inability or failure to meet any such milestones. If Vanda misses any of the above milestone dates, Vanda may request that BMS grant a reasonable extension to allow it to meet such milestone, and BMS agrees that it will not unreasonably withhold its assent to any such reasonable revision where supported by clear evidence that Vanda has been making good faith and diligent efforts to achieve the milestones but has failed as a result of technical difficulties or delays that the parties could not have reasonably avoided in the achievement of such milestones; and provided, that BMS may also need to seek approval of MGH in such event, and any approval by BMS shall further be conditioned on receipt of approval of MGH. 5.3 DEVELOPMENT REPORTS. Vanda shall provide quarterly written reports to BMS, within thirty (30) days following the end of each calendar quarter, presenting a meaningful summary of the Development activities accomplished by Vanda and results obtained through the end of such quarter. Such reports shall include all material results, information and data generated in the course of Development of Products. Vanda will make Development plans, clinical protocols, investigator brochures and regulatory submissions available to BMS at BMS' written request. In addition, on reasonable request by BMS, Vanda will meet with BMS to make presentations of the Development activities taken relating to the Products. 5.4 RECORDS. Vanda shall maintain complete and accurate records of all work conducted in furtherance of the Development and Commercialization of the Compounds and Products and all results, data and developments made in furtherance thereof. Such records shall be complete and accurate and shall fully and properly reflect all work done and results achieved in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes. -16-
5.5 DEVELOPMENT RESPONSIBILITIES AND COSTS. Except in the case where BMS enters into a Development and Commercialization Agreement or exercises its BMS Option, Vanda shall have sole responsibility for, and shall bear the cost of conducting, Development with respect to Products and Compounds. Vanda shall Develop the Compounds and Products in compliance with all applicable legal and regulatory requirements, including without limitation all legal and regulatory requirements pertaining to the design and conduct of clinical studies. 5.6 REGULATORY RESPONSIBILITIES AND COSTS. 5.6.1 Regulatory Interactions. Only in the case where Vanda does not enter into any Development and Commercialization Agreements and BMS does not exercise the BMS Option, Vanda shall have sole responsibility for, and shall bear the cost of preparing, all regulatory filings and related submissions with respect to Compounds or Products. Vanda shall be the primary interface with and otherwise handle all interactions with Regulatory Authorities concerning Compounds or Products. To the extent not prohibited by law or regulation, BMS shall have the right to have one representative participate in all material meetings pertaining to Development of a Product between representatives of Vanda and Regulatory Authorities of the Major Market Countries and the FDA. Vanda will provide BMS, at least five (5) business days before any such meeting, with copies of all documents, correspondence and other materials in its possession which are relevant to the matters to be addressed at any such meeting. Vanda will provide BMS with draft and final copies (which may be wholly or partly in electronic form) of all material correspondence with Regulatory Authorities relating to the Product, including any draft Marketing Authorizations, for BMS' review and comment within a reasonable time prior to filing with the Regulatory Authorities. Vanda will be responsible for meeting the requirements of all pre-approval inspections required by any Regulatory Authorities. 5.6.2 Ownership of Regulatory Filings. Vanda shall own all INDs, Marketing Authorizations, Approvals and submissions in connection therewith and Approvals shall be obtained by and in the name of Vanda, unless and until BMS (a) has entered into a Development and Commercialization Agreement with Vanda pursuant to Section 3.1, or (b) has exercised the BMS Option. ARTICLE 6 COMMERCIALIZATION 6.1 COMMERCIALIZING PARTY'S RESPONSIBILITIES. 6.1.1 Introduction. The Party Commercializing a Product in a country (the "Commercializing Party") shall use Commercially Reasonable Efforts to Commercialize the Product and, at a minimum, effect introduction of the Product into such country as soon as reasonably practicable. -17-
6.1.2 Continued Availability. Following the First Commercial Sale of a Product in a country in the Territory and until the expiration or termination of this Agreement, the Commercializing Party shall use Commercially Reasonable Efforts to supply and keep the Product reasonably available to the public in such country. 6.1.3 Marking. Each Product Commercialized by Vanda under this Agreement shall be marked (to the extent not prohibited by law): (a) with a notice that such Product is sold under a license from BMS and (b) with all patent and other intellectual property notices relating to the BMS Patent Rights in such a manner as may be required by applicable law. ARTICLE 7 MANUFACTURE AND SUPPLY 7.1 RESPONSIBILITY. Subject to Section 7.2, the Commercializing Party for a Product shall be solely responsible at its expense for all of its requirements in the Territory for any purpose of the Product and the Compound contained in the Product and shall use Commercially Reasonable Efforts to supply all requirements of its customers. The Commercializing Party shall manufacture, or cause to have manufactured, the Product and the Compound contained in the Product in compliance with all applicable legal and regulatory requirements and with its internal policies and procedures. 7.2 PROVISION OF COMPOUNDS. As soon as possible after the Effective Date, (and no later than thirty (30) days) BMS will transfer to Vanda [*] active pharmaceutical ingredient that has been requalified by BMS to be within specification as well as the most recent reference standard that has been submitted. 7.3 RIGHT TO MANUFACTURE COMMERCIAL SUPPLY. In the event that BMS has entered into a Development and Commercialization Agreement or exercised its BMS Option for a particular Product, BMS will have the first right to manufacture and supply such Product or the Compound contained in such Product at any time thereafter for clinical and commercial use, as applicable. In the event that BMS does not enter into a Development and Commercialization Agreement or exercise its BMS Option for a particular Product, and Vanda enters into negotiations with a Third Party to manufacture a clinical or commercial supply of such Product or the Compound contained in such Product (the "Supply Agreement"), it will promptly notify BMS and provide a reasonably detailed summary of the material financial terms of such Supply Agreement as well as a reasonably detailed summary of data pertinent to evaluating such opportunity. BMS will have thirty (30) days from receipt of the data summary to notify Vanda that it will enter into the agreement on the same material financial terms and conditions. The Parties will then negotiate a Supply Agreement in good faith for thirty (30) days or such longer period as agreed between the Parties. In the event the Parties do not enter into a Supply Agreement within such thirty (30) day period, or the agreed extension thereof, Vanda is free to enter into an agreement with any other entity with respect to such clinical or commercial supply. - ---------- 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. -18-
ARTICLE 8 PAYMENTS 8.1 TECHNOLOGY ACCESS FEE. On the Effective Date, Vanda will pay to BMS the sum of five hundred thousand Dollars ($500,000) as partial reimbursement for BMS' previously incurred research and development expenses for the Compounds. 8.2 MILESTONE PAYMENTS. 8.2.1 Milestone Payments By Vanda. In the event that Vanda is Developing or Commercializing a Product in any country and/or has entered into a Development and Commercialization Agreement for the Product with a Third Party, then Vanda will pay BMS, as partial reimbursement for research and development expenses for the Compounds, upon Vanda or such Third Party achieving the following milestones for that Product: MILESTONE DOLLARS - --------- ------- [*] [*] [*] [*] [*] [*] [*] [*] 8.2.2 "BMS Option" Milestone Payments by BMS. In the event that BMS exercises its BMS Option for a particular Product, then BMS will pay Vanda, as partial reimbursement for research and development expenses for the Compounds, upon BMS achieving the following milestones for that Product: - ---------- 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. -19-
MILESTONE DOLLARS - --------- ------- [*] [*] [*] [*] [*] [*] 8.2.3 No Milestone under any of Sections 8.2.1 and 8.2.2 shall be paid more than one time on a Product, regardless of the number of indications obtained for the Product or number of formulations, dosages or presentations of the particular active Compound in such Product. 8.3 TIMING. Payment shall be made on or before the thirtieth (30th) Business Day following the occurrence of an event giving rise to a payment obligation hereunder. All payments to BMS shall be made by wire transfer in Dollars to the credit of the bank account indicated below or to such other account as may be designated, from time to time, by BMS in writing. All Payments to Vanda shall be made by wire transfer in Dollars to the credit of such bank account as may be designated, from time to time, by Vanda in writing. Bank: [*] ABA No.: [*] Account No.: [*] Account Name: [*] Company Details: [*] 8.4 DEVELOPMENT COSTS. 8.4.1 Vanda Development Costs. Vanda will be responsible for all Development Costs, unless BMS enters into a Development and Commercialization Agreement prior to the BMS Option Period, in which the terms may involve sharing in Development Costs for that Product. 8.5 ROYALTY PAYMENT. - ---------- 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. -20-
8.5.1 Vanda Royalty to BMS. In the event that Vanda Commercializes a Product and/or enters into a Development and Commercialization Agreement with a Third Party for the Product, then Vanda will pay BMS a [*] percent ([*]%) royalty on annual Net Sales of that Product by Vanda, its Affiliates, and sublicensees, including but not limited to such Third Party, in he Territory, In the event that Vanda enters into one or more Development and Commercialization Agreements for a particular Product, Vanda will also pay BMS [*] percent ([*]%) of any and all sublicense fees, upfront payments and milestone payments (other than running royalties) that are received by Vanda in consideration of each such Development and Commercialization Agreement. Vanda agrees that it shall also pay MGH, on behalf of BMS, all financial obligations of BMS under the MGH License Agreement arising from the Development, manufacture and Commercialization of Products by Vanda, its Affiliates and sublicensees, including but not limited to any royalty obligation under the MGH License Agreement arising from the sale of any Product by Vanda, its Affiliates or sublicensees in the Territory, and shall comply with and fulfill all applicable terms and conditions of the MGH License Agreement. Without limiting the foregoing, with respect to each Product, Vanda shall comply with and fulfill all of the applicable terms and conditions of the MGH License Agreement relating to the Development, manufacture and Commercialization of Products by Vanda, its Affiliates and sublicensees, which shall include making the royalty payments in accordance with the terms and conditions of the MGH License Agreement, beeping books of accounting and making them available for inspection by MGH in accordance with the terms and conditions of the MGH License Agreement, providing any information and reports to MGH required by the terms and conditions of the MGH License Agreement in connection with the sale of any Product, and obtaining and maintaining the type and amounts of insurance required of BMS under the MGH License Agreement. Vanda shall provide BMS with a copy of each document provided to MGH in accordance with the terms and conditions of the MGH License Agreement, including but not limited to a copy of each royalty report and a copy of any other document providing information to MGH. 8.5.2 BMS Royalty to Vanda. In the event that BMS exercises its BMS Option for a particular Product, BMS will pay directly to Vanda a [*] percent ([*]%) royalty on annual Net Sales of that Product by BMS, its Affiliates and sublicensees in the Remaining Countries. If, however, BMS entered into a Development, and Commercialization Agreement, BMS would pay [*]. Each of the foregoing shall be collectively and individually referred to as "Royalties." The Party paying Royalties shall be referred to as the "Royalty Paying Party". The Party receiving Royalty payments shall be referred to as the "Royalty Receiving Party". 8.6 THIRD PARTY ROYALTY PAYMENTS. The Royalty Paying Party shall be responsible for making any Third Party license payments, whether existing as of or arising after the Effective Date and reasonably necessary to Develop or Commercialize the Product. - ---------- 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. -21-
8.7 ROYALTY OFFSET FOR THIRD PARTY ROYALTY PAYMENTS. Other than any royalties due to a Third Party under the MGH License Agreement or under agreements existing as of the Effective Date with respect to the manufacture, use or sale of a Product, the Royalty Paying Party, its Affiliate and sublicensees shall, except where Section 8.8.2 applies, be entitled to offset up to [*] percent ([*]%) of any royalties due to the Royalty Receiving Party by the amount of any royalties and license fees paid to a Third Party reasonably necessary to enable the Royalty Paying Party to sell the Product in a country in the Territory; provided, that the royalty payable to the Royalty Receiving Party shall not be reduced below [*] of what it would otherwise have received in the absence of this Section 8.7. 8.8 TERM FOR ROYALTY PAYMENTS. 8.8.1 Term. Royalties shall be payable on a country by country basis from the First Commercial Sale until the later of (a) ten (10) years from the First Commercial Sale and (b) the expiration of the last to expire patent owned or Controlled by the Royalty Receiving Party (including extensions thereof) with a Valid Claim directed to the Product, including, without limitation, a method of use thereof. 8.8.2 Countries With No Valid Claim Covering Product. If at any time during the royalty period set forth in 8.8.1 there is in a country no patent owned or Controlled by the Royalty Receiving Party with a Valid Claim directed to the Product or a method of use thereof, then the royalties shall be reduced by [*] percent ([*]%) with respect to the Net Sales of the Product in such country. 8.9 SALES REPORTS 8.9.1 Substance of Reports. After the First Commercial Sale of Product and during the term of this Agreement, the Royalty Paying Party shall furnish or cause to be furnished to the Royalty Receiving Party a written report, within 30 days after the end of each calendar quarter, showing the amount of royalty due calculated for such calendar quarter, with the royalty due paid to the Royalty Receiving Party at the time such report is provided. With each quarterly payment, the Royalty Paying Party shall deliver to the Royalty Receiving Party a full and accurate accounting to include at least the following information: (a) Quantity of each Product sold or leased (by country) by the Royalty Paying Party, and its Affiliates or sublicensees; (b) Total billings for each Product (by country); (c) Quantities of each Product used by the Royalty Paying Party and its Affiliates or sublicensees or sold to the U.S. Government; (d) Names and Addresses of all sublicensees of the Royalty Paying Party; and (e) Total royalties payable to the Royalty Receiving Party. - ---------- 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. -22-
8.9.2 Sales Record Audit. The Royalty Paying Party shall keep, and shall cause each of its Affiliates and sublicensees, if any, to keep full and accurate books of accounting containing all particulars that may be necessary for the purpose of calculating all royalties payable to the Royalty Receiving Party. Such books of accounting shall be kept at their principal place of business and, with all necessary supporting data, shall during all reasonable times for the [*] next following the end of the calendar year to which each shall pertain, be open for inspection at reasonable times by an independent certified accountant selected by the Royalty Receiving Party, and as to which the Royalty Paying Party has no reasonable objection, at the Royalty Receiving Party's expense, for the purpose of verifying royalty statements for compliance with this Agreement. Such accountant must have agreed in writing to maintain all information learned in confidence, except as necessary to disclose to the Royalty Receiving Party such compliance or noncompliance by the Royalty Paying Party. The results of each inspection, if any, shall be binding on both Parties. The Royalty Receiving Party shall pay for such inspections, except that in the event there is any upward adjustment in aggregate royalties payable for any year shown by such inspection of more than [*] percent ([*]%) of the amount paid, the Royalty Paying Party shall pay for such inspection. Any overpayments shall be fully creditable against amounts payable in subsequent payment periods. 8.10 CURRENCY EXCHANGE. With respect to Net Sales invoiced in Dollars, the Net Sales and the amounts due to the Royalty Receiving Party hereunder shall be expressed in Dollars. With respect to Net Sales invoiced in a currency other than Dollars, the Net Sales shall be expressed in the domestic currency of the entity making the sale, together with the Dollar equivalent, calculated using the arithmetic average of the spot rates on the close of business on last Business Day of each month of the calendar quarter in which the Net Sales were made. The "closing mid-point rates" found in the "dollar spot forward against the dollar" table published by The Financial Times or any other publication as agreed to by the Parties shall be used as the source of spot rates to calculate the average as defined in the preceding sentence. All payments shall be made in Dollars. If at any time legal restrictions in any country in the Territory prevent the prompt remittance of any payments with respect to sales in that country, the Royalty Paying Party shall have the right and option to make such payments by depositing the amount thereof in local currency to the Royalty Receiving Party's account in a bank or depository in such country. 8.11 TAX WITHHOLDING. The withholding tax, duties, and other levies (if any) applied by a government of any country of the Territory on payments made by the Royalty Paying Party, to the Royalty Receiving Party hereunder shall be borne by the Royalty Receiving Party. The Royalty Paying Party, its Affiliates and sublicensees shall cooperate with the Royalty Receiving Party to enable the Royalty Receiving Party to claim exemption therefrom under any double taxation or similar agreement in force and shall provide to the Royalty Receiving Party proper evidence of payments of withholding tax and assist the Royalty Receiving Party by obtaining or providing in as far as possible the required documentation for the purpose of the Royalty Receiving Party' tax returns. - ---------- 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. -23-
8.12 INTEREST DUE. In case of any delay in payment by the Royalty Paying Party to the Royalty Receiving Party not occasioned by Force Majeure, interest on the overdue payment shall accrue [*], as determined for each month on the last business day of that month, assessed from the day payment was initially due. The foregoing interest shall be due from the Royalty Paying Party without any special notice. ARTICLE 9 REPRESENTATIONS AND WARRANTIES; DISCLAIMER; LIMITATION OF LIABILITY 9.1 MUTUAL WARRANTIES. Each Party represents and warrants to the other Party that (a) it (and in the case of Vanda, its general partner as well) has all requisite corporate power and authority to enter into this Agreement, to grant the licenses granted by it hereunder, and to perform its other obligations under this Agreement, (b) execution of this Agreement and the performance by the warranting Party (and in the case of Vanda, by its general partner as well) of its obligations hereunder, including, without limitation, the licenses granted by that Party hereunder, have been duly authorized, (c) this Agreement is fully binding and enforceable on each Party (and in the case of Vanda, on its general partner as well) in accordance with its terms, and (d) the performance of this Agreement by it does not create a breach or default under any other agreement to which it (and in the case of Vanda, to which its general partner as well) is a Party. 9.2 BMS WARRANTIES AND COVENANTS. As of the Effective Date, BMS represents and warrants to Vanda that, to the actual knowledge of its in-house patent counsel (based on such counsels' good faith understanding of the facts and information in their possession without any duty to conduct any investigation with respect to such facts and information), (a) there is no pending litigation which alleges, or any written communication alleging, that BMS' activities with respect to the BMS Patent Rights or the Compounds have infringed or misappropriated any of the intellectual property rights of any Third Party, (b) all fees required to be paid by BMS in order to maintain the patents licensed to Vanda hereunder have been paid to date as of the Effective Date such that the claims included in any such issued patents are in full force and effect as of the Effective Date, (c) the BMS Patent Rights exist and are not invalid or unenforceable, in whole or in part, (d) it has the full right, power and authority to enter into this Agreement and to grant the licenses granted under Article II hereof, (e) it has not previously assigned, transferred, conveyed or otherwise encumbered its right, title and interest in the BMS Patent Rights or the BMS Know-How, and (f) it is the sole and exclusive owner of the BMS Patent Rights and the BMS Know-How. 9.3 VANDA WARRANTIES AND COVENANTS. 9.3.1 Vanda warrants, represents and covenants that all of its activities related to its use of the BMS Patent Rights and BMS Know-How, and the Development and Commercialization of the Compounds and Products, pursuant to this Agreement shall comply in all material respects with all applicable legal and regulatory requirements. - ---------- 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. -24-
Vanda further warrants and covenants that it shall not engage in any activities that use the BMS Patent Rights and BMS Know-How in a manner that is outside the scope of the license rights granted to it hereunder. 9.3.2 Vanda warrants, represents and covenants that it has available to it funds necessary to consummate the transaction contemplated by this Agreement to Develop and Commercialize the Compounds and Products in accordance with the terms of this Agreement. 9.4 DISCLAIMER. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, BMS MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE BMS PATENT RIGHTS OR BMS KNOW-HOW OR ANY LICENSE GRANTED BY BMS HEREUNDER, OR WITH RESPECT TO ANY COMPOUNDS OR PRODUCTS. FURTHERMORE, NOTHING IN THIS AGREEMENT SMALL BE CONSTRUED AS A WARRANTY THAT ANY PATENT OR OTHER PROPRIETARY RIGHTS INCLUDED IN THE BMS PATENT RIGHTS ARE VALID OR ENFORCEABLE OR THAT VANDA'S USE OF THE BMS PATENT RIGHTS AND BMS KNOW-HOW CONTEMPLATED HEREUNDER DOES NOT INFRINGE ANY PATENT RIGHTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD PARTY. 9.5 LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY SHALL BE LIABLE TO THE OTHER WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT, WHETHER UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY, FOR ANY INCIDENTAL, INDIRECT, SPECIAL, EXEMPLARY, PUNITIVE, MULTIPLE, OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF USE, DAMAGE TO GOODWILL, OR LOSS OF BUSINESS) AND, IN ANY CASE, BMS SHALL NOT BE LIABLE IN AN AMOUNT GREATER THAN THE AMOUNTS PAID BY VANDA TO BMS UNDER SECTIONS 8.1, 8.2 AND 8.5 OF THIS AGREEMENT; PROVIDED, THAT THE FOREGOING SHALL NOT APPLY TO ANY BREACH BY VANDA OF THE RIGHTS LICENSED TO IT UNDER ARTICLE 2 HEREOF OR TO ANY BREACH BY A PARTY OF ARTICLE 11 HEREOF. ARTICLE 10 PATENT MAINTENANCE; INFRINGEMENT; CONFIDENTIALITY 10.1 INVENTIONS. Each Party shall own the entire right, title and interest in and to any and all inventions conceived solely by its employees and agents after the Effective Date ("Sole Inventions"), and any patents covering such Sole Inventions. BMS and Vanda shall each own an undivided one-half interest in and to any and all inventions conceived jointly after the Effective Date by (a) employees and agents of BMS and (b) employees and agents of Vanda, and in and to any patents and other intellectual property -25-
rights claiming or covering such joint Inventions ("Joint Inventions"). BMS and Vanda as joint owners each shall have the right to exploit and to grant licenses under such Joint Inventions (without an accounting or obligation to, or consent required from, the other Party), unless otherwise specified in this Agreement. 10.2 PATENT MAINTENANCE; ABANDONMENT. 10.2.1 BMS PATENT RIGHTS. BMS shall be responsible for, and shall control, the prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of all BMS Patent Rights. BMS shall provide Vanda with copies of all correspondence from any and all patent offices concerning the BMS Patent Rights and an opportunity to comment on any proposed responses, voluntary amendments and submissions of any kind to be made to any and all such patent offices (other than routine filings and correspondence to maintain the patents). BMS shall have the right to select the in-house or outside counsel who will perform the aforementioned prosecution and maintenance-associated activities, and Vanda shall reimburse BMS for its fully-burdened costs (including any fees payable to the applicable patent office) incurred in connection therewith. In the event that BMS exercises the BMS Option and the Parties are co-Developing or co-promoting the Product, Vanda will only reimburse BMS for fifty percent (50%) of the patent costs incurred from the commencement of the Phase III Clinical Studies (i.e., the date when the first patient in the Phase III Clinical Studies is dosed) or the effective date of the co-promotion agreement, as applicable. If Vanda elects not to pay any expenses with respect to a BMS Patent Right in a given country, Vanda shall inform BMS in writing not less than two months before any relevant deadline (or, in the event of a shorter period in which to respond to a patent office, as soon as reasonably practicable). In the event Vanda makes such election, or if Vanda fails to reimburse BMS for its fully-burdened costs incurred for prosecuting and maintaining a BMS Patent Right in a given country, BMS may retain or abandon such BMS Patent Right at its sole discretion and Vanda's license under such BMS Patent Right shall be extinguished. Except as provided in the previous sentence, BMS may not abandon a BMS Patent Right without the prior written consent of Vanda. 10.2.2 SOLE INVENTIONS. Each Party shall direct and control at its expense the filing, prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of all patents covering its Sole Inventions. 10.2.3 JOINT INVENTIONS. The Parties shall supervise, and shall assign, on a Joint Invention-by-Joint Invention basis, one Party to be responsible for, the filing, prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of all patents covering such Joint Invention consistent with such strategy. The designated controlling Party shall provide the other Party with (a) drafts of any new patent application that covers a Joint Invention prior to filing that application, allowing adequate time for review and comment by the Party if possible; provided, however, the designated controlling Party shall not be obligated to delay the filing of any patent application; and (b) copies of all correspondence from any and all patent offices concerning patent applications covering Joint Inventions and an opportunity to comment on any proposed responses, voluntary amendments and submissions of any kind to be -26-
made to any and all such patent offices. The Parties shall mutually agree on the in-house or outside counsel who will perform the filing, prosecution and maintenance of Joint Inventions and the allocation of out-of-pocket costs incurred in connection therewith. 10.3 ENFORCEMENT OF BMS PATENT RIGHTS AGAINST INFRINGERS. 10.3.1 Enforcement by BMS. In the event that BMS or in-house counsel of Vanda becomes aware of a suspected infringement of any BMS Patent Right, such Party shall notify the other Party promptly, and following such notification, the Parties shall confer. BMS shall have the right, but shall not be obligated, to bring an infringement action at its own expense, in its own name and entirely under its own direction and control. Vanda will reasonably assist BMS (at BMS' expense) in any action or proceeding being prosecuted if so requested, and will lend its name to such actions or proceedings if requested by BMS or required by law, and BMS will indemnify and hold Vanda harmless from any liability incurred by Vanda arising out of any such actions or proceedings. Vanda shall have the right to participate and be represented in any such suit by its own counsel at its own expense. No settlement of any such action or defense which restricts the scope, or adversely affects the enforceability, of a BMS Patent Right may be entered into by BMS without the prior written consent of Vanda, which consent shall not be unreasonably withheld. 10.3.2 Enforcement by Vanda. If BMS elects not to bring any action for infringement described in Section 10.3.1 and so notifies Vanda, then Vanda may bring such action at its own expense, in its own name and entirely under its own direction and control. BMS will reasonably assist Vanda (at Vanda' expense) in any action or proceeding being prosecuted if so requested, and will lend its name to such actions or proceedings if requested by Vanda or required by law, and Vanda will indemnify and hold BMS harmless from any liability incurred by BMS arising out of any such actions or proceedings. BMS shall have the right to participate and be represented in any such suit by its own counsel at its own expense. No settlement of any such action or defense which restricts the scope, or adversely affects the enforceability, of a BMS Patent Right may be entered into by Vanda without the prior written consent of BMS, which consent shall not be unreasonably withheld. 10.3.3 Withdrawal. If either Party brings such an action or defends such a proceeding under this Section 10.3 and subsequently ceases to pursue or withdraws from such action or proceeding, it shall promptly notify the other Party and the other Party may substitute itself for the withdrawing Party under the terms of this Section 10.3. 10.3.4 Damages. In the event either Party exercises the rights conferred in this Section 10.3 and recovers any damages or other sums in such action, suit or proceeding or in settlement thereof, such damages or other sums recovered shall first be applied to all out-of-pocket costs and expenses incurred by the Parties in connection therewith, including attorneys fees. If such recovery is insufficient to cover all such costs and expenses of both Parties, it shall be shared in proportion to the total such costs and expenses incurred by each Party. If after such reimbursement any funds shall remain from such damages or other sums recovered, such funds shall be retained by the Party -27-
that controlled the action or proceeding under this Section 10.3; provided, that the Royalty Receiving Party shall receive out of any such remaining recovery received by the Royalty Paying Party an amount equal to the lost royalties or other license payments that would have been paid to it on the Net Sales to which such recovery pertains. 10.4 DEFENSE OF THIRD PARTY CLAIMS. If a claim is brought by a Third Party against either Party that any activity related to the Development, manufacture, Commercialization, use, sale, import or export of a Compound or Product infringes the intellectual property rights of such Third Party, each Party will give prompt written notice to the other Party of such claim. The Royalty Paying Party shall control and bear the expense of its own defense, and shall be solely responsible for, and shall defend, indemnify and hold harmless the Royalty Receiving Party and its Affiliates from and against, any such claims, damages, losses, liabilities, costs (including without limitation reasonable legal expenses, costs of litigation, and reasonable attorney's fees) or judgments, whether for money or equitable relief. ARTICLE 11 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. 11.1 NONDISCLOSURE. Each Party agrees that for a period of [*] after receipt of Confidential Information from the other Party, a Party receiving Confidential Information of the other Party will (a) use commercially reasonable efforts to maintain in confidence such Confidential Information (but not less than those efforts as such Party uses to maintain in confidence its own proprietary industrial information of similar kind and value) and not to disclose such Confidential Information to any Third Party without prior written consent of the other Party, except for disclosures made in confidence to any Third Party under terms consistent with this Agreement and made in furtherance of this Agreement or of rights granted to a Party hereunder, and (b) not use such other Party's Confidential Information for any purpose except those permitted by this Agreement (it being understood that this subsection (b) shall not create or imply any rights or licenses not expressly granted under Article 2 hereof). 11.1.1 EXCEPTIONS. The obligations in Section 11.1 shall not apply with respect to any portion of the Confidential Information that the receiving Party can show by competent proof: (a) Is publicly disclosed by the disclosing Party, either before or after it is disclosed to the receiving Party hereunder; or (b) Was known to the receiving Party or any of its Affiliates, without obligation to keep it confidential, prior to disclosure by the disclosing Party; or (c) Is subsequently disclosed to the receiving Party or any of its Affiliates by a Third Party lawfully in possession thereof and without obligation to keep it confidential; or - ---------- 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. -28-
(d) Is published by a Third Party or otherwise becomes publicly available or enters the public domain, either before or after it is disclosed to the receiving Party; or (e) Has been independently developed by employees or contractors of the receiving Party or any of its Affiliates without the aid, application or use of Confidential Information. 11.2 AUTHORIZED DISCLOSURE. A Party may disclose the Confidential Information belonging to the other Party to the extent such disclosure is reasonably necessary in the following instances: 11.2.1 Filing or prosecuting patents; 11.2.2 Regulatory filings; 11.2.3 Prosecuting or defending litigation; 11.2.4 Complying with applicable governmental laws and regulations and with judicial process; 11.2.5 Disclosure, in connection with the performance of this Agreement, to Affiliates, potential collaborators, partners, and counterparties (including potential co-marketing and co-promotion contractors), research collaborators, potential investment bankers, investors, lenders, and investors, employees, consultants, or agents, each of whom prior to disclosure must be bound by similar obligations of confidentiality and non-use at least equivalent in scope to those set forth in this Section 11.2; and 11.2.6 For purposes of raising capital, provided that prior to disclosure, each Third Party to whom Confidential Information is disclosed must be bound by similar obligations of confidentiality and non-use at least equivalent in scope to those set forth in this Section 11.2. 11.3 TERMS OF THIS AGREEMENT. The Parties acknowledge that the terms of this Agreement shall be treated as Confidential Information of both Parties. Such terms may be disclosed by a Party to individuals or entities covered by Sections 11.2.5 and 11.2.6 above, each of whom prior to disclosure must be bound by similar obligations of confidentiality and non-use at least equivalent in scope to those set forth in this Section 11.3. In addition, a copy of this Agreement may be filed by either Party with the Securities and Exchange Commission in connection with any public offering of such Party's securities. In connection with any such filing, such Party shall endeavor to obtain confidential treatment of economic and trade secret information. In any event, the Parties agree to take all reasonable action to avoid disclosure of Confidential Information except as permitted hereunder. 11.4 EXCEPTION FOR DISCLOSURE OF TAX TREATMENT. Notwithstanding anything else in this Agreement to the contrary, each Party hereto (and each employee, representative, or other agent of any Party) may disclose to any and all persons, without -29-
limitation of any kind, the Federal income tax treatment and Federal income tax structure of any and all transaction(s) contemplated herein and all materials of any kind (including opinions or other tax analyses) that are or have been provided to any Party (or to any employee, representative, or other agent of any Party) relating to such tax treatment or tax structure, provided, however, that this authorization of disclosure shall not apply to restrictions reasonably necessary to comply with securities laws. This authorization of disclosure is retroactively effective immediately upon commencement of the first discussions regarding the transactions contemplated herein, and the Parties aver and affirm that this tax disclosure authorization has been given on a date which is no later than thirty (30) days from the first day that any Party hereto (or any employee, representative, or other agent of any Party hereto) first made or provided a statement as to the potential tax consequences that may result from the transactions contemplated hereby. ARTICLE 12 INDEMNITY 12.1 VANDA INDEMNITY. Vanda shall indemnify, defend and hold harmless BMS and its Affiliates and the officers, directors, employees, agents, licensors (including without limitation MGH and its officers, medical and professional staff, employees, trustees, and agents and their respective successors, heirs and assigns) and representatives of BMS and its Affiliates from and against any and all claims, threatened claims, damages, losses, suits, proceedings, liabilities, costs (including without limitation reasonable legal expenses, costs of litigation, and reasonable attorney's fees) or judgments, whether for money or equitable relief, of any kind ("Losses and Claims") arising out of or relating to, directly or indirectly, (i) the research, Development, manufacture, use, sale or other disposition, promotion, advertising, Commercialization, offering for sale, importation, handling, storage, transfer, or exportation of any Compound or Product by Vanda and its Affiliates, sublicensees and contractors or to Vanda's (or its Affiliates' and sublicensees') use and practice otherwise of the BMS Patent Rights and BMS Compound Know-How, including without limitation, Claims based on (a) product liability, bodily injury, death or property damage, and (b) infringement or misappropriation of Third Party patents, copyrights, trademarks, or other intellectual property rights, or the failure to comply with applicable Laws related to the research, development, Commercialization, promotion, distribution and sale of the Products and/or to the manufacture and labeling of the Products; except for Losses and Claims to the extent reasonably attributable to (i) breach by BMS of Article 11, or (ii) BMS having committed an act or acts of gross negligence, recklessness, or willful misconduct. A claim to which indemnification applies under this Section 12.1 or Section 12.2 shall be referred to herein as an "Indemnification Claim". 12.2 BMS INDEMNITY. Only in the event that BMS exercises the BMS Option with respect to a Product shall BMS indemnify, defend and hold harmless Vanda and its Affiliates and the officers, directors, employees, agents, licensors and representatives of Vanda and its Affiliates from Losses and Claims arising out of or relating to, directly or -30-
indirectly, (i) the research, Development, manufacture, use, sale or other disposition, promotion, advertising, Commercialization, offering for sale, importation, handling, storage, transfer, or exportation of that Product by BMS and its Affiliates, sublicensees and contractors or to BMS' (or its Affiliates' and sublicensees') use and practice of the BMS Patent Rights and BMS Compound Know-How in the Development and Commercialization of that Product, including without limitation, Claims based on (a) product liability, bodily injury, death or property damage, and (b) infringement or misappropriation of Third Party patents, copyrights, trademarks, or other intellectual property rights, or the failure to comply with applicable Laws related to the research, development, Commercialization, promotion, distribution and sale of that Product and/or to the manufacture and labeling of that Product; except for Losses and Claims to the extent reasonably attributable to (i) breach by Vanda of Article 11, or (ii) Vanda having committed an act or acts of gross negligence, recklessness, or willful misconduct. 12.3 INDEMNIFICATION PROCEDURES. If a party or any its Affiliates or their respective officers, directors, employees, agents, licensors and representatives (collectively, the "Indemnitee") intends to claim indemnification under this Article 12, the Indemnitee shall notify the other party (the "Indemnitor") in writing promptly upon becoming aware of any Claim that may be an Indemnification Claim The Indemnitor shall have the right to assume and control the defense of the Indemnification Claim at its own expense. If the right to assume and have sole control of the defense is exercised by the Indemnitor, the Indemnitee shall have the right to participate in, but not control, such defense at its own expense and the Indemnitor's indemnity obligations shall not include any attorneys, fees and litigation expenses incurred by the Indemnitee after the assumption of the defense by the Indemnitor. If the Indemnitor does not assume the defense of the Indemnification Claim, the Indemnitee may defend the Indemnification Claim but shall have no obligation to do so. The Indemnitee will not settle or compromise the Indemnification Claim without the prior written consent of the Indemnitor, and the Indemnitor will not settle or compromise the Indemnification Claim in any manner which would have an adverse effect on the Indemnitee's rights under this Agreement or the scope or enforceability of the BMS Patents Rights or BMS Know-How, without the prior written consent of the Indemnitee, which consent, in each case, will not be unreasonably withheld. The Indemnitee shall reasonably cooperate with the Indemnitor at the Indemnitor's expense and will make available to the Indemnitor all pertinent information under the control of the Indemnitee. 12.4 INSURANCE. Vanda will, beginning with the initiation of the first clinical trial for the Product, maintain at all times thereafter during the term of this Agreement, and until the later of (a) six (6) years after termination or expiration of this Agreement or (b) the date that all statutes of limitation covering claims or suits that may be brought for personal injury based on the sale or use of a Product have expired in all states in the U.S.A., comprehensive general liability insurance from a recognized, creditworthy insurance company, on a claims-made basis, with endorsements for contractual liability and product liability, and with coverage limits of not less than Five Million Dollars ($5,000,000) per occurrence and Twenty-five Million dollars ($25,000,000) in the aggregate. The minimum level of insurance set forth herein shall not be construed to create a limit on Vanda's liability hereunder. Within ten days following written request -31-
from BMS, Vanda shall furnish to BMS a certificate of insurance evidencing such coverage as of the date. Each such certificate of insurance, as well as any certificates evidencing new or modified coverages of Vanda, shall include a provision whereby sixty (60) days' written notice must be received by BMS prior to coverage modification or cancellation by either Vanda or the insurer and of any new or modified coverage. In the case of a modification or cancellation of such coverage, Vanda shall promptly provide BMS with a new certificate of insurance evidencing that Vanda's coverage meets the requirements in the first sentence of this Section. ARTICLE 13 TERM AND TERMINATION 13.1 TERM. This Agreement shall commence upon the Effective Date and, unless sooner terminated in accordance with the terms hereof or by mutual written consent, shall continue until neither Party has any obligation to the other remaining hereunder. 13.2 TERMINATION BY BMS. BMS shall have the right to terminate this Agreement, at BMS' sole discretion, upon delivery of written notice to Vanda, upon the occurrence of any of the following: 13.2.1 INSOLVENCY. Upon the filing by Vanda in any court or agency pursuant to any statute or regulation of the United States or any other jurisdiction a petition in bankruptcy or insolvency or for reorganization or similar arrangement for the benefit of creditors or for the appointment of a receiver or trustee of Vanda or its assets, upon the proposal by Vanda of a written agreement of composition or extension of its debts, or if Vanda is served with an involuntary petition against it in any insolvency proceeding, upon the ninety-first (91st) day after such service if such involuntary petition has not previously been stayed or dismissed, or upon the making by Vanda of an assignment for the benefit of its creditors; or 13.2.2 BREACH. In the event of any material breach by Vanda of any terms and conditions of this Agreement, including failure to use Commercially Reasonable Efforts to Develop or Commercialize a Product or Compound, provided that such breach has not been cured within ninety (90) days after written notice thereof is given by BMS to Vanda; provided, that if such breach relates to the failure to make a payment when due, such breach must be cured within sixty (60) days after written notice thereof is given by BMS. 13.2.3 TERMINATION FOR FAILURE TO EFFECT COMMERCIAL LAUNCH. If Vanda is obligated to Commercialize a Product and fails to effect a commercial launch in a Major Market Country within twelve (12) months of achieving an Approval for such Product in such country; provided however, (i) that if the failure to launch in such Major Market Country is a consequence of lack of commercial feasibility in such country due to the pricing/reimbursement received for the Product in such country, then this Section shall not apply to such country; and provided, further, (ii) that subpart (i) of this Section -32-
13.2.3 may not be used to excuse launch, with respect to the European Union ("EU"), to more than two Major Market Countries of the EU. Termination under this Section 13.2.3 shall apply only to the Major Market Country affected by such failure to launch; provided that (iii) if such failure relates to a Major Market Country in the EU not excused under (ii), then it shall apply to the whole EU, and (iv) if all Major Market Countries are terminated, termination shall be as to all countries. Nothing in the foregoing shall relieve Vanda of its obligation to use Commercially Reasonable Efforts to Commercialize a Product once launched in a country. 13.2.4 SCOPE OF TERMINATION. Termination under Sections 13.2.1 and 13.2.2 shall be as to all countries and all Products. 13.3 TERMINATION BY VANDA. Subject to Section 13.3.4, Vanda shall have the right to terminate this Agreement, at Vanda's sole discretion, upon delivery of written notice to BMS, upon occurrence of any of the following: 13.3.1 TERMINATION FOR ANY REASON. At Vanda's discretion, on a country-by-country and Product-by-Product basis, it may terminate this Agreement for any reason; provided however, such termination shall be effective not sooner than ninety (90) days after written notice thereof; and further provided, however, that no such termination right may be exercised as to any Major Market Country unless all Major Market Countries are so terminated unless such termination in a Major Market Country is a consequence of lack of commercial feasibility in such Major Market Country due to the pricing/reimbursement received for the Product in such Country, in which event Vanda may terminate its license in such Major Market Country only. 13.3.2 TERMINATION FOR BMS' FAILURE TO EFFECT COMMERCIAL LAUNCH. If BMS is obligated to Commercialize a Product and fails to effect a commercial launch within twelve (12) months of achieving the first Approval for such Product in a given Major Market Country; provided however, if the failure to launch in such Major Market Country is a consequence of lack of commercial feasibility due to the pricing/reimbursement received for the Product in such Country or safety issues, then this Section 13.3 shall not apply to such failure to launch. 13.3.3 TERMINATION FOR BMS' CESSATION OF DEVELOPMENT. If BMS elects to cease development of a Product in its discretion with respect to a given Major Market Country for a period exceeding six (6) months (other than for safety reasons or regulatory reasons). 13.3.4 SCOPE OF TERMINATION. Termination under Sections 13.3.2 and 13.3.3 shall only be as to the countries affected by the BMS action in question and not to the entire agreement (unless such BMS action affects all Major Market Countries). 13.4 EFFECT OF TERMINATION. 13.4.1 Upon termination of this Agreement under Section 13.2.1 or 13.2.2 hereof or, with respect to each applicable country as to which termination occurs pursuant to Section 13.2.3 or 13.3.1 hereof (the rights of Vanda in the remaining countries of the -33-
Territory in which termination under Section 13.2.3 or 13.3.1 has not occurred being unaffected by such termination): (a) All rights and licenses granted to Vanda in Article 2 shall terminate with respect to each terminated country, all rights, title and interests to the BMS Patent Rights and BMS Know-How in each terminated country shall revert to BMS, and Vanda shall cease all use of the BMS Patent Rights and BMS Know-How with respect to each terminated country; and (b) All regulatory filings (including all INDs and NDAs) and Approvals relating to the Compounds and any Product (and all of Vanda's rights, title and interests therein) in each terminated country shall be assigned to BMS, and Vanda shall provide to BMS one copy of all documents and filings contained in or referenced in any such filings, together with the raw and summarized data for any preclinical and clinical studies of the Compounds and Products. BMS shall have the right to obtain specific performance of Vanda's obligations referenced in this Section 13.4.1(b) and/or in the event of failure to obtain assignment, Vanda hereby consents and grants to BMS the right to access and reference (without any further action required on the part of Vanda, whose authorization to file this consent with any Regulatory Authority is hereby granted) any and all such regulatory filings for any regulatory or other use or purpose in each terminated country; and (c) All amounts due or payable to BMS that were accrued, or that arise out of acts or events occurring, prior to the effective date of termination shall remain due and payable; but no additional amounts will be payable based on events occurring after the effective date of termination; and (d) BMS shall have the right to retain all amounts previously paid to BMS by Vanda; and (e) Should Vanda have any inventory of Compound suitable for use in clinical trials in each terminated country, Vanda shall offer to sell such Compound to BMS at Vanda's out of pocket cost (but BMS shall be under no obligation to purchase same unless it agrees to do so in writing at such time); and (f) Should Vanda have any inventory of Product approved and allocated prior to termination for sale in a terminated country, Vanda shall have six (6) months thereafter in which to dispose of such inventory (subject to the payment to BMS of any royalties due hereunder thereon); (g) Vanda will disclose to BMS its manufacturing patents, processes, techniques and trade secrets for making the Product and BMS will automatically have an exclusive, perpetual, worldwide, sublicensable right and license under know-how and patents Controlled by Vanda and its Affiliates relating to any composition, formulation, method of use or manufacture of the Compounds and Products solely for (i) using, importing, selling and offering for sale the Compounds and Products in the terminated countries and (ii) making and having made the Compounds and -34-
Products anywhere in the world for use, importation, sale and offer for sale in the terminated countries; (h) Vanda shall assign to BMS any trademark or trade dress that is specific to a Product (it being understood that the foregoing shall not include any trademarks or tradenames that contain the name "Vanda") in each terminted country; (i) Vanda shall assign to BMS its right, title and interest in any Sole Inventions and Joint Inventions (and any patent applications filed thereon and patents issued thereon) pertaining to the composition of matter or method of use or utility of the Compounds or Products in each terminated country; and (j) Neither Party shall be relieved of any obligation that accrued prior to the effective date of such termination. It is understood and agreed that BMS shall be entitled to specific performance as a remedy to enforce the provisions of this Section 13.4.1, in addition to any other remedy to which it may be entitled by applicable law. 13.4.2 In the event Vanda terminates the Agreement, in whole or in part (in accordance with Section 13.3.4), pursuant to Section 13.3.2 or 13.3.3: (a) BMS shall grant Vanda all necessary rights and licenses on the same terms and conditions set forth in Article 2, to the BMS Patent Rights and BMS Know-How solely for use in a terminated country; and (b) All regulatory filings (including all INDs and NDAs) and Approvals relating to the Compounds and any Product (and all of BMS' rights, title and interests therein) in a terminated country shall be assigned to Vanda, and BMS shall provide to Vanda one copy of all documents and filings contained in or referenced in any such filings, together with the raw and summarized data for any preclinical and clinical studies of the Compounds and Products. In the event of failure to obtain assignment, BMS hereby consents and grants to Vanda the right to access and reference (without any further action required on the part of BMS, whose authorization to file this consent with any Regulatory Authority is hereby granted) any and all such regulatory filings for any regulatory or other use or purpose with respect to each terminated country; and (c) All amounts due or payable to Vanda that were accrued, or that arise out of acts or events occurring, prior to the effective date of termination shall remain due and payable, but no additional amounts will be payable based on events occurring after the effective date of termination; and (d) Vanda shall have the right to retain all amounts previously paid to Vanda by BMS; and (e) BMS shall assign to Vanda any trademark or trade dress that is specific to a Product in such terminated country (it being understood that the -35-
foregoing shall not include any trademarks or tradenames that contain the name "BMS"); and (f) Vanda shall thereafter pay milestones and royalties to BMS in accordance with Sections 8.2.1 and 8.5.1. The remedies set forth in this Section 13.4.2 shall be Vanda's sole and exclusive remedy for breach by BMS of its Development and/or Commercialization obligations under this Agreement. 13.5 SURVIVAL. Except as expressly provided herein, the following provisions shall survive early termination of this Agreement, as well as any other provisions which by their nature ate intended to survive termination: Sections 4.2, 8.9.2, 9.4, 9.5, 10.1, 10.2, 10.4, 12.1, 12.2, 12.3, 12.4, 13.4.1(b), 13.4.1(f), 13.4.1(g), 13.4.2(b), 13.4.2(f), 13.5 and 13.6 and Articles 11 and 14. 13.6 BANKRUPTCY. 13.6.1 All rights and licenses granted under or pursuant to this Agreement, including amendments hereto, by each Party to the other Party are, for all purposes of Section 365(n) of Title 11 of the U.S. Code ("TITLE 11"), licenses of rights to intellectual property as defined in Title 11. Each Party agrees during the term of this Agreement to create and maintain current copies or, if not amenable to copying, detailed descriptions or other appropriate embodiments, to the extent feasible, of all such intellectual property. If a case is commenced by or against either Party (the "BANKRUPT PARTY") under Title 11, then, unless and until this Agreement is rejected as provided in Title 11, the Bankrupt Party (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, a Title 11 Trustee) shall, at the election of the Bankrupt Party made within 60 days after the commencement of the case (or, if no such election is made, immediately upon the request of the non-Bankrupt Party) either (i) perform all of the obligations provided in this Agreement to be performed by the Bankrupt Party including, where applicable and without limitation, providing to the non-Bankrupt Party portions of such intellectual property (including embodiments thereof) held by the Bankrupt Party and such successors and assigns or otherwise available to them or (ii) provide access or a license to the non-Bankrupt Party to all such intellectual property (including all embodiments thereof) held by the Bankrupt Party and such successors and assigns or otherwise available to them. 13.6.2 If a Title 11 case is commenced by or against the Bankrupt Party and this Agreement is rejected as provided in Title 11 and the non-Bankrupt Party elects to retain its rights hereunder as provided in Title, 11, then the Bankrupt Party (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, a Title 11 Trustee) shall provide access or a license to the non-Bankrupt Party to all such intellectual property (including all embodiments thereof) held by the Bankrupt Party and such successors and assigns or otherwise available to them immediately upon the non-Bankrupt Party's written request therefor. Whenever the Bankrupt Party or any of its successors or assigns provides access or a license to the non- -36-
Bankrupt Party to any of the intellectual property licensed hereunder (or any embodiment thereof) pursuant to this Section 13.7, the non-Bankrupt Party shall have the right to perform the obligations of the Bankrupt Party hereunder with respect to such intellectual property, but neither such provision nor such performance by the non-Bankrupt Party shall release the Bankrupt Party from any such obligation or liability for failing to perform it. 13.6.3 All rights, powers and remedies of the non-Bankrupt Party provided herein are in addition to and not in substitution for any and all other rights, powers and remedies now or hereafter existing at law or in equity (including, without limitation, Title 11) in the event of the commencement of a Title 11 case by or against the Bankrupt Party. The non-Bankrupt Party, in addition to the rights, power and remedies expressly provided herein, shall be entitled to exercise all other such rights and powers and resort to all other such remedies as may now or hereafter exist at law or in equity (including, without limitation, under Title 11) in such event. The Parties agree that they intend the foregoing non-Bankrupt Party rights to extend to the maximum extent permitted by law and any provisions of applicable contracts with Third Parties, including without limitation for purposes of Title 11, (i) the right of access or a license to any intellectual property (including all embodiments thereof) of the Bankrupt Party or any Third Party with whom the Bankrupt Party contracts to perform an obligation of the Bankrupt Party under this Agreement, and, in the case of the Third Party, which is necessary for the development, registration and manufacture of licensed products and (ii) the right to contract directly with any Third Party described in (i) in this sentence to complete the contracted work. Any intellectual property provided pursuant to the provisions of this Section 13.6 shall be subject to the licenses set forth elsewhere in this Agreement and the payment obligations of this Agreement, which shall be deemed to be royalties for purposes of Title 11. ARTICLE 14 MISCELLANEOUS 14.1 PROVISIONS CONTRARY TO LAW. In performing this Agreement, the Parties shall comply with all applicable laws. Wherever there is any conflict between any provision of this Agreement and any law, the law shall prevail, but in such event the affected provision of this Agreement shall be limited or eliminated only to the extent necessary, and the remainder of this Agreement shall remain in full force and effect. In the event the terms of this Agreement are materially altered as a result of the foregoing, the Parties shall renegotiate in good faith the terms of this Agreement to resolve any inequities. 14.2 THIRD PARTY RIGHTS. Notwithstanding anything to the contrary in this Agreement, the grant of rights by BMS under this Agreement shall be subject to and limited in all respects by the terms of the applicable BMS in-license(s) pursuant to which BMS acquired any licensed rights, and all rights or sublicenses granted under this Agreement shall be limited to the extent that BMS may grant such rights and sublicenses under such BMS in-license(s). -37-
14.3 NOTICES. Any notice required or permitted to be given by this Agreement shall be in writing and shall be delivered by hand or overnight courier with tracking capabilities or mailed postage prepaid by first class, registered or certified mail addressed as set forth below unless changed by notice so given: If to Vanda: Vanda Pharmaceuticals, Inc. 47 Hulfish Street, Suite 310 Princeton, New Jersey 08452 Attention: President If to BMS: Bristol-Myers Squibb Company Route 206 and Province Line Road Princeton, New Jersey 08450 Attention: Senior Vice President for Business Development With a copy to the Vice President and Senior Counsel, Corporate and Business Development, at the same address. Any such notice shall be deemed delivered on the date received. A Party may add, delete, or change the person or address to whom notices should be sent at any time upon written notice delivered to the Party's notices in accordance with this Section 14.3. 14.4 FORCE MAJEURE. Neither Party shall be liable for delay or failure in the performance of any of its obligations hereunder if such delay or failure is due to causes beyond its reasonable control, including, without limitation, acts of God, fires, earthquakes, strikes and labor disputes, acts of war, civil unrest or intervention of any governmental authority; provided, that the affected Party promptly notifies the other Party and further provided that the affected Party shall use its commercially reasonable efforts to avoid or remove such causes of non-performance and shall continue performance with the utmost dispatch whenever such causes are removed. When such circumstances arise, the Parties shall negotiate in good faith any modifications of the terms of this Agreement that may be necessary or appropriate in order to arrive at an equitable solution. 14.5 USE OF NAMES. Vanda, at its sole cost and expense, shall be responsible for the selection, registration and maintenance of all trademarks which it employs in connection with its activities conducted pursuant to this Agreement, if any, and shall own and control such trademarks. Nothing in this Agreement shall be construed as a grant to Vanda of rights, by license or otherwise, to the use of any trademarks, service marks, logos or the name of BMS for any purpose. Neither Party shall use the name or marks or logos of the other Party for any purpose without the prior written consent of such other Party. -38-
14.6 ASSIGNMENT. Neither Party shall assign its rights or obligations under this Agreement without the prior written consent of the Party, except that: 14.6.1 BMS may, without Vanda's consent, assign all of its rights and obligations hereunder in connection with any transfer of all of the BMS Patent Rights and BMS Compound Know-How, to any Affiliate of BMS or another Third Party, (including, without limitation, a successor in interest); provided, that such Affiliate or assignee or successor in interest agrees in a writing provided to Vanda to be bound by the terms of this Agreement; and 14.6.2 Upon thirty (30) days advance written notice to BMS and subject to BMS approval, not to be unreasonably withheld, conditioned, or delayed, Vanda may assign all of its rights and obligations hereunder to an entity of equal or superior financial condition as Vanda or to an Affiliate (and so long as such assignment includes, without limitation, the Approvals, all manufacturing assets relating to this Agreement, and all rights and obligations under this Agreement), provided, that such entity or Affiliate shall have agreed prior to such assignment to be bound by the terms of this Agreement in a writing provided to BMS and provided that Vanda remains jointly and severally liable with such entity or Affiliate for the performance of this Agreement where assigned to a Third Party or an Affiliate; 14.6.3 Vanda may assign all of its rights and obligations hereunder without such consent to a successor in interest by reason of merger, consolidation or sale of substantially all of the assets of Vanda (and so long as such assignment or sale includes, without limitation, the Approvals, all manufacturing assets relating to this Agreement, and all rights and obligations under this Agreement), provided, that such successor in interest shall have agreed prior to such assignment or sale to be bound by the terms of this Agreement in a writing provided to BMS; and 14.6.4 Subject to the foregoing, this Agreement shall inure to the benefit of and be binding on the Parties' successors and assigns. Any assignment in violation of the foregoing shall be null and void and wholly invalid, the assignee in any such assignment shall acquire no rights whatsoever, and the non-assigning Party shall not recognize, nor shall it be required to recognize, such assignment. 14.7 FURTHER ASSURANCES. Each Party agrees to do and perform all such further acts and things and shall execute and deliver such other agreements, certificates, instruments and documents necessary or that the other Party may deem advisable in order to carry out the intent and accomplish the purposes of this Agreement and to evidence, perfect or otherwise confirm its rights hereunder. 14.8 WAIVERS AND MODIFTCATIONS. The failure of any Party to insist on the performance of any obligation hereunder shall not be deemed to be a waiver of such obligation. Waiver of any breach of any provision hereof shall not be deemed to be a waiver of any other breach of such provision or any other provision on such occasion or any succeeding occasion. No waiver, modification, release or amendment of any -39-
obligation under or provision of this Agreement shall be valid or effective unless in writing and signed by all Parties hereto. 14.9 Choice of Law and Jurisdiction. 14.9.1 This Agreement shall be governed by, enforced, and shall be construed in accordance with the laws of the State of New York without regard to its conflicts of law provisions (other than section 5.1401 of the New York General Obligations Law). 14.9.2 Each Party irrevocably submits to the exclusive jurisdiction of (a) the Supreme Court of the State of New York, New York County, and (b) the United States District Court for the Southern District of New York, for the purposes of any suit, action or other proceeding arising out of this Agreement or out of any transaction contemplated hereby. Each Party agrees to commence any such action, suit or proceeding either in the United States District Court for the Southern District of New York or if such suit, action or other proceeding may not be brought in such court for jurisdictional reasons, in the Supreme Court of the State of New York, New York County. Each Party further agrees that service of any process, summons, notice or document by personal delivery, by registered mail, or by a recognized international express delivery service to such Party's respective address set forth above shall be effective service of process for any action, suit or proceeding in New York with respect to any matters to which it has submitted to jurisdiction in this Section 14.9. Each Party irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in (i) the Supreme Court of the State of New York, New York County or (ii) the United States District Court for the Southern District of New York, and hereby and thereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. 14.9.3 Each Party hereto hereby waives to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect to any litigation directly or indirectly arising out of, under or in connection with this Agreement. Each Party hereto (a) certifies that no representative, agent or attorney of the other Party has represented, expressly or otherwise, that such other Party would not, in the event of litigation, seek to enforce that foregoing waiver and (b) acknowledges that it and the other Party hereto have been induced to enter into this Agreement, as applicable, by, among other things, the mutual waivers and certifications in this Section 14.9. 14.10 Publicity. 14.10.1 Subject to Article 11, except as required by law, regulation or order, including, without limitation, laws, regulations and orders of the U.S. Securities and Exchange Commission, the National Association of Securities Dealers or any national stock exchange, and except as expressly provided herein, neither Vanda nor BMS shall make any public announcement concerning this Agreement, including but not -40-
limited to the execution of this Agreement and the economic terms of this Agreement, without the prior written consent of the other Party. In the event of a public disclosure required by law or regulation, including without limitation, any required disclosure in any securities offering document, the Party making such announcement shall at least five business days prior to such disclosure provide the other Party with a copy of the proposed text of the disclosure, and such other Party shall be entitled to have its reasonable comments incorporated prior to such announcement, provided that provision of proposed text and incorporation of comments referenced above is consistent with the disclosing Party's legal or regulatory obligations. 14.10.2 Notwithstanding the foregoing, in the event that Vanda decides that it would like to issue a public announcement regarding the execution of this Agreement following such execution, Vanda shall submit the proposed form of such public announcement to BMS for its review and written approval. Absent such approval of BMS, Vanda may not make such a public announcement. 14.11 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Parties as to the subject matter of this Agreement, and supersedes and merges all prior negotiations, representations, agreements and understandings regarding the same. 14.12 COUNTERPARTS. This Agreement may be executed in counter-parts with the same effect as if both Parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. 14.13 RELATIONSHIP OF THE PARTIES. Each Party is an independent contractor under this Agreement. Nothing contained herein is intended or is to be construed so as to constitute BMS and Vanda as partners, agents or joint venturers. Neither Party shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other Party or to bind the other Party to any contract, agreement or undertaking with any Third Party. 14.14 HEADINGS. Headings and captions are for convenience only and are not be used in the interpretation of this Agreement. Neither this Agreement nor any provision of this Agreement shall be construed for or against any Party because the Agreement as a whole, or any portion of it, was requested or drafted by such Party. 14.15 DISPUTE RESOLUTION. In the event of any dispute relating to this Agreement, prior to instituting any lawsuit, arbitration or other dispute resolution process on account of such dispute, the Parties shall attempt in good faith to settle such dispute first by negotiation and consultation between themselves, including referral of such dispute to the Chief Executive Officer of Vanda and the (a) President of the Pharmaceutical Research Institute of BMS for any dispute involving Development, or (b) the President of U.S. Primary Care of BMS for any dispute involving Commercialization. In the event said executives are unable to resolve such dispute or agree upon a mechanism to resolve such dispute within thirty (30) days of the first written request for dispute resolution under this -41-
Section 14.35, then the Parties shall be free to pursue any remedy or rights available to either of them at law or in equity. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their respective duly authorized officers. VANDA PHARMACEUTICALS, INC. By: /s/ Mihael Polymeropoulos ------------------------------------ (Signature) Name: Mihael Polymeropoulos Title: Chief Executive Officer Date: 7/22/04 BRISTOL-MYERS SQUIBB COMPANY By: /s/ James Palmer ------------------------------------ (Signature) Name: James Palmer Title: President, Pharmaceutical Research Institute Date: 7/25/04 -42-
SCHEDULE 1.3 BMS COMPOUND PATENT RIGHTS AND DESCRIPTION OF THE COMPOUNDS BMS-214778 is a [*] BMS-330446 is a [*] BMS Compound Patent Rights for BMS-214778 [*] - ---------- 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. -43-
BMS Compound Patent Rights for BMS-330446 [*] - ---------- 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. -44-
SCHEDULE 1.7 BMS MANUFACTURING PATENT RIGHTS None -45-
SCHEDULE 1.19 DEVELOPMENT PLAN DEVELOPMENT TIMELINES FOR A PRODUCT CONTAINING BMS-214778 [*] - ---------- 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. -46-
BUDGET FOR A PRODUCT CONTAINING BMS-214778 [*] - ---------- 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. -47-
SCHEDULE 1.25 FTE RATE The initial rate shall be $225,000. -48-
Exhibit 10.4 NDD-094 LICENSE AGREEMENT between Novartis Pharma AG, Novartis AG and Vanda Pharmaceuticals, Inc. - ---------- CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
NDD-094 LICENSE AGREEMENT This LICENSE AGREEMENT (the "Agreement") dated the 4th day of June, 2004 (the "Effective Date") by and between Novartis Pharma AG, a corporation organized and existing under the laws of Switzerland and having its principal office at Lichtstrasse 35, 4056 Basel, Switzerland ("Novartis"), Novartis AG, a corporation organized and existing under the laws of Switzerland and having its principal office at Lichtstrasse 35, 4056 Basel, Switzerland ("Novartis AG") and Vanda Pharmaceuticals, Inc., a corporation organized and existing under the laws of the State of Delaware and having its principal office at 47 Hulfish Street, Suite 310, Princeton, NJ 08542, The United States ("Vanda"). Novartis, Novartis AG and Vanda may be referred to herein individually as a "Party" and collectively as the "Parties". INTRODUCTION WHEREAS, Novartis AG owns or has rights to certain Novartis Patents (as defined below) and Novartis AG and Novartis each have rights to Novartis Know-How (as defined below) related to the Product (as defined below) and the Compound (as defined below), and each has the right to grant certain rights and licenses thereunder as set forth herein, and WHEREAS, Vanda has certain expertise in the development and commercialization of pharmaceutical products, and Vanda wishes to obtain certain licenses to the Compound for the purpose of developing and commercializing the Product, and WHEREAS, Novartis AG and Novartis each wish to grant a license to Vanda in respect of such development and commercialisation. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements hereinafter set forth, the sufficiency of which is hereby acknowledged, the Parties to this Agreement mutually agree as follows: ARTICLE 1 DEFINITIONS For purposes of this Agreement, the following initially capitalized terms in this Agreement, whether used in the singular or plural, shall have the following meanings: 1.1 "Affiliate" shall mean any corporation, company, partnership, joint venture and/or firm which controls, is controlled by, or is under common control with a specified person or entity. For purposes of this Section 1.1, "control" shall be presumed to exist if one of the following conditions is met: (a) in the case of corporate entities, control of at least fifty per cent (50%) of the voting rights at a meeting of the board of directors or direct or indirect ownership of at least fifty percent (50%) of the stock or shares having the right to vote for the election of directors, and (b) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies of such non-corporate entities. The Parties acknowledge that in the case of certain entities organized under the laws of certain countries outside of the United States, the Page 2 of 43
maximum percentage ownership permitted by law for a foreign investor may be less than fifty percent (50%), and that in such cases such lower percentage shall be substituted in the preceding sentence, provided that such foreign investor has the power to direct the management and policies of such entity. Notwithstanding the foregoing venture capital investors in Vanda shall not be considered Affiliates of Vanda. 1.2 "Annex" or "Schedule" shall mean the annexes attached to the back of this Agreement. In the event of conflict between the drafting of the operative terms of the Agreement and the Annex, the operative terms of the Agreement shall prevail. 1.3 "Back-up Compound" shall mean a compound currently available to Novartis and Novartis AG to be selected by Novartis in its sole discretion and offered by it to Vanda in the event that in the agreed opinion of Novartis and Vanda the Compound fails in a Phase II trial. 1.4 "Business Day" shall mean any day on which banking institutions in New York, New York and Basel are open for business. 1.5 "Commercialization" or "Commercialize" shall mean activities conducted by a Party either by itself or through a Third Party and directed to marketing, promoting, distributing, importing, exporting, offering for sale and selling a Product. When used as a verb, "Commercialize" means to engage in Commercialization. 1.6 "Commercializing Party" shall mean Vanda, except that "Commercializing Party" shall mean Novartis as soon as Novartis has exercised either the Scenario II Option or the Scenario III Option and thereby has elected to Commercialize the Product. 1.7 "Compound" shall mean the compound currently identified by Novartis and Novartis AG as NDD-094 or isomers or epimers thereof and any metabolites and salts thereof and more particularly described on Schedule 1.7. 1.8 "Confidential Information" has the meaning set forth in Section 8.1. 1.9 "Controlled" or "Controls", when used in reference to intellectual property, shall mean the legal authority or right of a Party hereto (or any of its Affiliates) to grant a license or sublicense of intellectual property rights to another party, or to otherwise disclose proprietary or trade secret information to such other Party, without breaching the terms of any agreement with a Third Party infringing upon the intellectual property rights of a Third Party, or misappropriating the proprietary or trade secret information of a Third Party. 1.10 "Co-Promotion Agreement" has the meaning set forth in Section 2.1(b). 1.11 "Development Costs" shall mean all reasonable costs incurred by Vanda after the Effective Date in developing the Product in accordance with this Agreement, as set out in the Development Plan, which costs shall be proportionate and in line with the costs incurred by Vanda in commercializing other compounds at the same stage of development with equivalent sales and profit potential and including: Page 3 of 43
(a) all reasonable Out-of-Pocket Costs and expenses incurred; (b) the reasonable direct and indirect costs of internal scientific, medical or technical personnel (including personnel expenses, travel expenses and infrastructure costs but for the avoidance of doubt, not including the costs of managerial, financial, legal or business development personnel) engaged in such efforts, which costs shall be determined based on the FTE Rate, unless another basis is otherwise agreed by the Parties in writing (c) the reasonable costs and expenses of clinical supplies for such efforts, including without limitation (i) supply cost of clinical supplies of the Product; (ii) costs and expenses incurred to purchase and/or package comparator or combination drugs or devices; and (iii) costs and expenses of disposal of clinical samples; (d) the reasonable costs and expenses incurred in connection with manufacturing process development and validation, manufacturing scale-up and improvements, stability testing and quality assurance/quality control development; qualification and validation of Third Party contract manufacturers; (e) the reasonable direct and indirect costs of senior management of Vanda to the extent reasonably related to the Product and (f) all regulatory filing fees. 1.12 "Development Plan" shall mean the detailed plan drafted by Vanda and showing its intentions and estimated costs with respect to the development of the Compound. 1.13 "Effective Date" shall mean the date specified in the first paragraph of this Agreement. 1.14 "EMEA" shall mean the European Agency for the Evaluation of Medicinal Products. 1.15 "FDA" shall mean the U.S. Food and Drug Administration or its successor agency. 1.16 "Field of Use" shall mean application to all conditions, disorders and diseases in humans. 1.17 "First Commercial Sale" shall mean the first sale of a Product to a Third Party by a Party or an Affiliate or sublicensee of such Party in a country in the Territory following the obtaining of the applicable Regulatory Approval of such Product in such country. 1.18 "FTE Rate" shall mean a rate of $ 200,000 per annum for the time of an employee for a full-time equivalent person year (consisting of a total of 2,000 hours per annum) of work, to be pro-rated on a daily basis (per annum amount to be divided by 250 to produce the rate per whole day consisting of eight hours) if necessary, such rate to include all travel expenses. Page 4 of 43
1.19 "Good Clinical Practice" shall mean the current Good Clinical Practice regulations promulgated by the FDA, published at 21 C.F.R. Part 50 and 56 as such regulations may be amended, and such comparable regulations or standards as may be applicable with respect to the design, conduct, performance, monitoring, auditing, recording, analyses and reporting of clinical trials outside the United States. 1.20 "GMP" shall mean the current Good Manufacturing Practice regulations promulgated by the FDA, published at 21 C.F.R. Part 210 et seq., as such regulations may be amended, and such comparable regulations or standards as may be applicable with respect to Compound or Product(s) manufactured or sold outside the United States. 1.21 "Investigational New Drug Application" or "IND" has the meaning set forth in Section 2.2(a). 1.22 "Indemnified Party" has the meaning set forth in Section 10.3. 1.23 "Indemnifying Party" has the meaning set forth in Section 10.3. 1.24 "Infringement Claim" has the meaning set forth in Section 6.2(a). 1.25 "Joint Development Committee" or "JDC" shall mean the joint global development committee to be set up by Vanda and Novartis to coordinate the development and registration efforts described in this Agreement. 1.26 "Loss" has the meaning set forth in Section 10.1 1.27 "Major Market Country" means each and any of the USA, Japan, UK, France, Germany, Italy and Spain. 1.28 "NDA" or "New Drug Application" shall mean a new drug application and all amendments and supplements thereto filed with the FDA pursuant to 21 C.F.R. Section 314, the EMEA or an equivalent Regulatory Authority in a Major Market Country, requiring such filing, and including all documents, data and other information concerning a pharmaceutical product which are necessary for the gaining of Regulatory Approval seeking permission to market and sell the Product in a Major Market Country. 1.29 "NDA Acceptance" means the written notification by the FDA or its equivalent outside the United States, that the NDA has met all the criteria for filing acceptance pursuant to 21 C.F.R. Section 314.101 or such equivalent. 1.30 "NDA Filing" means the first submission of the NDA to the FDA, EMEA or its equivalent in a Major Market Country. 1.31 "Net Sales" shall mean the amount invoiced by or on behalf of a Party and its Affiliates and sublicensees for sales of the Product to Third Parties in the Territory in a bona fide arm's length transaction, less the following deductions in respect of the Product (each as determined in accordance with International Accounting Standards("IAS")) if not previously deducted or reimbursed or paid by a Third Party in the amount invoiced or received: (a) cash, Page 5 of 43
and/or quantity discounts actually allowed or taken; (b) excise, sales and other consumption taxes and customs duties to the extent included in the invoice price (and excluding taxes based on Vanda's income); (c) all reasonable freight, postage and shipping, insurance and other transportation charges to the extent included in the invoice price to the customer; (d) all amounts repaid or credited by reason of rejections, return of goods or price adjustments, in each case specifically identifiable as relating to Product; (e) amounts incurred resulting from governmental (or an agency thereof) mandated rebate programs;(f) any Third Party rebates, administrative fees and chargebacks clearly and directly related to the sale of Product to the extent actually allowed as agreed by the parties in writing, any other specifically identifiable amounts included in Product's gross sales that were or ultimately will be credited and that are substantially similar to the items listed above. Sales from Novartis or Vanda to their Affiliates, Sublicensees or to each other shall be disregarded for purposes of calculating Net Sales. In the event that the Product is sold as part of a combination product, the Net Sales of the Product, for the purposes of determining royalty payments, shall be determined by multiplying the Net Sales (as defined above in this Section) of the combination product by the fraction A/(A+B), where A is the weighted (by sales volume) average sale price of Product when sold separately in finished form and B is the weighted average sale price of the other product(s) sold separately in finished form. In the event that such average sale price cannot be determined for both Product and the other product(s) in combination, Net Sales for purposes of determining royalty payments shall be mutually agreed by the Parties within a reasonable period of time prior to the first Regulatory Approval of such combination product based on all relevant factors including relative cost and the relative value contributed by each component, and such agreement shall not be unreasonably withheld. 1.32 "Novartis Know-How" shall mean any proprietary or nonproprietary information specific to the Compound or Product within the Field of Use and of a confidential nature necessary or useful for the manufacture, preparation or development of the Compound or Product Controlled by Novartis and/or Novartis AG during the term of this Agreement and shall include, without limitation, data, knowledge and information., including chemical, stability, pharmacological, toxicological, pre-clinical, clinical and manufacturing data, samples, documentation, analytical standards, and gene expression data, provided that Novartis Know-How shall not include [*]. 1.33 "Novartis Monthly Average Exchange Rate" shall mean for a currency, the mathematical average of Reuters Daily Rates between 9:00 a.m. and 10 a.m. Basel time and the official European Central Bank daily rate fixed at 2p.m. for each Business Day of a month, where applicable. 1.34 "Novartis Patents" shall mean those Patents Controlled by Novartis AG claiming Compound, Product, or their metabolites or any formulation of Compound, processes, uses and intermediates of the foregoing, including those listed on Annex 3 attached hereto. For the avoidance of doubt, such Novartis Patents shall not include patents for [*]. - ---------- 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 of 43
1.35 "Out of Pocket Costs" shall mean, in accordance with International Accounting Standards, expenses incurred by a Party and for the avoidance of doubt, not including pre-paid amounts and capital expenditure. 1.36 "Patents" shall mean all rights under any patents or patent applications and any continuations, continuations-in-part, divisions, provisionals, substitutions, patents of addition, reissues, reexamination, renewals or extensions thereof (including any supplemental patent certificates) and any confirmation patent or registration patent and all foreign counterparts of any of the foregoing. 1.37 "Payee" has the meaning set forth in Section 5.6. 1.38 "Payor" has the meaning set forth in Section.5.6 1.39 "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization or government or political subdivision thereof. 1.40 "Phase I Clinical Trial" shall mean the first phase of human clinical trials of a drug required by the FDA to gain evidence of safety for Product(s), as described in 21 C.F.R. 312(a), as may be amended and deemed to commence on the date that the first patient is first dosed by or on behalf of Vanda. 1.41 "Phase II Clinical Trials" shall mean that portion of the FDA submission and approval process which provides for the initial trials of a Product on a limited number of patients for the purposes of determining dose and, evaluating safety and efficacy in the proposed therapeutic indication, as more fully defined in 21 C.F.R. 312.21(b) as may be amended and deemed to commence on the date that the first patient is first dosed by or on behalf of Vanda. 1.42 "Phase III Clinical Trials" shall mean that portion of the FDA submission and approval process which provides for the continued trials of a Product on sufficient numbers of patients to generate safety, efficacy and pharmacoeconomic data to support regulatory approval in the proposed therapeutic indication, as more fully defined in 21 C.F.R. 312.21(c) as may be amended and deemed to commence on the date that the first patient is first dosed by or on behalf of Vanda (and Novartis, if applicable). 1.43 "Primary Market Research Development" shall mean all market research activity undertaken by the Commercialising Party prior to the First Commercial Sale. 1.44 "Product" shall mean a formulated pharmaceutical product containing the Compound or Back-up Compound as an active ingredient and packaged for the use by the ultimate consumer. 1.45 "Reasonable Commercial Efforts" shall mean the efforts and resources normally used in the pharmaceutical industry by companies employing best practice and the highest commercial standards for a product with equivalent sales and profit potential. Page 7 of 43
1.46 "Regulatory Approval" shall mean, with respect to a country or group of countries in the Territory, all authorizations by the appropriate Regulatory Authority, governmental entity or entities necessary for commercial sale of a Product in that country or group of countries including, without limitation and where applicable, approval of labeling, price, reimbursement and manufacturing. 1.47 "Regulatory Authority" shall mean the FDA, EMEA or any other counterpart or additional governmental or regulatory agencies responsible for applicable Regulatory Approvals. 1.48 "Scenario I Option" has the meaning set forth in Section 2.2(c). 1.49 "Scenario II Option" has the meaning set forth in Section 2.2(a). 1.50 "Scenario III Option" has the meaning set forth in Section 2.2(b). 1.51 "Sublicensee" shall mean a Person, other than a Vanda Affiliate, to whom Vanda grants any right or license to use Novartis Patents or Novartis Know-How or to make, use or sell any Product under all or part of Novartis' Patents or Novartis' Know-How in the Territory. 1.52 "Supply Agreement" has the meaning set forth in Section 3.2. 1.53 "Support" or "Supporting" shall mean the preparation, filing, prosecution, maintenance, renewal and defense of a Patent. 1.54 "Term" has the meaning set forth in Section 9.1(a). 1.55 "Territory" shall mean all the countries and territories of the world. 1.56 "Third Party" shall mean any Person or other entity other than Vanda, Novartis, Novartis AG or their respective Affiliates of rights conveyed under this Agreement. 1.57 "Valid Claim" shall mean (i) an unexpired or issued claim of a Novartis Patent which claim has not been held invalid or unenforceable by final decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which is not admitted to be invalid or unenforceable through reissue, disclaimer or otherwise or (ii) pending patent application that is a Novartis Patent Right, which claim was filed in good faith and has not been abandoned or finally disallowed without the possibility of appeal or refiling of said application. 1.58 "Vanda Technology" means all Patents and know-how that are (i) generated, identified, discovered, created or made by Vanda, its employees or a Third Party on behalf of Vanda, (ii) controlled by Vanda, and (iii) necessary to manufacture, use, research, develop, sell or seek regulatory approval, including, without limitation, manufacturing processes, formulations, modes of delivery and methods of use for the Compound, Back-up Compound, or Products developed by Vanda pursuant to its development work with the Compound or the Back-up Compound. Page 8 of 43
ARTICLE 2 LICENSE 2.1 Grant to Vanda. (a) Subject to the terms and conditions of this Agreement, on the Effective Date, Novartis and Novartis AG hereby grant to Vanda an exclusive license, with the right to sublicense with the prior written consent of Novartis and Novartis AG, such consent not to be unreasonably withheld, under the Novartis Patents and Novartis Know-How, to develop, use, make and have made Compound and Product in the Field of Use and in the Territory. (b) Subject to the Scenario II Option pursuant to Section 2.2 (a) and Scenario III Option pursuant to Section 2.2 (b) and the Co-Promotion Option pursuant to Section 2.3 (a) and (b), Vanda shall have an exclusive license to Commercialize the Compound and Product, with right to sublicense without consent. (c) Novartis AG and Novartis retain all rights to Novartis Patents and Novartis Know-How except to the extent explicitly granted to Vanda hereunder. 2.2 Option. (a) Scenario II Option. Upon the execution of this Agreement, Vanda agrees and undertakes that it shall commence Phase II Clinical Trials for the Product on [*]. Vanda shall be responsible for the conduct and financing of each of the Phase I Clinical Trials and Phase II Clinical Trials which it elects to conduct. Within three (3) months of the completion of the Phase II Clinical Trials, Vanda shall provide Novartis with a full written report of the results of the Phase II Clinical Trials, including the conclusions thereof. Upon request by Novartis, Vanda shall make available to Novartis any source data reasonably necessary for Novartis to determine whether to exercise the Scenario II Option. Novartis shall have sixty (60) Business Days immediately following the delivery to Novartis of the final Phase II Clinical Trial report to provide notice of exercise to Vanda stating, that Novartis wishes to co-develop and Commercialize the Product (the "Scenario II Option"). Upon exercise of the Scenario II Option, Novartis shall take over the Investigational New Drug Application with the FDA or such other application filed with any other Regulatory Authority ("IND") and Novartis shall be responsible for the overall development and regulatory filings for the Product in the Territory. After the exercise of the Scenario II Option, Vanda shall remain responsible for continuing to conduct the development of the Product(s) in accordance with the Development Plan as approved by the JDC. As per Section 4.2 below Novartis shall take over the Chairman of the JDC immediately after the exercise of the Scenario II Option. Subject only to the option to co-promote in Section 2.3 (c) below, under Scenario II Novartis and its Affiliates shall have the exclusive rights for the Commercialisation of the Compound or Product and Vanda shall grant Novartis an exclusive license under the Vanda Technology. - ---------- 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 of 43
Upon the exercise of the Scenario II Option by Novartis the Scenario I Option, pursuant to Section 2.2(c) below and Scenario III Option pursuant to Section 2.2(b) below as well the Co-Promotion Option pursuant to Section 2.3(a) and (b) shall be deemed expired. (b) Scenario III Option. In the event that Novartis does not exercise its Scenario II Option, Vanda will consider the results of the Phase II Clinical Trial and may elect to commence Phase III Clinical Trials for the Product within [*] of the delivery of the final Phase II Clinical Trial report to Novartis. Vanda shall provide written notice of such election to Novartis. Upon such election, Vanda shall be responsible for the conduct and financing of the Phase III Clinical Trials. If Novartis does not receive such election notice within the twelve (12) months period, Novartis may terminate this Agreement according to Section 9.3. Within three months of the completion of the Phase III Clinical Trials, Vanda shall provide Novartis with a full written report of the results of the Phase III Clinical Trials, including the conclusions thereof. The Phase III Clinical Trials shall be performed in accordance with a plan reviewed with the relevant Regulatory Authority in a post Phase IIB meeting and be approved by the JDC. Upon request by Novartis Vanda shall make available to Novartis any source data reasonably necessary for Novartis to determine whether to exercise the Scenario III Option. Novartis shall have sixty (60) Business Days immediately following the delivery to Novartis of the final Phase III Clinical Trials report to provide written notice to Vanda of exercise stating, Novartis wishes to Commercialize the Product (the "Scenario III Option"). Upon exercise of the Scenario III Option, Novartis shall take over the Investigational New Drug application with the FDA or such other application filed with any other Regulatory Authority ("IND") and Novartis shall be responsible for the overall development and regulatory filings for the Product in the Territory. As per Section 4.2 below Novartis shall take over the Chairman of the JDC immediately after the exercise of the Scenario III Option. Subject only to the option to co-promote in Section 2.3(c) below, under Scenario III Novartis and its Affiliates shall have the exclusive rights for the Commercialisation of the Compound or Product and Vanda shall grant Novartis and exclusive license under the Vanda Technology. Upon the exercise of the Scenario III Option by Novartis the Scenario I Option pursuant to Section 2.2(c) below and the Co-Promotion Option pursuant to Section 2.3(a) and (b) shall be deemed expired. (c) Scenario I Option. In the event that Novartis does not exercise the Scenario II Option or the Scenario III Option, Novartis shall be deemed to have exercised the Scenario I Option. Under Scenario I Vanda shall be fully responsible for the entire development, manufacturing and Commercialisation of the Compound and the Product. Subject to the option to co-promote in Section 2.3(a) and (b) below, under Scenario I Novartis shall have no right or obligation to the Commercialisation of the Compound or Product. Within three months of the last date for Novartis to exercise the Scenario III Option, but did not exercise such option, Vanda shall submit to Novartis a detailed commercialisation plan demonstrating the planned application of Reasonable Commercial Efforts. - ---------- 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 of 43
(d) Good Clinical Practices. All Phase I Clinical Trials, Phase II Clinical Trials or Phase III Clinical Trials conducted by Vanda pursuant to this Agreement shall be conducted in accordance to Good Clinical Practice. 2.3 Co-Promotion Option. (a) Novartis First Right of Refusal - If pursuant to section 2.2(c) above Novartis is deemed to have exercised its Scenario I Option, and Vanda decides to co-promote the product with a Third Party, Vanda shall notify Novartis in writing of its intention to co-promote the Products with such a co-promotion partner. Novartis will have ninety (90) Business Days from the date Vanda notifies Novartis of its intention to co-promote the Product with a Third Party to provide written notice of its intent to exercise its option to co-promote the Product with Vanda and to negotiate in good faith a Co-Promotion Agreement on commercially reasonable terms and conditions. (b) If after such ninety-Business Day period, the Parties have not entered into a Co-Promotion Agreement, Vanda would be free to enter into an arrangement with a Third Party leading pharmaceutical company; provided, that Vanda will provide Novartis a last opportunity to submit a Matching counteroffer on terms no less favorable to Vanda than those terms last offered by the potential Third Party leading pharmaceutical company. Vanda shall provide to Novartis all reasonably available information belonging to Vanda, and not subject to Third Party confidentiality restrictions, relating to the arrangement as Novartis shall reasonably require, including proposed terms; provided, however, that Vanda shall not be required to disclose the identity of such Third Party. Within sixty (60) Business Days of Novartis' receipt of the written notice, Novartis will respond to Vanda in writing regarding Novartis' interest in Matching the counter-offer. During the same sixty (60) Business Day period following receipt of such notice from Vanda, Novartis may submit to Vanda the counter-offer. Vanda shall consider such counteroffer from Novartis in good faith and agree to negotiate with Novartis in the event that the terms of such Novartis counteroffer are more favourable to Vanda than those of a bona fide definitive agreement negotiated by Vanda with a Third Party. As used herein, "Matching" shall mean [*] or (ii) [*]. (c) If Novartis exercises its Scenario II Option or Scenario III Option, and intends to co-promote the product in a Major Market Country with a Third Party, Novartis shall notify Vanda in writing of its intention to co-promote the Products with a co-promotion partner. Vanda will have ninety (90) Business Days from the date Novartis notifies Vanda of its intention to co-promote the Product to provide written notice of its intent to exercise its option to co-promote the Product with Novartis on commercially reasonable terms and conditions to be negotiated in good faith and set forth in the Co-Promotion Agreement. If after ninety (90) Business Days of such good faith negotiations there is no agreement on 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 11 of 43
terms of the Co-Promotion Agreement between the Parties, Novartis shall be free to co-promote the Product with a Third Party. ARTICLE 3 MANUFACTURE AND SUPPLY 3.1 Provision of Compound. Within twenty (20) Business days of the Effective Date, Novartis will provide to Vanda, at no cost to Vanda, [*] EX WORKS (as such term is defined in INCOTERMS 2000 of the International Chamber of Commerce in Paris: delivery to Vanda shall occur when the Compound and Product is placed at Vanda's disposal at Novartis' premises), as well as adequate data in connection with the development of the Compound and Product. Further Novartis shall sell to Vanda and Vanda shall buy (only if in useable condition, on an as needed basis) from Novartis the remaining Compound available at Novartis in addition to the 20 kg specified in this Section 3.1 at the terms and conditions specified in SCHEDULE 3.1. For the avoidance of doubt, Novartis makes no representation or warranty that any quantities of Compound provided to Vanda under this Agreement will meet the GMP standards. 3.2 Right to Manufacture Clinical Supply. Within thirty (30) Business Days of the Effective Date, the Parties shall determine whether Novartis will manufacture and supply to Vanda the clinical supplies of Compound and/or Product, and the parties shall negotiate the terms and conditions of a clinical supply agreement pursuant to which the Compound shall be supplied. To the extent that the Parties do not enter into an agreement for the supply of Compound for clinical purposes within such thirty (30) Business Day period, then Novartis shall co-operate in all reasonable respects to transfer such Novartis Know-How to Vanda and provide such other assistance reasonably necessary in order to enable Vanda or a Third Parry to supply clinical supplies of Compound and/or Product. Novartis shall have exclusive rights to manufacture the Compound and Product in the event that Novartis exercises either the Scenario II Option or the Scenario III Option. 3.3 Transfer of Novartis Know-How and Novartis Patent Files. In furtherance of the activities contemplated by this Agreement, Novartis and Novartis AG each shall, or shall cause its Affiliates to, transfer as promptly as possible to Vanda the Novartis Know-How and the files of the Novartis Patents, including copies of all relevant laboratory notebook information, screening data and synthesis schemes clinical trial information and clinical trial raw and derived datasets, which includes description in any forms, data and other information disclosed or transferred to Vanda before the Effective Date. Banked DNA samples and or animal tissues treated with the compound will only be made available to Vanda for further studies in accordance with the protocols and informed consents set forth at the time of sample acquisition provided however that no human tissue samples with identifiable patient data will be transferred to Vanda. All raw data and individual clinical and genetic data will be transferred to Vanda under a mutually agreed coding schema, in order to protect patient confidentiality. All original identifiable patient data will, however be provided to the FDA as part of the submission package. If Vanda requires additional genotyping on existing samples, Novartis will contract this work out, in accordance with the informed consents, on Vanda's - ---------- 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 of 43
behalf and at Vanda's cost. If further DNA samples from past study patients are desired, Vanda will revisit the sites and try to consent or reconsent these patients for additional DNA sampling. Novartis and Vanda shall each be responsible for the costs of their employees, representatives or agents incurred in the transfer from Novartis to Vanda of the Novartis Know-How and the files of the Novartis Patents. In addition, Novartis and Novartis AG shall make a Novartis representative familiar with the Novartis Know-How and the files of the Novartis Patents reasonably available within reasonable office hours of the relevant employee to assist Vanda with the transfer as well as to answer any questions Vanda may have concerning such transferred information. In the event a translator is necessary or any of the materials need to be translated into English, the Parties shall share equally in the cost of such translation. Upon Novartis' exercise of the Scenario II option Vanda shall transfer back to Novartis the files of the Novartis Patents. 3.4 Transfer of Pharmacovigilance obligations and IND. In furtherance of the activities contemplated by this Agreement, Novartis and Novartis AG each shall, or shall cause its Affiliates to, transfer to Vanda the IND, including copies of all relevant registration dossiers. Such transfer shall however be subject to the transfer of all Pharmacovigilance obligations, with respect to clinical trials of Products performed prior to the Effective Date by Novartis to Vanda or Vanda's Affiliates. ARTICLE 4 DEVELOPMENT AND COMMERCIALIZATION 4.1 Development. Subject to the exercise by Novartis of either the Scenario II Option or the Scenario III Option, Vanda shall be responsible for overall development and regulatory filings for the Product in the Territory. Vanda shall use its Reasonable Commercial Efforts to perform its obligations under this Agreement and cause or cause to be done, all things necessary to perform the obligations contemplated hereby. Vanda shall use Reasonable Commercial Efforts to make all registrations, filings and applications, to give all notices to the relevant Regulatory Authority and obtain any governmental transfers, approvals, orders, qualifications and waivers necessary or desirable for the commercialisation of the Product hereby. 4.2 The JDC shall be set up within four (4) weeks of the Scenario II Option and shall be comprised of at least one member from Vanda and Novartis respectively (or further equal numbers from both Parties on an ad hoc basis as is agreed), plus the chairman from the Commercialising Party with the deciding vote to assist in a consistent and harmonized development of the Product under this Agreement, it being understood that each member shall be entitled and expected to consult with their organization. The JDC shall discuss development and registration issues and shall co-ordinate the development and registration efforts described in this Agreement. Meetings of the JDC shall be at such times and places and in such form (e.g., in person, telephonic or video conference) as the members of the JDC shall determine but shall meet at least once every six (6) months. Representatives of both Novartis and Vanda shall be present at any meeting of the JDC. Decisions of the JDC shall be made by a majority vote at a telephone or video conference or by a written consent signed by Page 13 of 43
all members thereof. The JDC shall keep minutes of its deliberations (or appoint a secretary to do so) setting forth, amongst other matters, all proposed actions and all votes thereon. 4.3 All records of the JDC shall at all times be available to the Parties. The JDC may delegate to one Party or to a specific representative the authority to make certain decisions. The costs incurred by each Party through its participation in the JDC shall be borne by each Party. 4.4 Quarterly Reports. While the Compound is under development and until the completion of Phase II and Phase III Clinical Trials, Novartis will receive reports every three months prepared by Vanda within forty-five (45) Business Days after the end of each quarterly period. Such reports shall set forth in summary form the results of development work performed and costs incurred during the preceding quarterly period and the planned development work, time-lines, launch plans, estimated costs to be incurred and commercialisation to be performed by Vanda in the next quarterly interval and explain to Novartis in detail the reasons for any disparity between product development work performed and costs incurred during the preceding quarterly period and the description of planned development work and costs estimate contained in the preceding quarterly report. 4.5 Discontinuance of or Delay in Development. If either (1) Vanda should decide to discontinue the development of the Compound into Product or (2) if a time period of more than one year, elapses between patient dosings prior to the NDA Filing or (3) more than one year elapses between the receipt of guidance by Vanda from a Regulatory Authority and the next dosing of a patient it shall promptly notify Novartis in person and in writing and all licenses granted hereunder will thereupon automatically terminate. Vanda will make available to Novartis all results of development work carried out up to the point of discontinuance and Novartis shall have a non-exclusive license to use all such results of the Vanda Technology solely for use in any future development or commercialisation work to be carried out in respect of the Compound, Product or Back-up Compound. Should the Compound ultimately become a commercialized Product, a [*]([*])% royalty on Net Sales will be payable to Vanda by Novartis where such Net Sales are in countries where the Product is protected by Patents in the name of Vanda. For countries where Net Sales are made and where the Product is not protected by Patents in the name of Vanda, Novartis shall pay to Vanda a royalty of [*] ([*]) per cent on Net Sales for a period of five (5) years after the First Commercial sale of a Product. 4.6 Regulatory and Marketing Efforts (a) Market Launch. The Commercializing Party shall use Reasonable Commercial Efforts to seek marketing authorizations in Major Market Countries and effect the introduction of Product into Major Market Countries within [*] of such Product completing the Regulatory Approval process. (b) Sole Discretion. Subject to the terms and conditions of the Co-Promotion Agreement, if entered into by the Parties, the Commercializing Party shall be responsible for and have sole discretion over all Commercialization of Product 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 14 of 43
Territory. The Commercialising Party shall have sole responsibility for all Primary Market Research Development 4.7 Commercialisation. The Commercialising Party shall have full responsibility for the costs of the Commercialisation unless otherwise agreed in writing by the parties. ARTICLE 5 PAYMENTS 5.1 Upfront Payment. Within ten Business Days of the Effective Date, Vanda shall pay to Novartis an upfront payment of $500,000. 5.2 Technology Access Fee. Vanda shall pay to Novartis a [*] milestone payment upon [*] should Vanda's aggregate expenditure on [*] not reach [*]. If upon the initiation of the first qualified Phase II Clinical Trial, Vanda's cost of [*] exceeds [*], and is less than [*], Vanda will pay to Novartis a milestone payment equal to [*] minus the cost of [*]. 5.3 Outside Funding from a Third Party. If Novartis has not exercised its Scenario II Option and Vanda needs outside funding to support further development, Vanda will provide written notice to Novartis of Vanda's intention to seek a Third Party partner to assist Vanda with the continued development of the Compound. Novartis will have thirty (30) Business Days from its receipt of such notice to inform Vanda if Novartis is willing to provide a secured interest-bearing loan facility to Vanda on terms to be negotiated, to be used to fund all subsequent development costs that Vanda may need to complete its obligations as set out in the Development Plan (or the Development plan amendments as approved by the JDC). In the event that Vanda receives debt funding from a Third Party it shall not grant any interest to that Third Party which conflict with its obligations to Novartis. If Vanda requests that Novartis relinquish Novartis' Scenario III Option rights (primarily for the purposes of securing Third Party outside funding), financial consideration for these rights shall be negotiated between Vanda and Novartis. 5.4 Milestone Payments by Vanda (a) Scenario I Milestone Payments. In the event that Novartis does not exercise its Scenario II Option or Scenario III Option, and Vanda continues with the development, manufacture and Commercialization of the Product, then Vanda will pay to Novartis or Novartis AG (as specified) upon achieving the following milestones in addition and not instead of any payments received prior to such milestones: MILESTONE UNITED STATES DOLLARS - --------- --------------------- [*] [*] to Novartis AG - ---------- 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 of 43
[*] [*] to Novartis AG [*] [*] to Novartis Each such milestone shall be payable only once upon the first Product to achieve a milestone. 5.5 Milestone Payments by Novartis (a) Scenario II Milestone Payments. In the event that Novartis exercises its Scenario II Option, then, Novartis shall pay to Vanda the following milestones: MILESTONE UNITED STATES DOLLARS - --------- --------------------- [*] [*] [*] [*] [*] [*] [*] [*] Each such milestone shall be payable only once upon the first Product to achieve a milestone. (b) Scenario III Milestone Payments. In the event that Novartis exercises its Scenario III Option, Novartis shall pay to Vanda the following milestones: MILESTONE UNITED STATES DOLLARS - --------- --------------------- [*] [*] [*] [*] [*] [*] [*] [*] Each such milestone shall be payable only once upon the first Product to achieve a milestone. 5.6 Timing. Payment to be made by one Party (the "Payor") to the other ("Payee") shall be made within thirty (30) Business Days after its receipt of notification by the Payee of the occurrence of a milestone event giving rise to a payment obligation hereunder, with an accompanying invoice from the Payee. All payments shall be made by wire transfer in United States Dollars to the credit of such bank account as may be designated, from time to time, by the Payor in writing. Vanda may receive a milestone amount stated in this clause (if payable) only once from the applicable paying Party. - ---------- 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 of 43
5.7 Development Costs. (a) Scenario I or Scenario III Development Costs. In the event that either the Scenario I Option or Scenario III Option applies, Vanda will be responsible for all Development Costs for Product. (b) Scenario II Development Costs. In the event that Novartis exercises its Scenario II Option, Novartis will reimburse Vanda for [*] percent ([*]%) of any and all Development Costs paid by Vanda prior to the exercise of the Scenario II Option (as set forth in Section 5.2). Thereafter, Novartis shall pay [*] percent ([*]%) of all future Development Costs to be incurred by Vanda after such exercise date and Vanda will provide Novartis with quarterly invoices for Novartis' share of the Development Costs and Novartis will pay such invoices within thirty (30) days of the date of such invoice. Vanda shall reimburse Novartis [*] percent ([*]%) of all future Development Costs to be incurred by Novartis after such exercise date, should the JDC determine such costs are warranted. 5.8 Royalties. (a) Payment. (i) Scenario I Royalty. In the event that Novartis does not exercise its Scenario II Option or Scenario III Option, Vanda will pay to Novartis a [*] percent ([*]%) royalty on annual Net Sales of Product by Vanda, its Affiliates and Sublicensees in the Territory in consideration of the license granted under the Novartis Know-How and Novartis Patents. (ii) Scenario II Royalty. In the event that Novartis exercise its Scenario II Option, Novartis will pay to Vanda a [*] percent ([*]%) royalty on annual Net Sales of Product by Novartis, its Affiliates and Sublicensees in the Territory in consideration of the license granted under the Vanda Technology. (iii) Scenario III Royalty. In the event that Novartis exercises its Scenario III Option, Novartis will pay to Vanda a [*] percent ([*]%) royalty on annual Net Sales of Product by Novartis, its Affiliates and Sublicensees in the Territory in consideration of the license granted under the Vanda Technology. (iv) Each of the foregoing shall be collectively and individually referred to as "Royalties". (b) Royalty Offset for Third Party Royalty Payments. The Commercialising Party may require additional patented technologies to which no Party has rights, from a Third Party, in order to develop, manufacture and Commercialize the Compound or Products. As between Novartis and Vanda, the Commercialising Party shall have the right to deduct [*] percent ([*]%) of such third person royalty or consideration from the royalty owed to the other Party on Net Sales of the Product in such country, provided that any deduction under this Section shall not exceed [*] percent ([*]%) of the royalty percentage (e.g. [*]%, [*]%, [*]% respectively for [*]%, [*]%, and [*]% royalties as described in Section 5.5(a) above) otherwise due to the other party for the Net Sales from that country. - ---------- 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 of 43
(c) Royalty Offset for Third Party Intellectual Property Infringement. As between Novartis and Vanda and in the event that the manufacture, use or sale of Compound or Product in any country infringes a Third Party patent and the Commercialising Party must pay to a Third Party a royalty or consideration accordingly, the Commercialising Party shall have the right to deduct such third person royalty or consideration from the royalty owed to the other Party on Net Sales of the Product in such country, provided that any deduction under this Section shall not exceed [*] percent ([*]%) of the royalty percentage (e.g. [*]%, [*]%, [*]%, respectively for [*]%, [*]% and [*]% royalties as described in Section 5.5 (a) above) otherwise due to the other Party for Net Sales from that country, and provided further that such deduction shall be in addition to any indemnification for breach of representation that such Party may be entitled to receive under this Agreement. (d) Countries with No Valid Claim Covering Product. As between Novartis and Vanda and for countries where there is no Valid Claim of an applicable Patent related to the Compound or Product or a method of use thereof, Royalty amounts payable by the Commercialising Party with respect to the Net Sales of Product in such country shall be reduced by [*] percent ([*]%). (e) As between Novartis and Vanda and the maximum Royalty relief which may be claimed by the Commercialising Party in respect of this Section 5.8 in any one country is [*] percent ([*]%) of the royalty otherwise due to the other Party. (f) Term for Royalty Payments. Royalties shall be payable on a country by country basis from the First Commercial Sale until the later of either the last applicable Patent to expire (including extensions thereof) with a Valid Claim which in absence of the license would be infringed by the Compound, the Product or a method of use thereof, or five (5) years from the date of First Commercial Sale of a Product. 5.9 Sales Reports. (a) Substance of Reports. After the First Commercial Sale of Product and during the term of this Agreement, the Commercialising Party shall furnish or cause to be furnished to the other Party on a quarterly basis no later than one month after the end of the preceding quarter a written report showing the Net Sales of Product in each country in the Territory. (b) Timing. Final yearly reports shall be due on the ninetieth (90) day following the close of the calendar year. (c) Records. The Commercialising Party shall keep accurate records in sufficient detail to enable the amounts due hereunder to be determined and to be verified by an independent certified public accountant mutually agreed upon by the Parties pursuant to Section 5.4(e). (d) Vanda Currency Exchange. With respect to payments to be made by Vanda to Novartis in respect of Net Sales invoiced in United States Dollars, the Net Sales 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 18 of 43
the amounts due to Novartis hereunder shall be expressed in United States Dollars. With respect to Net Sales invoiced in a currency other than United States Dollars, the Net Sales shall be expressed in the domestic currency of the entity making the sale, together with the Dollar equivalent, calculated using the arithmetic average of the spot rates on the last Business Day of each month of the calendar quarter in which the Net Sales were made. The "closing mid-point rates" found in the "dollar spot forward against the dollar" table published by The Financial Times or any other publication as agreed to by the Parties shall be used as the source of spot rates to calculate the average as defined in the preceding sentence. All payments shall be made in United States Dollars. If at any time legal restrictions in any country in the Territory prevent the prompt remittance of any payments with respect to sales in that country, Vanda shall have the right and option to make such payments by depositing the amount thereof in local currency to Novartis' account in a bank or depository in such country. (e) Novartis Currency Exchange. With respect to royalty payments to be made by Novartis to Vanda in relation to Net Sales invoiced in United States Dollars, payments to Vanda by Novartis shall be made in United States Dollars. With respect to the calculation of royalty payments to be made by Novartis to Vanda in relation to Net Sales invoiced in a currency other than United States Dollars, for the conversion of the Net Sales amount into United States Dollars, the Novartis Monthly Average Exchange Rate or such other standard methodology for currency conversion as employed by Novartis at that time, shall be used. (f) In the event of a co-commercialization between Vanda and Novartis, local payments to be made between Vanda and Novartis shall be made in the applicable local currency. (g) Royalty Payment Due Date; Accrual. Royalties which have accrued during any calendar year and are required to be shown on a sales report provided for under this Section 5.4(a) of this Agreement shall be due and payable on the date such sales report is due. (i) The Commercializing Party, its Affiliates and Sublicensees shall keep for [*] from the date of each payment of royalties complete and accurate records of sales by the Commercializing Party and its Affiliates and Sublicensees of Product in sufficient detail to allow the accruing royalties to be determined accurately. (ii) The non-Commercializing Party shall have the right for a period of [*] after receiving any report or statement with respect to royalties due and payable to appoint an independent certified public accountant reasonably acceptable to the Commercializing Party to inspect the relevant records of the Commercializing Party and its Affiliates and Sublicensees to verify such report or statement not more than once a year. (iii) The Commercializing Party and its Affiliates and Sublicensees shall each make its records available for inspection by such independent certified public accountant during regular business hours at such place or - ---------- 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 of 43
places where such records are customarily kept, upon reasonable notice from the non-Commercializing Party, solely to verify the accuracy of the reports and payments. Such inspection right shall not be exercised more than once in any calendar year. (iv) The non-Commercializing Party 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 (and not to make copies of such reports and information), except to the extent necessary for the non-Commercializing Party to reveal such information in order to enforce its rights under this Agreement or if disclosure is required by law, regulation or judicial order. The results of each inspection, if any, shall be binding on both Parties. (v) The non-Commercializing Party shall pay for such inspections, except that in the event there is any upward adjustment in aggregate royalties payable for any year shown by such inspection of more than [*] ([*]%) of the amount paid, the Commercializing Party shall pay for such inspection. Any overpayments shall be fully creditable against amounts payable in subsequent payment periods. (vi) The Commercializing Party shall include in each sublicense or marketing agreement entered into by it pursuant to this Agreement a provision requiring the Sublicensee or marketing partner to keep and maintain adequate records of sales made pursuant to such sublicense or marketing agreement and to grant access to such records by the aforementioned independent public accountant for the reasons specified in this Section. 5.10 Tax Withholding. The withholding tax, duties, and other levies (if any) applied by a government of any country of the Territory on payments made by one Party (the "Payor") to the other ("Payee") hereunder shall be borne by Payee. Payor, its Affiliates and Sublicensees shall cooperate with Payee to enable Payee to claim exemption therefrom under any double taxation or similar agreement in force and shall provide to Payee proper evidence of payments of withholding tax and assist Payee by obtaining or providing in as far as possible the required documentation for the purpose of Payee's tax returns. 5.11 Interest Due. In case of any delay in payment by Vanda to Novartis not occasioned by Force Majeure, interest on the overdue payment shall accrue at an annual interest rate, compounded monthly, equal to the three month London Interbank Offer Rate (LIBOR) as determined for each month on the last Business Day of that month, assessed from the day payment was initially due. The foregoing interest shall be due from Vanda without any special notice. 5.12 Payments to Novartis. All payments to be made by Vanda shall be made to the following bank account of Novartis and Novartis AG: - ---------- 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 20 of 43
Bank: [*] Swift: [*] Correspondent Bank for USD: [*] USD Account Novartis AG, Basel / Switzerland: [*] USD Account Novartis Pharma AG, Basel / Switzerland: [*] 5.13 Payments to Vanda. All payments to be made by Novartis shall be made to the following bank account of Vanda: [*] ABA: [*] Account #: [*] Account Name: [*] ARTICLE 6 INTELLECTUAL PROPERTY 6.1 Novartis Patentable Inventions and Know-How. Any invention made by Novartis shall be owned by Novartis and any invention made by Vanda shall be owned by Vanda. (a) Novartis Patent Prosecution. (i) During the term of the Agreement, the Commercializing Party shall, diligently and in the reasonable exercise of its commercial discretion, Support the Novartis Patents in the countries where such Novartis Patents are filed as of the Effective Date. Except as provided in Paragraph 6.1(a)(ii) for discontinued Novartis Patents, the Parties will split the costs of maintenance of the Novartis Patents worldwide equally (50:50). (ii) If the Commercializing party does not intend to file for patent protection or does not wish to continue Supporting a Novartis Patent, (a "discontinued Novartis Patent") then it shall give at least ninety (90) days advance notice, and in no event less than a reasonable period of time for the other Party to act in its stead. (A) In such case, the other Party may elect at its sole discretion to continue Supporting the discontinued Novartis Patent at its sole 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 21 of 43
(B) Discontinuance may be elected on a country-by-country basis or for a patent application or patent series in total. (b) Co-operation. Commercializing Party will consult with the other Party and will keep the other Party continuously informed of all matters relating to Support of the Novartis Patents. (i) Commercialising Party shall provide the other Party with a copy of any Novartis Patents relating to the Compound or Product, prior to filing the first of such Patents in any jurisdiction and copies of all material correspondence with the relevant patent office pertaining to the Novartis Patents and relating to the Compound or Product. (ii) In no event shall a Party relinquish control of the prosecution of Novartis Patents to a Third Party. 6.2 Infringement Claims by Third Parties. (a) Notice. If the manufacture, use or sale of Product under the Novartis Patents results in a claim or a threatened claim by a Third Party against a Party hereto for patent infringement or for inducing or contributing to patent infringement ("Infringement Claim"), the Party first having notice of an Infringement Claim shall promptly notify the other in writing. The notice shall set forth the facts of the Infringement Claim in reasonable detail. (b) Third Party Licenses. In the event that exploitation under the Novartis Patents in connection with manufacture, use or sale of Compound or Product in a country would infringe a Third Party Patent and a license to such Third Party Patent is available and the Commercializing Party in its sole discretion seeks such a license, the Parties agree that the Commercializing Party will use commercially reasonable efforts to obtain any such required licenses under the Third Party's Patents with a right to sublicense to the other Party and if requested by other Party will grant such sublicense, under reasonable sublicense terms mutually acceptable to both Novartis and Vanda. (c) Litigation. In the event of the institution of any suit by a Third Party against Vanda as a result of Vanda's manufacture, use or sale of Compound or Product, Vanda shall have the right but not the obligation to defend such suit at its expense. Novartis shall cooperate and assist Vanda in any such litigation at Vanda's expense. 6.3 Infringement Claims Against Third Parties. (a) Cooperation. Novartis and Vanda each agree to take reasonable actions to protect Novartis Patents from infringement, subject to the terms of this Section 6.3. If one Party brings any such action or proceeding, the second Party may be joined as a Party plaintiff if necessary for the action or proceeding to proceed and, in case of joining, the second Party agrees to give the first Party reasonable assistance and authority to file and to prosecute such suit. Page 22 of 43
(b) Notice. If any Novartis Patents are infringed by a Third Party, the Party to this Agreement first having knowledge of such infringement, or knowledge of a reasonable probability of such infringement, shall promptly notify the other in writing. The notice shall set forth the facts of such infringement in reasonable detail. (c) Institution of Proceedings. Vanda, shall have the primary right, but not the obligation, to institute, prosecute, and control with its own counsel at its own expense any action or proceeding with respect to infringement of the claims of such Novartis Patents and the other Party shall have the right, but not the obligation at its own expense, to be represented in such action by its own counsel. (d) Failure to Institute Proceedings. If Vanda fails to institute, prosecute, and control such action or prosecution and fails to do so within a period of sixty (60) Business Days after receiving notice of the infringement, Novartis shall have the right but not the obligation to bring and control any such action by counsel of its own choice, and Vanda shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. (e) Division of Damages Award. Each Party shall recover their respective actual out-of-pocket expenses associated with any litigation or settlement thereof from any recovery made by any party. Any excess amount awarded in damages shall be retained by the Party instituting such action. (f) Settlement. The Parties shall keep each other informed of the status of and of their respective activities regarding any litigation or settlement thereof concerning Product; provided, however, that no settlement or consent judgment or other voluntary final disposition of a suit under this Section may be undertaken without the consent of the other Party if such settlement would require the other Party to be subject to an injunction or to make a monetary payment or would otherwise adversely affect the other Party's rights under this Agreement. 6.4 Notice of Certification. Novartis and Vanda each shall immediately give notice to the other of any certification filed under the "U.S. Drug Price Competition and Patent Term Restoration Act of 1984" (or its foreign equivalent) claiming that a Novartis Patent is invalid or that infringement will not arise from the manufacture, use or sale of any Product by a Third Party ("Hatch-Waxman Suit Notice"). (a) Within ten (10) Business Days after receipt of notice of such certification Vanda shall give written notice to Novartis of its decision as to whether to bring a suit at its expense within a thirty (30) Business Day period from the date of such certification. Should Vanda inform Novartis that it is not to bring a suit, then Novartis shall be free to immediately bring such a suit in its name. If Vanda brings suit, at Vanda's written request Novartis agrees to be named as a party to such suit. If Novartis brings such a suit, at Novartis' written request Vanda agrees to be named as a party to such suit. (b) Novartis may then, but is not required to, bring suit against the party that filed the certification. Page 23 of 43
(c) Any suit by Vanda or Novartis shall either be in the name of Vanda or in the name of Novartis, or jointly in the name of Vanda and Novartis, as may be required by law. (d) For this purpose, the Party not bringing suit shall execute such legal papers necessary for the prosecution of such suit as may be reasonably requested by the Party bringing suit. 6.5 Patent Term Extensions. The Parties shall cooperate in good faith with each other in gaining patent term extensions wherever applicable to Novartis Patents covering Compound or Product. (a) Vanda and Novartis shall jointly determine which Novartis Patents shall be extended. (b) All filings for such extension shall be made by the Party responsible for prosecution and maintenance of the Novartis Patent, provided, however, that in the event that the Party who is responsible for prosecution and maintenance of the Novartis Patent elects not to file for an extension, such Party shall (i) inform the other Party of its intention not to file and (ii) grant the other Party the right to file for such extension. 6.6 Trademarks. No trade mark shall be included in the licences granted to Vanda under this Agreement. The parties agree to negotiate the terms of a further agreement governing trade marks related to the Compound or Product. ARTICLE 7 REPRESENTATIONS AND WARRANTIES 7.1 Novartis AG and Novartis Representations and Warranties. Each of Novartis and Novartis AG hereby represents and warrants to Vanda as of the Effective Date that: (a) This Agreement has been duly executed and delivered by it and constitutes the valid and binding obligation of it, enforceable against it in accordance with its terms except as enforceability may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of it, its officers and directors; (b) to the best of Novartis' and Novartis AG's knowledge, the Novartis Patents and Novartis Know-How exist and neither Novartis nor Novartis AG have information that would render any Patent invalid or unenforceable, except as disclosed to Vanda or available to Vanda in public information; notwithstanding anything to the contrary in this Agreement, in no event shall Novartis or Novartis AG be deemed to have guaranteed the validity of the Patents. (c) it has not previously assigned, transferred, conveyed or otherwise encumbered its right, title and interest in Novartis Patents; Page 24 of 43
(d) to the best of Novartis AG's knowledge, (i) it is the sole and exclusive owner of the Novartis Patents, (ii) all of which are free and clear of any liens, charges and encumbrances, and (iii) no other person, corporate or other private entity, or governmental entity or subdivision thereof, has or shall have any claim of ownership with respect to the Novartis Patents, whatsoever; (e) So far as it is aware, the execution, delivery and performance of this Agreement does not conflict with any agreement, instrument or understanding, oral or written, to which it is a Party or by which it may be bound, and, to the best of its knowledge, does not violate any material law or regulation of any court, governmental body or administrative or other agency having authority over it that would be inconsistent with the obligations under this Agreement; (f) It is not subject to any order, decree or injunction by a court of competent jurisdiction which prevents or materially delays the consummation of the transactions contemplated by this Agreement. NOVARTIS AND NOVARTIS AG MAKE NO REPRESENTATION OR WARRANTY AND SPECIFICALLY DISCLAIMS ANY GUARANTEE THAT THE DEVELOPMENT OF COMPOUND OR PRODUCTS WILL BE SUCCESSFUL, IN WHOLE OR IN PART, OR THAT NOVARTIS PATENTS AND NOVARTIS KNOW-HOW WILL BE SUITABLE FOR COMMERCIALIZATION OR THAT THE COMPOUND AND/OR PRODUCTS WILL BE SUITABLE FOR USE WITH ANY ADDITIONAL PATENTED TECHNOLOGIES LICENSED FROM A THIRD PARTY. NOVARTIS AND NOVARTIS AG EXPRESSLY DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE WITH RESPECT TO NOVARTIS PATENTS AND NOVARTIS KNOW-HOW, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OR MERCHANTABILITY OF FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. 7.2 Vanda Representation And Warranty. Vanda hereby represents and warrants to each of Novartis and Novartis AG as of the Effective Date that: (a) The execution, delivery and performance of this Agreement by Vanda does not conflict with any agreement, instrument or understanding, oral or written, to which it is a Party or by which it may be bound, and, to the best of its knowledge, does not violate any material law or regulation of any court, governmental body or administrative or other agency having authority over it; (b) Vanda is not currently a party to, and during the term of this Agreement will not enter into, any agreements, oral or written, that are inconsistent with its obligations under this Agreement; (c) Vanda is duly organized and validly existing under the laws of the country of its incorporation and has full legal power and authority to enter into this Agreement; and Page 25 of 43
(d) Vanda is not subject to any order, decree or injunction by a court of competent jurisdiction which prevents or materially delays the consummation of the transactions contemplated by this Agreement. 7.3 Disclaimer of Warranties. THE LIMITED WARRANTIES CONTAINED IN THIS ARTICLE ARE THE SOLE WARRANTIES GIVEN BY THE PARTIES AND ARE MADE EXPRESSLY IN LIEU OF AND EXCLUDE ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, INFRINGEMENT OR OTHERWISE, AND ALL OTHER EXPRESS OR IMPLIED REPRESENTATIONS AND WARRANTIES PROVIDED BY COMMON LAW, STATUTE OR OTHERWISE ARE HEREBY DISCLAIMED BY EACH PARTY. ARTICLE 8 CONFIDENTIALITY 8.1 Confidentiality. During the term of this Agreement, and for a period of [*] thereafter, Novartis and Novartis AG will maintain in confidence all information disclosed by Vanda and Vanda will maintain in confidence all information disclosed by Novartis and Novartis AG, including for the avoidance of doubt, Novartis Know-how ("Confidential Information"). With respect to Novartis and Novartis AG, Vanda shall not use, disclose or grant use of such Confidential Information except as required under this Agreement. With respect to Vanda, Novartis and Novartis AG shall not use, disclose or grant use of such Confidential Information except as required under this Agreement, each Party shall use at least the same standard of care as it uses to protect its own Confidential Information to ensure that its and its Affiliates' employees, agents, consultants, and clinical investigators only make use of Confidential Information for the purpose of this Agreement and do not disclose any Confidential Information without the express prior written consent of the other Party, which consent shall not be unreasonably withheld, or make any unauthorized use of such Confidential Information. Each Party shall promptly notify the other upon discovery of any unauthorized use or disclosure of Confidential Information. Confidential Information shall not include any information which and to the extent: (a) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the other Party; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the other Party; (c) becomes generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (d) was disclosed to the receiving Party, other than under an obligation of confidentiality, by a Third Party who had no obligation to the other Party not to disclose such information; or (e) was independently developed by the receiving Party without reference to the disclosure by the other Party. - ---------- 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 26 of 43
8.2 Terms of Agreement. The Parties agree that the material financial terms of the Agreement shall be considered the Confidential Information of each Party. 8.3 Permitted Disclosure. Each Party may disclose the Confidential Information to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, or complying with any applicable statute or governmental regulation provided such Party has given the disclosing Party prompt written notice allowing it to limit such disclosure. In addition, each Party may disclose Confidential Information to its Affiliates and to its Sublicensees; provided, however, in connection with any such disclosure the disclosing Party shall secure confidential treatment of such Confidential Information. 8.4 Employee Obligations. The Parties shall undertake to ensure that all their employees who have access to Confidential Information of the other Party are under obligations of confidentiality fully consistent with those provided in this Article. 8.5 Publication. As between Novartis and Novartis AG on the one hand, and Vanda on the other, no Party may publish confidential or proprietary information of the other Party, without the consent of the other Party. The reviewing Party shall have thirty (30) days from receipt of the proposed oral disclosure or written publication to provide comments and/or proposed changes to the disclosing Party. The review period may be extended for an additional two (2) months to permit the reviewing Party to file one or more patent applications as it deems appropriate. This Section 8.5 shall be inapplicable to the publication of information presented in substantially the same form in which was previously published or disclosed to the public, and to any other disclosures which, on the advice of counsel, are required by law to be disclosed. ARTICLE 9 TERM AND TERMINATION 9.1 Term. (a) Term. Unless earlier terminated as provided herein, the term of this Agreement shall commence as of the Effective Date and shall remain in full force and effect until the end of the last to expire milestone or royalty payment obligation of a Party under this Agreement (the "Term"). (b) Accrued Obligations. Except where explicitly provided elsewhere herein, termination of this Agreement for any reason, or expiration of this Agreement, will not affect: (i) obligations, including the payment of any royalties or other sums which have accrued as of the date of termination or expiration, and (ii) rights and obligations which, from the context thereof, are intended to survive termination or expiration of this Agreement. 9.2 Termination for Insolvency. Either Party may terminate this Agreement immediately upon delivery of written notice to the other Party (a) upon the institution by or against the other Party of insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of the other Party's debts; provided, however with respect to involuntary proceedings, that such proceedings are not dismissed within one hundred and twenty (120) days; (b) upon the other Party's making an assignment for the benefit of Page 27 of 43
creditors; or (c) upon the other Party's dissolution or ceasing to do business. In the event that such insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of a Party's debts are instituted, that Party shall immediately notify the other Party of such proceedings. 9.3 Termination for Lack of Diligence. If Vanda ceases all research, development, and commercialization activities with respect to the Compound or Product for a one (1) year period for reasons other than a safety (including toxicity), efficacy, regulatory, manufacturing, medical, legal issue, or a technical or commercial issue, as determined by Vanda with the agreement of Novartis or materially breaches the terms of this Agreement, then Novartis may terminate this Agreement upon thirty (30) days' prior written notice to Vanda. Such prior written notice shall specify that it is a notice of termination under this Section 9.3. Within thirty (30) Business Days following Vanda's receipt of such prior written notice (the "Response Period"), Vanda shall respond, in writing with reasonable detail, indicating the manner in which it is performing research, development, and commercialization activities in compliance with this Agreement. At the request of either Vanda or Novartis, representatives of Novartis and Vanda shall meet to discuss the status of Vanda's activities with respect to the Products during the Response Period. For avoidance of doubt, Vanda may remedy any remediable breach of its obligations under this Section 9.3 during the Response Period. Should Vanda, during the Response Period, fail to (i) remedy such remediable breach, (ii) respond to Novartis' written notice of termination under this Section, or (iii) provide to Novartis any written response regarding compliance or remedy of breach under this Section, then Novartis may terminate this Agreement pursuant to the termination provisions set forth in Section 9.4. 9.4 Material Breach. Either Party may terminate this Agreement upon thirty (30) days prior written notice to the other Party upon the material breach by the other Party of any of its obligations under this Agreement; provided, however, that such termination shall become effective only if the other Party shall fail to remedy or cure the breach within such thirty (30) day period. If either Party is in breach of any material obligation hereunder and, in the case of a breach incapable of remedy, the Party not in breach of the material obligation may forthwith terminate this Agreement by notice without prejudice to the accrued rights of either Party. 9.5 Termination by Vanda. Vanda's obligations to develop and commercialise under this Agreement may be terminated by it at any time upon six(6) months prior written notice to Novartis in the event that Vanda determines after consultation and prior mutual agreement with Novartis that there exists any material safety (including toxicity), efficacy, regulatory, manufacturing, medical, legal, technical or commercial issue with respect to the continued development of the Compound or Product, and Vanda agrees to give Novartis prompt notice in writing and in person thereof of such issue. 9.6 Effect Of Termination. (a) Effect On License. Upon the expiration or earlier termination of this Agreement, the rights licensed under this Agreement shall be treated as follows: Page 28 of 43
(i) Upon the expiration of the Term, Vanda shall have a fully paid-up, perpetual, irrevocable, royalty-free, transferable, worldwide, non-exclusive right and license under the Novartis Patents and Novartis Know-How existing as of the date of such expiration to make, have made, use, offer to sell, and sell Product in the Territory. (ii) Upon termination by Novartis pursuant to Section 9.2, 9.3, 9.4 or by Vanda pursuant to Section 9.5 all rights to Product granted by Novartis to Vanda shall revert to Novartis. Upon such termination, Vanda shall grant to Novartis a non-exclusive, world-wide, transferable, irrevocable, perpetual license, with the right to sublicense, under the Vanda Technology to make, use, offer to sell, sell and import Products solely in the country or countries in which Vanda's licenses under this Agreement were so terminated. If the termination was not due to Section 9.4 and if the Product is ultimately commercialized, Novartis would pay Vanda [*]% of Net Sales until the later of either the last Novartis Patent to expire (including extensions thereof) with a Valid Claim related to the Compound or Product or a method of use thereof, or five (5) years from the date of First Commercial Sale. (b) Ongoing Obligations. (i) Upon expiration or termination of this Agreement for any reason, each Party shall immediately return to the other Party or destroy any Confidential Information disclosed by the other Party, except for one copy which may be retained in its confidential files for archive purposes only. (ii) Upon termination of this Agreement by Novartis pursuant to Sections 9.2, 9.3, 9.4 or by Vanda pursuant to Section 9.5, Vanda shall assign and deliver to Novartis all data and information (including registration dossiers) obtained for or in pursuing Regulatory Approvals, and all Regulatory Approvals (e.g., to Novartis; designee in the Territory as permitted under the applicable law) for Product in the Territory received as of such termination date. 9.7 Inventory. Notwithstanding the foregoing, upon early termination of this Agreement pursuant to Sections 9.2, 9.3, 9.4 or 9.5, Vanda shall have the right to sell all remaining Product in its inventory within four (4) months after the date of termination, subject to the payment to Novartis of the amounts specified in Article 5. Thereafter, Vanda agrees to destroy any remaining supply of Product at Novartis' request and direction. 9.8 Royal and Payment Obligations. Termination of this Agreement by either Party for any reason Will not release the other Party from any obligation to pay royalties or make any other payments to the Party which were accrued prior to and including the effective date of termination or expiration (including for Net Sales and milestones payable prior to the date of termination). Termination of this Agreement by either Party for any reason will not release Vanda from any obligation to pay royalties to Novartis on sales arising from Section 9.7. All payments due to Novartis but not yet paid by Vanda as of the date of termination shall become immediately due to Novartis. - ---------- 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 29 of 43
ARTICLE 10 INDEMNIFICATION 10.1 Indemnification by Novartis. Novartis will indemnify and hold Vanda and its Affiliates, and their employees, officers and directors harmless against any loss, damages, action, suit, claim, demand, liability, expense, bodily injury, death or property damage (a "Loss"), that may be brought, instituted or arise against or be incurred by such persons to the extent such Loss is based on or arises out of the breach by Novartis, Novartis AG of any of its covenants, representations or warranties set forth in this Agreement; provided however, that the foregoing indemnification shall not apply to any Loss to the extent such Loss is caused by the grossly negligent or willful misconduct of Vanda, its Affiliates or Sublicensees. 10.2 Indemnification by Vanda. Vanda will indemnify and hold Novartis and Novartis AG, and its Affiliates, and their employees, officers and directors harmless against any Loss that may be brought, instituted or arise against or be incurred by such persons to the extent such Loss is based on or arises out of: (a) the development, manufacture, use, sale, storage or handling of a Compound or a Product by Vanda or its Affiliates or their Sublicensees, representatives, agents or subcontractors under this Agreement, or any actual or alleged violation of law resulting therefrom; or (b) the breach by Vanda of any of its covenants, representations or warranties set forth in this Agreement; (c) provided that the foregoing indemnification shall not apply to any Loss to the extent such Loss is caused by the grossly negligent or willful misconduct of Novartis, Novartis AG or its Affiliates. 10.3 Claims Procedures. Each Party entitled to be indemnified by the other Party (an "Indemnified Party") pursuant to Section 10.1 or 10.2 hereof shall give notice to the other Party (an "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any threatened or asserted claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided: (a) That counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld) and the Indemnified Party may participate in such defense at such Party's expense (unless (i) the employment of counsel by such Indemnified Party has been authorized by the Indemnifying Party; or (ii) the Indemnified Party shall have reasonably concluded that there may be a conflict of interest between the Indemnifying Party and the Indemnified Party in the defense of such action, in each of which cases the Indemnifying Party shall pay the reasonable fees and expenses of one law firm serving as counsel for the Indemnified Party, which law firm shall be subject to approval, not to be unreasonably withheld, by the Indemnifying Party). Page 30 of 43
(b) The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement to the extent that the failure to give notice did not result in harm to the Indemnifying Party. (c) No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the approval of each Indemnified Party which approval shall not be unreasonably withheld, consent to entry of any judgment or enter into any settlement which (i) would result in injunctive or other relief being imposed against the Indemnified Party; or (ii) does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. 10.4 Indemnification Amounts. An Indemnifying Party shall not have liability with respect to any breach of any of this Agreement: (a) for any individual item where the Loss relating thereto is less that $ 50,000, and (b) in respect of each individual item where the Loss relating thereto is equal to or greater than $ 50,000, unless and until the aggregate amount of such Losses exceeds $ 200,000 and then the Indemnifying Party will be liable for the entire amount of the Losses described in this clause. Each Party shall take and shall cause its Affiliates to take all reasonable steps to mitigate any Loss upon becoming aware of any event which would reasonably be expected to, or does, give rise thereto, including incurring costs only to the minimum extent necessary to remedy a breach that gives rise to the Loss. 10.5 Compliance. The Parties shall comply fully with all applicable laws and regulations in connection with their respective activities under this Agreement. ARTICLE 11 MISCELLANEOUS PROVISIONS 11.1 Dispute Resolution. In the event of any controversy or claim arising out of relating to or in connection with any provision of this Agreement, or the rights or obligations hereunder, the Parties shall try to settle their differences amicably between themselves. As between Novartis and Novartis AG on the one hand, and Vanda on the other, each Party may initiate such informal dispute resolution by sending written notice of the dispute to the other Party and within ten (10) Business Days after such notice appropriate representatives of the Parties shall meet for attempted resolutions by good faith negotiations. If such representatives are unable to resolve such disputed matters, it shall be referred to the Chief Executive Officers of Novartis Pharma AG and Vanda, for discussion and resolution. 11.2 Governing Law. This Agreement shall be construed and the respective rights of the Parties determined according to the substantive laws of the State of New York notwithstanding the provisions governing conflict of laws under such New York law to the contrary, except matters of intellectual property law which shall be determined in accordance with the intellectual property laws relevant to the intellectual property in question. Page 31 of 43
11.3 Jurisdiction. Any controversy or claim arising out of or in connection with this Agreement, which cannot be settled within one hundred eighty (180) days of the notice according to Section 11.1, shall be under the exclusive jurisdiction of the courts in New York, NY, USA. 11.4 Waiver. The failure on the part of Vanda or Novartis to exercise or enforce any rights conferred upon it hereunder shall not be deemed to be a waiver of any such rights nor operate to bar the exercise or enforcement thereof at any time or times thereafter. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the Party entitled to enforce such term, but any such waiver shall be effective only if in writing signed by the Party against whom such waiver is to be asserted. 11.5 Force Majeure. No Party shall be held liable or responsible to the other Party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement, other than an obligation to make a payment, when such failure or delay is caused by or results from fire, foods, embargoes, government regulations, prohibitions or interventions, war, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts, acts of God, or any other cause beyond the reasonable control of the affected Party. 11.6 Severability. It is the intention of the Parties to comply with all applicable laws domestic or foreign in connection with the performance of its obligations hereunder. In the event that any provision of this Agreement, or any part hereof, is found invalid or unenforceable, the remainder of this Agreement will be binding on the Parties hereto, and will be construed as if the invalid or unenforceable provision or part thereof had been deleted, and the Agreement shall be deemed modified to the extent necessary to render the surviving provisions enforceable to the fullest extent permitted by law. 11.7 Government Acts. In the event that any act, regulation, directive, or law of a government, including its departments, agencies or courts, should make impossible or prohibit, restrain, modify or limit any material act or obligation of Vanda or Novartis or Novartis AG under this Agreement, the Party, if any, not so affected shall have the right, at its option, to suspend or terminate this Agreement as to such country, if good faith negotiations between the Parties to make such modifications to this Agreement as may be necessary to fairly address the impact thereof, after a reasonable period of time are not successful in producing mutually acceptable modifications to this Agreement. 11.8 Assignment. This Agreement may not be assigned or otherwise transferred by either Party without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement, without the consent of the other Party, (i) to any of its Affiliates, if the assigning Party guarantees the full performance of its Affiliates' obligations hereunder, or (ii) in connection with the transfer or sale of all or substantially all of its assets or business or in the event of its merger or consolidation with another company. In all cases the assigning Party shall provide the other Party with prompt notice of any such assignment. Any purported assignment in contravention of this Section shall, at the option of the non- Page 32 of 43
assigning Party, be null and void and of no effect. No assignment shall release either Party from responsibility for the performance of any accrued obligation of such Party hereunder. 11.9 Counterparts. This Agreement may be executed in duplicate, both of which shall be deemed to be originals, and both of which shall constitute one and the same Agreement. 11.10 No Agency. Nothing herein contained shall be deemed to create an agency, joint venture, amalgamation, partnership or similar relationship between Novartis AG and Novartis on the one hand, and Vanda on the other. Notwithstanding any of the provisions of this Agreement, as between Novartis and Novartis AG on the one hand, and Vanda on the other, no Party shall at any time enter into, incur, or hold itself out to third Parties as having authority to enter into or incur, on behalf of the other Party, any commitment, expense, or liability whatsoever, and all contracts, expenses and liabilities undertaken or incurred by one Party in connection with or relating to the development, manufacture or sale of Compounds or Products shall be undertaken, incurred or paid exclusively by that Party, and not as an agent or representative of the other Party. 11.11 Notice. As between Novartis and Novartis AG on the one hand, and Vanda on the other, all communications between the Parties with respect to any of the provisions of this Agreement will be sent to the addresses set out below, or to other addresses as designated by one Party to the other by notice pursuant hereto, by internationally recognized courier or by prepaid certified, air mail (which shall be deemed received by the other Party on the seventh Business Day following deposit in the mails), or by facsimile transmission or other electronic means of communication (which shall be deemed received when transmitted), with confirmation by letter given by the close of business on or before the next following Business Day: If to Novartis AG, at: Novartis AG Postfach CH-4002 Basel, Switzerland Attn: General Counsel If to Novartis, at: Novartis Pharma AG Postfach CH-4002 Basel, Switzerland Attn: General Counsel, Pharma Legal If to Vanda at: Vanda Pharmaceuticals Inc. 47 Hulfish Street, Suite 310 Princeton, NJ 08542 Attn: Patricia Nasshorn Page 33 of 43
11.12 Headings. The paragraph headings are for convenience only and will not be deemed to affect in any way the language of the provisions to which they refer. 11.13 Entire Agreement. This Agreement contains the entire understanding of the Parties relating to the matters referred to herein, and may only be amended by a written document, duly executed on behalf of the respective Parties. ***[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK - SIGNATURE PAGE FOLLOWS]*** Page 34 of 43
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. VANDA PHARMACEUTICALS, INC. By: /s/ Mihael Polymeropoulos ------------------------------------ Mihael Polymeropoulos Chief Executive Officer NOVARTIS PHARMA AG By: /s/ Herve Girsault ------------------------------------ Name: Herve Girsault Title: Head, Global Partnering Business Development & Licensing June 4, 2004 By: /s/ Tom Chakraborti ------------------------------------ Name: Tom Chakraborti Title: Senior Legal Counsel 22nd June, 2004 NOVARTIS AG By: /s/ Jorg Walther ------------------------------------ Name: Jorg Walther Title: Authorized Signatory By: /s/ Clive S. Morris ------------------------------------ Name: Clive S. Morris Title: Authorized Signatory 23.06.04 Page 35 of 43
Schedule 1.7 NDD094 corresponds to [*]. It has the molecular formula [*] and the following structure: [*] - ---------- 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 36 of 43
SCHEDULE 3.1 TERMS AND CONDITIONS FOR THE SALE OF COMPOUND FORM NOVARTIS TO VANDA Available Compound Substance and Lot Number: [*] [*] [*] [*] --- [*] Total available Compound substance for technical use only === Price per kg of Compound substance: [*] Delivery Terms: EX WORKS (as such term is defined in INCOTERMS 2000 of the International Chamber of Commerce in Paris: delivery to Vanda shall occur when the Compound and Product is placed at Vanda's disposal at Novartis' premises) NOVARTIS AND NOVARTIS AG MAKE NO REPRESENTATION OR WARRANTY THAT ANY QUANTITIES OF COMPOUND PROVIDED TO VANDA UNDER THIS AGREEMENT WILL [*]. - ---------- 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 37 of 43
ANNEX 1- DEVELOPMENT PLAN AND BUDGET A. DEVELOPMENT TIMELINES [*] B CLINICAL TRIALS TO BE PERFORMED UNDER DEVELOPMENT PLAN BY VANDA: B1 [*] Primary objectives: (1) [*] (2) [*] B2 [*] Primary objectives: (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 38 of 43
B3 [*] Primary objectives: (1) [*] (2) [*] (3) [*] (4) [*] B4 [*] Primary objectives: (1) [*] (2) [*] (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 39 of 43
C. DEVELOPMENT COST [*] VANDA PHARMACEUTICALS, INC. NDD094 - ---------- 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 40 of 43
ANNEX 2 ***[INTENTIONALLY LEFT BLANK]*** Page 41 of 43
ANNEX 3 PATENT SCHEDULE [*] - ---------- 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 42 of 43
ANNEX 4 Novartis POLICY STATEMENT VANDA agrees to abide by the following policy statement, which is binding on all parties under contract with Novartis, and is in support of the protection of internationally proclaimed human rights, ethical and legal behaviour, fair, courteous and respectful treatment of others, and professionalism and good business practice. Gifts, favours, kickbacks, entertainment or other offering of financial advantage to an official of a government or a government-controlled entity for the purpose of obtaining business or other services, as set out in the OECD Convention on Combating Bribery of Foreign Public Officials are not allowed. Gifts, favours or entertainment to non-governmental officials may be provided to others only if they meet all of the following criteria: (a) they are consistent with government regulations and customary business practices; (b) they are not excessive in value, and cannot be construed as a bribe or a pay-off; (c) they are not in contravention of applicable law or ethical standards; and (d) they will not embarrass Novartis, VANDA, or the recipient if publicly disclosed. VANDA shall respect the principles and rules of fair competition and shall not violate applicable antitrust laws. VANDA hereby agrees that in its dealings on behalf of Novartis, it will take no action, directly or indirectly, that is inconsistent with the language or, spirit of this policy statement. VANDA further acknowledges and agrees that any such action will serve as grounds for immediate termination of this Agreement by Novartis. Page 43 of 43
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
610 LINCOLN STREET
WALTHAM, MASSACHUSETTS 02451
TELEPHONE: (781) 890-8800 FACSIMILE: (781) 622-1622
Division of Corporation Finance
Washington, D.C. 20549
Attention: Jeffrey Riedler and Mary Fraser
Mail Stop 6010
| Re: | Vanda Pharmaceuticals Inc. Amendment No. 4 to Registration Statement on Form S-1 Filed April 7, 2006 |
| cc: | Mihael H. Polymeropoulos, M.D., Vanda Pharmaceuticals Inc. William D. Clark, Vanda Pharmaceuticals Inc. Steven A. Shallcross, Vanda Pharmaceuticals Inc. Jay K. Hachigian, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP Gregg A. Griner, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP Richard Truesdell, Davis Polk & Wardwell Dana Willis, Davis Polk & Wardwell |