UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x Annual Report pursuant to Section 13
or 15(d)
of
the Securities Exchange Act of 1934
For
the fiscal year ended December 31, 2004
o Transition report pursuant to Section 13 or
15(d)
of
the Securities Exchange Act of 1934
For the
transition period from _______ to
________
Commission
file number 000-26422
DISCOVERY
LABORATORIES, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE |
94-3171943 |
|
(State
or other jurisdiction of |
(I.R.S.
Employer |
|
incorporation
or organization) |
Identification
No.) |
2600
KELLY ROAD, SUITE 100, WARRINGTON, PENNSYLVANIA 18976-3646
(Address
of principal executive offices) (Zip
Code)
(215)
488-9300
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class |
Name
of each exchange on which registered |
|
None |
None |
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.001 par value and,
Preferred
Stock Purchase Rights
(Title of
class)
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). YES x NO o
The
aggregate market value of shares of voting and non-voting common equity held by
non-affiliates of the registrant computed using the closing price of common
equity as reported on NASDAQ National Market under the symbol DSCO on June 30,
2004, the last business day of the registrant’s most recently completed second
fiscal quarter, was approximately $381 million. For the purposes of determining
this amount only, the registrant has defined affiliates to include: (a) the
executive officers named in Part III of this Annual Report on Form 10-K; (b) all
directors of the registrant; and (c) each shareholder that has informed the
registrant by February 29, 2004 that it is the beneficial owner of 10% or more
of the outstanding shares of common stock of the registrant.
As of
March 14, 2005, 53,511,946 shares of the registrant’s common stock were
outstanding.
Portions
of the information required by Items 10 through 14 of Part III of this Annual
Report on Form 10-K are incorporated by reference to the extent described herein
from our definitive proxy statement, which is expected to be filed by us with
the Commission within 120 days after the close of our 2004 fiscal
year.
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery Laboratories, Inc. (Discovery), and its
wholly-owned, presently inactive subsidiary, Acute Therapeutics,
Inc.
FORWARD
LOOKING STATEMENTS
The
statements set forth under Item 1: “Business” and elsewhere in this report,
including in Item 7: “Management’s Discussion and Analysis of Financial
Condition and Results of Operation - Risks Related to Our Business” and those
incorporated by reference herein which are not historical, including, without
limitation, statements concerning our research and development programs and
clinical trials, the possibility of submitting regulatory filings for our
products under development, the seeking of collaboration arrangements with
pharmaceutical companies or others to develop, manufacture and market products,
the research and development of particular compounds and technologies and the
period of time for which our existing resources will enable us to fund our
operations, constitute “Forward Looking Statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We intend that all forward-looking statements be subject
to the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are only predictions and reflect our
views as of the date they are made with respect to future events and financial
performance. Forward-looking statements are subject to many risks and
uncertainties which could cause our actual results to differ materially from any
future results expressed or implied by the forward-looking statements.
Examples
of the risks and uncertainties include, but are not limited to: risk that
financial conditions may change; risks relating to the progress of our research
and development; the risk that we will not be able to raise additional capital
or enter into additional collaboration agreements (including strategic alliances
for our aerosol and Surfactant Replacement Therapies); risk that we will not be
able to develop a successful sales and marketing organization in a timely
manner, if at all; risk that our internal sales and marketing organization will
not succeed in developing market awareness of our products; risk that our
internal sales and marketing organization will not be able to attract or
maintain qualified personnel; risk of delay in the FDA’s or other health
regulatory authorities’ approval of any applications we file; risks that any
such regulatory authority will not approve the marketing and sale of a drug
product even after acceptance of an application we file for any such drug
product; risks relating to the ability of our third party contract manufacturers
to provide us with adequate supplies of drug substance and drug products for
completion of any of our clinical studies; risks relating to the lack of
adequate supplies of drug substance and drug product for completion of any of
our clinical studies, and risks relating to the development of competing
therapies and/or technologies by other companies; and the
other risks and certainties detailed in Item 7: “Management’s Discussion and
Analysis of Financial Condition and Results of Operation - Risks Related to Our
Business,” and in the documents incorporated by reference in this report.
Companies
in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials, even after obtaining promising earlier
trial results. Data obtained from tests are susceptible to varying
interpretations, which may delay, limit or prevent regulatory
approval.
Except to
the extent required by applicable laws or rules, we do not undertake to update
any forward-looking statements or to publicly announce revisions to any of the
forward-looking statements, whether as a result of new information, future
events or otherwise.
DISCOVERY
LABORATORIES, INC.
Table
of contents to Form 10-K
For
the Fiscal Year Ended December 31, 2004
|
PART
I |
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| |
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ITEM
1. |
BUSINESS |
1 |
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ITEM
2. |
PROPERTIES |
18 |
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ITEM
3. |
LEGAL
PROCEEDINGS |
18 |
|
ITEM
4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS |
18 |
| |
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PART
II |
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| |
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ITEM
5. |
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASE OF EQUITY SECURITIES |
19 |
|
ITEM
6. |
SELECTED
FINANCIAL DATA |
20 |
|
ITEM
7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION |
22 |
|
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
58 |
|
ITEM
8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA |
59 |
|
ITEM
9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
59 |
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ITEM
9A. |
CONTROLS
AND PROCEDURES |
59 |
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ITEM
9B. |
OTHER
INFORMATION |
60 |
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PART
III |
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| |
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ITEM
10. |
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT |
61 |
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ITEM
11. |
EXECUTIVE
COMPENSATION |
61 |
|
ITEM
12. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS |
61 |
|
ITEM
13. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS |
61 |
|
ITEM
14. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES |
61 |
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PART
IV |
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| |
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ITEM
15. |
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES |
62 |
| |
SIGNATURES |
63 |
PART
I
COMPANY
SUMMARY
Discovery
Laboratories, Inc. is a biopharmaceutical company developing its proprietary
precision-engineered lung surfactant technology as Surfactant Replacement
Therapies (SRTs) for respiratory diseases. Surfactants are compositions produced
naturally in the lungs and are essential to the lungs’ ability to absorb oxygen
and to maintain proper airflow through the respiratory system. The absence or
depletion of surfactants is involved in a number of respiratory
diseases.
Our
technology produces a precision-engineered, peptide-containing surfactant that
is designed to closely mimic the function of human lung surfactant. We believe
that through this SRT technology, pulmonary surfactants have the potential, for
the first time, to be developed into a series of respiratory therapies for
patients in the Neonatal Intensive Care Unit (NICU), critical care unit and
other hospitalized settings, where there are few or no approved therapies
available.
In
February 2005, we received an Approvable Letter from the U.S. Food and Drug
Administration (FDA) for clearance to market SurfaxinÒ
(lucinactant), our lead product, for the prevention and treatment of Respiratory
Distress Syndrome (RDS) in premature infants. The Approvable Letter is an
official notification that the FDA is prepared to approve the Surfaxin New Drug
Application and contains conditions that the applicant must meet prior to
obtaining final U.S. marketing approval. The conditions that we must meet
primarily involve finalizing labeling and correcting previously reported
manufacturing issues. Most notably, the FDA is not requiring additional
preclinical or clinical trials for final approval. Based on the nature of the
observations contained in the Approvable Letter, we currently anticipate that we
will respond to the FDA with a “Class 2” response. A “Class 2” response allows
the FDA up to six months following the completion of the labeling and
manufacturing issues outlined in the Approvable Letter. We have also filed a
Marketing Authorization Application (MAA) with the European Medicines Evaluation
Agency (EMEA) for clearance to market Surfaxin for the same indication in
Europe.
In
addition to the New Drug Application (NDA) we filed for Surfaxin for RDS, we are
conducting several NICU therapeutic programs in an effort to enhance the
potential commercial and medical value of our SRT by addressing the most
prevalent respiratory disorders affecting infants in the NICU. The programs we
are conducting include therapeutic programs targeting respiratory conditions
cited as some of the most significant unmet medical needs confronting the
neonatal community. We are conducting three Phase 2 clinical trials - Surfaxin
for Bronchopulmonary Dysplasia (BPD) in premature infants, aerosolized SRT
administered through nasal continuous positive airway pressure (nCPAP) for
Neonatal Respiratory Failures, and a prophylactic/early treatment trial for
Surfaxin for the treatment of Meconium Aspiration Syndrome (MAS) in full term
infants.
In an
effort to enhance the potential commercial and medical value of our SRT, we are
also developing SRT to address unmet respiratory conditions affecting pediatric,
young adult and adult patients in the critical care and other hospital settings.
We are conducting a Phase 2 clinical trial for the treatment of ARDS in adults
in the intensive care unit (ICU), for which we announced preliminary data on
December 7, 2004. With our aerosolized surfactant formulations, we have
completed a Phase 1b trial and are preparing to initiate a Phase 2 trial for
patients with moderate to severe asthma (development name DSC-104). In addition,
we are evaluating the development of aerosolized formulations of our
precision-engineered SRT to potentially treat Acute Lung Injury (ALI), Chronic
Obstructive Pulmonary Disease (COPD) and rhinitis/sinusitis.
In
anticipation of the potential approval of Surfaxin for RDS in the United States,
we are presently building sales and marketing capabilities to execute the launch
of Surfaxin. This specialty pulmonary United States sales and marketing
organization will focus initially on opportunities in the NICU and, as products
may be developed, the focus will be expanded to critical care and hospital
settings. We plan on implementing our commercialization strategy for Surfaxin in
Europe and the rest of the world through corporate partnerships.
In
addition, our long-term commercial strategy includes building manufacturing
capabilities for the production of our precision-engineered surfactant drug
products to meet anticipated clinical and commercial needs in the United States
and Europe. To support a long-term manufacturing strategy for the production of
clinical and commercial supply of our precision-engineered surfactant drug
product, we are evaluating further development and scale-up of our current
contract manufacturer, Laureate Pharma, Inc. (Laureate), alternative contract
manufacturers and building our own manufacturing operations in order to secure
additional manufacturing capabilities to meet our production needs as they
expand. Upon marketing approval, if at all, we intend to rely on outside
manufacturers for production of our products.
SURFACTANT
TECHNOLOGY
Our
precision-engineered surfactant replacement technology was invented at The
Scripps Research Institute and was exclusively licensed to Johnson & Johnson
which, together with its wholly-owned subsidiary, Ortho Pharmaceutical
Corporation, developed it further. We acquired the exclusive worldwide
sublicense to the technology in October 1996.
Surfactants
are protein and lipid (fat) compositions that are produced naturally in the
lungs and are critical to all air-breathing mammals. They cover the entire
alveolar surface, or air sacs, of the lungs and the terminal conducting airways
which lead to the air sacs. Surfactants facilitate respiration by continually
modifying the surface tension of the fluid normally present within the alveoli,
or air sacs, that line the inside of the lungs. In the absence of sufficient
surfactant or should the surfactant degrade, these air sacs tend to collapse,
and, as a result, the lungs do not absorb sufficient oxygen. In addition to
lowering aveolar surface-tension, surfactants play other important roles in
human respiration including, but not limited to, lowering the surface tension of
the conducting airways and maintaining airflow and airway patency (keeping the
airways open and expanded). Human surfactants include four known surfactant
proteins, A, B, C and D. It has been established, through numerous studies, that
surfactant protein B (SP-B) is essential for respiratory function.
Presently,
the FDA has approved surfactants as replacement therapy only for RDS in
premature infants, a condition in which infants are born too soon and thus have
an insufficient amount of their own natural surfactant. The most commonly used
of these approved replacement surfactants are derived from pig and cow lungs.
Although they are clinically effective, they have drawbacks and cannot readily
be scaled or developed to treat broader populations for RDS in premature infants
and other respiratory diseases. There is presently only one approved synthetic
surfactant available, however, this product does not contain surfactant
proteins, is not widely used and is not actively marketed by its
manufacturer.
Animal-derived
surfactant products are prepared using a chemical extraction process from minced
cow and pig lung. Because of the animal-sourced materials and the chemical
extraction processes, there can potentially be significant variation in
production lots and, consequently, product quality specifications must be broad.
In addition, the protein levels of these animal-derived surfactants are
inherently lower than the protein levels of native human surfactant. The
production costs of these animal-derived surfactants are high, relative to other
analogous pharmaceutical products, generation of large quantities is severely
limited, and these products cannot readily be reformulated for aerosol delivery
to the lungs.
Our
precision-engineered surfactant product candidates, including Surfaxin, are
engineered versions of natural human lung surfactant and contain a
precision-engineered peptide, sinapultide. Sinapultide is a 21 amino acid
protein-like substance that is designed to closely mimic the essential
attributes of human surfactant protein B (SP-B), the surfactant protein that is
most important for the proper functioning of the respiratory system. Our
products have the ability to be precisely formulated, either as a liquid
instillate, aerosolized liquid or dry powder, to address various medical
indications.
We
believe that our precision-engineered surfactant can be manufactured in
sufficient quantities, in more exact and consistent pharmaceutical grade
quality, less expensively than the animal-derived surfactants and has no
potential to cause adverse immunological responses in young and older adults,
all important attributes for our products to potentially fulfill significant
unmet medical needs. In addition, we believe that our precision-engineered
surfactants might possess other pharmaceutical benefits not currently found with
the animal surfactants such as longer shelf-life, reduced number of
administrations to the patient’s lungs and elimination of the risk of
animal-borne diseases including the brain-wasting bovine spongiform
encephalopathy (commonly called “mad-cow disease”).
Aerosolized
Surfactant Formulations
Many
respiratory diseases are associated with an inflammatory event that causes
surfactant dysfunction and a loss of patency of the conducting airways.
Scientific data support the premise that the therapeutic use of surfactants in
aerosol form has the ability to reestablish airway patency, improve pulmonary
mechanics and act as an anti-inflammatory. Surfactant normally prevents moisture
from accumulating in the airways’ most narrow sections and thereby maintains the
patency of the conducting airways.
We are
currently developing aerosolized formulations of our precision-engineered
surfactant to potentially treat patients who could benefit from surfactant-based
therapy to improve lung function and maintain proper airflow through the
respiratory system. We are conducting a Phase 2 trial for aerosolized SRT
administered through nasal continuous positive airway pressure (nCPAP) for
Neonatal Respiratory Failures. In addition, we have completed a Phase 1b trial
using a proprietary aerosolized surfactant formulation and are preparing to
initiate a Phase 2 trial for patients with moderate to severe asthma
(development name DSC-104). We are also evaluating the development of
aerosolized formulations of our precision-engineered SRT to potentially treat
ALI, COPD, and rhinitis/sinusitis.
SURFACTANT
THERAPY FOR RESPIRATORY MEDICINE
Products
for the Neonatal Intensive Care Unit
Surfaxin®
(Lucinactant) for Respiratory Distress Syndrome in Premature
Infants
RDS is a
condition in which premature infants are born with an insufficient amount of
their own natural surfactant. Premature infants born prior to 32 weeks gestation
have not fully developed their own natural lung surfactant and therefore need
treatment to sustain life. This condition often results in the need for the
infant to undergo surfactant replacement therapy or mechanical ventilation. RDS
is experienced in approximately half of the babies born between 28 and 32 weeks
gestational age. The incidence of RDS approaches 100% in babies born less than
26 weeks gestational age. Surfaxin is the first precision-engineered, protein
B-based agent that mimics the surface-active properties of human surfactant. To
treat premature infants suffering from RDS, surfactants, including Surfaxin, are
delivered in a liquid form and injected through an endotracheal tube (a tube
inserted into the infant’s mouth and down the trachea).
For RDS,
we conducted a Phase 3 pivotal trial, which formed the basis of our New Drug
Application to the FDA that was filed in April 2004, and a supportive Phase 3
trial.
The
pivotal Phase 3 trial enrolled 1,294 patients and was designed as a
multinational, multicenter, randomized, masked, controlled, prophylaxis,
event-driven, superiority trial to demonstrate the safety and efficacy of
Surfaxin over Exosurf®, an
approved, non-protein containing synthetic surfactant. Survanta®, a
cow-derived surfactant and the leading surfactant used in the United States,
served as a reference arm in the trial. Key trial results were assessed by an
independent adjudication committee comprised of leading neonatologists and
pediatric radiologists. This committee provided a consistent and standardized
method for assessing critical efficacy data in the trial. An independent Data
Safety Monitoring Board (DSMB) was responsible for monitoring the overall safety
of the trial and no major safety issues were identified. We anticipate the
publication of the results of this trial in a leading, peer reviewed journal in
April 2005.
The
supportive, multinational Phase 3 clinical trial enrolled 252 patients and was
designed as a non-inferiority trial comparing Surfaxin to Curosurf®, a
porcine (pig) derived surfactant and the leading surfactant used in Europe. This
trial demonstrated the overall safety and non-inferiority of Surfaxin to
Curosurf.
In
February 2005, we received an Approvable Letter from the FDA for clearance to
market Surfaxin, our lead product, for the prevention and treatment of RDS in
premature infants. The Approvable Letter is an official notification that the
FDA is prepared to approve the Surfaxin New Drug Application and contains
conditions that the applicant must meet prior to obtaining final U.S. marketing
approval. The conditions that we must meet primarily involve finalizing labeling
and correcting certain manufacturing issues. Most notably, the FDA is not
requiring additional preclinical or clinical trials for final approval. Based on
the nature of the observations contained in the Approvable Letter, we currently
anticipate that we will respond to the FDA with a “Class 2” response. A “Class
2” response allows the FDA up to six months following the completion of the
labeling and manufacturing issues outlined in the letter to complete its review
of our response.
With
respect to the manufacturing issues mentioned above, in January 2005, the FDA
issued an inspection report (Form FDA-483) to Laureate, our contract
manufacturer of Surfaxin, citing certain observations concerning Laureate’s
compliance with current Good Manufacturing Practices (cGMPs) in connection with
its review of our NDA for Surfaxin for RDS. The general focus of the inspection
observations relates to basic quality controls, process assurances and
documentation requirements to support the commercial production process. In
response, a cGMP Action Plan was submitted to the FDA on January 31, 2005,
outlining corrective measures anticipated to be completed by July 2005. Assuming
the adequacy of such corrective actions and the approval of marketing clearance
for Surfaxin, we anticipate that the potential approval and commercial launch of
Surfaxin for the United States will occur in the first quarter of 2006. Our
other clinical programs currently in progress are not affected by this
inspection report and remain on track. However, if the inspection observations
noted in the Form 483 are not resolved in the time period stated above, a delay
may occur in these programs.
In
October 2004, the European Medicines Evaluation Agency validated our Marketing
Authorization Application that we had filed previously for clearance to market
Surfaxin for the same indication in Europe. This validation indicated that the
Marketing Authorization Application was complete and that the review process had
begun. We
anticipate the potential approval of Surfaxin for Europe will occur in the first
quarter of 2006.
There are
over 3,000,000 premature infants born annually worldwide. More than 750,000 of
these premature infants are considered “very low birth weight” infants (less
than 1,250 grams), of which, approximately 550,000 are considered at significant
risk for RDS. Due to limitations associated with the animal-derived surfactant
products that are currently approved to treat RDS in premature infants, access
to such therapy is mainly limited to the approximately 150,000 very low birth
weight infants born in the United States and Western Europe. This results in
hundreds of thousands of premature infants born in the world each year who need,
but do not receive, effective surfactant replacement therapy.
The FDA
has granted us Orphan Drug Designation for Surfaxin for RDS. Orphan drugs are
pharmaceutical products that are intended to treat diseases affecting fewer than
200,000 patients in the United States. The Office of Orphan Product Development
of the FDA grants certain advantages to the sponsors of orphan drugs including,
but not limited to, seven years of market exclusivity upon approval of the drug,
certain tax incentives for clinical research and grants to fund testing of the
drug. Most recently, the Commission of the European Communities has designated
Surfaxin as an Orphan Medicinal Product for the prevention and treatment of RDS
in premature infants. This designation allows us exclusive marketing rights for
Surfaxin for indications of RDS in Europe for 10 years (subject to revision
after six years) following marketing approval by the European Medicines
Evaluation Agency. In addition, the designation enables us to receive regulatory
assistance in the further development process of Surfaxin, and to access reduced
regulatory fees throughout its marketing life.
Surfaxin®
for the Prevention of Bronchopulmonary Dysplasia
BPD is a
costly syndrome associated with surfactant and SP-B deficiency, and the
prolonged use of
mechanical ventilation and oxygen supplementation, usually associated with a
premature infant being treated for RDS. Presently there are no approved drugs
for the treatment of BPD. These babies suffer from abnormal lung development and
typically have a need for respiratory assistance - oftentimes, for many months,
as well as comprehensive care spanning years. It is estimated that the cost of
treating an infant with BPD in the United States can approach $250,000 with
approximately 50,000 infants developing BPD in the United States and Europe each
year.
We are
currently conducting a double-blind, controlled Phase 2 BPD clinical trial that
will enroll up to 210 very low birth weight premature infants born at risk for
developing BPD. The study objective is to determine the safety and tolerability
of a series of Surfaxin doses administered in the first weeks of life as a
therapeutic approach for the prevention of BPD and to determine whether such
treatment can decrease the proportion of infants on mechanical ventilation or
oxygen or the incidence of death or BPD. Infants will be randomized to receive
several doses of Surfaxin which will be administered in liquid form and injected
through
the patient’s endotracheal tube, or the current standard of care - mechanical
ventilation and support therapies. The trial will be conducted at approximately
25 sites throughout the United States, as well as sites in Latin America and
Europe. The results
of this trial are expected to be available in the first quarter of
2006.
Aerosolized
Surfactant Replacement Therapy for Respiratory Dysfunction in Premature
Infants
Serious
respiratory problems are some of the most prevalent medical issues facing
premature infants in Neonatal Intensive Care Units. On top of the approximately
550,000 premature infants born annually worldwide at risk for RDS, there are
another approximately 1 million premature infants, 300,000 of which are in the
US and Europe, born annually at risk for a range of other respiratory problems
associated with surfactant dysfunction. These infants are usually at a birth
weight greater than 1,250 grams and neonatologists generally try to avoid
mechanically ventilating these patients because doing so requires intubation
(the highly invasive process of inserting a breathing tube down the patient’s
trachea). This reluctance is due to the perceived risks by many neonatologists
regarding the intubation of these larger babies, such as the risk of trauma and
the need of paralytic agents and sedation. As a result, many neonatologists will
only intubate in cases of severe respiratory disease, where the benefits clearly
outweigh the risks. We believe that there is growing recognition by the neonatal
medical community for the potential utility of a non-invasive method of
delivering SRT to treat premature infants suffering from respiratory disorders
including BPD, bronchiolitis, acute hypoxia, pneumonia, and transient
tachypnea.
We are
currently conducting an open label, Phase 2, multicenter pilot study to evaluate
aerosolized SRT delivered via nasal continuous positive airway pressure (nCPAP)
in premature infants. This trial will be conducted at up to four centers in the
United States and will enroll approximately 20 infants with a gestational age of
28-32 weeks who are suffering from RDS. Patients will receive, in two treatment
regimens, aerosolized SRT delivered via nCPAP within thirty minutes of birth.
Our overall program is to begin with a pilot study to evaluate the safety and
tolerability of aerosolized SRT delivered via our proprietary nCPAP technology,
initially within patients who suffer from RDS followed by additional studies to
include other neonatal respiratory failures within the NICU. Results of this
Phase 2 pilot study are anticipated to be available in the third quarter of
2005.
SurfaxinÒ for
Meconium Aspiration Syndrome in Full-Term Infants
Meconium
Aspiration Syndrome (often referred to as MAS) is an inflammatory condition in
which full-term infants are born with meconium in their lungs that depletes the
natural surfactant in their lungs. Meconium is a baby’s first bowel movement in
its mother’s womb and, when inhaled, MAS can occur. MAS can be life-threatening
as a result of the failure of the lungs to absorb sufficient oxygen. There are
no approved therapies for this condition and the standard of care principally
consists of mechanical ventilation. Surfaxin has been shown to not only remove
inflammatory and infectious infiltrates from the lungs when using our
proprietary lavage (or “lung wash”) but to also replenish the vital surfactant
levels in the babies’ lungs.
We are
conducting a Phase 2 clinical trial of our proprietary Surfaxin lavage in up to
60 full-term infants for use as a prophylactic or early treatment for patients
who are at risk of developing MAS but have not shown symptoms of compromised
respiratory function. Surfaxin is administered as a liquid bolus through an
endotracheal tube as well as by our proprietary lavage (lung-wash)
technique.
Products
for the Critical Care Unit and other Hospital Settings
SurfaxinÒ
for
Acute Respiratory Distress Syndrome in Adults
ARDS is a
life-threatening disorder for which no approved therapies exist anywhere in the
world. It is characterized by an excess of fluid in the lungs and decreased
oxygen levels in the patient. One prominent characteristic of this disorder is
the destruction of surfactants naturally present in lung tissue. The conditions
are caused by illnesses including pneumonia and septic shock (a toxic condition
caused by infection) and events such as smoke inhalation, near drowning,
industrial accidents and other traumas.
We are
presently conducting a Phase 2 open-label, controlled, multi-center clinical
trial of Surfaxin for the treatment of adults with ARDS. In December 2004, we
announced what we believe to be encouraging preliminary data from this trial and
that we were modifying the trial protocol to allow for increased enrollment of
up to 160 patients. Patients will be randomized to either receive Surfaxin or
the current standard of care, which is mechanical ventilation and support
therapies.
Surfaxin
is administered to patients in high concentration and large volume via a
proprietary sequential lavage technique, or lung wash, delivered through a
bronchoscope to each of the 19 segments of the lung. The procedure is intended
to cleanse and remove inflammatory substances and debris from the lungs, while
leaving sufficient amounts of Surfaxin behind to
help re-establish the lungs’ capacity to absorb oxygen. The objective is to
restore functional surfactant levels and to allow critically ill patients to be
removed from mechanical ventilation sooner. The primary endpoint of this trial
is the incidence rate of patients being alive and off mechanical ventilation at
Day 28. Key secondary endpoints include mortality at the end of Day 28 and
safety and tolerability of Surfaxin and the bronchoscopic lavage procedure.
Results of the Phase 2 trial are anticipated to be available in the first
quarter of 2006.
The
current standard of care for ARDS includes placing patients on mechanical
ventilators in intensive care units at a cost per patient of approximately
$8,500 per day, typically for an average of 21 to 28 days. There are
estimated to be between 150,000 and 200,000 adults per year in the United States
suffering from ARDS with similar numbers afflicted in Europe. Presently, the
mortality rate is estimated to be between 30% to 40%.
The FDA
has granted us Fast-Track Status and Orphan Drug Designation for Surfaxin for
the treatment of ARDS in adults. The EMEA has granted us Orphan Product
designation for Surfaxin for the treatment of ALI in adults (which in this
circumstance is a larger patient population that encompasses ARDS). We were
awarded and received a $1 million Fast-Track Small Business Innovative Research
Grant by the National Institutes of Health to develop Surfaxin for the treatment
of ARDS and ALI in adults.
Aerosolized
Surfactant (development name DSC 104) for Severe, Acute Asthma
Asthma is
a common disease characterized by sudden constriction and inflammation of the
lungs. Constriction of the upper airway system occurs when the airway muscles
tighten, while inflammation is a swelling of the airways usually due to an
allergic reaction caused by an airborne irritant. Both of these events cause
airways to narrow and may result in wheezing, shortness of breath and chest
tightness. Several studies have shown that surfactant damage and dysfunction is
a significant component of asthma — airway constriction occurs when there is a
surfactant dysfunction in the airways of the deep lung of the type that develops
during an asthma attack. We believe that surfactant replacement therapy has the
potential to relieve the constriction in the airways associated with
asthma.
According
to information provided by the American Lung Association, asthma afflicts more
than 20 million people in the United States and its incidence rate continues to
rise. Asthma is a chronic disease; it is prevalent in people of all ages and an
estimated 12 million people have experienced an asthma attack within the past
year. In the United States alone, there are roughly 1 million hospital
outpatient visits, approximately 1.8 million emergency room visits and 9.3
million physician visits each year due to asthma. Asthma ranks within the top 10
prevalent activity-limiting health conditions costing $14 billion in United
States healthcare costs annually.
Asthma
may require life-long therapy to prevent or treat episodes. Ten percent of
patients are considered severe asthmatics and require moderate to high doses of
drugs. Currently available asthma medications include inhaled and oral steroids,
bronchodilators and leukotriene antagonists. Bronchodilators cannot be used to
control severe episodes or chronic, severe asthma. Oral steroids can cause
serious side effects when used for prolonged periods and, thus, are typically
limited to severe asthmatic episodes and chronic, severe asthma. We believe that
supplying surfactant as an inhaled aerosol may relieve airway obstruction in the
deep lung and lead to a more rapid improvement in asthmatic
symptoms.
In 2004,
we completed a Phase 1b clinical trial to evaluate the safety and lung
tolerability and deposition characteristics of our precision-engineered lung
surfactant, delivered as an inhaled aerosol to treat individuals who suffer from
asthma. This masked, placebo-controlled, randomized, Phase 1b study included six
healthy subjects and eight mild-persistent asthmatic patients. Results
demonstrated that DSC-104 was safe and well tolerated, did not induce
bronchospasm and was deposited to both the central and peripheral regions of the
lungs in the mild-persistent asthmatic group and the healthy volunteers. We are
preparing a Phase 2 trial for patients with moderate to severe asthma
(development name DSC-104). We initially anticipated initiating this trial in
the first half of 2005. Recently, we have reordered our aerosolized SRT pipeline
development programs to prioritize our Phase 2, pilot study to evaluate
aerosolized SRT delivered via nCPAP in premature infants. We now expect to
initiate our DSC-104 trial for moderate to severe asthma in the fourth quarter
of 2005.
Aerosolized
Surfactant for Acute Lung Injury
ALI is
associated with conditions that either directly or indirectly injure the air
sacs of the lung. ALI is a syndrome of inflammation and increased permeability
of the lungs with an associated breakdown of the lungs’ surfactant layer. The
most serious manifestation of ALI is ARDS.
Among the
causes of ALI are complications typically associated with certain major
surgeries, mechanical ventilator induced lung injury (often referred to as
VILI), smoke inhalation, pneumonia and sepsis. There are an estimated 1 million
patients at risk in the United States for Acute Lung Injury annually and there
are no currently-approved therapies.
We are
evaluating aerosolized formulations of our precision-engineered surfactant to
potentially treat ALI. We believe that our proprietary precision-engineered
aerosol surfactant may be effective as a preventive measure for patients at risk
for ALI. This prophylactic approach may result in fewer patients requiring
costly intensive care therapy, thereby eliminating long periods of therapy and
offering cost savings in the hospital setting.
STRATEGIC
ALLIANCES
Quintiles
Transnational Corp. (Quintiles), and PharmaBio Development Inc.
(PharmaBio)
In
November 2004, we reached an agreement with Quintiles Transnational Corp. to
restructure our business arrangements and terminate our commercialization
agreements for Surfaxin in the United States. We now have full commercialization
rights for Surfaxin in the United States. Under the commercialization agreement
we entered into with Quintiles in 2001, Quintiles and its affiliates would have
provided commercialization services for seven years post-launch, with an
obligation to fund such services up to $10 million per year. Quintiles was
entitled to a commission on net sales in the United States of Surfaxin for the
treatment of RDS and MAS for 10 years following launch. Pursuant to the
restructuring, Quintiles is no longer obligated to provide any commercialization
services and our obligation to pay a commission on net sales in the United
States of Surfaxin for the treatment of RDS and MAS to Quintiles has been
terminated. In addition, we have entered into a three-year limited
preferred-provider arrangement with Quintiles. The existing secured revolving
credit facility of $8.5 million with PharmaBio, Quintiles strategic investment
group affiliate, will remain available to us and the original maturity date of
December 10, 2004, is now extended until December 31, 2006. In connection with
the restructuring of the business arrangements with Quintiles and termination of
the commercialization agreement, we issued 850,000 warrants to QFinance, Inc., a
subsidiary of Quintiles, for no additional consideration, to purchase shares of
our common stock at an exercise price equal to $7.19 per share. The warrants
have a 10-year term and are exercisable for cash only.
Laboratorios
del Dr. Esteve, S.A. (Esteve)
In
December 2004, we restructured our strategic alliance with Laboratorios del Dr.
Esteve S.A. for the development, marketing and sales of our products in Europe
and Latin America. Under the revised collaboration, we have regained full
commercialization rights in key European markets, Central America and South
America. Esteve will focus on Andorra, Greece, Italy, Portugal and Spain, and
now has development and marketing rights to a broader portfolio of our potential
SRT products. Under the restructured collaboration, Esteve will pay us a
transfer price on sales of Surfaxin and our other Surfactant Replacement
Therapies that is increased from those provided for in our previous
collaborative arrangement. We will be responsible for the manufacture and supply
of all of the covered products and Esteve will be responsible for all sales and
marketing in the revised territory.
Esteve
has also agreed to make stipulated cash payments to us upon our achievement of
certain milestones, primarily upon receipt of marketing regulatory approvals for
the covered products. In addition, Esteve has agreed to contribute to Phase 3
clinical trials for the covered products by conducting and funding development
performed in the revised territory.
In
consideration for regaining commercial rights in the restructuring, we issued to
Esteve 500,000 shares of common stock for no cash consideration and granted to
Esteve rights to additional potential SRT products in our pipeline. We also
agreed to pay to Esteve 10% of up-front cash and milestone fees that we receive
in connection with any future strategic collaborations for the development and
commercialization of Surfaxin for RDS, ARDS or certain of our other Surfactant
Replacement Therapies in the territory for which we had previously granted a
license to Esteve. Any such up-front and milestone fees that we may pay to
Esteve are not to exceed $20 million in the aggregate. This restructured
collaboration supersedes the existing sublicense and supply agreements we had
entered into with Esteve in March 2002.
LICENSING
ARRANGEMENTS; PATENTS AND PROPRIETARY RIGHTS
Patents
and Proprietary Rights
Johnson
& Johnson and The Scripps Research Institute
Our
precision-engineered surfactant platform technology, including Surfaxin, is
based on the proprietary peptide, sinapultide, (a 21 amino acid protein-like
substance that closely mimics the essential human lung protein SP-B). This
technology was invented at The Scripps Research Institute and was exclusively
licensed to, and further developed by, Johnson & Johnson and its wholly
owned subsidiary, Ortho Pharmaceutical. We have received an exclusive, worldwide
sublicense from Johnson & Johnson and Scripps for, and have rights to, a
series of over 30 patents and patent filings (worldwide) which are important,
either individually or collectively, to our strategy for commercializing our
precision-engineered surfactant technology for the diagnosis, prevention and
treatment of disease. The sublicense gives us the exclusive rights to such
patents for the life of the patents.
Patents
covering our proprietary precision-engineered surfactant technology that have
been issued or are pending worldwide include composition of matter, formulation,
manufacturing and uses, including the pulmonary lavage, or “lung wash”
techniques. Our most significant patent rights principally consist of five
issued United States patents: U.S. Patent No. 5,407,914; U.S. Patent No.
5,260,273; U.S. Patent No. 5,164,369; U.S. Patent No. 5,789,381; and U.S. Patent
No. 6,013,619 (along with corresponding issued and pending foreign
counterparts). These patents relate to precision-engineered pulmonary
surfactants (including Surfaxin), certain related peptides (amino acid
protein-like substances) and compositions, methods of treating respiratory
distress syndromes with these surfactants and compositions, and our
proprietary pulmonary lavage method of treating RDS with these surfactants. We
also have certain pending United States and foreign patent applications that
relate to methods of manufacturing certain peptides which may be used in the
manufacture of Surfaxin and other
aspects of our precision-engineered surfactant technology.
In
September 2003, we were issued United States Patent No. 6,613,734, which
covers a wide
variety of combinations of peptides, proteins and other molecules related to our
proprietary precision-engineered pulmonary surfactant technology. The patent
also includes methods of making and using these molecules.
In
September 2002, we were granted European Patent No. 0590006, which covers claims
directed to compositions that contain sinapultide for use as a therapeutic
surfactant for treating RDS and related conditions. We also have been granted
European Patent Nos. 0350506 and 0593094 covering certain other surfactant
peptides, including sinapultide and related peptides.
U.S.
Patent No. 6,013,619 was issued to Scripps and licensed to us, and covers
methods of using any engineered surfactants (including Surfaxin) or animal- or
human-derived surfactants in pulmonary lavage for RDS. Our proprietary pulmonary
lavage techniques (using surfactant) include lavage via a bronchoscope in adults
as well as direct pulmonary lung lavage via an endotracheal tube in newborn
babies with MAS. Scientific rationale supports the premise that our proprietary
lavage technique may provide a clinical benefit to the treatment of ALI and ARDS
in adults and MAS in full-term infants by decreasing the amount of infectious
and inflammatory debris in the lungs, restoring the air sacs to a more normal
state and possibly resulting in patients getting off mechanical ventilation
sooner.
All such
patents, including our relevant European patents, expire on various
dates beginning in 2008 and ending in 2017 or, in some cases, possibly
later.
The
Scripps Research Institute Research Agreement
Our
research funding and option agreement with Scripps expired in February 2005.
Pursuant to this agreement, we funded a portion of Scripps' research efforts and
are entitled to an option to acquire an exclusive worldwide license to the
technology developed from the research program during the term of the agreement.
Scripps owns all of the technology that it developed pursuant to work performed
under the agreement. To the extent we do not exercise our option, we have the
right to receive 50% of the net royalty income received by Scripps for
inventions that we jointly develop under the agreement.
See Item
7: “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Risks Related to Our Business”: “ - If we cannot protect our
intellectual property, other companies could use our technology in competitive
products. If we infringe the intellectual property rights of others, other
companies could prevent us from developing or marketing our products”; “ - Even
if we obtain patents to protect our products, those patents may not be
sufficiently broad and others could compete with us”; “ - Intellectual property
rights of third parties could limit our ability to market our products”; and “ -
If we cannot meet requirements under our license agreements, we could lose the
rights to our products.”
MANUFACTURING
AND DISTRIBUTION - THIRD PARTY SUPPLIERS
Manufacturing
Our
precision-engineered surfactant product candidates, including
Surfaxin, must be
manufactured in a sterile environment and in compliance with current good
manufacturing practice requirements (cGMPs) set by the FDA and other relevant
worldwide regulatory authorities. These product candidates are manufactured
through the combination of sinapultide, which is provided by BACHEM California,
Inc., and PolyPeptides Laboratories, Inc., and certain other active ingredients,
including certain lipids, that are provided by other suppliers such as Genzyme
Pharmaceuticals, a division of the Genzyme Corporation, and Avanti Polar Lipids
with our own specialized equipment under the direction and supervision of our
manufacturing and quality control personnel. Our surfactant drug products,
including Surfaxin, are manufactured at the sterile facilities of our contract
manufacturer, Laureate, using these ingredients with our own specialized
equipment under the direction and supervision of our manufacturing and quality
control personnel. The termination, disruption or expiration of the
manufacturing relationships with any of these parties would have a material
adverse effect on our business.
In
January 2005, the FDA issued an inspection report (Form FDA-483) to Laureate,
our contract manufacturer of Surfaxin, citing certain observations concerning
Laureate’s compliance with current Good Manufacturing Practices (cGMPs) in
connection with its review of our NDA for Surfaxin for the prevention of RDS in
premature infants. The general focus of the inspection observations relates to
basic quality controls, process assurances and documentation requirements to
support the commercial production process. In response, a cGMP Action Plan was
submitted to the FDA on January 31, 2005, outlining corrective measures
anticipated to be completed by July 2005. Assuming the adequacy of such
corrective actions and the approval of our NDA for Surfaxin, we anticipate that
the commercial launch of Surfaxin for the United States will occur in the fourth
quarter of 2005. Our other clinical programs currently in progress are not
affected by this inspection report and remain on track. However, if the
inspection observations noted in the Form 483 are not resolved in the time
period stated above, a delay may occur in these programs. We do not expect that
the foregoing will have an effect on our European regulatory filings.
We
anticipate that our manufacturing capabilities through Laureate, upon successful
completion and implementation of our cGMP Action Plan dated January 31, 2005,
should allow sufficient commercial production of Surfaxin, if approved, to
supply the present worldwide demand for the treatment of RDS in premature
infants. We expect these capabilities to allow us to provide adequate supply of
Surfaxin and our other Surfactant Replacement Therapies for our planned clinical
trials.
To
support a long-term manufacturing strategy for the production of clinical and
commercial supply of our precision-engineered surfactant drug product, we are
evaluating further development and scale-up of our current contract
manufacturer, Laureate, alternative contract manufacturers and building our own
manufacturing operations in order to secure additional manufacturing
capabilities to meet our production needs as they expand. Upon marketing
approval, if at all, we intend to rely on outside manufacturers for
production of our products after marketing approval.
Should
the proper financial and other resources be available, our manufacturing process
for our precision-engineered surfactant drug product allows us to scale-up
production of our precision-engineered surfactant drug product, including
Surfaxin. The scaling up of the currently-approved, animal-derived products is
significantly less efficient, if at all possible. By scaling up our production,
we should be able to produce sufficient drug products to potentially treat
diseases with larger patient populations, such as ARDS in adults, Neonatal
Respiratory Failures in premature infants, asthma, ALI, COPD and other broader
respiratory diseases and upper airway disorders.
Manufacturing
or quality control problems have already and may again occur at Laureate or our
other contract manufacturers, causing production and shipment delays or a
situation where the contractor may not be able to maintain compliance with the
FDA’s GMP requirements necessary to continue manufacturing our ingredients or
drug product. If any such suppliers or manufacturers of our products fail to
comply with cGMP requirements or other FDA and comparable foreign regulatory
requirements, it could adversely affect our clinical research activities and our
ability to market and develop our products. See Item 7: “Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Risks Related to
Our Business”: “ - We currently have a limited sales and marketing team and,
therefore, must develop a sales and marketing team or enter into distribution
arrangements and marketing alliances, which could require us to give up rights
to our product candidates. Our limited sales and marketing experience may
restrict our success in commercializing our product candidates”; “ - If the
parties we depend on for manufacturing our pharmaceutical products do not timely
supply these products, it may delay or impair our ability to develop and market
our products”; and “ - In order to conduct our clinical trials we need adequate
supplies of our drug substance and drug product and competitor’s drug product,
which may not be readily available.”
Distribution
We are
currently evaluating third party distribution capability in order to
commercialize Surfaxin in the United States.
Our
collaboration with Esteve provides that Esteve has the responsibility for
distribution in Andorra, Greece, Italy, Portugal and Spain. We will need to
evaluate third party distribution capabilities in other parts of the world prior
to commercializing those regions. See Item 7: “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Risks Related to Our
Business - We currently have a limited sales and marketing team and, therefore,
must develop a sales and marketing team or enter into distribution arrangements
and marketing alliances, which could require us to give up rights to our product
candidates. Our limited sales and marketing experience may restrict our success
in commercializing our product candidates” and “ - If the parties we depend on
for manufacturing our pharmaceutical products do not timely supply these
products, it may delay or impair our ability to develop and market our
products”.
COMPETITION
We are
engaged in highly competitive fields of pharmaceutical research. Competition
from numerous existing companies and others entering the fields in which we
operate is intense and expected to increase. We expect to compete with, among
others, conventional pharmaceutical companies. Most of these companies have
substantially greater research and development, manufacturing, marketing,
financial, technological personnel and managerial resources than we do.
Acquisitions of competing companies by large pharmaceutical or health care
companies could further enhance such competitors’ financial, marketing and other
resources. Moreover, competitors that are able to complete clinical trials,
obtain required regulatory approvals and commence commercial sales of their
products before we do may enjoy a significant competitive advantage over us.
There are also existing therapies that may compete with the products we are
developing. See Item 7: “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Risks Related to Our Business - Our
industry is highly competitive and we have less capital and resources than many
of our competitors, which may give them an advantage in developing and marketing
products similar to ours or make our products obsolete.”
Currently,
the FDA has approved surfactants as replacement therapy only for the treatment
of RDS in premature infants, a condition in which infants are born with an
insufficient amount of their own natural surfactant. The most commonly used of
these approved replacement surfactants are derived from a chemical extraction
process of pig and cow lungs. Curosurf® is a
porcine lung extract that is marketed in Europe by Chiesi Farmaceutici S.p.A.,
and in the United States by Dey Laboratories, Inc. Survanta®,
marketed by the Ross division of Abbott Laboratories, Inc., is derived from
minced cow lung that contains the cow version of surfactant protein B. Forest
Laboratories, Inc., markets its calf lung surfactant extract,
Infasurf®, in the
United States.
There is
presently only one approved synthetic surfactant available, Exosurf®,
marketed by GlaxoSmithKline, plc. However, this product does not contain any
surfactant proteins, is not widely used and its active marketing recently has
been discontinued by its manufacturer.
With
respect to the development of lung surfactants for the treatment of other
respiratory diseases and upper airway disorders, with the exception of one
porcine-derived surfactant drug candidate under development by Leo Pharma A/S in
Denmark, we are not aware of any other lung surfactant currently under
development.
There are
no drugs currently approved that are specifically indicated for the treatment of
ARDS in adults or MAS in full-term infants. Current therapy consists of general
supportive care and mechanical ventilation. There are a significant number of
other potential therapies in development for the treatment of ARDS in adults
that are not surfactant related. Any of these various drugs or devices could
significantly impact the commercial opportunity for Surfaxin.
Our
precision-engineered surfactant product candidates, including Surfaxin, are
engineered versions of natural human lung surfactant and contain our
precision-engineered peptide, sinapultide. We believe that our
precision-engineered surfactant can be manufactured less expensively than the
animal-derived surfactants, in sufficient quantities, in exact and consistent
pharmaceutical grade quality, and has no potential to cause adverse
immunological responses in young and older adults, all important attributes to
potentially meet significant unmet medical needs. Our products also have the
ability to be more precisely formulated, such as in the form of aerosolized
liquids or dry powders to address various medical indications. In addition, we
believe that our precision-engineered surfactant might possess other
pharmaceutical benefits not currently found with the animal surfactants such as
longer shelf-life, reduced number of administrations to the patient’s lungs and
elimination of the risk of animal-borne diseases including the brain-wasting
bovine spongiform encephalopathy (commonly called “mad-cow
disease”).
GOVERNMENT
REGULATION
The
testing, manufacture, distribution, advertising and marketing of drug products
are subject to extensive regulation by federal, state and local governmental
authorities in the United States, including the FDA, and by similar agencies in
other countries. Any product that we develop must receive all relevant
regulatory approvals or clearances before it may be marketed in a particular
country.
The
regulatory process, which includes preclinical studies and clinical trials of
each pharmaceutical compound to establish its safety and efficacy and
confirmation by the FDA that good laboratory, clinical and manufacturing
practices were maintained during testing and manufacturing, can take many years,
requires the expenditure of substantial resources and gives larger companies
with greater financial resources a competitive advantage over us. Delays or
terminations of clinical trials we undertake would likely impair our development
of product candidates. Delays or terminations could result from a number of
factors, including stringent enrollment criteria, slow rate of enrollment, size
of patient population, having to compete with other clinical trials for eligible
patients, geographical considerations and others.
The FDA
review process can be lengthy and unpredictable, and we may encounter delays or
rejections of our applications when submitted. Generally, in order to gain FDA
approval, we first must conduct preclinical studies in a laboratory and in
animal models to obtain preliminary information on a compound’s efficacy and to
identify any safety problems. The results of these studies are submitted as part
of an IND (Investigational New Drug) application that the FDA must review before
human clinical trials of an investigational drug can start.
Clinical
trials are normally done in three sequential phases and generally take two to
five years or longer to complete. Phase 1 consists of testing the drug product
in a small number of humans, normally healthy volunteers, to determine
preliminary safety and tolerable dose range. Phase 2 usually involves studies in
a limited patient population to evaluate the effectiveness of the drug product
in humans having the disease or medical condition for which the product is
indicated, determine dosage tolerance and optimal dosage and identify possible
common adverse effects and safety risks. Phase 3 consists of additional
controlled testing at multiple clinical sites to establish clinical safety and
effectiveness in an expanded patient population of geographically dispersed test
sites to evaluate the overall benefit-risk relationship for administering the
product and to provide an adequate basis for product labeling. Phase 4 clinical
trials may be conducted after approval to gain additional experience from the
treatment of patients in the intended therapeutic indication.
After
completion of clinical trials of a new drug product, FDA and foreign regulatory
authority marketing approval must be obtained. A New Drug Application submitted
to the FDA generally takes one to three years to obtain approval. If questions
arise during the FDA review process, approval may take a significantly longer
period of time. The testing and approval processes require substantial time and
effort and we may not receive approval on a timely basis, if at all. Even if
regulatory clearances are obtained, a marketed product is subject to continual
review, and later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as
possible civil or criminal sanctions. For marketing outside the United States,
we also will be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. None of our
products under development have been approved for marketing in the United States
or elsewhere. We may not be able to obtain regulatory approval for any such
products under development. Failure to obtain requisite governmental approvals
or failure to obtain approvals of the scope requested will delay or preclude us,
or our licensees or marketing partners, from marketing our products, or limit
the commercial use of our products, and thereby would have a material adverse
effect on our business, financial condition and results of operations. See Item
7: “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Risks Related to Our Business”: “ - Our technology platform is
based solely on our proprietary precision-engineered surfactant technology. Our
ongoing clinical trials for our lead surfactant replacement technologies may be
delayed, or fail, which will harm our business”; and “ - The clinical trial and
regulatory approval process for our products is expensive and time consuming,
and the outcome is uncertain.”
The FDA
has granted us Fast-Track Approval Designation for the indications of ARDS and
MAS. Fast-Track Status facilitates the development and expedites the review of
new drugs intended for treatment of life-threatening conditions for which there
are presently no medical options or an unmet medical need by providing for the
FDA’s review of the New Drug Application within six months following filing. We
have also received Orphan Drug Designation from the FDA’s Office of Orphan
Products Development for Surfaxin as a treatment for RDS in premature infants,
MAS in full-term infants, and ARDS in adults. Surfaxin has
received designation as an Orphan Product for MAS and ALI (which, in this
circumstance, encompasses ARDS) from the EMEA.
EMPLOYEES
We have
approximately 90 full-time employees, primarily employed in the United States,
Europe and Latin America. Our future success depends in significant part upon
the continued service of our key scientific personnel and executive officers and
our continuing ability to attract and retain highly qualified scientific and
managerial personnel. There is a competitive market for such personnel and we
may not be able to retain our key employees or attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. See
Item 7: “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Risks Related to Our Business - We depend upon key employees and
consultants in a competitive market for skilled personnel. If we are unable to
attract and retain key personnel, it could adversely affect our ability to
develop and market our products.”
AVAILABLE
INFORMATION
We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any document
we file with the Commission at the Commission’s public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549, 233 Broadway, New York, New York
10279, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661- 2511. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Our Commission filings are also
available to the public from the Commission’s Website at “http://www.sec.gov.”
We make available free of charge our annual, quarterly and current reports,
proxy statements and other information upon request. To request such materials,
please send an e-mail to ir@DiscoveryLabs.com or
contact John G. Cooper, our Executive Vice President, Chief Financial Officer at
our address as set forth above.
We
maintain a Website at “http://www.DiscoveryLabs.com”
(this is not a
hyperlink, you must visit this website through an Internet browser). Our Website
and the information contained therein or connected thereto are not incorporated
into this Annual Report on Form 10-K.
Our
principal offices are leased and located at 2600 Kelly Road, Suite
100,Warrington, Pennsylvania 18976-3646. The telephone number of our executive
office is (215) 488-9300 and the facsimile number is (215) 488-9301. We also
lease space in Doylestown, Pennsylvania, for our analytical laboratory. We
currently lease our research facility, which is located in Mountain View,
California, to principally develop aerosolized formulations of our proprietary
precision-engineered surfactant.
|
ITEM
3. |
LEGAL
PROCEEDINGS. |
We are
not aware of any pending or threatened legal actions other than disputes arising
in the ordinary course of our business that would not, if determined adversely
to us, have a material adverse effect on our business and
operations.
|
ITEM
4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS. |
No
matters were submitted to a vote of security holders during the fourth quarter
of 2004.
PART
II
|
ITEM
5. |
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES. |
Our
common stock is traded on the Nasdaq National Market under the symbol “DSCO.” As
of February 7, 2005, the number of stockholders of record of shares of our
common stock was 173 and the number of beneficial owners of shares of our common
stock was approximately 12,000. As of February 7, 2005, there were 48,444,690
shares of our common stock issued and outstanding; and as of March 14, 2005,
53,511,946 shares of our common stock were issued and outstanding.
The
following table sets forth the quarterly price ranges of our common stock for
the periods indicated, as reported by Nasdaq.
| |
|
|
|
|
| |
Low |
|
High |
| |
|
|
|
|
|
First
Quarter 2003 |
$1.32 |
|
$2.94 |
|
|
Second
Quarter 2003 |
$1.56 |
|
$7.40 |
|
|
Third
Quarter 2003 |
$6.12 |
|
$8.50 |
|
|
Fourth
Quarter 2003 |
$5.40 |
|
$10.75 |
|
|
First
Quarter 2004 |
$9.94 |
|
$13.90 |
|
|
Second
Quarter 2004 |
$8.25 |
|
$13.22 |
|
|
Third
Quarter 2004 |
$5.75 |
|
$9.90 |
|
|
Fourth
Quarter 2004 |
$6.42 |
|
$9.52 |
|
|
First
Quarter 2005 (through February 7, 2005) |
$5.84 |
|
$8.60 |
|
We have
not paid dividends on our common stock. It is anticipated that we will not pay
dividends on our common stock in the foreseeable future.
Sales
of Unregistered Securities
In the quarter ended December 31, 2004, pursuant to the exercise
of outstanding warrants and options, we issued an aggregate of 3,167 shares of
our common stock at various exercise prices ranging from $7.00 to $8.32 per
share. We claimed the exemption from registration provided by Section 4(2) of
the Securities Act for these transactions. No broker-dealers were involved in
the sale and no commissions were paid by us. Information relating to
compensation plans under which our common stock is authorized for issuance is
set forth in Part III, Item 12 of this Annual Report on Form 10-K.
We have a
voluntary 401(k) savings plan covering eligible employees. Effective January 1,
2003, we allowed for periodic discretionary matches of newly issued shares of
common stock to be made by the Company with the amount of any such match
determined as a percentage of each individual participant’s cash contribution.
For the quarter ended December 31, 2004, shares issued by us as a discretionary
match totaled 8,116 shares of common stock.
ITEM
6. SELECTED
FINANCIAL DATA
The
selected consolidated financial data set forth below with respect to our
consolidated statement of operations for the years ended December 31, 2004, 2003
and 2002 and with respect to the consolidated balance sheets as of December 31,
2004 and 2003 have been derived from audited consolidated financial statements
included as part of this Annual Report on Form 10-K (“Form 10-K”). The statement
of operations data for the years ended December 31, 2001 and 2000 and the
balance sheet data as of December 31, 2002 and 2001 and 2000 are derived
from audited financial statements not included in this Form 10-K. The following
selected consolidated financial data should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K.
|
Consolidated
Statement of Operations Data:
(in
thousands, except per share data) |
|
|
|
|
|
|
|
| |
|
For
the year ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
Revenues
from collaborative agreements |
|
$ |
1,209 |
|
$ |
1,037 |
|
$ |
1,782 |
|
$ |
1,112 |
|
$ |
741 |
|
|
Operating
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
25,793 |
|
|
19,750
|
|
|
14,347
|
|
|
8,007
|
|
|
7,494
|
|
|
General
and administrative |
|
|
13,322 |
|
|
5,722
|
|
|
5,458
|
|
|
5,067
|
|
|
5,145
|
|
|
Corporate
partnership restructuring charges |
|
|
8,126 |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
expenses |
|
|
47,241 |
|
|
25,472
|
|
|
19,805
|
|
|
13,074
|
|
|
12,639
|
|
|
Operating
loss |
|
|
(46,032 |
) |
|
(24,435 |
) |
|
(18,023 |
) |
|
(11,962 |
) |
|
(11,898 |
) |
|
Other
income and expense |
|
|
(171 |
) |
|
155
|
|
|
580
|
|
|
816
|
|
|
1,037
|
|
|
Net
loss |
|
$ |
(46,
203 |
) |
$ |
(24,280 |
) |
$ |
(17,443 |
) |
$ |
(11,146 |
) |
$ |
(10,861 |
) |
|
Net
loss per common share - basic and diluted |
|
$ |
(1.00 |
) |
$ |
(0.65 |
) |
$ |
(0.64 |
) |
$ |
(0.51 |
) |
$ |
(0.58 |
) |
|
Weighted
average number of common
shares
outstanding |
|
|
46,179 |
|
|
37,426
|
|
|
27,351
|
|
|
22,038
|
|
|
18,806
|
|
Consolidated
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
(in
thousands) |
|
For
the year ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Current
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash/cash
equivalents and marketable securities |
|
$ |
32,654 |
|
$ |
29,422 |
|
$ |
19,152 |
|
$ |
16,696 |
|
$ |
18,868 |
|
|
Prepaid
expenses and other current assets |
|
|
688 |
|
|
668
|
|
|
327
|
|
|
1,582
|
|
|
149
|
|
|
Total
Current Assets |
|
|
33,342 |
|
|
30,090
|
|
|
19,479
|
|
|
18,278
|
|
|
19,017
|
|
|
Property
and equipment, net of depreciation |
|
|
4,063 |
|
|
2,414
|
|
|
1,231
|
|
|
822
|
|
|
697
|
|
|
Other
assets |
|
|
232 |
|
|
211
|
|
|
352
|
|
|
965
|
|
|
3
|
|
|
Total
Assets |
|
$ |
37,637 |
|
$ |
32,715 |
|
$ |
21,062 |
|
$ |
20,065 |
|
$ |
19,717 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facility, current portion |
|
$ |
- |
|
$ |
2,436 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
Other
current liabilities |
|
|
8,823 |
|
|
4,593
|
|
|
3,202
|
|
|
1,794
|
|
|
2,399
|
|
|
Total
Current Liabilities |
|
|
8,823 |
|
|
7,029
|
|
|
3,202
|
|
|
1,794
|
|
|
2,399
|
|
|
Deferred
revenue |
|
|
134 |
|
|
672
|
|
|
1,393
|
|
|
615
|
|
|
851
|
|
|
Credit
facility, non-current portion |
|
|
5,929 |
|
|
-
|
|
|
1,450
|
|
|
-
|
|
|
-
|
|
|
Capitalized
lease |
|
|
1,654 |
|
|
711
|
|
|
256
|
|
|
33
|
|
|
31
|
|
|
Total
Liabilities |
|
|
16,540 |
|
|
8,412
|
|
|
6,301
|
|
|
2,442
|
|
|
3,281
|
|
|
Stockholders'
Equity |
|
|
21,097 |
|
|
24,303
|
|
|
14,761
|
|
|
17,623
|
|
|
16,436
|
|
|
Total
Liabilities and Stockholders' Equity |
|
$ |
37,637 |
|
$ |
32,715 |
|
$ |
21,062 |
|
$ |
20,065 |
|
$ |
19,717 |
|
|
Common
Stock, $0.001 par value, issued and outstanding |
|
|
48,434 |
|
|
42,491 |
|
|
32,818 |
|
|
25,546 |
|
|
20,871 |
|
|
ITEM
7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION |
This Item
7: “Management’s Discussion and Analysis of Financial Condition and Results of
Operation” should be read in connection with our Consolidated Financial
Statements. See Item 15: “Exhibits and Financial Statement
Schedules.”
Overview
Discovery
Laboratories, Inc. is a biopharmaceutical company developing its proprietary
surfactant technology as precision-engineered Surfactant Replacement Therapies
(SRT) for respiratory diseases. Surfactants are produced naturally in the lungs
and are essential for breathing. Our technology produces a precision-engineered
surfactant that is designed to mimic the essential properties of natural human
lung surfactant. We believe that through our technology, pulmonary surfactants
have the potential, for the first time, to be developed into a series of
respiratory therapies for patients in the neonatal intensive care unit, critical
care unit and other hospital settings, where there are few or no approved
therapies available.
We have
received an Approvable Letter from the U.S. FDA for SurfaxinÒ
(lucinactant), our lead product, for the prevention of RDS in premature infants,
and have filed a Marketing Authorization Application with the EMEA for clearance
to market Surfaxin in Europe. We anticipate potential approval and commercial
launch of Surfaxin in the United States and potential EMEA approval to occur in
the first quarter of 2006.
In
addition to Surfaxin for RDS, in an effort to enhance the potential commercial
and medical value of our SRT by addressing the most prevalent respiratory
disorders affecting infants in the NICU, we are conducting several NICU
therapeutic programs targeting respiratory conditions cited as some of the most
significant unmet medical needs for the neonatal community. We are conducting
three Phase 2 clinical trials - Surfaxin for BPD in premature infants,
aerosolized SRT administered through nCPAP for Neonatal Respiratory Failures,
and Surfaxin for the prophylactic/early treatment of MAS in full term infants.
In an
effort to enhance the potential commercial and medical value of our SRT, we are
also developing SRT to address unmet respiratory conditions affecting pediatric,
young adult and adult patients in the critical care and other hospital settings.
We are conducting a Phase 2 clinical trial for the treatment of ARDS in adults
in the intensive care unit (ICU), for which we announced preliminary data in
December 2004. With our aerosolized surfactant formulations, we have completed a
Phase 1b trial and are preparing to initiate a Phase 2 trial for patients with
moderate to severe asthma (development name DSC-104). In addition, we are
evaluating the development of aerosolized formulations of our
precision-engineered SRT to potentially treat Acute Lung Injury, COPD and
rhinitis/sinusitis.
In
anticipation of the potential approval of Surfaxin for RDS in the United States,
we are presently implementing a long-term commercial strategy which
includes:
|
(i) |
manufacturing
for the production of our precision-engineered surfactant drug products to
meet anticipated clinical and commercial needs, if approved, in the United
States and Europe. We are investing in the further development and
scale-up of our current contract manufacturer of our SRT, Laureate, and
securing additional manufacturing capabilities to meet production needs as
they expand, including alternative contract manufacturers and building our
own manufacturing facility. In January 2005, the FDA issued an inspection
report (Form FDA-483) to Laureate citing certain observations concerning
Laureate’s compliance with current Good Manufacturing Practices (cGMPs) in
connection with the FDA’s review of our NDA for Surfaxin for the
prevention of RDS in premature infants. The general focus of the
inspection observations relates to basic quality controls, process
assurances and documentation requirements to support the commercial
production process. In response, Discovery and Laureate submitted a cGMP
Action Plan to the FDA on January 31, 2005, outlining corrective measures
anticipated to be completed by July 2005. Assuming the adequacy of such
corrective actions and the approval of our NDA, we anticipate that the
commercial launch of Surfaxin will occur in the first quarter of 2006. Our
other clinical programs currently in progress are not affected by this
inspection report and remain on track. However, if the inspection
observations noted in the Form 483 are not resolved in the time period
stated above, a delay may occur in these programs. We do not expect that
the foregoing will have an effect on our European regulatory filings;
|
| (ii) |
building
sales and marketing capabilities to execute the launch of Surfaxin in the
United States, if approved. We are building
our own specialty pulmonary United States sales and marketing organization
to focus initially on opportunities in the NICU and, as products are
developed, to expand to critical care and hospital settings. This
strategic initiative, led by the anticipated launch of Surfaxin, is
intended to allow us to fully control our own sales and marketing
operation, establish a strong presence in the NICU, and optimize company
economics; and |
| (iii) |
implementing
our commercialization strategy for Surfaxin in Europe and the rest of the
world through corporate partnerships. |
Since our
inception, we have incurred significant losses and, as of December 31, 2004, we
had an accumulated deficit of $143,061,000 (including historical results of
predecessor companies). The majority of our expenditures to date have been for
research and development activities. Research and development expenses represent
costs incurred for scientific and clinical personnel, clinical trials,
regulatory filings and manufacturing efforts (including raw material costs). We
expense our research and development costs as they are incurred. General and
administrative expenses consist primarily of executive management, financial,
business development, pre-launch commercialization sales and marketing, legal
and general corporate activities and related expenses. See Item 7: “Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Plan
of Operations.”
Historically,
we have funded our operations with working capital provided principally through
public and private equity financings and strategic collaborations. As of
December 31, 2004, we had cash and investments of $32,654,000, a secured
revolving credit facility of $8,500,000 with PharmaBio, of which $2,571,000 was
available for borrowing and $5,929,000 was outstanding, and a $9,000,000 capital
equipment lease financing arrangement, of which $5,958,000 was available for
borrowing, $3,042,000 has been drawn, and $2,454,000 was outstanding. We also
had up to $67.8 million available under the Committed Equity Financing Facility
(CEFF), subject to the terms and conditions thereof and to the terms and
conditions of the Placement Agent Agreement we entered into with SG Cowen &
Co. LLC (as discussed below). See Item 7: “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources.”
Research
and Development
Research
and development expenses for the years ended December 31, 2004, 2003 and 2002
were $25,793,000, $19,750,000, and $14,347,000, respectively. Our research and
development expenses are charged to operations as incurred and we track such
costs by category rather than by project. Our research and development costs
consist primarily of expenses associated with research and pre-clinical
operations, manufacturing development, clinical and regulatory operations, and
other direct clinical trials activities. These cost categories typically include
the following expenses:
Research
and Pre-Clinical Operations
Research
and pre-clinical operations reflects activities associated with research prior
to the initiation of any potential human clinical trials. These activities
predominantly represent projects associated with the development of aerosolized
and other related formulations of our precision-engineered lung surfactant and
aerosol delivery systems to potentially treat a range of respiratory disorders
prevalent in the NICU and the hospital. Research and pre-clinical operations
costs primarily reflect expenses incurred for personnel, consultants, facilities
and research and development arrangements with collaborators.
Manufacturing
Development
Manufacturing
development primarily reflects costs incurred to prepare current good
manufacturing procedures (cGMP) manufacturing capabilities in order to provide
clinical and commercial scale drug supply. Included in manufacturing development
are activities with external contract manufacturing resources (including further
development and scale-up of our current contract manufacturer of our SRT,
Laureate, and securing additional manufacturing capabilities to meet production
needs as they expand, including alternative contract manufacturers and building
our own manufacturing facility), personnel costs, depreciation, and expenses
associated with technology transfer, process development and validation, quality
control and assurance activities, and analytical services.
Unallocated
Development — Clinical and Regulatory Operations
Clinical
and regulatory operations reflect the preparation, implementation, and
management of our clinical trial activities in accordance with current good
clinical practices (cGCPs). Included in unallocated clinical development and
regulatory operations are costs associated with personnel, supplies, facilities,
fees to consultants, and other related costs for clinical trial implementation
and management, clinical quality control, and regulatory compliance activities,
data management and biostatistics.
Direct
Expenses — Clinical Trials
Direct
expenses of clinical trials includes patient enrollment costs, external site
costs, expense of clinical drug supply, and external costs such as contract
research consultant fees and expenses.
The
following summarizes our research and development expenses by the foregoing
categories for the years ended December 31, 2004, 2003 and 2002:
|
(Dollars
in thousands) |
|
Year
Ended December 31, |
|
| |
|
|
|
|
|
|
|
|
Research
and Development Expenses: |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
Research
and pre-clinical operations |
|
$ |
2,916 |
|
$ |
1,958 |
|
$ |
1,683 |
|
Manufacturing
development |
|
|
7,010
|
|
|
4,268
|
|
|
834
|
|
Unallocated
development - clinical and regulatory operations |
|
|
8,588
|
|
|
5,966
|
|
|
3,275
|
|
Direct
clinical trial expenses |
|
|
7,279
|
|
|
7,558
|
|
|
8,555
|
|
|
Total
Research and Development Expenses |
|
$ |
25,793 |
|
$ |
19,750 |
|
$ |
14,347 |
|
Due to
the significant risks and uncertainties inherent in the clinical development and
regulatory approval processes, the nature, timing and costs of the efforts
necessary to complete projects in development are not reasonably estimable.
Results from clinical trials may not be favorable. Data from clinical trials are
subject to varying interpretation and may be deemed insufficient by the
regulatory bodies reviewing applications for marketing approvals. As such,
clinical development and regulatory programs are subject to risks and changes
that may significantly impact cost projections and timelines.
Currently,
none of our drug product candidates are available for commercial sale. All of
our potential products are in regulatory review, clinical or pre-clinical
development and the status and anticipated completion date of each of our lead
SRT programs is discussed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operation - Plan of Operations,” below. Successful
completion of development of our Surfactant Replacement Therapies is contingent
on numerous risks, uncertainties and other factors, which are described in
detail in the section entitled “Risk Factors”.
These
factors include:
| · |
Completion
of pre-clinical and clinical trials of the product candidate with the
scientific results that support further development and/or regulatory
approval; |
| · |
Receipt
of necessary regulatory approvals; |
| · |
Obtaining
adequate supplies of surfactant raw materials on commercially reasonable
terms; |
| · |
Obtaining
capital necessary to fund our operations, including our research and
development efforts, manufacturing requirements and clinical
trials; |
| · |
Performance
of third-party collaborators on whom we rely for the commercialization and
manufacture of Surfaxin; |
| · |
Timely
resolution of the cGMP-related matters at Laureate, our contract
manufacturer for Surfaxin and certain of our other Surfactant Replacement
Therapies presently under development, that were noted by the FDA in its
inspectional report on Form FDA-483; and |
| · |
Obtaining
manufacturing, sales and marketing capabilities for which we presently
have limited resources. |
As a
result of the amount and nature of these factors, many of which are outside our
control, the success, timing of completion, and ultimate cost, of development of
any of our product candidates is highly uncertain and cannot be estimated with
any degree of certainty. The timing and cost to complete drug trials alone may
be impacted by, among other things,
| ·
|
Slow
patient enrollment; |
| · |
Long
treatment time required to demonstrate
effectiveness; |
| · |
Lack
of sufficient clinical supplies and material; |
| · |
Adverse
medical events or side effects in treated
patients; |
| · |
Lack
of effectiveness of the product candidate being tested;
and |
| · |
Lack
of sufficient funds. |
If we do
not successfully complete clinical trials, we will not receive regulatory
approval to market our SRT products. If we do not obtain and maintain regulatory
approval for our products, we will not generate any revenues from the sale of
our products and the value of our company and our financial condition and
results of operations will be substantially harmed.
Corporate
Partnership Agreements
Quintiles
Transnational Corp., and PharmaBio Development Inc.
In 2001,
we entered into a commercialization agreement with Quintiles Transnational
Corp., and its strategic investment group affiliate, PharmaBio Development Inc.,
to provide certain commercialization services in the United States for Surfaxin
for the treatment of RDS in premature infants and MAS in full-term infants.
Quintiles was obligated to hire and train a dedicated United States sales force
that would have been branded in the market as Discovery’s. PharmaBio agreed to
fund up to $70 million of the sales and marketing costs for commercialization of
Surfaxin in the United States for seven years. Additionally, the collaboration
allowed for this sales force to transfer to us at the end of the seven year
term, with an option to acquire it sooner. Under the agreement, we were to
receive 100% of the revenues from sales of Surfaxin and agreed to pay PharmaBio
a commission on net sales in the United States of Surfaxin for the treatment of
RDS in premature infants and MAS in full-term infants and all “off-label” uses
for 10 years following first launch of the product in the United States.
PharmaBio also extended to us a secured revolving credit facility of up to $8.5
to $10.0 million to fund pre-marketing activities associated with the launch of
Surfaxin in the United States as we achieved certain milestones.
In
November 2004, we reached an agreement with Quintiles to restructure our
business arrangements and terminate the commercialization agreement for Surfaxin
in the United States. We now have full commercialization rights for Surfaxin in
the United States. Pursuant to the restructuring, Quintiles is no longer
obligated to provide any commercialization services and our obligation to pay a
commission on net sales in the United States of Surfaxin for the treatment of
RDS and MAS to Quintiles has been terminated.
In
connection with obtaining full commercialization rights for Surfaxin, we issued
850,000 warrants to PharmaBio to purchase shares of our common stock at an
exercise price equal to $7.19 per share. The warrants have a 10-year term and
shall be exercisable for cash only with expected total proceeds to us, if
exercised, equal to approximately $6.0 million. We valued the warrants at their
fair value on the date of issuance and incurred a non-cash charge of $4.0
million in connection with the issuance. This charge is a component of Corporate
Partnership Restructuring Charges on the Income Statement that were realized
during the fourth quarter of fiscal year 2004. The existing secured revolving
credit facility of $8.5 million with PharmaBio, will remain available and the
original maturity date of December 10, 2004 is now extended until December 31,
2006. See “Liquidity and Capital Resources”.
Laboratorios
del Dr. Esteve, S.A. (Esteve)
In 1999,
we entered into a corporate partnership with Esteve to develop, market and sell
Surfaxin, primarily in southern Europe. In 2002, we significantly expanded our
relationship with Esteve by entering into a new collaboration arrangement, which
superseded the 1999 agreement, and expanded the territory covered by those
original agreements to all of Europe, Central and South America, and Mexico.
Esteve was obligated to provide certain commercialization services for Surfaxin
for the treatment of RDS in premature infants, MAS in full-term infants and ARDS
in adult patients. Our exclusive supply agreement with Esteve provided that
Esteve would purchase all of its Surfaxin drug product requirements at an
established transfer price based on sales of Surfaxin by Esteve and/or its
sublicensee(s). Esteve also agreed to sponsor certain clinical trial costs
related to obtaining regulatory approval in Europe for ARDS and make certain
milestone payments to us upon the attainment of European marketing regulatory
approval for Surfaxin. In connection with the 2002 expanded agreement, Esteve
purchased 821,862 shares of our common stock at $4.867 per share for $4.0
million in gross proceeds and paid us a non-refundable licensing fee of
$500,000. We have accounted for the license fees and reimbursement of research
and development expenditures associated with the Esteve collaboration as
deferred revenue.
In
December 2004, we reached an agreement with Esteve to restructure our corporate
partnership for the development, marketing and sales of our products in Europe
and Latin America. This restructured partnership supersedes the existing
sublicense and supply agreements we had entered into with Esteve in March 2002.
Under the revised partnership, we have regained full commercialization rights in
key European markets, Central America and South America for SRT, including
Surfaxin for RDS in premature infants and ARDS in adults. Esteve will focus on
Andorra, Greece, Italy, Portugal, and Spain, and now has development and
marketing rights to a broader portfolio of our potential SRT products. Under the
restructured collaboration, Esteve will pay us a transfer price on sales of
Surfaxin and our other Surfactant Replacement Therapies that is increased from
those provided for in our previous collaborative arrangement. We will be
responsible for the manufacture and supply of all of the covered products and
Esteve will be responsible for all sales and marketing in the revised territory.
Esteve has agreed to make stipulated cash payments to us upon our achievement of
certain milestones, primarily upon receipt of marketing regulatory approvals for
the covered products. In addition, Esteve has agreed to contribute to Phase 3
clinical trials for the covered products by conducting and funding development
performed in the revised territory.
In
consideration for regaining commercial rights in the 2004 restructured
partnership, we issued to Esteve 500,000 shares of common stock for no cash
consideration, valued at $3.5 million. We incurred a non-cash charge, including
the value of the shares issued and other costs related to the restructuring, of
$4.1 million. This charge is a component of Corporate Partnership Restructuring
Charges on the Income Statement. We also granted to Esteve rights to additional
potential SRT products in our pipeline. We also agreed to pay to Esteve 10% of
cash up-front and milestone fees that we may receive in connection with any
future strategic collaborations for the development and commercialization of
Surfaxin for RDS, ARDS or certain of our other SRTs in the territory for which
we had previously granted a license to Esteve. Payments to Esteve in respect of
any such up-front and milestone fees are not to exceed $20 million in the
aggregate.
Plan
of Operations
We expect
to continue to incur increasing operating losses for the foreseeable future,
primarily due to our continued research and development activities attributable
to new and existing products, manufacturing, commercialization, and general and
administrative activities.
We
anticipate that during the next 12 to 24 months we will:
| (i) |
increase
our research, development and regulatory activities in an effort to
develop a broad pipeline of potential SRT for respiratory diseases. The
drug development, clinical trial and regulatory process is lengthy,
expensive and uncertain and subject to numerous risks including, without
limitation, the following risks discussed in the “Risks Related to Our
Business” - “Our technology platform is based solely on our proprietary,
precision-engineered surfactant technology. Our ongoing clinical trials
for our lead surfactant replacement therapies may be delayed, or fail,
which will harm our business”; - “The clinical trial and regulatory
approval process for our products is expensive and time consuming, and the
outcome is uncertain.” |
Our major
research and development projects include:
SRT
for Neonatal Respiratory Failures
In
addition to Surfaxin for RDS, in an effort to enhance the potential commercial
and medical value of our SRT by addressing the most prevalent respiratory
disorders affecting infants in the NICU, we are conducting several NICU
therapeutic programs targeting respiratory conditions cited as some of the most
significant unmet medical needs for the neonatal community. We are conducting
three Phase 2 clinical trials - Surfaxin for BPD in premature infants,
aerosolized SRT administered through nasal continuous positive airway pressure
(nCPAP) for Neonatal Respiratory Failures, and Surfaxin for the
prophylactic/early treatment of MAS in full term infants.
The Phase
2 BPD clinical trial is a double-blind, controlled trial (that will enroll up to
210 very low birth weight premature infants born at risk for developing BPD) to
determine the safety and tolerability of Surfaxin administration in the first
weeks of life as a therapeutic approach for the prevention of BPD. This study is
designed to determine whether such treatment can decrease the proportion of
infants on mechanical ventilation or oxygen or the incidence of death or BPD.
The results of this trial are expected to be available in the first quarter of
2006.
We are
currently conducting an open label, Phase 2, multicenter pilot study to evaluate
aerosolized SRT delivered via nCPAP in premature infants. This trial will be
conducted at up to four centers in the United States and will enroll
approximately 20 infants with a gestational age of 28-32 weeks who are suffering
from RDS. Patients will receive, in two treatment regimens, aerosolized SRT
delivered via nCPAP within thirty minutes of birth. Our overall program is to
begin with a pilot study to evaluate the safety and tolerability of aerosolized
SRT delivered via our proprietary nCPAP technology, initially within patients
who suffer from RDS followed by additional studies to include other neonatal
respiratory failures within the NICU. Results of this Phase 2 pilot study are
anticipated to be available in the third quarter of 2005.
We are
conducting a Phase 2 clinical trial of our proprietary Surfaxin lavage in
up to 60 full-term infants for use as a prophylactic or early treatment for
patients who are at risk of developing MAS but have not shown symptoms of
compromised respiratory function. Surfaxin is
administered as a liquid bolus through an endotracheal tube as well as by our
proprietary lavage (lung-wash) technique.
SRT
for Critical Care and Hospital indications
In an
effort to enhance the potential commercial and medical value of our SRT, we are
also developing SRT to address unmet respiratory conditions affecting pediatric,
young adult and adult patients in the critical care and other hospital settings.
We are conducting a Phase 2 clinical trial for the treatment of ARDS in adults
in the intensive care unit (ICU), for which we announced preliminary data in
December 2004. Based on that data, the current ARDS Phase 2 protocol was
modified to better establish the endpoint signal in key clinical outcomes in
order to properly power and design a potential Phase 3 clinical trial. The
modified protocol allows for increased enrollment of up to 160 patients. The
remainder of the trial will be comprised of Surfaxin Dose Group B (lavage with
bolus) and Standard of Care. Results of the Phase 2 trial are anticipated to be
available in the first quarter of 2006.
During
2004, we completed a successful Phase 1b clinical trial intended to evaluate the
tolerability and lung deposition of our precision-engineered lung surfactant,
delivered as an inhaled aerosol (development name DSC-104), to treat patients
with asthma and are currently preparing to initiate a follow-on Phase 2 clinical
trial in the fourth quarter of 2005.
In
addition, we are evaluating the development of aerosolized formulations of our
precision-engineered surfactant to potentially treat ALI, COPD, rhinitis,
sinusitis, sleep apnea and otitis media (inner ear infection);
| (ii) |
invest
in and support a long-term manufacturing strategy for the production of
our precision-engineered surfactant drug product including: (i) further
development and scale-up of our current contract manufacturer, Laureate;
(ii) corrective measures related to the observations cited by the FDA
concerning
Laureate’s compliance with cGMPs in connection with its review of our NDA
for Surfaxin for the prevention of RDS; (iii) securing additional
manufacturing capabilities to meet production needs as they expand,
including alternative contract manufacturers and building our own
manufacturing facility. We anticipate that our manufacturing capabilities
through Laureate, upon successful completion and implementation of our
cGMP Action Plan dated January 31, 2005, should allow sufficient
commercial production of Surfaxin, if approved, to supply the present
worldwide demand for the treatment of RDS in premature infants and all of
our anticipated clinical-scale production requirements including Surfaxin
for the treatment of ARDS in adults. See “Risks Related to Our Business” -
“In order to conduct our clinical trials we need adequate supplies of our
drug substance and drug product which may not be readily available” and
“If the parties we depend on for manufacturing our pharmaceutical products
do not timely supply these products, it may delay or impair our ability to
develop and market our products”; |
| (iii) |
build
our sales and marketing capabilities to execute the launch of Surfaxin in
the U.S., if approved. We are building its own specialty pulmonary United
States sales and marketing organization to focus initially on
opportunities in the NICU and, as products are developed, to expand to
critical care and hospital settings. This strategic initiative, led by the
anticipated launch of Surfaxin, is intended to allow us to fully control
our own sales and marketing operation, establish a strong presence in the
NICU, and optimize company economics; |
| (iv) |
implement
our commercialization strategy for Surfaxin in Europe and the rest of the
world through corporate partnerships; and |
|
(v) |
invest
in additional general and administrative resources primarily to support
our business development initiatives, financial systems and controls and
management information technologies. |
We will
need to generate significant revenues from product sales and or related
royalties and transfer prices to achieve and maintain profitability. Through
December 31, 2004, we had no revenues from any product sales, and have not
achieved profitability on a quarterly or annual basis. Our ability to achieve
profitability depends upon, among other things, our ability to develop products,
obtain regulatory approval for products under development and enter into
agreements for product development, manufacturing and commercialization. In
addition, our results are dependent upon the performance of our strategic
partners and third party contract manufacturers and suppliers. Moreover, we may
never achieve significant revenues or profitable operations from the sale of any
of our products or technologies.
Through
December 31, 2004, we had not generated taxable income. On December 31, 2004,
net operating losses available to offset future taxable income for Federal tax
purposes were approximately $140,652,000. The future utilization of such loss
carryforwards may be limited pursuant to regulations promulgated under Section
382 of the Internal Revenue Code. In addition, we have a research and
development tax credit carryforward of $2,558,000. The Federal net operating
loss and research and development tax credit carryforwards expire beginning in
2008 and continuing through 2023.
Critical
Accounting Policies
The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
We have
identified below some of our more critical accounting policies and changes to
accounting policies. For further discussion of our accounting policies see Note
2 “Summary of Significant Accounting Policies” in the Notes to Consolidated
Financial Statements. See Item 15: “Exhibits and Financial Statement
Schedules.”
Revenue
Recognition- research and development collaborative agreements
For
up-front payments and licensing fees related to our contract research or
technology, we defer and recognize revenue as earned over the life of the
related agreement. Milestone payments are recognized as revenue upon achievement
of contract-specified events and when there are no remaining performance
obligations.
Revenue
earned under our research and development collaborative agreement contracts is
recognized over a number of years as we perform research and development
activities. For up-front payments and licensing fees related to our contract
research or technology, we defer and recognize revenue as earned over the
estimated period in which the services are expected to be
performed.
Research
and Development Costs
Research
and development costs are expensed as incurred. We will continue to incur
research and development costs as we continue to expand our product development
activities. Our research and development costs have included, and will continue
to include, expenses for internal development personnel, supplies and
facilities, clinical trials, regulatory compliance and reviews, validation of
processes and start up costs to establish commercial manufacturing capabilities.
Once a product candidate is approved by the FDA, if at all, and we begin
commercial manufacturing, we will no longer expense certain manufacturing costs
as research and development costs for any such product.
Results
of Operations
The net
loss for the years ended December 31, 2004, 2003 and 2002 were $46,203,000 (or
$1.00 per share), $24,280,000 (or $0.65 per share) and $17,443,000 (or $0.64 per
share), respectively.
Revenue
Revenue
for the years ended December 31, 2004, 2003 and 2002 were $1,209,000, $1,037,000
and $1,782,000, respectively. These revenues are primarily associated with our
corporate partnerships agreement with Esteve to develop, market and sell
Surfaxin in Southern Europe. Additional collaborative revenues relate to our
Small Business Innovative Research (SBIR) grant to develop Surfaxin for ALI and
ARDS in adults and our Orphan Products Development grant to develop Surfaxin for
MAS.
The
increase from 2003 to 2004 reflects revenues associated with our alliance with
Esteve to develop, market and sell Surfaxin in Southern Europe. The decrease
from 2002 to 2003 reflects: (i) the conclusion of our SBIR grant for research
for treatments of ALI and ARDS in adults and our Orphan Products Development
grant to develop Surfaxin for MAS; and (ii) the extension of the amortization
period and related revenue recognition of the funding previously provided to us
in connection with our strategic alliance with Esteve.
Research
and Development Expenses
Research
and development expenses for the years
ended December 31, 2004, 2003 and 2002 were $25,793,000, $19,750,000 and
$14,347,000, respectively.
The
increase in research and development expenses for the years ended December 31,
2004, 2003 and 2002 primarily reflect:
| (i) |
manufacturing
activities, including manufacturing personnel costs to support further
development and scale-up of our current contract manufacturer, Laureate
and securing additional manufacturing capabilities to meet production
needs as they expand, including alternative contract manufacturers and
building our own manufacturing facility. Also included in manufacturing
activities are expenses associated with the transfer and validation of our
manufacturing equipment to Laureate (completed in 2004), to support the
production of clinical and commercial drug supply of Surfaxin in
conformance with cGMPs. Expenses related to manufacturing activities were
$7,010,000, $4,268,000 and $834,000 for the years ended December 31, 2004,
2003 and 2002, respectively; |
| (ii) |
non-cash
compensation charges associated with stock options granted to certain
employees and non-employees of $832,000, $89,000, and $34,000 for the
years ended December 31, 2004, 2003 and 2002, respectively;
|
| (iii) |
development
and regulatory efforts for Surfaxin - primarily the Phase 3 clinical
trials for Surfaxin for the prevention of RDS in premature
infants; |
| (iv) |
development
activities, including drug supply, for the Phase 2 clinical trial of
Surfaxin for the treatment of ARDS in adults;
|
| (v) |
investment
in our clinical and regulatory capabilities to manage multiple Phase 2 and
anticipated Phase 3 clinical trials for other SRT products in several
geographic areas, including the United States, western and eastern Europe,
and South America; and |
|
(iv) |
research
and development activities of aerosolized formulations of our SRT
technology. |
General
and Administrative Expenses
General
and administrative expenses for the years ended December 31, 2004, 2003 and 2002
were $13,322,000, $5,722,000 and $5,458,000, respectively. General and
administrative expenses consist primarily of the costs of executive management,
finance and accounting, business and commercial development, pre-launch
commercial sales and marketing, legal, facility and other administrative costs.
The
increase in general and administrative expenses for the years ended December 31,
2004, 2003 and 2002 primarily reflects:
| (i) |
commercialization
activities, including building a sales and marketing senior management
team, in anticipation of the launch of Surfaxin for RDS in the United
States and Europe, if approved. Expenses for commercialization activities
were $5,886,000, $986,000 and $1,450,000 for the years ended December 31,
2004, 2003 and 2002, respectively. These commercialization expenses were
financed by use of the secured, revolving credit facility with PharmaBio
in the amounts of $2,693,000, $986,000 and $1,450,000, during the years
ended December 31, 2004, 2003 and 2002, respectively. See “Liquidity and
Capital Resources”; |
| (ii) |
non-cash
compensation charges associated with stock options granted to certain
employees and non-employees of $432,000, $119,000, and $368,000 for the
years ended December 31, 2004, 2003 and 2002, respectively;
|
| (iii) |
financial
and information technology capabilities in preparation for the potential
approval and launch of Surfaxin for RDS; |
| (iv) |
corporate
governance and other regulatory compliance initiatives related to the
Sarbanes-Oxley Act and other recent regulatory changes concerning public
companies generally; and |
| (v) |
legal
activities related to the preparation and filing of patents and other
activities associated with our intellectual property in connection with
the expansion of our SRT pipeline. |
Corporate
Partnership Restructuring Charges
In 2004,
we incurred a non-cash charge of $8,126,000 related to the restructuring of our
corporate partnerships with Quintiles and Esteve. There were no such charges in
2003 and 2002.
In
November 2004, we reached an agreement with Quintiles to restructure our
business arrangements and terminate our commercialization agreements for
Surfaxin in the United States. We now have full commercialization rights for
Surfaxin in the United States. Pursuant to the restructuring, Quintiles is no
longer obligated to provide any commercialization services and our obligation to
pay a commission on net sales in the United States of Surfaxin for the treatment
of RDS and MAS to Quintiles has been terminated. See “Corporate Partnership
Agreements”. In connection with obtaining full commercialization rights for
Surfaxin, we issued a warrant to purchase 850,000 shares of our common stock at
an exercise price equal to $7.19 per share, which resulted in a non-cash charge
of $4.0 million.
In
December 2004, we restructured our strategic alliance with Esteve for the
development, marketing and sales of our products in Europe and Latin America.
Under the revised collaboration, we have regained full commercialization rights
in key European markets, Central America and South America for our SRT,
including Surfaxin for RDS in premature infants and ARDS in adults. See
“Corporate Partnership Agreements”. In consideration for regaining commercial
rights in the restructuring, we issued to Esteve 500,000 shares of common stock
for no cash consideration. We incurred a non-cash charge of $3.5 million related
to the shares of common stock issued to Esteve and $0.6 million for other
expenses associated with the restructuring, primarily the reversal of Esteve’s
funding of research and development costs for ARDS under our prior agreement.
Other
Income and (Expense)
Other
income and (expense) for the years ended December 31, 2004, 2003 and 2002 were
$(171,000), $155,000 and $580,000, respectively.
Interest
income for the years ended December 31, 2004, 2003 and 2002 was $711,000,
$452,000, and $724,000, respectively. The
increase from 2003 to 2004 is primarily due to a higher average cash, cash
equivalent and marketable securities balance. The decrease from 2002 to 2003 was
primarily due to a reduction in interest earned on our cash, cash equivalents,
and marketable securities due to a general reduction in earned market interest
rates.
Interest
expense and amortization expense for the years ended December 31, 2004, 2003 and
2002 was $882,000, $297,000, and $144,000, respectively. The increase is
primarily due to interest expense associated with our secured, revolving credit
facility, and capital lease financing arrangements (See “Liquidity and Capital
Resources”) and amortization of premiums associated with our marketable
securities.
Liquidity
and Capital Resources
Cash,
Cash Equivalents and Marketable Securities
As of
December 31, 2004, we had cash, cash equivalents, restricted cash and marketable
securities of $32,654,000 as compared to $29,422,000 as of December 31, 2003.
The increase from December 31, 2003, is primarily due to: (i) an underwritten
public offering with net proceeds of $22,795,000, resulting in the issuance of
2,200,000 shares of common stock; (ii) use of the CEFF resulting in net proceeds
of $7,091,000 and the issuance of 901,742 shares of common stock; (iii)
$4,321,000 received from the exercise of outstanding options and warrants; and
(iv) $5,421,000 from our secured, revolving credit facility and capital lease
financing arrangements. These increases were offset by approximately $35.5
million used in operating activities and purchases of equipment during the
year.
Subsequent
to December 31, 2004, in February 2005, we completed a registered direct
offering of 5,060,000 shares of common stock. The shares were priced at $5.75
per share resulting in our receipt of gross and net proceeds equal to $29.1
million and $27.5 million, respectively.
Committed
Equity Financing Facility (CEFF)
In July
2004, we entered into a CEFF with Kingsbridge, pursuant to which Kingsbridge
committed to finance up to $75,000,000 of capital to support our future growth.
Subject to certain conditions and limitations, from time to time under the CEFF,
we may require Kingsbridge to purchase newly-issued shares of our common stock
at a discount between 6% and 10% of the volume weighted average price of our
common stock and thus raise capital as required, at the time, price and in
amounts deemed suitable to us. In connection with the CEFF, we issued a Class B
Investor warrant to Kingsbridge to purchase up to 375,000 shares of common stock
at an exercise price equal to $12.0744 per share.
In
December 2004, we entered into a financing, pursuant to the CEFF, resulting in
proceeds of $7,200,000 and the issuance of 901,742 shares of common stock at an
average price of $7.98, after taking into account the applicable discount rate
provided for by the CEFF. As of December 31, 2004, $67,800,000 remained
available under the CEFF.
In
connection with a registered public offering that we conducted in February 2005,
we entered into a Placement Agent Agreement with SG Cowen & Co. LLC (SG
Cowen) pursuant to which we agreed not to access funds under the CEFF until May
26, 2005, or in an amount greater than $5 million for an additional 90-day
period thereafter.
Secured,
Revolving Credit Facility and Capital Lease Arrangement
Secured
Credit Facility with Quintiles
We
entered into a collaboration arrangement with Quintiles, in 2001, to provide
certain commercialization services in the United States for Surfaxin for the
treatment of RDS in premature infants and MAS in full-term infants. In
connection with the commercialization agreement, Quintiles extended to us a
secured, revolving credit facility of up to $8.5 to $10.0 million to fund
pre-marketing activities associated with the launch of Surfaxin in the United
States as we achieve certain milestones. We were obligated to use a significant
portion of the funds borrowed under the credit facility for pre-launch marketing
services provided by Quintiles. Principal amounts owed by us under the credit
facility may have been repaid out of the proceeds of milestone payments to be
paid to us by Quintiles upon the achievement of certain corporate milestones.
Interest was payable quarterly in arrears at a rate of 8% annually. Outstanding
principal was originally due on December 10, 2004; however, certain terms and
conditions of the credit facility have been restructured as described
immediately below.
In
November 2004, we restructured our business arrangements with Quintiles and
terminated the commercialization agreement for Surfaxin in the United States. By
virtue of the termination of the commercialization agreements, we are no longer
obligated to use funds advanced under the credit facility for services provided
by Quintiles, and Quintiles is no longer obligated to make milestone payments to
us. The existing secured, revolving credit facility remained available to borrow
up to $8.5 million. The original maturity date of December 10, 2004, was
extended until December 31, 2006. The interest rate remains 8% annually and
payments are due quarterly in arrears. As of December 31, 2004, $5,929,000 was
outstanding under the credit facility, including $3,493,000 used in 2004.
Subsequent to December 31, 2004, in February 2005, we borrowed the remaining
available funds and have an outstanding balance of $8.5 million. Outstanding
principal and interest due under the credit facility are due and payable as a
balloon payment on December 31, 2006.
Capital
Lease Financing Arrangement with GECC
We have a
capital lease financing arrangement with the Life Science and Technology Finance
Division of General Electric Capital Corporation. Under this arrangement, we
purchase capital equipment, including manufacturing, information technology
systems, laboratory, office and other related capital assets and subsequently
finances those purchases through this capital lease financing arrangement. The
arrangement was originally for financing of up to $1,000,000 with an interest
rate of 12.50% per annum. In 2003, the arrangement was expanded to provide,
subject to certain conditions, up to an aggregate of $4,000,000 in financing for
capital purchases with an interest rate of 9.50% per annum for all lab and
manufacturing equipment and 10.50% per annum on all other equipment. In 2004,
the arrangement was once again expanded to provide, subject to certain
conditions, up to $6.5 million in addition to the $2.5 million outstanding at
that time, for total available financing of up to $9.0
million.
Under the
terms of the expanded financing arrangement, $5.0 million of the $6.5 million
increase is immediately available to us with the remaining $1.5 million subject
to FDA approval to market our lead product, Surfaxin, for the prevention of RDS
in premature infants. The funds may be drawn down through September 2005. Laboratory
and manufacturing equipment is leased over 48 months with an interest rate equal
to 9.39% per annum and all other equipment is leased over 36 months with an
interest rate equal to 9.63% per annum. As of
December 31, 2004, we had used $3,042,000 of the financing available under the
line of credit and, after giving effect to principal payments, $2,454,000 was
outstanding.
Lease
Agreements
We
maintain facility leases for our operations in Pennsylvania and California.
We
maintain our headquarters in Warrington, Pennsylvania. The facility is 39,594
square feet and serves as the main operating facility for clinical development,
regulatory, sales and marketing, and administration. The lease expires in
February 2010 with total aggregate payments of $4.6 million.
We also
lease approximately 18,000 square feet of office and laboratory space in
Doylestown, Pennsylvania. We intend to maintain a portion of the Doylestown
facility for the continuation of analytical laboratory activities and sublease
the remaining portions to the greatest extend possible. To the extent that
subleasing is not possible, the leases will expire according to their terms. The
leases expire in March 2005 and August 2005.
We lease
office and laboratory space in Mountain View, California. The facility is 16,800
square feet and houses our aerosol development operations. The lease expires in
June 2008 with total aggregate payments of $804,000.
Prior to
the Mountain View facility, we leased office and laboratory space in Redwood
City, California. The facility was approximately 5,000 square feet and housed
our aerosol development operations. In December 2004, we vacated the Redwood
City facility and moved to the Mountain View facility. In February 2005, the
sublease agreement for the Redwood City facility was terminated.
Working
Capital
We
believe our current working capital, including the net proceeds from the
February 2005 registered direct public offering, is sufficient to meet our
planned activities into 2006, before taking into account any amounts that may be
available through use of the CEFF. In connection with a registered public
offering that we conducted in February 2005, we entered into a Placement Agent
Agreement with SG Cowen pursuant to which we agreed not to offer to sell any
additional shares of our common stock until May 29, 2005 without the consent of
SG Cowen, subject to certain exceptions. Pursuant to the Placement Agent
Agreement, we also agreed to not access funds under the CEFF until May 26, 2005,
or in an amount greater than $5 million for an additional 90-day period
thereafter.
We will
need additional financing from investors or collaborators to complete research
and development and commercialization of our current product candidates under
development. Our
working capital requirements will depend upon numerous factors, including,
without limitation, the progress of our research and development programs,
clinical trials, timing and cost of obtaining regulatory approvals, timing and
cost of sales and marketing activities, levels of resources that we devote to
the development of manufacturing and marketing capabilities, technological
advances, status of competitors, our ability to establish collaborative
arrangements with other organizations, the ability to defend and enforce our
intellectual property rights and the establishment of additional strategic or
licensing arrangements with other companies or acquisitions.
Historically,
our working capital has been provided from the proceeds of private financings
and strategic alliances:
December
2003 Shelf Registration Statement
In 2003,
we filed a shelf registration statement with the SEC for the proposed offering
from time to time of up to an aggregate 6,500,000 shares of our common stock. In
February 2005, we amended the original shelf registration statement, increasing
the shares available by 1,468,592 shares.
In April
2004, we completed an underwritten registered direct public offering of
2,200,000 million shares of common stock priced at $11.00 per share pursuant to
the shelf registration statement, resulting in gross and net proceeds of $24.2
million and $22.8 million, respectively. As of December 31, 2004, we had
4,300,000 shares reserved for issuance under the shelf registration statement
which does not take into account the amendment thereto that we filed in February
2005
In
February 2005, we completed a registered
direct public offering of 5,060,000 shares of our common stock. The shares were
priced at $5.75 per share resulting in our receipt of gross and net proceeds
equal to $29.1 million and $27.5 million, respectively. There are currently
708,592 shares reserved for potential future issuance under the shelf
registration statement, as amended.
Committed
Equity Financing Facility (CEFF)
In
December 2004, we entered into a financing pursuant to the CEFF resulting in
proceeds of $7.2 million from the issuance of 901,742 shares at an average price
of $7.98, after taking into account the applicable discount rate provided
for by the CEFF. Currently, there is up to $67.8 million available under the
CEFF, subject to the conditions and limitations thereof and the terms of the
Placement Agent Agreement with SG Cowen.
Other
Financing Transactions
In June
and July 2003, our common stock attained certain price performance thresholds on
the Nasdaq SmallCap Market that permitted us to redeem (and thereby effectively
compel the exercise thereof) three of our outstanding classes of warrants which
represented, in aggregate, the right to purchase approximately 3.6 million
shares of common stock. Such warrants (i.e., the Class I, Class F and Class C
warrants) were previously issued by us in connection with certain private
placement financings that occurred in November 2002, October 2001, and April
1999, respectively. These warrants were exercised, in accordance with their
respective terms, either cashlessly or for cash, resulting in the issuance to
the holders of approximately 3.3 million shares of common stock and our receipt
of aggregate cash proceeds of $6.1 million.
In June
2003, we completed the sale of securities in a private placement to selected
institutional and accredited investors for net proceeds of approximately
$26,100,000. We issued 4,997,882 shares of common stock and 999,577 Class A
Investor Warrants to purchase shares of common stock at an exercise price equal
to $6.875 per share. The Class A Investor Warrants have a seven-year
term.
In
November 2002, we received approximately $11.9 million in net proceeds from the
sale of 6,397,517 shares of Common Stock and 2,878,883 Class I Warrants to
purchase shares of Common Stock at an exercise price of $2.425 per share. In
connection with this private placement, the placement agent received fees of
approximately $766,000. The Class I Warrants had a five-year term and we were
entitled to redeem the Class I Warrants upon the attainment of certain price
performance thresholds of the common stock. In June 2003, the price performance
criteria was met and all of the Class I Warrants were redeemed, resulting in
2,506,117 shares issued and proceeds of approximately $4.3 million.
We will
require substantial additional funding to conduct our business, including our
expanded research and product development activities. Based on our current
operating plan, we believe that our currently available resources, including
amounts that may be available under our revolving credit facility with
PharmaBio, our CEFF with Kingsbridge and our capital lease financing arrangement
with General Electric Capital Corporation, will be adequate to satisfy our
capital needs into 2006. Our future capital requirements will depend on the
results of our research and development activities, clinical studies and trials,
competitive and technological advances and the regulatory process. Our
operations will not become profitable before we exhaust our current resources;
therefore, we will need to raise substantial additional funds through additional
debt or equity financings or through collaborative ventures with potential
corporate partners. We may in some cases elect to develop products on our own
instead of entering into collaboration arrangements and this would increase our
cash requirements. Other than our revolving credit facility with PharmaBio, our
CEFF with Kingsbridge and our capital lease financing arrangement with General
Electric Capital Corporation, we have not entered into any additional
arrangements to obtain additional financing. The sale of additional equity and
debt securities may result in additional dilution to our shareholders, and we
cannot be certain that additional financing will be available in amounts or on
terms acceptable to us, if at all. If we fail to enter into collaborative
ventures or to receive additional funding, we may have to reduce significantly
the scope of or discontinue our planned research, development and
commercialization activities, which could significantly harm our financial
condition and operating results. Furthermore, we could cease to qualify for
listing of our common stock on the NASDAQ National Market if the market price of
our common stock declines as a result of the dilutive aspects of such potential
financings. See “Risks
Related to Our Business - “We will need additional capital, and our ability to
continue all of our existing planned research and development activities is
uncertain. Any additional financing could result in equity dilution”; “ - The
market price of our stock may be adversely affected by market volatility”; and “
- - A substantial number of our securities are eligible for future sale and this
could affect the market price for our stock and our ability to raise
capital.”
Contractual
Obligations
Our
long-term contractual obligations include commitments and estimated purchase
obligations entered into in the normal course of business.
Payments
due under contractual obligations at December 31, 2004 are as
follows:
(Dollars
in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009
|
|
Thereafter |
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facility with corporate partner (1) |
|
$ |
— |
|
$ |
5,929 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
5,929 |
|
|
Capital
lease obligations (1) |
|
|
1,073 |
|
|
886 |
|
|
747 |
|
|
225 |
|
|
— |
|
|
— |
|
|
2,931 |
|
|
Operating
lease obligations (2) |
|
|
1,214 |
|
|
1,161 |
|
|
1,193 |
|
|
1,078 |
|
|
957 |
|
|
160 |
|
|
5,763 |
|
|
Purchase
obligations (3) |
|
|
4,947 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,947 |
|
|
Employment
agreements (3) |
|
|
2,203 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
2,203 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,437 |
|
$ |
7,976 |
|
$ |
1,940 |
|
$ |
1,303 |
|
$ |
957 |
|
$ |
160 |
|
$ |
21,773 |
|
| (1) |
See
Item 7: “Management’s
Discussion and Analysis of Financial Condition and Operations - Liquidity
and Capital Resources - Secured Revolving Credit Facility and Capital
Lease Arrangement”. |
| (2) |
See
Item 7: “Management’s
Discussion and Analysis of Financial Condition and Operations - Liquidity
and Capital Resources - Lease Agreements”. |
| (3) |
See discussion below. |
Our
purchase obligations include commitments entered in the ordinary course of
business, primarily commitments to purchase manufacturing equipment and services
for the enhancement of our manufacturing capabilities for Surfaxin and sales and
marketing services related to the potential launch of Surfaxin in the United
States.
Employment
Agreements
On
December 31, 2004, we had employment agreements with eight officers providing
for an aggregate annual salary of $2,203,000. The agreements expire in December
2005. However, commencing on January 1, 2006, and on each January 1st
thereafter, the term of each agreement shall automatically be extended for one
additional year, unless at least 90 days prior to such January 1st date, either
we or the respective officer that is a party thereto shall have given notice
that any such extension is not desired. All of the foregoing agreements provide
for the issuance of annual bonuses and the granting of options subject to
approval by the Board of Directors. In addition, the employment agreements
contain severance arrangements providing for, in certain circumstances, cash
payments, equity benefits and the continuation of certain other employee
benefits.
In
addition to the contractual obligations above, we have certain milestone payment
obligations, aggregating $2,500,000, and royalty payment obligations to Ortho
Pharmaceutical, Inc. related to our product licenses. To date, we have paid
$450,000 with respect to such milestones.
Risks
Related to Our Business
The
following risks, among others, could cause our actual results, performance,
achievements or industry results to differ materially from those expressed in
our forward-looking statements contained herein and presented elsewhere by
management from time to time.
Because
we are a biopharmaceutical company, we may not successfully develop and market
our products, and even if we do, we may not generate enough revenue or become
profitable.
We are a
biopharmaceutical company, therefore, you must evaluate us in light of the
uncertainties and complexities present in such companies. We currently have no
products approved for marketing and sale and are conducting research and
development on our product candidates. As a result, we have not begun to market
or generate revenues from the commercialization of any of our products. Our
long-term viability will be impaired if we are unable to obtain regulatory
approval for, or successfully market, our product candidates.
To date,
we have only generated revenues from investments, research grants and
collaborative research and development agreements. We will need to engage in
significant, time-consuming and costly research, development, pre-clinical
studies, clinical testing and regulatory approval for our products under
development prior to their commercialization. In addition, pre-clinical or
clinical studies may show that our products are not effective or safe for one or
more of their intended uses. We may fail in the development and
commercialization of our products. As of December 31, 2004, we have an
accumulated deficit of approximately $143 million and we expect to continue to
incur significant increasing operating losses over the next several years. If we
succeed in the development of our products, we still may not generate sufficient
or sustainable revenues or we may not be profitable.
Our
precision-engineered surfactant platform technology is based on the scientific
rationale of SRT to treat life threatening respiratory disorders and as the
foundation for the development of novel respiratory therapies and products. Our
business is dependent upon the successful development and approval of our
product candidates based on this platform technology. Recently, we completed and
filed an NDA with the FDA and an MAA with the EMEA based on results from a
pivotal Phase 3 clinical trial and supportive Phase 3 clinical trial with our
lead product, Surfaxin, for the prevention of RDS in premature infants. In
addition, we are conducting a Phase 2 clinical trial for the treatment of ARDS
in adults and a Phase 2 trial for the prevention of MAS in full-term infants. We
are preparing for the initiation of a Phase 2 clinical trial using aerosolized
SRT via nCPAP to potentially treat premature infants in the NICU suffering from
neonatal respiratory failures, a Phase 2 clinical trial using Surfaxin for the
prevention of BPD, and a Phase 2 trial using DSC-104 to treat patients with
moderate to severe asthma.
Companies
in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials, even after obtaining promising results in
earlier trials. Data obtained from tests are susceptible to varying
interpretations which may delay, limit or prevent regulatory approval. In
addition, we may be unable to enroll patients quickly enough to meet our
expectations for completing any or all of these trials. The timing and
completion of current and planned clinical trials of our product candidates
depend on, among other factors, the rate at which patients are enrolled, which
is a function of many factors, including:
| — |
the
number of clinical sites; |
| — |
the
size of the patient population; |
| — |
the
proximity of patients to the clinical sites; |
| — |
the
eligibility criteria for the study; |
| — |
the
existence of competing clinical trials; and |
| — |
the
existence of alternative available products. |
Delays in
patient enrollment in clinical trials may occur, which would likely result in
increased costs, program delays or both.
If
the parties we depend on for manufacturing our pharmaceutical products do not
timely supply these products, it may delay or impair our ability to develop and
market our products.
We rely
on outside manufacturers for our drug substance and other active ingredients for
Surfaxin and to produce material that meets appropriate standards for use in
clinical studies of our products. Presently, Laureate is our sole clinical
manufacturing facility that has been qualified to produce appropriate clinical
grade material of our drug product for use in our ongoing clinical studies.
In
January 2005, the FDA issued an inspection report (Form FDA-483) to Laureate,
citing certain observations concerning Laureate’s compliance with current cGMPs
in connection with the FDA’s review of our NDA for Surfaxin for the prevention
of RDS in premature infants. The general focus of the inspection observations
relates to basic quality controls, process assurances and documentation
requirements to support the commercial production process. In response, a cGMP
Action Plan was submitted to the FDA on January 31, 2005, outlining corrective
measures anticipated to be completed by July 2005. Assuming the adequacy of such
corrective actions and the approval of our NDA for Surfaxin, we anticipate that
the commercial launch of Surfaxin will occur in the fourth quarter of 2005. We
anticipate that our manufacturing capabilities through Laureate, upon successful
completion and implementation of our Action Plan should allow sufficient
commercial production of Surfaxin, if approved, to supply the present worldwide
demand for the treatment of RDS in premature infants and our other Surfactant
Replacement Therapies for our planned clinical trials. If the FDA does not
accept the cGMP Action Plan, or we or Laureate do not adequately address the
initiatives set forth therein, the FDA may delay its approval of our NDA for
Surfaxin or reject our NDA. Any delay in the approval of the NDA, or the
rejection thereof, will have a material adverse effect on our
business.
Laureate
or other outside manufacturers may not be able to (i) produce our drug substance
or drug product to appropriate standards for use in clinical studies, (ii)
comply with remediation activities set forth in the cGMP Action Plan (iii)
perform under any definitive manufacturing agreements with us or (iv) remain in
the contract manufacturing business for a sufficient time to successfully
produce and market our product candidates. If we do not maintain important
manufacturing relationships, we may fail to find a replacement manufacturer or
develop our own manufacturing capabilities which could delay or impair our
ability to obtain regulatory approval for our products and substantially
increase our costs or deplete profit margins, if any. If we do find replacement
manufacturers, we may not be able to enter into agreements with them on terms
and conditions favorable to us and, there could be a substantial delay before a
new facility could be qualified and registered with the FDA and foreign
regulatory authorities.
We may in
the future elect to manufacture some of our products on our own. Although we own
certain specialized manufacturing equipment, are considering an investment in
additional manufacturing equipment and employ certain manufacturing managerial
personnel, we do not presently maintain a complete manufacturing facility and we
do not anticipate manufacturing on our own any of our products during the next
12 months. If we decide to manufacture products on our own and do not
successfully develop manufacturing capabilities, it will adversely affect sales
of our products.
The FDA
and foreign regulatory authorities require manufacturers to register
manufacturing facilities. The FDA and corresponding foreign regulators also
inspect these facilities to confirm compliance with cGMPs or similar
requirements that the FDA or corresponding foreign regulators establish.
Contract manufacturers may face manufacturing or quality control problems
causing product production and shipment delays or a situation where the
contractor may not be able to maintain compliance with the FDA’s cGMP
requirements, or those of comparable foreign regulatory authorities, necessary
to continue manufacturing our drug substance. Any failure to comply with cGMP
requirements or other FDA and comparable foreign regulatory requirements could
adversely affect our clinical research activities and our ability to market and
develop our products. See also “Risks Related to Our Business - In order to
conduct our clinical trials we need adequate supplies of our drug substance and
drug product, which may not be readily available.”
In
order to conduct our clinical trials we need adequate supplies of our drug
substance and drug product, which may not be readily
available.
To
succeed, clinical trials require adequate supplies of drug substance and drug
product, which may be difficult or uneconomical to procure or manufacture. We
rely on third party contract manufacturers for our drug substance and other
active ingredients for Surfaxin and to produce material that meets appropriate
standards for use in clinical trials of our products. Laureate, our contract
manufacturer, may not be able to produce Surfaxin to appropriate standards for
use in clinical studies. Manufacturing or quality control problems have already
and may again occur at Laureate or our other contract manufacturers, causing
production and shipment delays or a situation where the contractor may not be
able to maintain compliance with the FDA’s cGMP requirements necessary to
continue manufacturing our ingredients or drug product. If any such suppliers or
manufacturers of our products fail to comply with cGMP requirements or other FDA
and comparable foreign regulatory requirements, it could adversely affect our
clinical research activities and our ability to market and develop our products.
See also “Risks Related to Our Business - If the parties we depend on for
manufacturing our pharmaceutical products do not timely supply these products,
it may delay or impair our ability to develop and market our
products.”
We
will need additional capital and our ability to continue all of our existing
planned research and development activities is uncertain. Any additional
financing could result in equity dilution.
We will
need substantial additional funding to conduct our presently planned research
and product development activities. Based on our current operating plan, we
believe that our currently available financial resources will be adequate to
satisfy our capital needs into the second half of 2005. Our future capital
requirements will depend on a number of factors that are uncertain, including
the results of our research and development activities, clinical studies and
trials, competitive and technological advances and the regulatory process, among
others. We will likely need to raise substantial additional funds through
collaborative ventures with potential corporate partners and through additional
debt or equity financings. We may also continue to seek additional funding
through capital lease transactions. We may in some cases elect to develop
products on our own instead of entering into collaboration arrangements. This
would increase our cash requirements for research and development.
We have
not entered into arrangements to obtain any additional financing, except for the
CEFF with Kingsbridge, our revolving credit facility with PharmaBio
and our capital equipment lease financing arrangement with GECC. In
connection with a registered public offering that we conducted in February 2005,
we entered into a Placement Agent Agreement with SG Cowen pursuant to which we
agreed not to offer to sell any additional shares of our common stock until May
29, 2005 without the consent of SG Cowen, subject to certain exceptions.
Pursuant to the Placement Agent Agreement, we also agreed to not access funds
under the CEFF until May 26, 2005, or in an amount greater than $5 million for
an additional 90-day period thereafter. Any additional financing could include
unattractive terms or result in significant dilution of stockholders’ interests
and share prices may decline. If we fail to enter into collaborative ventures or
to receive additional funding, we may have to delay, scale back or discontinue
certain of our research and development operations, and consider licensing the
development and commercialization of products that we consider valuable and
which we otherwise would have developed ourselves. If we are unable to raise
required capital, we may be forced to limit many, if not all, of our research
and development programs and related operations, curtail commercialization of
our product candidates and, ultimately, cease operations. See “Risks
Related to Our Business - Our Committed Equity Financing Facility may have a
dilutive impact on our stockholders”.
Furthermore,
we could cease to qualify for listing of our securities on the NASDAQ National
Market if the market price of our common stock declines as a result of the
dilutive aspects of such potential financings. See “Risks
Related to Our Business - The market price of our stock may be adversely
affected by market volatility”.
Our
Committed Equity Financing Facility may have a dilutive impact on our
stockholders.
There are
14,473,000 shares of our common stock that are reserved for issuance under the
CEFF arrangement with Kingsbridge, 375,000 of which are issuable under the
warrant we granted to Kingsbridge. The issuance of shares of our common stock
under the CEFF and upon exercise of the warrant will have a dilutive impact on
our other stockholders and the issuance or even potential issuance of such
shares could have a negative effect on the market price of our common stock. In
addition, if we access the CEFF, we will issue shares of our common stock to
Kingsbridge at a discount of between 6% and 10% of the daily volume weighted
average price of our common stock during a specified period of trading days
after we access the CEFF. Issuing shares at a discount will further dilute the
interests of other stockholders.
To the
extent that Kingsbridge sells shares of our common stock issued under the CEFF
to third parties, our stock price may decrease due to the additional selling
pressure in the market. The perceived risk of dilution from sales of stock to or
by Kingsbridge may cause holders of our common stock to sell their shares, or it
may encourage short sales of our common stock or either similar transactions.
This could contribute to a decline in the stock price of our common
stock.
We may
not be able to meet the conditions we are required to meet under CEFF and we may
not be able to access any portion of the remaining $67.8 million available under
the CEFF. In addition, we are dependent upon the financial ability of
Kingsbridge to fund the CEFF. Any failure by Kingsbridge to perform its
obligations under the CEFF could have a material adverse effect upon us.
The
clinical trial and regulatory approval process for our products is expensive and
time consuming, and the outcome is uncertain.
In order
to sell Surfaxin and our other products that are under development, we must
receive regulatory approvals for each product. The FDA and comparable agencies
in foreign countries extensively and rigorously regulate the testing,
manufacture, distribution, advertising, pricing and marketing of drug products
like our products. This approval process includes preclinical studies and
clinical trials of each pharmaceutical compound to establish the safety and
effectiveness of each product and the confirmation by the FDA and comparable
agencies in foreign countries that the manufacturer of the product maintains
good laboratory and manufacturing practices during testing and manufacturing.
Although we are involved in certain late-stage clinical trials, pharmaceutical
and biotechnology companies have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier clinical trials or in
preliminary findings for such clinical trials. Further, even if favorable
testing data is generated by clinical trials of drug products, the FDA or EMEA
may not accept or approve an NDA or MAA filed by a pharmaceutical or
biotechnology company for such drug product. On April 13, 2004, we filed an NDA
for Surfaxin for the prevention of RDS in premature infants. The FDA accepted
the NDA filing and in February 2005 we received an Approvable Letter from the
FDA with respect to our NDA. The Approvable Letter contains conditions that we
must meet prior to obtaining final U.S. marketing approval for Surfaxin. The
conditions that we must meet primarily involve finalizing labeling and
correcting previously reported manufacturing issues, however, the FDA might
still reject the NDA. We have also submitted an MAA with the EMEA for clearance
to market Surfaxin for the prevention and treatment of RDS in premature infants.
The EMEA has validated the MAA indicating that the application is complete and
that the review process has begun. However, the EMEA may not complete the review
or may reject the MAA.
The
approval process is lengthy, expensive and uncertain. It is also possible that
the FDA or comparable foreign regulatory authorities could interrupt, delay or
halt any one or more of our clinical trials for any of our product candidates.
If we, or any regulatory authorities, believe that trial participants face
unacceptable health risks, any one or more of our trials could be suspended or
terminated. We also may not reach agreement with the FDA and/or comparable
foreign agencies on the design of any one or more of the clinical studies
necessary for approval. Conditions imposed by the FDA and comparable agencies in
foreign countries on our clinical trials could significantly increase the time
required for completion of such clinical trials and the costs of conducting the
clinical trials. Data obtained from clinical trials are susceptible to varying
interpretations which may delay, limit or prevent regulatory
approval.
Delays
and terminations of the clinical trials we conduct could result from
insufficient patient enrollment. Patient enrollment is a function of several
factors, including the size of the patient population, stringent enrollment
criteria, the proximity of the patients to the trial sites, having to compete
with other clinical trials for eligible patients, geographical and geopolitical
considerations and others. Delays in patient enrollment can result in greater
costs and longer trial timeframes. Patients may also suffer adverse medical
events or side effects that are common to this class of drug such as a decrease
in the oxygen level of the blood upon administration.
Clinical
trials generally take two to five years or more to complete, and, accordingly,
our first product is not expected to be commercially available in the United
States until at least the first quarter of 2006, and our other product
candidates will take longer. The FDA has notified us that two of our intended
indications for our precision-engineered surfactant-based therapy, MAS in
full-term infants and ARDS in adults, have been granted designation as
“fast-track” products under provisions of the Food and Drug Administration
Modernization Act of 1997. The FDA has also granted us Orphan Drug Designation
for three of our intended indications for Surfaxin: ARDS in adults; RDS in
infants; and MAS in full-term infants. To support our development of Surfaxin
for the treatment of MAS, the FDA has awarded us an Orphan Products Development
Grant. Fast-Track Status does not accelerate the clinical trials nor does it
mean that the regulatory requirements are less stringent. The Fast-Track Status
provisions are designed to expedite the FDA’s review of new drugs intended to
treat serious or life-threatening conditions. The FDA generally will review the
New Drug Application for a drug granted Fast-Track Status within six months
instead of the typical one to three years.
The EMEA
has granted Orphan Medicinal Product designation for three of our intended
indications for Surfaxin; RDS in premature infants, MAS in full-term infants and
ALI in adults.
Our
products may not, however, continue to qualify for expedited review and our
other drug candidates may fail to qualify for fast track development or
expedited review. Even though some of our drug candidates have qualified for
expedited review, the FDA may not approve them at all or any sooner than other
drug candidates that do not qualify for expedited review.
The FDA
and comparable foreign agencies could withdraw any approvals we obtain, if any.
Further, if there is a later discovery of unknown problems or if we fail to
comply with other applicable regulatory requirements at any stage in the
regulatory process, the FDA may restrict or delay our marketing of a product or
force us to make product recalls. In addition, the FDA could impose other
sanctions such as fines, injunctions, civil penalties or criminal prosecutions.
To market our products outside the United States, we also need to comply with
foreign regulatory requirements governing human clinical trials and marketing
approval for pharmaceutical products. The FDA and foreign regulators have not
yet approved any of our products under development for marketing in the United
States or elsewhere. If the FDA and other regulators do not approve our
products, we will not be able to market our products.
Our
strategy, in many cases, is to enter into collaboration agreements with third
parties with respect to our products and we may require additional collaboration
agreements. If we fail to enter into these agreements or if we or the third
parties do not perform under such agreements, it could impair our ability to
commercialize our products.
Our
strategy for the completion of the required development and clinical testing of
our products and for the manufacturing, marketing and commercialization of our
products, in many cases, depends upon entering into collaboration arrangements
with pharmaceutical companies to market, commercialize and distribute our
products. We have a collaboration arrangement with Esteve for Surfaxin and
certain other of our product candidates that is focused on key Southern European
markets. Esteve will be responsible for the marketing of Surfaxin for the
prevention/treatment of RDS in premature infants, MAS in full-term infants and
ALI/ARDS in adults. Esteve will also be responsible for the sponsorship of
certain clinical trial costs related to obtaining EMEA approval for
commercialization of Surfaxin in Europe for the indications of ALI/ARDS. We will
be responsible for the remainder of the regulatory activities relating to
Surfaxin, including with respect to EMEA filings.
If Esteve
or us breach or terminate the agreements that make up such collaboration
arrangements or Esteve otherwise fails to conduct their Surfaxin-related
activities in a timely manner or if there is a dispute about their obligations,
we may need to seek other partners or we may have to develop our own internal
sales and marketing capability for the indications of Surfaxin which Esteve.
Accordingly, we may need to enter into additional collaboration agreements and
our success, particularly outside of the United States, may depend upon
obtaining additional collaboration partners. In addition, we may depend on our
partners’ expertise and dedication of sufficient resources to develop and
commercialize our proposed products. We may, in the future, grant to
collaboration partners rights to license and commercialize pharmaceutical
products developed under collaboration agreements. Under these arrangements, our
collaboration partners may control key decisions relating to the development of
the products. The rights of our collaboration partners would limit our
flexibility in considering alternatives for the commercialization of our
products. If we fail to successfully develop these relationships or if our
collaboration partners fail to successfully develop or commercialize any of our
products, it may delay or prevent us from developing or commercializing our
products in a competitive and timely manner and would have a material adverse
effect on the commercialization of Surfaxin. See “Risks Related to Our Business
- - We currently have a limited sales and marketing team and, therefore, must
develop a sales and marketing team or enter into distribution arrangements and
marketing alliances, which could require us to give up rights to our product
candidates. Our limited sales and marketing experience may restrict our success
in commercializing our product candidates.”
If
we cannot protect our intellectual property, other companies could use our
technology in competitive products. If we infringe the intellectual property
rights of others, other companies could prevent us from developing or marketing
our products.
We seek
patent protection for our drug candidates so as to prevent others from
commercializing equivalent products in substantially less time and at
substantially lower expense. The pharmaceutical industry places considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Our success will depend in part on our ability and that
of parties from whom we license technology to:
| — |
defend
our patents and otherwise prevent others from infringing on our
proprietary rights; |
| — |
protect
trade secrets; and |
| — |
operate
without infringing upon the proprietary rights of others, both in the
United States and in other countries. |
The
patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions for which important legal
principles are unresolved. To date, the United States Patent and Trademark
Office has not adopted a consistent policy regarding the breadth of claims that
the United States Patent and Trademark Office allows in biotechnology patents or
the degree of protection that these types of patents afford. As a result, there
are risks that we may not develop or obtain rights to products or processes that
are or may seem to be patentable.
Even
if we obtain patents to protect our products, those patents may not be
sufficiently broad and others could compete with us.
We, and
the parties licensing technologies to us, have filed various United States and
foreign patent applications with respect to the products and technologies under
our development, and the United States Patent and Trademark Office and foreign
patent offices have issued patents with respect to our products and
technologies. These patent applications include international applications filed
under the Patent Cooperation Treaty. Our pending patent applications, those we
may file in the future or those we may license from third parties may not result
in the United States Patent and Trademark Office or foreign patent office
issuing patents. Also, if patent rights covering our products are not
sufficiently broad, they may not provide us with sufficient proprietary
protection or competitive advantages against competitors with similar products
and technologies. Furthermore, if the United States Patent and Trademark Office
or foreign patent offices issue patents to us or our licensors, others may
challenge the patents or circumvent the patents, or the patent office or the
courts may invalidate the patents. Thus, any patents we own or license from or
to third parties may not provide any protection against
competitors.
Furthermore,
the life of our patents is limited. We have licensed a series of patents from
Johnson & Johnson and its wholly owned subsidiary, Ortho Pharmaceutical
Corporation, which are important, either individually or collectively, to our
strategy of commercializing our surfactant technology. Such patents, which
include relevant European patents, expire on various dates beginning in 2009 and
ending in 2017 or, in some cases, possibly later. We have filed, and when
possible and appropriate, will file, other patent applications with respect to
our products and processes in the United States and in foreign countries. We may
not be able to develop additional products or processes that will be patentable
or additional patents may not be issued to us. See also “Risks Related to Our
Business - If we cannot meet requirements under our license agreements, we could
lose the rights to our products.”
Intellectual
property rights of third parties could limit our ability to market our
products.
Our
commercial success also significantly depends on our ability to operate without
infringing the patents or violating the proprietary rights of others. The United
States Patent and Trademark Office keeps United States patent applications
confidential while the applications are pending. As a result, we cannot
determine which inventions third parties claim in pending patent applications
that they have filed. We may need to engage in litigation to defend or enforce
our patent and license rights or to determine the scope and validity of the
proprietary rights of others. It will be expensive and time consuming to defend
and enforce patent claims. Thus, even in those instances in which the outcome is
favorable to us, the proceedings can result in the diversion of substantial
resources from our other activities. An adverse determination may subject us to
significant liabilities or require us to seek licenses that third parties may
not grant to us or may only grant at rates that diminish or deplete the
profitability of the products to us. An adverse determination could also require
us to alter our products or processes or cease altogether any related research
and development activities or product sales.
If
we cannot meet requirements under our license agreements, we could lose the
rights to our products.
We depend
on licensing agreements with third parties to maintain the intellectual property
rights to our products under development. Presently, we have licensed rights
from Johnson & Johnson and Ortho Pharmaceutical. These agreements require us
to make payments and satisfy performance obligations in order to maintain our
rights under these licensing agreements. All of these agreements last either
throughout the life of the patents, or with respect to other licensed
technology, for a number of years after the first commercial sale of the
relevant product.
In
addition, we are responsible for the cost of filing and prosecuting certain
patent applications and maintaining certain issued patents licensed to us. If we
do not meet our obligations under our license agreements in a timely manner, we
could lose the rights to our proprietary technology.
Finally,
we may be required to obtain licenses to patents or other proprietary rights of
third parties in connection with the development and use of our products and
technologies. Licenses required under any such patents or proprietary rights
might not be made available on terms acceptable to us, if at all.
We
rely on confidentiality agreements that could be breached and may be difficult
to enforce.
Although
we believe that we take reasonable steps to protect our intellectual property,
including the use of agreements relating to the non-disclosure of confidential
information to third parties, as well as agreements that purport to require the
disclosure and assignment to us of the rights to the ideas, developments,
discoveries and inventions of our employees and consultants while we employ
them, the agreements can be difficult and costly to enforce. Although we seek to
obtain these types of agreements from our consultants, advisors and research
collaborators, to the extent that they apply or independently develop
intellectual property in connection with any of our projects, disputes may arise
as to the proprietary rights to this type of information. If a dispute arises, a
court may determine that the right belongs to a third party, and enforcement of
our rights can be costly and unpredictable. In addition, we will rely on trade
secrets and proprietary know-how that we will seek to protect in part by
confidentiality agreements with our employees, consultants, advisors or others.
Despite the protective measures we employ, we still face the risk
that:
| — |
they
will breach these agreements; |
| — |
any
agreements we obtain will not provide adequate remedies for the applicable
type of breach or that our trade secrets or proprietary know-how will
otherwise become known or competitors will independently develop similar
technology; and |
| — |
our
competitors will independently discover our proprietary information and
trade secrets. |
We
currently have a limited sales and marketing team and, therefore, must develop a
sales and marketing team or enter into distribution arrangements and marketing
alliances, which could require us to give up rights to our product candidates.
Our limited sales and marketing experience may restrict our success in
commercializing our product candidates.
If we
successfully develop and obtain regulatory approval for Surfaxin and the other
product candidates that we are currently developing, we may: (1) market and sell
them through our sales force, (2) license some of them to large pharmaceutical
companies and/or (3) market and sell them through other arrangements, including
co-promotion arrangements.
We
currently have a limited sales and marketing team and we plan to further develop
our marketing and sales team as we expect to rely primarily on such team to
market Surfaxin in the United States, if Surfaxin is approved by the FDA.
Recruiting, training and retaining qualified sales personnel is therefore
critical to our success. Competition for skilled personnel is intense, and we
may be unable to attract and retain a sufficient number of qualified individuals
to successfully launch Surfaxin. Additionally, we may not be able to provide
adequate incentive to our sales force. Accordingly, we may be unable to
establish marketing, sales and distribution capabilities necessary to
commercialize and gain market acceptance for Surfaxin or our other product
candidates.
Developing
a marketing and sales team to market and sell products is a difficult,
significantly expensive and time-consuming process. We have no prior experience
developing a marketing and sales team and may be unsuccessful in our attempt to
do so. If we are unable to develop an internal sales and marketing operation, we
may not be able to increase market awareness and sell our products.
Establishing
the expertise necessary to successfully market and sell Surfaxin, or any other
product, will require a substantial capital investment. We expect to incur
significant expenses in developing our marketing and sales team. Our ability to
make that investment and also execute our current operating plan is dependent on
numerous factors, including, the performance of third party collaborators with
whom we may contract. Accordingly, we may not have sufficient funds to
successfully commercialize Surfaxin or any other potential product in the United
States or elsewhere.
We may
also need to enter into additional co-promotion arrangements with third parties
where our own sales force is neither well situated nor large enough to achieve
maximum penetration in the market. We may not be successful in entering into any
co-promotion arrangements, and the terms of any co-promotion arrangements may
not be favorable to us. In addition, if we enter into co-promotion arrangements
or market and sell additional products directly, we may need to further expand
our sales force and incur additional costs.
We may
also rely on third-party distributors to distribute our products or enter into
marketing alliances to sell our products. We may not be successful in entering
into distribution arrangements and marketing alliances with third parties. Our
failure to successfully develop a marketing and sales team or to enter into
these arrangements on favorable terms could delay or impair our ability to
commercialize our product candidates and could increase our costs of
commercialization. Dependence on distribution arrangements and marketing
alliances to commercialize our product candidates will subject us to a number of
risks, including:
| · |
we
may be required to relinquish important rights to our products or product
candidates; |
| · |
we
may not be able to control the amount and timing of resources that our
distributors or collaborators may devote to the commercialization of our
product candidates; |
| · |
our
distributors or collaborators may experience financial difficulties;
|
| · |
our
distributors or collaborators may not devote sufficient time to the
marketing and sales of our products thereby exposing us to potential
expenses in terminating such distribution agreements; and
|
| · |
business
combinations or significant changes in a collaborator’s business strategy
may also adversely affect a collaborator’s willingness or ability to
complete its obligations under any
arrangement. |
If we
fail to establish marketing and sales capabilities or fail to enter into
arrangements with third parties in a timely manner or if they fail to perform,
it could adversely affect sales of our products. We and any of our third-party
collaborators must also market our products in compliance with federal, state
and local laws relating to the providing of incentives and inducements.
Violation of these laws can result in substantial penalties. If we are unable to
successfully motivate and expand our marketing and sales force and further
develop our sales and marketing capabilities, or if our distributors fail to
promote our products, we will have difficulty maintaining and increasing the
sales of our products.
We
may be unable to either establish marketing and sales capabilities or enter into
corporate collaborations necessary to successfully commercialize Surfaxin or our
other potential products.
We have
limited experience in marketing or selling pharmaceutical products and have
limited marketing and sales resources. To achieve commercial success for
Surfaxin, or any other approved product, we must either rely upon our limited
marketing and sales force and related infrastructure, or enter into arrangements
with others to market and sell our products. We intend to promote Surfaxin in
the United States through our own dedicated marketing and sales team.
Recruiting, training and retaining qualified sales personnel is therefore
critical to our success. Competition for skilled personnel is intense, and we
may not be able to attract and retain a sufficient number of qualified
individuals to successfully launch Surfaxin. Accordingly, we may be unable to
establish marketing, sales and distribution capabilities necessary to
commercialize and gain market acceptance for Surfaxin.
In
addition, establishing the expertise necessary to successfully market and sell
Surfaxin, or any other product, will require a substantial capital investment.
Our ability to make that investment and also execute our current operating plan
and attain profitability by 2006 is dependent on numerous factors, including, as
described above, partnering of clinical programs at opportune times and
continued prudent fiscal management. Accordingly, we may not have the funds to
successfully commercialize Surfaxin or any other potential product in the United
States or elsewhere.
Moreover,
Surfaxin competes, and our product candidates in development are likely to
compete, with products of other companies that currently have extensive and
well-funded marketing and sales operations. Because these companies are capable
of devoting significantly greater resources to their marketing and sales
efforts, our marketing and sales efforts may not compete successfully against
the efforts of these other companies.
We have
also announced our intention to market and sell Surfaxin outside of the United
States through one or more marketing partners upon receipt of approval abroad.
Although our agreement with Esteve provides for collaborative efforts in
directing a global commercialization effort, we have somewhat limited influence
over the decisions made by Esteve or their sublicensees or the resources they
devote to the marketing and distribution of Surfaxin products in their licensed
territory, and Esteve or their sublicensees may not meet their obligations in
this regard. Our marketing and distribution arrangement with Esteve may not be
successful, and we may not receive any revenues from it. Also, we may not be
able to enter into marketing and sales agreements on acceptable terms, if at
all, for Surfaxin in territories not covered by the Esteve agreement, or for any
of our other product candidates.
We
depend upon key employees and consultants in a competitive market for skilled
personnel. If we are unable to attract and retain key personnel, it could
adversely affect our ability to develop and market our
products.
We are
highly dependent upon the principal members of our management team, especially
our Chief Executive Officer, Dr. Capetola, and our directors, as well as our
scientific advisory board members, consultants and collaborating scientists.
Many of these people have been involved in our formation or have otherwise been
involved with us for many years, have played integral roles in our progress and
we believe that they will continue to provide value to us. A loss of any of
these personnel may have a material adverse effect on aspects of our business
and clinical development and regulatory programs.
At December 31, 2004, we had employment agreements with eight officers expiring
in December 2005. However, commencing on January 1, 2006, and on each January
1st thereafter, the term of these agreements shall automatically be extended for
one additional year, unless at least 90 days prior to such January 1st date,
either we or the officer shall have given notice that such party does not wish
to extend the agreement. Although these employment agreements generally provide
for severance payments that are contingent upon the applicable employee’s
refraining from competition with us, the loss of any of these persons’ services
would adversely affect our ability to develop and market our products and obtain
necessary regulatory approvals, and the applicable noncompete provisions can be
difficult and costly to monitor and enforce. Further, we do not maintain key-man
life insurance.
Our
future success also will depend in part on the continued service of our key
scientific and management personnel and our ability to identify, hire and retain
additional personnel, including marketing and sales staff. We experience intense
competition for qualified personnel, and the existence of non-competition
agreements between prospective employees and their former employers may prevent
us from hiring those individuals or subject us to suit from their former
employers.
While we
attempt to provide competitive compensation packages to attract and retain key
personnel, some of our competitors are likely to have greater resources and more
experience than we have, making it difficult for us to compete successfully for
key personnel.
Our
industry is highly competitive and we have less capital and resources than many
of our competitors, which may give them an advantage in developing and marketing
products similar to ours or make our products obsolete.
Our
industry is highly competitive and subject to rapid technological innovation and
evolving industry standards. We compete with numerous existing companies
intensely in many ways. We intend to market our products under development for
the treatment of diseases for which other technologies and treatments are
rapidly developing and, consequently, we expect new companies to enter our
industry and that competition in the industry will increase. Many of these
companies have substantially greater research and development, manufacturing,
marketing, financial, technological, personnel and managerial resources than we
have. In addition, many of these competitors, either alone or with their
collaborative partners, have significantly greater experience than we do
in:
| — |
undertaking
preclinical testing and human clinical trials; |
| — |
obtaining
FDA and other regulatory approvals or products;
and |
| — |
manufacturing
and marketing products. |
Accordingly,
our competitors may succeed in obtaining patent protection, receiving FDA or
comparable foreign approval or commercializing products before us. If we
commence commercial product sales, we will compete against companies with
greater marketing and manufacturing capabilities who may successfully develop
and commercialize products that are more effective or less expensive than ours.
These are areas in which, as yet, we have limited or no experience. In addition,
developments by our competitors may render our product candidates obsolete or
noncompetitive.
Presently,
there are no approved drugs that are specifically indicated for the prevention
and treatment of MAS in full-term infants or ALI/ARDS in adults. Current therapy
consists of general supportive care and mechanical ventilation.
Four
products, three that are animal-derived and one that is a synthetic, are
specifically approved for the treatment of RDS in premature infants.
Exosurf® is
synthetic and is marketed by GlaxoSmithKline, plc, outside the United States and
contains only phospholipids (the fats normally present in the lungs) and
synthetic organic detergents and no stabilizing protein or peptides. This
product, however, does not contain any surfactant proteins, is not widely used
and its active marketing recently has been discontinued by its manufacturer.
Curosurf® is a
porcine lung extract that is marketed in Europe by Chiesi Farmaceutici S.p.A.,
and in the United States by Dey Laboratories, Inc. Survanta®,
marketed by the Ross division of Abbott Laboratories, Inc., is an extract of
bovine lung that contains the cow version of surfactant protein C. Forest
Laboratories, Inc., markets its calf lung surfactant, Infasurf® in the
United States for the treatment of RDS in premature infants. Although none of
the four approved surfactants for RDS in premature infants is approved for ALI
or ARDS in adults, which are significantly larger markets, there are a
significant number of other potential therapies in development for these
indications that are not surfactant-related. Any of these various drugs or
devices could significantly impact the commercial opportunity for Surfaxin. We
believe that engineered precision-engineered surfactants such as Surfaxin will
be far less expensive to produce than the animal-derived products approved for
the treatment of RDS in premature infants and will have no capability of
transmitting the brain-wasting bovine spongiform encephalopathy (commonly called
“mad-cow disease”) or causing adverse immunological responses in young and older
adults.
We also
face, and will continue to face, competition from colleges, universities,
governmental agencies and other public and private research organizations. These
competitors are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed. Some of these technologies may compete directly with the technologies
that we are developing. These institutions will also compete with us in
recruiting highly qualified scientific personnel. We expect that therapeutic
developments in the areas in which we are active may occur at a rapid rate and
that competition will intensify as advances in this field are made. As a result,
we need to continue to devote substantial resources and efforts to research and
development activities.
If
product liability claims are brought against us, it may result in reduced demand
for our products or damages that exceed our insurance
coverage.
The
clinical testing of, marketing and use of our products exposes us to product
liability claims in the event that the use or misuse of those products causes
injury, disease or results in adverse effects. Use of our products in clinical
trials, as well as commercial sale, could result in product liability claims. In
addition, sales of our products through third party arrangements could also
subject us to product liability claims. We presently carry product liability
insurance with coverages of up to $10.0 million per occurrence and $10.0 million
in the aggregate, an amount we consider reasonable and customary relating to our
clinical trials of Surfaxin. However, this insurance coverage includes various
deductibles, limitations and exclusions from coverage, and in any event might
not fully cover any potential claims. We may need to obtain additional product
liability insurance coverage prior to initiating other clinical trials. We
expect to obtain product liability insurance coverage before commercialization
of our proposed products; however, the insurance is expensive and insurance
companies may not issue this type of insurance when we need it. We may not be
able to obtain adequate insurance in the future at an acceptable cost. Any
product liability claim, even one that was not in excess of our insurance
coverage or one that is meritless and/or unsuccessful, could adversely affect
our cash available for other purposes, such as research and development. In
addition, the existence of a product liability claim could affect the market
price of our common stock.
We
expect to face uncertainty over reimbursement and healthcare
reform.
In both
the United States and other countries, sales of our products will depend in part
upon the availability of reimbursement from third party payors, which include
government health administration authorities, managed care providers and private
health insurers. Third party payors are increasingly challenging the price and
examining the cost effectiveness of medical products and services.
Directors,
executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions that
you do not consider to be in your best interest.
As of
December 31, 2004, our directors, executive officers, principal stockholders and
affiliated entities beneficially owned, in the aggregate, approximately 16% of
our outstanding voting securities. As a result, if some or all of them acted
together, they would have the ability to exert substantial influence over the
election of our Board of Directors and the outcome of issues requiring approval
by our stockholders. This concentration of ownership may have the effect of
delaying or preventing a change in control of our Company that may be favored by
other stockholders. This could prevent transactions in which stockholders might
otherwise recover a premium for their shares over current market
prices.
The
market price of our stock may be adversely affected by market
volatility.
The
market price of our common stock, like that of many other development stage
pharmaceutical or biotechnology companies, has been and is likely to be
volatile. In addition to general economic, political and market conditions, the
price and trading volume of our stock could fluctuate widely in response to many
factors, including:
| — |
announcements
of the results of clinical trials by us or our
competitors; |
| — |
adverse
reactions to products; |
| — |
governmental
approvals, delays in expected governmental approvals or withdrawals of any
prior governmental approvals or public or regulatory agency concerns
regarding the safety or effectiveness of our
products; |
| — |
changes
in the United States or foreign regulatory policy during the period of
product development; |
| — |
developments
in patent or other proprietary rights, including any third party
challenges of our intellectual property rights; |
| — |
announcements
of technological innovations by us or our
competitors; |
| — |
announcements
of new products or new contracts by us or our competitors;
|
| — |
actual
or anticipated variations in our operating results due to the level of
development expenses and other factors; |
| — |
changes
in financial estimates by securities analysts and whether our earnings
meet or exceed the estimates; |
| — |
conditions
and trends in the pharmaceutical and other
industries; |
| — |
new
accounting standards; and |
| — |
the
occurrence of any of the risks described in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Risks Related
to Our Business”. |
Our
common stock is listed for quotation on the NASDAQ National Market. During the
12-month period ended December, 2004, the price of our common stock has ranged
from $5.75 to $13.90. We expect the price of our common stock to remain
volatile. The average daily trading volume in our common stock varies
significantly. For the 12-month period ended December 31, 2004, the average
daily trading volume in our common stock was approximately 505,000 shares and
the average number of transactions per day was approximately 1,600. Our
relatively low average volume and low average number of transactions per day may
affect the ability of our stockholders to sell their shares in the public market
at prevailing prices and a more active market may never develop.
In
addition, we may not be able to continue to adhere to the strict listing
criteria of the National Market. If the common stock were no longer listed on
the National Market, investors might only be able to trade on the Nasdaq
SmallCap Market, in the over-the-counter market in the Pink Sheets® (a
quotation medium operated by the National Quotation Bureau, LLC) or on the OTC
Bulletin Board® of the
National Association of Securities Dealers, Inc. This would impair the liquidity
of our securities not only in the number of shares that could be bought and sold
at a given price, which might be depressed by the relative illiquidity, but also
through delays in the timing of transactions and reduction in media
coverage.
In the
past, following periods of volatility in the market price of the securities of
companies in our industry, securities class action litigation has often been
instituted against companies in our industry. If we face securities litigation
in the future, even if meritless or unsuccessful, it would result in substantial
costs and a diversion of management attention and resources, which would
negatively impact our business.
A
substantial number of our securities are eligible for future sale and this could
affect the market price for our stock and our ability to raise
capital.
The
market price of our common stock could drop due to sales of a large number of
shares of our common stock or the perception that these sales could occur. As of
December
31, 2004, we had
48,434,438 shares of common stock issued and outstanding. In addition, as of
December 31, 2004, up to 9,684,327 shares of our common stock were issuable upon
exercise of outstanding options and warrants. In December 2003, we filed a Form
S-3 shelf registration statement with the Commission for the proposed offering
from time to time of up to 6,500,000 shares of common stock. In February 2005,
we filed a post-effective amendment to such registration statement registering
an additional 1,468,592 shares of our common stock. In February 2005 we
completed a registered direct offering of 5,060,000 shares of our common stock
under the two registration statements leaving 708,592 shares of our common stock
available for us to sell in registered transactions under the shelf registration
statement. We have no immediate plans to sell any securities under the shelf
registration. However, subject to the effectiveness of the shelf registration
statement, we may issue securities from time to time in response to market
conditions or other circumstances on terms and conditions that will be
determined at such time. Additionally, there are 14,098,000 shares of our common
stock that are reserved for issuance under the CEFF arrangement with
Kingsbridge. See “Risks Related to Our Business - Our Committed Equity Financing
Facility may have a dilutive impact on our stockholders.
Holders
of our stock options and warrants are likely to exercise them, if ever, at a
time when we otherwise could obtain a price for the sale of our securities that
is higher than the exercise price per security of the options or warrants. This
exercise, or the possibility of this exercise, may impede our efforts to obtain
additional financing through the sale of additional securities or make this
financing more costly, and may reduce the price of our common
stock.
Provisions
of our Certificate of Incorporation, Shareholders Rights Agreement and Delaware
law could defer a change of our management which could discourage or delay
offers to acquire us.
Provisions
of our Restated Certificate of Incorporation, as amended, our Shareholders
Rights Agreement and Delaware law may make it more difficult for someone to
acquire control of us or for our stockholders to remove existing management, and
might discourage a third party from offering to acquire us, even if a change in
control or in management would be beneficial to our stockholders. For example,
our Restated Certificate of Incorporation, as amended, allows us to issue shares
of preferred stock without any vote or further action by our stockholders. Our
Board of Directors has the authority to fix and determine the relative rights
and preferences of preferred stock. Our Board of Directors also has the
authority to issue preferred stock without further stockholder approval. As a
result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of
the shares, together with a premium, prior to the redemption of our common
stock. In addition, our Board of Directors, without further stockholder
approval, could issue large blocks of preferred stock. We have adopted a
shareholders rights agreement which under certain circumstances would
significantly impair the ability of third parties to acquire control of us
without prior approval of our Board of Directors thereby discouraging
unsolicited takeover proposals. The rights issued under the shareholders rights
agreement would cause substantial dilution to a person or group that attempts to
acquire us on terms not approved in advance by our Board of
Directors.
|
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
Our
exposure to market risk is confined to our cash, cash equivalents and available
for sale securities. We place our investments with high quality issuers and, by
policy, limit the amount of credit exposure to any one issuer. We currently do
not hedge interest rate or currency exchange exposure. We classify highly liquid
investments purchased with a maturity of three months or less as “cash
equivalents” and commercial paper and fixed income mutual funds as “available
for sale securities.” Fixed income securities may have their fair market value
adversely affected due to a rise in interest rates and we may suffer losses in
principal if forced to sell securities that have declined in market value due to
a change in interest rates.
|
ITEM
8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA. |
See Index
to Consolidated Financial Statements on Page F-1.
|
ITEM
9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE. |
Not
applicable.
|
ITEM
9A. |
CONTROLS
AND PROCEDURES. |
(a)
Evaluation of disclosure controls and procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or our internal control over
financial reporting will prevent all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this
Annual
Report on Form
10-K. Based
on this
evaluation, our
Chief Executive Officer and our Chief Financial Officer
concluded that as of the
end of the period covered by this report our
disclosure controls and procedures were
effective in their
design to ensure that
information required
to be disclosed by us
in the
reports that
we file
or submit
under the
Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
(b)
Management’s Report on the Company’s Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
promulgated under the Exchange Act. Our internal control system is designed to
provide reasonable assurance to the Company's management and board of directors
regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2004. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on our assessment, we
believe that our internal control over financial reporting is effective based on
those criteria, as of December 31, 2004.
Our
independent auditors have issued an audit report on our assessment of our
internal control over financial reporting, which is included
herein.
(c) Changes
in internal controls
There
were no changes in our internal controls or other factors that could materially
affect those controls subsequent to the date of our evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
|
ITEM
9B. |
OTHER
INFORMATION |
Not
applicable.
PART
III
The
information required by Items 10 through 14 of Part III is incorporated by
reference to our definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the end of our fiscal
year.
We have
adopted a Code of Ethics that applies to our officers, including our principal
executive, financial and accounting officers, and our directors and employees.
We have posted the Code of Ethics on our Internet Website at “http://www.DiscoveryLabs.com”
(this is not a
hyperlink, you must visit this website through an Internet browser) under the
Investor Information, Corporate Policies section. We intend to make all required
disclosures on a Current Report on Form 8-K concerning any amendments to, or
waivers from, our Code of Ethics with respect to our executive officers and
directors. Our Website and the information contained therein or connected
thereto are not incorporated into this Annual Report on Form 10-K.
PART
IV
|
ITEM
15. |
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES |
Exhibits
are listed on the Index to Exhibits at the end of this Annual Report. The
exhibits required by Item 601 of Regulation S-K, listed on such Index in
response to this Item, are incorporated herein by reference.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DISCOVERY
LABORATORIES, INC.
Date:
March 16, 2005 |
By: |
/s/
Robert J. Capetola |
| |
|
Robert
J. Capetola, Ph.D. |
|
|
|
President
and |
|
|
|
Chief
Executive Officer |
In
accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature |
Name
& Title |
Date |
| |
|
|
|
/s/
Robert J. Capetola |
Robert
J. Capetola, Ph.D.
President
and Chief Executive Officer |
March
16, 2005 |
| |
|
|
|
/s/
John G. Cooper |
John
G. Cooper
Senior
Vice President and Chief Financial Officer |
March
16, 2005 |
| |
|
|
|
/s/
Kathleen A. McGowan |
Kathleen
A. McGowan
Controller
(Principal
Accounting Officer) |
March
16, 2005 |
| |
|
|
|
/s/
Herbert H. McDade, Jr. |
Herbert
H. McDade, Jr.
Chairman
of the Board of Directors |
March
16, 2005 |
| |
|
|
|
/s/
Marvin E. Rosenthale, Ph.D. |
Marvin
E. Rosenthale, Ph.D.
Director |
March
16, 2005 |
| |
|
|
|
/s/
Max E. Link, Ph.D. |
Max
E. Link, Ph.D.
Director |
March
16, 2005 |
| |
|
|
|
/s/
Antonio Esteve, Ph.D. |
Antonio
Esteve, Ph.D.
Director |
March
16, 2005 |
| |
|
|
|
/s/
W. Thomas Amick |
W.
Thomas Amick
Director |
March
16, 2005 |
INDEX
TO EXHIBITS
The
following exhibits are included with this Annual Report. All management
contracts or compensatory plans or arrangements are marked with an
asterisk.
|
Exhibit
No. |
|
Description |
|
Method
of Filing |
| |
|
|
|
|
|
3.1 |
|
Restated
Certificate of Incorporation of Discovery, dated September 18,
2002. |
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC on March
31, 2003. |
| |
|
|
|
|
|
3.2 |
|
Amended
and Restated By-laws of Discovery. |
|
Incorporated
by reference to Exhibit 3.2 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2003, as filed with the SEC on March
15, 2004. |
| |
|
|
|
|
|
3.3 |
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Cumulative Preferred Stock of Discovery, dated February 6,
2004. |
|
Incorporated
by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC
on February 6, 2004. |
| |
|
|
|
|
|
3.4 |
|
Certificate
of Amendment to the Certificate of Incorporation of Discovery, dated as of
May 28, 2004. |
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August 9,
2004. |
| |
|
|
|
|
|
4.1 |
|
Form
of Class E Warrant. |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on March 29, 2000. |
| |
|
|
|
|
|
4.2 |
|
Form
of Unit Purchase Option issued to Paramount Capital, Inc. |
|
Incorporated
by reference to Exhibit 4.4 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999, as filed with the SEC on
March 30, 2000. |
| |
|
|
|
|
|
4.3 |
|
Class
G Warrant issued to PharmaBio Development Inc., dated as of December 10,
2001. |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on December 19, 2001. |
|
Exhibit
No. |
|
Description |
|
Method
of Filing |
| |
|
|
|
|
|
4.4 |
|
Class
H Warrant issued to PharmaBio Development Inc., dated as of December 10,
2001. |
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on December 19, 2001. |
| |
|
|
|
|
|
4.5 |
|
$284,657.37
Promissory Note, dated December 27, 2002, issued to General Electric
Capital Corporation. |
|
Incorporated
by reference to Exhibit 4.9 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC on March
31, 2003. |
| |
|
|
|
|
|
4.6 |
|
Form
of Class A Investor Warrant. |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on June 20, 2003. |
| |
|
|
|
|
|
4.7 |
|
Class
B Investor Warrant issued to Kingsbridge Capital Limited. |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on July 9, 2004. |
| |
|
|
|
|
|
4.9 |
|
$8,500,000
Amended and Restated Promissory Note, amended and restated as of November
3, 2004, by and between Discovery and PharmaBio Development
Inc. |
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004. |
| |
|
|
|
|
|
4.10 |
|
Warrant
Agreement, dated as of November 3, 2004, by and between Discovery and
QFinance, Inc. |
|
Incorporated
by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004. |
| |
|
|
|
|
|
10.1 |
|
Form
of Registration Rights Agreement between Discovery, Johnson & Johnson
Development Corporation and The Scripps Research
Institute. |
|
Incorporated
by reference to Exhibit F to Exhibit 2.1 to Discovery’s Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997, as filed with the
SEC on March 31, 1998. |
| |
|
|
|
|
|
10.2+ |
|
Sublicense
Agreement, dated as of October 28, 1996, between Johnson & Johnson,
Ortho Pharmaceutical Corporation and Acute Therapeutics,
Inc. |
|
Incorporated
by reference to Exhibit 10.6 to Discovery’s Registration Statement on Form
SB-2, as filed with the SEC on January 7, 1997 (File No.
333-19375). |
| Exhibit
No. |
|
Description |
|
Method
of Filing |
| |
|
|
|
|
|
10.3 |
|
*Restated
1993 Stock Option Plan of Discovery. |
|
Incorporated
by reference to Discovery’s Registration Statement on Form SB-2 (File No.
33-92-886). |
| |
|
|
|
|
|
10.4 |
|
*1995
Stock Option Plan of Discovery. |
|
Incorporated
by reference to Discovery’s Registration Statement on Form SB-2 (File No.
33-92-886). |
| |
|
|
|
|
|
10.5 |
|
*Amended
and Restated 1998 Stock Incentive Plan of Discovery (amended as of May 11,
2004). |
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Registration Statement on Form
S-8, as filed with the SEC on June 8, 2004 (File No.
333-116268). |
| |
|
|
|
|
|
10.6 |
|
Registration
Rights Agreement, dated June 16, 1998, among Discovery, Johnson &
Johnson Development Corporation and The Scripps Research
Institute. |
|
Incorporated
by reference to Exhibit 10.28 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998, as filed with the SEC on
April 9, 1999. |
| |
|
|
|
|
|
10.7 |
|
Stock
Exchange Agreement, dated June 16, 1998, between Discovery and Johnson
& Johnson Development Corporation. |
|
Incorporated
by reference to Exhibit 10.29 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998, as filed with the SEC on
April 9, 1999. |
| |
|
|
|
|
|
10.8 |
|
Form
of Proprietary Information and Inventions, Non-Solicitation and Non
Competition Agreement. |
|
Incorporated
by reference to Exhibit 10.50 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998, as filed with the SEC on
April 9, 1999. |
| |
|
|
|
|
|
10.9* |
|
Form
of Notice of Grant of Stock Option under the 1998 Stock Incentive
Plan. |
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999, as filed with the SEC on
November 17, 1999. |
| |
|
|
|
|
|
10.10+ |
|
Research
Funding and Option Agreement, dated March 1, 2000, between The Scripps
Research Institute and Discovery. |
|
Incorporated
by reference to Exhibit 10.55 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999, as filed with the SEC on
March 31, 2000. |
| |
|
|
|
|
| Exhibit
No. |
|
Description |
|
Method
of Filing |
| |
|
|
|
|
|
10.11 |
|
Master
Security Agreement, dated as of December 23, 2002, between General
Electric Capital Corporation and Discovery. |
|
Incorporated
by reference to Exhibit 10.32 to Discovery’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, as filed with the SEC on
March 31, 2003. |
| |
|
|
|
|
|
10.12 |
|
Amendment,
dated as of December 23, 2002, to the Master Security Agreement between
General Electric Capital Corporation and Discovery. |
|
Incorporated
by reference to Exhibit 10.33 to Discovery’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, as filed with the SEC on
March 31, 2003. |
| |
|
|
|
|
|
10.13+ |
|
Technology
Transfer and Manufacturing Agreement dated as of October 3, 2003, between
Discovery and Laureate Pharma, L.P. (now Laureate Pharma,
Inc.). |
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on October 22, 2003. |
| |
|
|
|
|
|
10.14 |
|
Shareholder
Rights Agreement, dated as of February 6, 2004, by and between Discovery
and Continental Stock Transfer & Trust Company. |
|
Incorporated
by reference to Exhibit 2.4 to Discovery’s Form 8-A12G, as filed with the
SEC on February 6, 2004. |
| |
|
|
|
|
|
10.15 |
|
Common
Stock Purchase Agreement, dated as of July 7, 2004, by and between
Kingsbridge Capital Limited and Discovery. |
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 9, 2004. |
| |
|
|
|
|
|
10.16 |
|
Registration
Rights Agreement, dated as of July 7, 2004, by and between Kingsbridge
Capital Limited and Discovery. |
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 9, 2004. |
| |
|
|
|
|
|
10.17 |
|
Agreement,
dated as of November 3, 2004, by and between Discovery, Quintiles
Transnational Corp. and PharmaBio Development Inc.
|
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004. |
| |
|
|
|
|
|
10.18 |
|
Amended
and Restated Loan Agreement, dated as of December 10, 2001, amended and
restated as of November 3, 2004, by and between Discovery and PharmaBio
Development Inc. |
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004. |
| Exhibit
No. |
|
Description |
|
Method
of Filing |
| |
|
|
|
|
|
10.19 |
|
Amended
and Restated Security Agreement, dated as of December 10, 2001, amended
and restated as of November 3, 2004, by and between Discovery and
PharmaBio Development Inc. |
|
Incorporated
by reference to Exhibit 10.3 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004. |
| |
|
|
|
|
|
10.21 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Robert J.
Capetola, Ph.D. |
|
Filed
herewith. |
| |
|
|
|
|
|
10.22 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and John G.
Cooper. |
|
Filed
herewith. |
| |
|
|
|
|
|
10.23 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and David L.
Lopez, Esq., CPA. |
|
Filed
herewith. |
| |
|
|
|
|
|
10.24 |
|
Employment
Agreement, dated as of May 24, 2004, between Discovery and Mark
Osterman. |
|
Filed
herewith. |
| |
|
|
|
|
|
10.25 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Christopher
J. Schaber, Ph.D. |
|
Filed
herewith. |
| |
|
|
|
|
|
10.26 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Robert
Segal, M.D. |
|
Filed
herewith. |
| |
|
|
|
|
|
10.27 |
|
Employment
Agreement, dated as of January 1, 2004, between Discovery and Deni M.
Zodda, Ph.D. |
|
Filed
herewith. |
| |
|
|
|
|
|
10.28+ |
|
Amended
and Restated Sublicense and Collaboration Agreement made as of December 3,
2004, between Discovery and Laboratorios Del Dr. Esteve,
S.A. |
|
Filed
herewith. |
| Exhibit
No. |
|
Description |
|
Method
of Filing |
| |
|
|
|
|
|
10.29+ |
|
Amended
and Restated Supply Agreement, dated as of December 3, 2004, by and
between Discovery and Laboratorios Del Dr. Esteve, S.A. |
|
Filed
herewith. |
| |
|
|
|
|
|
21.1 |
|
Subsidiaries
of Discovery. |
|
Incorporated
by reference to Exhibit 21.1 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997, as filed with the SEC on
March 31, 1998. |
| |
|
|
|
|
|
23.1 |
|
Consent
of Ernst & Young LLP. |
|
Filed
herewith. |
| |
|
|
|
|
|
31.1 |
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange
Act. |
|
Filed
herewith. |
| |
|
|
|
|
|
31.2 |
|
Certification
of Chief Financial Officer and Principal Accounting Officer Pursuant to
Rule 13a-14(a) of the Exchange Act. |
|
Filed
herewith. |
| |
|
|
|
|
|
32.1 |
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
Filed
herewith. |
| + |
Confidential
treatment requested as to certain portions of these exhibits. Such
portions have been redacted and filed separately with the
Commission. |
| CONTENTS |
Page |
| |
|
|
Consolidated
Financial Statements |
|
| |
|
|
Report
of Independent Registered Public Accounting Firm |
F-2 |
| |
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting |
F-3 |
| |
|
|
Balance
Sheets as of December 31, 2004 and December 31, 2003 |
F-4 |
| |
|
|
Statements
of Operations for the years ended December 31, 2004, 2003 and
2002 |
F-5 |
| |
|
|
Statements
of Changes in Stockholders' Equity for the years ended December 31, 2004,
2003 and 2002 |
F-6 |
| |
|
|
Statements
of Cash Flows for the years ended December 31, 2004, 2003 and
2002 |
F-7 |
| |
|
|
Notes
to consolidated financial statements: |
|
| |
|
|
Note
1 - |
The
Company and Basis of Presentation |
F-8 |
|
Note
2 - |
Summary
of Significant Accounting Policies |
F-8 |
|
Note
3 - |
Investments |
F-11 |
|
Note
4 - |
Restricted
Cash |
F-11 |
|
Note
5 - |
Note
Receivable |
F-11 |
|
Note
6 - |
Property
and Equipment |
F-11 |
|
Note
7 - |
Secured
Credit Facility and Capital Lease Financing Arrangement |
F-12 |
|
Note
8 - |
Corporate
Partnership Agreements |
F-13 |
|
Note
9 - |
Licensing
and Research Funding Agreements |
F-15 |
|
Note
10 - |
Stockholders’
Equity |
F-15 |
|
Note
11 - |
Stock
Options |
F-19 |
|
Note
12 - |
401(k)
Match |
F-22 |
|
Note
13 - |
Commitments |
F-22 |
|
Note
14 - |
Recently
Issued Accounting Standards |
F-23 |
|
Note
15 - |
Related
Party Transactions |
F-23 |
|
Note
16 - |
Income
Taxes |
F-25 |
|
Note
17 - |
Subsequent
Events |
F-26 |
|
Note
18 - |
Selected
Quarterly Financial Data (unaudited) |
F-27 |
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
Discovery
Laboratories, Inc.
Warrington,
Pennsylvania
We have
audited the accompanying consolidated balance sheets of Discovery Laboratories,
Inc. and subsidiary (the “Company”) as of December 31, 2004 and 2003, and the
related consolidated statements of operations, changes in stockholders’ equity
and cash flows for each of the three years in the period ended December 31,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2004 and 2003, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
March 11, 2005, expressed an unqualified opinion thereon.
/s/Ernst
& Young LLP
Philadelphia,
Pennsylvania
March 11,
2005
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
Discovery
Laboratories, Inc.
Warrington,
Pennsylvania
We have
audited management’s assessment, included in the accompanying Management’s
Report on the Company’s Internal Control over Financial Reporting, that
Discovery Laboratories, Inc. and subsidiary (the “Company”) maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an opinion on the
effectiveness of the company’s internal control over financial reporting based
on our audit.
We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
In our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balances sheets of the Company
as of December 31, 2004 and 2003, and the related consolidated statement of
operations, changes in stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2004 of the Company and our report dated
March 11, 2005 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Philadelphia,
Pennsylvania
March 11,
2005
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
| |
|
December
31, |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
Current
Assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
29,264,000 |
|
$ |
29,422,000 |
|
|
Restricted
cash |
|
|
646,000 |
|
|
— |
|
|
Available-for-sale
marketable securities |
|
|
2,744,000 |
|
|
— |
|
|
Note
receivable, current portion |
|
|
3,000
|
|
|
3,000
|
|
|
Prepaid
expenses and other current assets |
|
|
685,000
|
|
|
665,000
|
|
|
Total
Current Assets |
|
|
33,342,000 |
|
|
30,090,000
|
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation |
|
|
4,063,000 |
|
|
2,414,000
|
|
|
Note
receivable, non-current portion |
|
|
190,000 |
|
|
192,000
|
|
|
Other
assets |
|
|
42,000 |
|
|
19,000
|
|
|
Total
Assets |
|
$ |
37,637,000 |
|
$ |
32,715,000 |
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Current
Liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses |
|
$ |
7,969,000 |
|
$ |
4,210,000 |
|
|
Credit
facility, current portion |
|
|
—
|
|
|
2,436,000
|
|
|
Capitalized
leases, current portion |
|
|
854,000 |
|
|
383,000
|
|
|
Total
Current Liabilities |
|
|
8,823,000 |
|
|
7,029,000
|
|
| |
|
|
|
|
|
|
|
|
Deferred
revenue |
|
|
134,000 |
|
|
672,000
|
|
|
Credit
facility, non-current portion |
|
|
5,929,000 |
|
|
— |
|
|
Capitalized
leases, non-current portion |
|
|
1,654,000 |
|
|
711,000
|
|
|
Total
Liabilities |
|
|
16,540,000 |
|
|
8,412,000
|
|
| |
|
|
|
|
|
|
|
|
Shareholders'
Equity: |
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; 80,000,000 authorized;
48,434,438
and 42,491,438 issued and outstanding
at
December 31, 2004 and December 31, 2003, respectively |
|
|
49,000 |
|
|
43,000
|
|
|
Additional
paid-in capital |
|
|
167,627,000 |
|
|
122,409,000
|
|
|
Unearned
portion of compensatory stock options |
|
|
(461,000 |
) |
|
(2,000 |
) |
|
Accumulated
deficit |
|
|
(143,061,000 |
) |
|
(96,858,000 |
) |
|
Treasury
stock (at cost; 313,383 and 167,179 shares of common
stock
at December 31, 2004 and 2003, respectively) |
|
|
(3,054,000 |
) |
|
(1,289,000 |
) |
|
Accumulated
other comprehensive income |
|
|
(3,000 |
) |
|
— |
|
|
Total
Shareholders' Equity |
|
|
21,097,000 |
|
|
24,303,000
|
|
|
Total
Liabilities & Shareholders’ Equity |
|
$ |
37,637,000 |
|
$ |
32,715,000 |
|
| |
|
|
|
|
|
|
|
See notes to consolidated financial statements
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Contracts,
licensing, milestones and grants |
|
$ |
1,209,000 |
|
$ |
1,037,000 |
|
$ |
1,782,000 |
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Research
& development |
|
|
25,793,000 |
|
|
19,750,000
|
|
|
14,347,000
|
|
|
General
& administrative |
|
|
13,322,000 |
|
|
5,722,000
|
|
|
5,458,000
|
|
|
Corporate
partnership restructuring charges |
|
|
8,126,000 |
|
|
— |
|
|
— |
|
|
Total
expenses |
|
|
47,241,000 |
|
|
25,472,000
|
|
|
19,805,000
|
|
|
Operating
Loss |
|
|
(46,032,000 |
) |
|
(24,435,000 |
) |
|
(18,023,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Other
income and expenses: |
|
|
|
|
|
|
|
|
|
|
|
Interest
income, dividends, realized
gains,
and other income |
|
|
711,000 |
|
|
452,000
|
|
|
724,000
|
|
|
Interest
expense |
|
|
(882,000 |
) |
|
(297,000 |
) |
|
(144,000 |
) |
|
Other
(expense) / income, net |
|
|
(171,000 |
) |
|
155,000 |
|
|
580,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss |
|
|
(46,203,000 |
) |
|
(24,280,000 |
) |
$ |
(17,443,000 |
) |
|
Net
loss per common share - basic and diluted |
|
|
(1.00 |
) |
|
(0.65 |
) |
$ |
(0.64 |
) |
|
Weighted
average number of common shares
outstanding - basic and diluted |
|
|
46,178,981 |
|
|
37,426,034 |
|
|
27,350,835
|
|
| |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Changes in Stockholders' Equity
For
Years Ended December 31, 2004,
2003, and 2002
| |
|
|
Common
Stock |
|
|
|
|
|
|
|
|
|
|
|
Treasury
Stock |
|
|
|
|
|
|
|
| |
|
|
Shares |
|
|
Amount |
|
|
Additional
Paid-in
Capital |
|
|
Unearned
Portion
of
Compensatory
Stock
Options |
|
|
Accumulated
Deficit |
|
|
Shares |
|
|
Amount |
|
|
Accumulated
Other
Comprehensive
(Loss) |
|
|
Total |
|
|
Balance
- January 1, 2002 |
|
|
25,546,293
|
|
$ |
26,000 |
|
$ |
73,163,000 |
|
$ |
(264,000 |
) |
$ |
(55,135,000 |
) |
|
(38,243 |
) |
$ |
(239,000 |
) |
$ |
72,000 |
|
$ |
17,623,000 |
|
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,443,000 |
) |
|
|
|
|
|
|
|
|
|
|
(17,443,000 |
) |
|
Other
comprehensive loss - unrealized loss on marketable
securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,000 |
|
|
105,000
|
|
|
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,338,000 |
) |
|
Issuance
of common stock, stock option exercises |
|
|
77,925
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
Issuance
of common stock, payment for services |
|
|
6,086
|
|
|
|
|
|
26,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,000
|
|
|
Compensation
charge on modification of options |
|
|
|
|
|
|
|
|
171,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,000
|
|
|
Compensation
charge on vesting of options and warrants |
|
|
|
|
63,000
|
|
|
169,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,000
|
|
|
Issuance
of common stock, March 2002 private financing |
|
|
821,862
|
|
|
|
|
|
2,666,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,666,000
|
|
|
Private
financing expenses |
|
|
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,000 |
) |
|
Issuance
of common stock, November 2002 private financing |
|
|
6,397,517
|
|
|
7,000
|
|
|
11,937,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,944,000
|
|
|
Change
in value of Class H warrants |
|
|
|
|
|
|
|
|
(618,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(618,000 |
) |
|
Issuance
of common stock, warrant exercises |
|
|
6,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2002 |
|
|
32,856,526
|
|
|
33,000
|
|
|
87,463,000
|
|
|
(95,000 |
) |
|
(72,578,000 |
) |
|
(38,243 |
) |
|
(239,000 |
) |
|
177,000 |
|
|
14,761,000
|
|
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,280,000 |
) |
|
|
|
|
|
|
|
|
(
24,280,000 |
) |
|
Other
comprehensive loss - unrealized gain on marketable
securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177,
000 |
) |
|
(177,000 |
) |
|
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,457,000 |
) |
|
Issuance
of common stock, stock option exercises |
|
|
993,001 |
|
|
1,000 |
|
|
1,940,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,941,000 |
|
|
Issuance
of common stock, warrant exercises |
|
|
3,789,875 |
|
|
4,000 |
|
|
6,846,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,850,000 |
|
|
Compensatory
stock options and warrants granted/earned |
|
|
|
|
|
|
|
|
20,000 |
|
|
(17,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
Compensation
charge on modification of options |
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
Compensation
charge on vesting of options and warrants |
|
|
|
|
|
|
|
|
79,000
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,000
|
|
|
Earned
portion of compensatory stock options |
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
Issuance
of common stock, June 2003 private financing |
|
|
4,997,882
|
|
|
5,000
|
|
|
25,925,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,930,000
|
|
|
Issuance
of common stock, 401k employer match |
|
|
21,333
|
|
|
|
|
|
86,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,000 |
|
|
Change
in value of Class H warrants |
|
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
|
Shares
tendered for exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128,936 |
) |
|
(1,050,000 |
) |
|
|
|
|
(1,050,000 |
) |
|
Balance
- December 31, 2003 |
|
|
42,658,617
|
|
|
43,000
|
|
|
122,409,000 |
|
|
(2,000 |
) |
|
(96,858,000 |
) |
|
(167,179 |
) |
|
(1,289,000 |
) |
|
__ |
|
|
24,303,000
|
|
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,203,000 |
) |
|
|
|
|
|
|
|
|
|
|
(46,203,000 |
) |
|
Other
comprehensive loss - unrealized gain on marketable
securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,000 |
) |
|
(3,000 |
) |
|
Total
comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,206,000 |
) |
|
Issuance
of common stock, stock option exercises
|
|
|
1,271,493 |
|
|
1,000 |
|
|
2,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,501,000 |
|
|
Issuance
of common stock, warrant exercises
|
|
|
1,193,405 |
|
|
1,000 |
|
|
1,819,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,820,000 |
|
|
Issuance
of common stock, 401(k) employer match |
|
|
22,564 |
|
|
|
|
|
196,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,000 |
|
|
Expense
related to stock options |
|
|
|
|
|
|
|
|
1,723,000 |
|
|
(459,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,264,000 |
|
|
Issuance
of common stock, April 2004 financing
|
|
|
2,200,000 |
|
|
2,000 |
|
|
22,793,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,795,000 |
|
|
Issuance
of warrants, October 2004 Quintiles restructuring |
|
|
|
|
|
|
|
|
3,978,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,978,000 |
|
|
Issuance
of common stock, December 2004 Esteve restructuring |
|
|
500,000 |
|
|
1,000 |
|
|
3,465,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,466,000 |
|
|
Issuance
of common stock, December 2004 draw on CEFF |
|
|
901,742 |
|
|
1,000 |
|
|
7,090,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,091,000 |
|
|
Financing
expenses |
|
|
|
|
|
|
|
|
(63,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,000 |
) |
|
Change
in value of Class H warrants |
|
|
|
|
|
|
|
|
(48,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,000 |
) |
|
Shares
tendered for exercise of stock options |
|
|
|
|
|
1,765,000 |
|
|
|
|
|
|
|
|
(146,204 |
) |
|
(1,765,000 |
) |
|
|
|
|
— |
|
|
Balance
- December 31, 2004 |
|
|
48,747,821 |
|
$ |
49,000 |
|
$ |
167,627,000 |
|
$ |
(461,000 |
) |
$ |
(143,061,000 |
) |
$ |
(313,383 |
) |
|
(3,054,000 |
) |
$ |
(3,000 |
) |
$ |
21,097,000 |
|
See notes to consolidated financial statements
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
| |
|
|
|
|
|
|
|
| |
|
Year
Ended December 31, |
|
| |
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002 |
|
Cash
flow from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(46,203,000 |
) |
$ |
(24,280,000 |
) |
$ |
(17,443,000 |
) |
|
Adjustments
to reconcile net loss to net cash used
In
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
816,000 |
|
|
416,000
|
|
|
285,000
|
|
|
Realized
(gains) losses on marketable securities |
|
|
— |
|
|
(114,000 |
) |
|
(174,000 |
) |
|
Non-cash
charge for issuance of common stock and
warrants
related to corporate partnership restructurings |
|
|
7,443,000 |
|
|
— |
|
|
— |
|
|
Non-cash
stock compensation expense |
|
|
1,264,000 |
|
|
192,000
|
|
|
403,000
|
|
|
Stock
issued for 401(k) match |
|
|
196,000 |
|
|
86,000 |
|
|
— |
|
|
Expenses
paid using treasury stock and Common Stock |
|
|
— |
|
|
— |
|
|
26,000
|
|
|
Loss
on disposal of fixed assets |
|
|
12,000 |
|
|
— |
|
|
— |
|
|
Changes
in: |
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses, inventory and other current assets |
|
|
(68,000 |
) |
|
(340,000 |
) |
|
1,255,000
|
|
|
Accounts
payable and accrued expenses |
|
|
3,759,000 |
|
|
1,197,000
|
|
|
1,263,000
|
|
|
Other
assets |
|
|
(23,000 |
) |
|
103,000
|
|
|
(40,000 |
) |
|
Proceeds
from research and development
collaborative
agreements |
|
|
— |
|
|
— |
|
|
1,833,000
|
|
|
Amortization
of deferred revenue |
|
|
(538,000 |
) |
|
(721,000 |
) |
|
(1,055,000 |
) |
|
Net
cash used in operating activities |
|
|
(33,342,000 |
) |
|
(23,461,000 |
) |
|
(13,647,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment |
|
|
(2,207,000 |
) |
|
(1,514,000 |
) |
|
(661,000 |
) |
|
Restricted
cash |
|
|
(646,000 |
) |
|
— |
|
|
— |
|
|
Related
party loan payments received |
|
|
2,000 |
|
|
2,000
|
|
|
2,000
|
|
|
Purchase
of marketable securities |
|
|
(18,483,000 |
) |
|
(284,000 |
) |
|
(8,569,000 |
) |
|
Proceeds
from sale or maturity of marketable securities |
|
|
15,465,000 |
|
|
10,873,000
|
|
|
11,134,000
|
|
|
Net
cash (used in) / provided by investing activities |
|
|
(5,869,000 |
) |
|
9,077,000
|
|
|
1,906,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of securities, net of expenses |
|
|
35,911,000 |
|
|
34,721,000
|
|
|
14,665,000
|
|
|
Proceeds
from use of credit facility |
|
|
3,493,000 |
|
|
986,000
|
|
|
1,450,000
|
|
|
Purchase
of treasury stock |
|
|
(1,765,000 |
) |
|
(1,050,000 |
) |
|
— |
|
|
Equipment
subsequently financed through capital lease |
|
|
1,928,000 |
|
|
908,000 |
|
|
434,000 |
|
|
Principal
payments under capital lease obligation |
|
|
(514,000 |
) |
|
(259,000 |
) |
|
(66,000 |
) |
|
Net
cash provided by financing activities |
|
|
39,053,000 |
|
|
35,305,000
|
|
|
16,483,000
|
|
|
Net
(decrease) / increase in cash and cash equivalents |
|
|
(158,000 |
) |
|
20,922,000
|
|
|
4,742,000
|
|
|
Cash
and cash equivalents - beginning of year |
|
|
29,422,000 |
|
|
8,500,000
|
|
|
3,758,000
|
|
|
Cash
and cash equivalents - end of year |
|
$ |
29,264,000 |
|
$ |
29,422,000 |
|
$ |
8,500,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Supplementary
disclosure of cash flows information: |
|
|
|
|
|
|
|
|
|
|
|
Interest
Paid |
|
$ |
186,000 |
|
$ |
167,000 |
|
$ |
88,000 |
|
|
Noncash
transactions: |
|
|
|
|
|
|
|
|
|
|
|
Class
H warrants issued/revalued |
|
$ |
(48,000 |
) |
$ |
50,000 |
|
$ |
(618,000 |
) |
|
Unrealized
gain / (loss) on marketable securities |
|
|
(3,000 |
) |
|
(177,000 |
) |
|
105,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Note
1 - The Company and Basis of Presentation
Discovery
Laboratories, Inc. (the “Company”) is a biopharmaceutical company developing its
proprietary surfactant technology as Surfactant Replacement Therapies (SRT) for
respiratory diseases. Surfactants are produced naturally in the lungs and are
essential for breathing. The Company’s technology produces a
precision-engineered surfactant that is designed to closely mimic the essential
properties of natural human lung surfactant. The Company believes that through
its technology, pulmonary surfactants have the potential, for the first time, to
be developed into a series of respiratory therapies for patients in the neonatal
intensive care unit, critical care unit and other hospital settings, where there
are few or no approved therapies available.
The
Company has received an Approvable Letter from the FDA for SurfaxinÒ, the
Company’s lead product, for the prevention of Respiratory Distress Syndrome
(RDS) in premature infants, and has filed a Marketing Authorization Application
with the EMEA for clearance to market Surfaxin in Europe. The Company is also
conducting various clinical programs to address Acute Respiratory Distress
Syndrome (ARDS) in adults, Bronchopulmonary Dysplasia (BPD) in premature
infants, Neonatal Respiratory Disorders in premature infants, severe asthma in
adults, and Meconium Aspiration Syndrome (MAS) in full-term
infants.
Management’s
Plans and Financings
The
Company has incurred substantial losses since inception. The Company funds its
operations primarily through the issuance of equity and through strategic
alliances. The Company expects to continue to expend substantial amounts for
continued product research, development and commercialization activities for the
foreseeable future. Management plans to fund its research, development and
commercialization activities with the issuance of additional equity and entering
into strategic alliances, if possible, that will provide funding for operations,
including increased commercialization efforts this year. Continuation of the
Company is dependent on its ability to obtain additional financing and,
ultimately, on its ability to achieve profitable operations. There is no
assurance, however, that such financing will be available or that the Company's
efforts ultimately will be successful.
Note
2 - Summary of Significant Accounting Policies
Cash
and cash equivalents
The
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Available-for-sale
marketable securities
The
investments are classified as available for sale and are comprised of shares of
high quality fixed income commercial paper and mutual funds. Investments are
carried at fair market value. Realized gains and losses are computed using the
average cost of securities sold. Any appreciation/depreciation on these
investments is recorded as other comprehensive income (loss) in the statements
of changes in stockholders' equity until realized.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Property
and equipment
|
|
Property
and equipment is recorded at cost. Depreciation of furniture and equipment
is computed using the straight-line method over the estimated useful lives
of the assets (five to seven years). Leasehold improvements are amortized
over the lower of the (a) term of the lease or (b) useful life of the
improvements. |
Use
of estimates
The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Long-lived
assets
Under
Statement of Financial Accounting Standards (SFAS) No. 144, the Company is
required to recognize an impairment loss only if the carrying amount of a
long-lived asset is not recoverable from its undiscounted cash flows and measure
any impairment loss as the difference between the carrying amount and the fair
value of the asset. No impairment was recorded during the years ended December
31, 2004, 2003 and 2002, as management of the Company believes the sum of its
future undiscounted cash flows will exceed the carrying amount of the
assets.
Research
and development
Research
and development costs are charged to operations as incurred.
Revenue
recognition - research and development collaborative
agreements
The
Company received nonrefundable fees from companies under license, sublicense,
collaboration and research funding agreements. The Company initially records
such funds as deferred revenue and recognizes research and development
collaborative contract revenue when the amounts are earned, which occurs over a
number of years as the Company performs research and development activities. See
Note 8 - Corporate Partnerships Agreements for a detailed description of the
Company’s revenue recognition methodology under these agreements.
Additionally,
the Company has been awarded grants from certain third party organizations to
help fund research for the drugs that the Company is currently developing. Once
research and development expenditures qualifying under the grant are incurred,
grant reports are periodically completed and submitted to the granting agency
for review. If approved, the granting agency remits payment to the Company,
which is recorded as revenue upon receipt.
DISCOVERY LABORATORIES, INC. AND
SUBSIDIARY
Stock-based
compensation
The
Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation -
Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123, “Accounting for
Stock-Based Compensation” to provide alternative methods of transition to a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on the reported results.
The Company continues to account for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, “Accounting for Stock Options Issued
to Employees” and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying Common Stock and the
exercise price of the option at the date of grant. The effect of applying SFAS
No. 148 on pro forma net loss is not necessarily representative of the effects
on reported net income or loss for future years due to, among other things, (i)
the vesting period of the stock options and (ii) the fair value of additional
stock options in future years. Had compensation cost for the Company's stock
option plans been determined based upon the fair value of the options at the
grant date of awards under the plans consistent with the methodology prescribed
under SFAS No. 148, the pro forma net loss for the years ended December 31,
2004, 2003, and 2002 would have been as follows:
| |
|
Years
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Net
Loss as reported |
|
$ |
(46,203,000 |
) |
$ |
(24,280,000 |
) |
$ |
(17,443,000 |
) |
|
Additional
stock-based
employee
compensation |
|
$ |
(3,996,000 |
) |
$ |
(3,738,000 |
) |
$ |
(2,264,000 |
) |
|
Pro
forma net loss |
|
$ |
(50,199,000 |
) |
$ |
(28,018,000 |
) |
$ |
(19,707,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net loss per share |
|
$ |
(1.09 |
) |
$ |
(0.75 |
) |
$ |
(0.72 |
) |
The net
loss as reported on the income statement for the year ended December 31, 2004
includes compensation
costs for stock-based employee compensation awards of
$1,264,000. These costs include a non-cash charge of $483,000 for the
modification of options held by a former member of management. These
compensation costs also include a non-cash charge related to the vested portion
of employee stock options granted and approved by the Company’s Board of
Directors in December 2003, but were subject to subsequent shareholder approval.
These employee options were granted at fair market value on the date of approval
by the Board of Directors. These options were expressly subject to the requisite
approval of the Company’s shareholders for an amendment to the 1998 Plan
authorizing an increase in the number of shares of Common Stock issuable under
the plan in an amount equal to or greater than the aggregate amount of such
options. Approval was obtained at the Company’s Annual Meeting of Shareholders
for 2004, at which time the fair market value of our Common Stock was greater
than the fair market value on the date the options were granted. The difference
in fair market value on the date of grant versus the date of subsequent
shareholder approval was recorded as unearned portion of compensatory stock
options and will be recognized into expense as the options vest. The Company
incurred a non-cash charge of $461,000 related to the vesting of such options in
2004.
The
weighted average fair value of the options granted were estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
| |
|
Years
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Expected
dividend yield |
|
|
0 |
% |
|
0 |
% |
|
0 |
% |
|
Expected
stock price volatility |
|
|
81 |
% |
|
86 |
% |
|
95 |
% |
|
Risk-free
interest rate |
|
|
3.5 |
% |
|
2.4 |
% |
|
2.5 |
% |
|
Expected
option term |
|
|
3.5
years |
|
|
3.5
years |
|
|
3.5
years |
|
In
December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, which establishes standards for transactions in which an
entity exchanges its equity instruments for goods or services. See Note 14 -
Recently Issued Accounting
Standards
Net
loss per common share
Net loss
per common share is computed pursuant to the provisions of SFAS No. 128,
"Earnings per Share", and is based on the weighted average number of common
shares outstanding for the periods. For the years ended December 31, 2004, 2003
and 2002, 9,684,000, 8,753,000 and 4,032,000 shares of Common Stock,
respectively, were potentially issuable upon the exercise of certain of the
Company’s stock options and warrants and were not included in the calculation of
net loss per share as the effect would be anti-dilutive.
Reclassification
Certain
prior year balances have been reclassified to conform with the current
presentation.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
3 - Investments
The
available-for-sale marketable securities held by the Company at December 31,
2004 consisted of high-quality, corporate bonds with an aggregate cost of
$2,737,000 and gross unrealized losses of $3,000 included in accumulated other
comprehensive income. As of December 31, 2003, the Company did not hold
marketable securities. As of December 31, 2002, the Company had marketable
securities with an aggregate cost of $10,475,000 and a net unrealized holding
gain of $177,000 included in accumulated other comprehensive income. All
available-for-sale marketable securities have a maturity period of less than one
year.
Note
4 - Restricted Cash
The
Company has cash balances that are restricted as to use and discloses such
amounts separately on the Balance Sheet. The primary component of Restricted
Cash is a security deposit in the amount of $600,000 in the form of a letter of
credit related to the lease agreement dated May 26, 2004 for the Company’s
office space in Bucks County, Pennsylvania. The letter of credit is secured by
cash and is included in the Balance Sheet as “Restricted Cash.” Beginning in
March 2008, the security deposit and the letter of credit will be reduced to
$400,000. That balance will remain in effect through the remainder of the lease
term. Subject to certain conditions, upon expiration of the lease in November
2009, the letter of credit will expire.
Note
5 - Note Receivable
Note
receivable pertains to a $200,000, 7% per annum mortgagor’s note due from an
executive of the Company. This note is secured by a mortgage agreement dated
July 24, 2001. The note calls for monthly payments of principal and interest
over a 360-month period. The principal balance outstanding at December 31, 2004,
2003 and 2002 was approximately $193,000, $195,000 and $197,000,
respectively.
Note
6 - Property and Equipment
Property
and equipment as of December 31, 2004 and 2003 was comprised of the
following:
| |
|
December 31, |
|
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
|
|
Equipment
(1) |
|
$ |
3,589,000 |
|
$ |
2,217,000 |
|
|
Furniture |
|
|
869,000 |
|
|
314,000
|
|
|
Leasehold
improvements |
|
|
330,000 |
|
|
174,000
|
|
|
Construction
in progress |
|
|
891,000 |
|
|
792,000
|
|
| |
|
|
|
|
|
|
|
|
Property
and equipment before accumulated depreciation |
|
|
5,679,000 |
|
|
3,497,000
|
|
|
Accumulated
depreciation |
|
|
(1,616,000 |
) |
|
(1,083,000 |
) |
|
Net
property and equipment |
|
|
4,063,000 |
|
$ |
2,414,000 |
|
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
| (1) |
The
equipment balance consists of (i) manufacturing equipment to produce
Surfaxin for use in the Company’s clinical trials and for anticipated
commercial needs; (ii) laboratory equipment for research and development
activities, including aerosol development; and (iii) computers and office
equipment to support the research, development, administrative and
commercialization activities of the Company. |
The
property and equipment balance as of December 31, 2004 and 2003 includes
$3,396,000 and $1,468,000, respectively, of property and equipment subject to a
capital lease. The related accumulated depreciation was $546,000 and $194,000 as
of December 31, 2004 and 2003, respectively.
The
balance of Construction in Progress at December 31, 2003 primarily consisted of
manufacturing equipment and related installation and validation costs associated
with the transfer of the Company’s manufacturing capabilities to its contract
manufacturer, Laureate Pharma, Inc. (“Laureate”). This project was completed in
2004 and the assets were transferred from Construction in Progress to Equipment.
The balance of Construction in Progress at December 31, 2004 primarily consists
of new manufacturing equipment that will ultimately serve as the Company’s
back-up manufacturing capability.
In
addition to the balance in Construction in Progress, the Company had additional
construction purchase commitments, yet to be fulfilled, totaling $891,000 as of
December 31, 2004. As of December 31, 2003, the Company had $554,000 of
construction purchase commitments, yet to be fulfilled, which were subsequently
fulfilled in 2004.
Depreciation
expense for the years ended December 31, 2004, 2003, and 2002 was $546,000,
$331,000, and $252,000, respectively.
Note
7 - Secured Credit Facility and Capital Lease Financing
Arrangement
Secured
Credit Facility with Quintiles Transnational Corp.
(“Quintiles”)
The
Company entered into a collaboration arrangement with Quintiles, in 2001, to
provide certain commercialization services in the United States for Surfaxin for
the treatment of RDS in premature infants and MAS in full-term infants. In
connection with the commercialization agreement, Quintiles extended to the
Company a secured, revolving credit facility of up to $8.5 to $10.0 million to
fund pre-marketing activities associated with the launch of Surfaxin in the
United States certain milestones were achieved. The Company was obligated to use
a significant portion of the funds borrowed under the credit facility for
pre-launch marketing services provided by Quintiles. Principal amounts owed by
us under the credit facility may have been repaid out of the proceeds of
milestone payments to be paid to the Company by Quintiles upon the achievement
of certain corporate milestones. Interest was payable quarterly in arrears at a
rate of 8% annually. Outstanding principal was due on December 10, 2004.
DISCOVERY LABORATORIES, INC. AND
SUBSIDIARY
In
November 2004, the Company restructured its business arrangements with Quintiles
and terminated the commercialization agreement for Surfaxin in the United
States. The existing secured, revolving credit facility remained available to
borrow up to $8.5 million. By virtue of the termination of the commercialization
agreements, the Company is no longer obligated to use funds advanced under the
credit facility for services provided by Quintiles, and Quintiles is no longer
obligated to make milestone payments. The original maturity date of December 10,
2004, is now extended until December 31, 2006. The interest rate remains 8%
annually and payments are due quarterly in arrears. As of December 31, 2004,
$5,929,000 was outstanding under the credit facility, including $3,493,000 used
in 2004. Subsequent to December 31, 2004, in February 2005, the Company borrowed
the remaining available funds and has an outstanding balance of $8.5 million.
Outstanding principal and interest due under the credit facility are due and
payable as a balloon payment on December 31, 2006.
Capital
Lease Financing Arrangement with General Electric Capital Corporation
(GECC)
Capital
lease liabilities for the years ended December 31, 2004 and 2003 are as
follows:
| |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
GECC |
|
$ |
828,000 |
|
$ |
305,000 |
|
|
All
Other |
|
|
26,000
|
|
|
78,000
|
|
|
Capital
Leases, Current |
|
|
854,000
|
|
|
383,000
|
|
| |
|
|
|
|
|
|
|
|
Long
Term |
|
|
|
|
|
|
|
|
GECC |
|
|
1,626,000
|
|
|
658,000
|
|
|
All
Other |
|
|
28,000
|
|
|
52,000
|
|
|
Capital
Leases, Long Term |
|
|
1,654,000
|
|
|
711,000
|
|
| |
|
|
|
|
|
|
|
|
Total
Capital Leases |
|
$ |
2,508,000 |
|
$ |
1,094,000 |
|
The
Company has a capital lease financing arrangement with the Life Science and
Technology Finance Division of General Electric Capital Corporation (“GECC”).
Under this arrangement, the Company purchases capital equipment, including
manufacturing, information technology systems, laboratory, office and other
related capital assets and subsequently finances those purchases through this
capital lease financing arrangement. The arrangement originally provided for
financing up to $1,000,000 with an interest rate of 12.50% per annum. In 2003,
the arrangement was expanded to provide, subject to certain conditions, up to an
aggregate $4,000,000 in financing for capital purchases with an interest rate of
9.50% per annum for all lab and manufacturing equipment and 10.50% per annum on
all other equipment. In 2004, the arrangement was expanded again to provide,
subject to certain conditions, up to $6.5 million in addition to the $2.5
million outstanding at that time, for total available financing of up to $9.0
million. Under the terms of the expanded financing arrangement, $5.0 million of
the $6.5 million increase is immediately available to the Company with the
remaining $1.5 million subject to FDA approval to market the Company’s lead
product Surfaxin, for the prevention of RDS in premature infants. The funds may
be drawn through September 2005. Laboratory and manufacturing equipment is
leased over 48 months with an interest rate equal to 9.39% per annum and all
other equipment is leased over 36 months with an interest rate equal to 9.63%
per annum. As of December 31, 2004, the Company had used $3,042,000 of the
available financing under the line of credit and, after giving effect to
principal payments made by the Company, $2,454,000 was outstanding.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
8 - Corporate Partnership Agreements
Laboratorios
del Dr. Esteve, S.A. (Esteve)
In 1999,
the Company entered into a corporate partnership with Esteve to develop, market
and sell Surfaxin in portions of Europe. In 2002, the Company significantly
expanded its relationship with Esteve by entering into a new collaboration
arrangement, which superseded the 1999 agreement, and expanded the territory
covered by those original agreements to all of Europe, Central and South
America, and Mexico. Esteve was obligated to provide certain commercialization
services for Surfaxin for the treatment of RDS in premature infants, MAS in
full-term infants and ARDS in adult patients. The Company’s exclusive supply
agreement with Esteve provided that Esteve would purchase all of its Surfaxin
drug product requirements at an established transfer price based on sales of
Surfaxin by Esteve and/or its sublicensee(s). Esteve also agreed to sponsor
certain clinical trial costs related to obtaining regulatory approval in Europe
for ARDS and make certain milestone payments to the Company upon the attainment
of European marketing regulatory approval for Surfaxin. In connection with the
2002 expanded agreement, Esteve purchased 821,862 shares of Common Stock at
$4.867 per share for $4.0 million in gross proceeds and paid the Company a
non-refundable licensing fee of $500,000. The Company has accounted for the
license fees and reimbursement of research and development expenditures
associated with the Esteve collaboration as deferred revenue. The balance in
deferred revenue of $134,000 at December 31, 2004 relates entirely to the
license agreement with Esteve for which the Company will recognize revenue using
a straight-line method through the anticipated date of FDA approval for RDS.
In
December 2004, the Company and
Esteve restructured their corporate partnership for the development, marketing
and sales of the Company’s products in Europe and Latin America. Under the
revised partnership, the Company has regained full commercialization rights in
key European markets, Central America and South America for its SRT, including
Surfaxin® for RDS in premature infants and ARDS in adults. Esteve will focus on
Andorra, Greece, Italy, Portugal and Spain, and now has development and
marketing rights to a broader portfolio of the Company’s potential SRT products.
This restructured partnership supersedes the existing sublicense and supply
agreements we had entered into with Esteve in March 2002.
Esteve
has also agreed to pay the Company stipulated cash fees upon achieving certain
milestones, primarily upon marketing regulatory approvals for the covered
products. In addition, Esteve has agreed to contribute to Phase 3 clinical
trials for the covered products by conducting and funding development performed
in the revised territory.
In
consideration for regaining commercial rights in the 2004 restructured
partnership, the Company issued to Esteve 500,000 shares of Common Stock for no
cash consideration, valued at $3.5 million. The Company incurred a non-cash
charge, including the value of the shares issued and other costs related to the
restructuring, of $4.1 million. This charge is a component of Corporate
Partnership Restructuring Charges on the Income Statement. The Company also
granted to Esteve rights to additional potential SRT products in the Company’s
pipeline. The Company also agreed to pay to Esteve 10% of cash up-front and
milestone fees that the Company may receive in connection with any future
strategic collaborations for the development and commercialization of Surfaxin
for RDS, ARDS or certain of our other Surfactant Replacement Therapies in the
territory for which the Company had previously granted a license to Esteve. Any
such up-front and milestone fees that the Company may pay to Esteve are not to
exceed $20 million in the aggregate.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Quintiles
Transnational Corp., and PharmaBio Development Inc.
In 2001,
the Company entered into a commercialization agreement with Quintiles, and its
affiliate, PharmaBio Development Inc. (PharmaBio), to provide certain
commercialization services in the United States for Surfaxin for the treatment
of RDS in premature infants and MAS in full-term infants. Quintiles was
obligated to hire and train a dedicated United States sales force that would
have been branded in the market as Discovery’s. PharmaBio agreed to fund up to
$70 million of the sales force costs as well as other sales and marketing costs
for commercialization of Surfaxin in the United States for seven years.
Additionally, the collaboration allowed for this sales force to be transferred
to the Company at the end of the seven year term, with an option for the Company
to acquire it sooner. Under the agreement, the Company was to receive 100% of
the revenues from sales of Surfaxin and agreed to pay PharmaBio a commission on
net sales in the United States of Surfaxin for the treatment of RDS in premature
infants and MAS in full-term infants and all “off-label” uses for 10 years
following first launch of the product in the United States. PharmaBio also
extended to the Company a secured revolving credit facility of up to $8.5 to
$10.0 million to fund pre-marketing activities associated with the launch of
Surfaxin in the United States as the Company achieved certain milestones. See
Note 7 - Secured Credit Facility and Capital Lease Financing
Arrangement.
In
November 2004, the Company reached an agreement with Quintiles to restructure
its business arrangements and terminate the commercialization agreements for
Surfaxin in the United States. The Company now has full commercialization rights
for Surfaxin in the United States. Pursuant to the restructuring, Quintiles is
no longer obligated to provide any commercialization services and the Company’s
obligation to pay a commission on net sales in the United States of Surfaxin for
the treatment of RDS and MAS to Quintiles has been terminated.
In
connection with obtaining full commercialization rights for Surfaxin, the
Company issued 850,000 warrants to PharmaBio, Quintiles’ strategic investment
group, to purchase shares of Common Stock at an exercise price equal to $7.19
per share. The warrants have a 10-year term and shall be exercisable for cash
only with expected total proceeds to the Company if exercised equal to
approximately $6.0 million. The Company valued the warrants at this fair value
on the date of issuance and incurred a non-cash charge of $4.0 million in
connection with the issuance. This charge is a component of Corporate
Partnership Restructuring Charges on the Income Statement. The existing secured
revolving credit facility of $8.5 million with PharmaBio will remain available
and the original maturity date of December 10, 2004 is now extended until
December 31, 2006. See Note 7 - Secured Credit Facility and Capital Lease
Financing Arrangement.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
9 - Licensing and Research Funding Agreements
Ortho
Pharmaceutical, Inc.
The
Company and Ortho Pharmaceutical, Inc. (Ortho Pharmaceutical), a wholly-owned
subsidiary of Johnson & Johnson, Inc., are parties to an agreement granting
an exclusive license of the Surfaxin technology to the Company in exchange for
certain license fees, future milestone payments (aggregating $2,500,000) and
royalties. To date, the Company has paid $450,000 for milestones
achieved.
The
Scripps Research Institute
The
Company and The Scripps Research Institute (Scripps) were parties to a research
funding and option agreement which expired in February 2005. Pursuant to this
agreement, the Company was obligated to fund a portion of Scripps' research
efforts and thereby had the option to acquire an exclusive worldwide license to
the technology developed from the research program during the term of the
agreement. Scripps owned all of the technology that it developed pursuant to
work performed under the agreement. To the extent the Company did not exercise
its option to technology developed under the agreement, the Company had the
right to receive 50% of the net royalty income received by Scripps for
inventions that were jointly developed under the agreement. Payments to Scripps
under this agreement were $600,000, $649,000 and $572,000 in 2004, 2003, and
2002, respectively.
Note
10 - Stockholders’ Equity
2005
Registered
Public Offering
Subsequent
to December 31, 2004, in
February 2005, the Company completed a registered direct offering of 5,060,000
shares of Common Stock. The shares were priced at $5.75 per share resulting in
gross and net proceeds to the Company equal to $29.1 million and $27.5 million,
respectively.
2004
Committed Equity Financing Facility (CEFF)
In July
2004, the Company entered into a Committed Equity Financing Facility (“CEFF”)
with Kingsbridge Capital Ltd. (“Kingsbridge”), pursuant to which Kingsbridge has
committed to finance up to $75.0 million of capital for newly-issued shares of
Common Stock. The exact timing, amount and price of any CEFF financings is
subject to the Company’s ultimate determination, and certain conditions of the
facility agreement. See - Liquidity and Capital Resources “Committed Equity
Financing Facility (“CEFF”)”. In connection with the CEFF, the Company issued a
Class B Investor warrant to Kingsbridge to purchase up to 375,000 shares of
Common Stock at an exercise price equal to $12.0744 per share. The warrant,
which expires in January 2010, must be exercised for cash, except in limited
circumstances, for total proceeds equal to approximately $4.5 million, if
exercised. As of December 31, 2004, the Class B Investor Warrant had not been
exercised in whole or in part. In
connection with the 2005 Registered Public Offering, the Company entered into a
Placement Agent Agreement with SG Cowen & Co. LLC (“SG Cowen”) pursuant to
which the Company agreed not to access funds under the CEFF for the 90-day
period ending May 26, 2005, or in an amount greater than $5 million for an
additional 90-day period thereafter.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
In
December 2004, the Company entered into a financing pursuant to the CEFF
resulting in aggregate cash proceeds to the Company of $7.2 million from the
issuance of 901,742 shares of Common Stock at an average price of $7.98, after
taking into account the applicable discount rate provided for by the CEFF. As of
December 31, 2004, $67.8 million remained available under the CEFF.
2004
Restructuring of the Corporate Partnership with Esteve
In
December 2004, the Company restructured its strategic alliance with Esteve for
the development, marketing and sales of our products in Europe and Latin
America. Under the revised collaboration, the Company has regained full
commercialization rights in key European markets, Central America and South
America for its SRT, including Surfaxin for RDS in premature infants and ARDS in
adults. The Company granted to Esteve rights to additional potential SRT
products in its pipeline. See Note 8 - Corporate Partnership Agreements. In
consideration for regaining commercial rights in the restructuring, the Company
issued to Esteve 500,000 shares of common stock for no cash consideration, and
for accounting purposes, incurred a non-cash charge of $3.5 million,
representing the fair market value of the shares on the date of issuance. This
charge, including other costs associated with the restructuring, is a component
of Corporate Partnership Restructuring Charges on the Income Statement.
2004
Restructuring of Corporate Partnership with Quintiles
In
November 2004, the Company agreed with Quintiles to restructure its business
arrangements and terminate the commercialization agreements for Surfaxin in the
United States. The Company regained full commercialization rights for Surfaxin
in the United States. Pursuant to the restructuring, Quintiles is no longer
obligated to provide any commercialization services and the Company’s obligation
to pay a commission on net sales in the United States of Surfaxin for the
treatment of RDS and MAS to Quintiles has been terminated. See Note 8 -
Corporate Partnership Agreements. In connection with obtaining full
commercialization rights for Surfaxin, the Company issued to Quintiles a warrant
to purchase 850,000 shares of Common Stock at an exercise price equal to $7.19
per share. The warrant has a 10-year term and is exercisable for total proceeds
equal to approximately $6 million in cash or as an offset to cancel indebtedness
of the Company in connection with the existing secured revolving credit facility
of $8.5 million. For accounting purposes, the Company incurred a non-cash charge
of $4.0 million, representing the fair market value of the warrant on the date
of issuance. This charge is a component of Corporate Partnership Restructuring
Charges on the Income Statement.
2004
Private Placement
In April
2004, the Company completed an underwritten public offering of 2,200,000 shares
of common stock. The shares were priced at $11.00 per share resulting in the
Company’s receipt of gross and net proceeds equal to $24.2 million and $22.8
million, respectively.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
2004
Redemption of Warrants
Pursuant
to an equity investment from Quintiles and PharmaBio in December 2001, the
Company issued Class G Warrants to purchase 357,143 shares of Common Stock at an
exercise price equal to $3.485 per share (subject to adjustment). The Class G
Warrants had a 10-year term and the Company was entitled to redeem the Class G
Warrants upon the attainment of certain price performance thresholds of the
common stock. In February 2004, the price performance criteria was met and the
warrants were redeemed. The warrants were cashlessly exercised resulting in the
issuance of 249,726 shares of Common Stock.
Pursuant
to a credit facility from Quintiles and PharmaBio in December 2001, the Company
issued Class H Warrants to purchase 320,000 shares of Common Stock. The Class H
Warrants were exercisable at $3.03 per share and were exercisable
proportionately only upon availability of the credit facility. The Class H
Warrants had a 10-year term and the Company was entitled to redeem the Class H
warrants upon the attainment of certain price performance thresholds of the
Common Stock. In 2004, the price performance criteria was met and the warrants
were redeemed. The Class H Warrants were cashlessly exercised resulting in the
issuance of 228,402 shares of Common Stock.
2003
Private Placement
In June
2003, the Company completed the sale of securities in a private placement to
selected institutional and accredited investors for net proceeds of
approximately $25.9 million. The Company issued 4,997,882 shares of Common Stock
and 999,577 Class A Investor Warrants to purchase shares of Common Stock at an
exercise price equal to $6.875 per share. The Class A Investor Warrants have a
seven-year term. As of December 31, 2004, approximately 946,000 of the Class A
Investor Warrants remain unexercised.
2002
Private Placement
In
November 2002, the Company received approximately $11.9 million in net proceeds
from the sale of 6,397,517 shares of Common Stock and 2,878,883 Class I Warrants
to purchase shares of Common Stock at an exercise price equal to $2.425 per
share. In connection with this private placement, the placement agent received
fees of approximately $766,000. The Class I Warrants had a five-year term and
the Company was entitled to redeem the Class I Warrants upon the attainment of
certain price performance thresholds of the Common Stock. In June 2003, the
price performance criteria was met and all of the Class I Warrants were
redeemed, resulting in 2,506,117 shares of Common Stock issued and proceeds of
approximately $4.3 million.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Common
shares reserved for future issuance
Common
shares reserved for potential future issuance upon exercise of
warrants
The chart
below details shares of Common Stock reserved for future issuance upon the
exercise of warrants.
| |
|
Shares
Reserved for Issuance upon Exercise of Warrants |
|
|
|
|
|
| |
|
December
31, |
|
|
|
|
|
| |
|
2004
|
|
2003
|
|
Exercise
Price |
|
Expiration
Date |
|
| |
|
|
|
|
|
|
|
|
|
|
Quintiles
Warrant
(2004
business restructuring) |
|
|
850,000
|
|
|
— |
|
$ |
7.19 |
|
|
11/3/2014 |
|
|
Class
B Investor Warrants
(2004
Kingsbridge CEFF) |
|
|
375,000
|
|
|
— |
|
$ |
12.07 |
|
|
1/6/2010 |
|
|
Class
A Investor Warrants (2003) |
|
|
945,745
|
|
|
954,717
|
|
$ |
6.88 |
|
|
2/19/2010 |
|
|
Class
G Quintiles Warrants (2001) |
|
|
— |
|
|
357,143
|
|
$ |
3.49 |
|
|
12/9/2011 |
|
|
Class
H Quintiles Warrants (2001) |
|
|
— |
|
|
320,000
|
|
$ |
3.03 |
|
|
12/9/2011 |
|
|
Class
E Investor Warrants (2000) |
|
|
310,567
|
|
|
549,029
|
|
$ |
7.38 |
|
|
3/21/2005 |
|
|
Placement
Agent (2000) |
|
|
214,794
|
|
|
348,341
|
|
$ |
8.11 |
|
|
9/21/2007 |
|
|
Placement
Agent Warrants (1999) |
|
|
— |
|
|
193,100
|
|
$ |
0.67 |
|
|
1/1/2010 |
|
|
Placement
Agent Warrants (1996) |
|
|
4,615
|
|
|
41,454
|
|
$ |
0.64 |
|
|
11/15/2006 |
|
|
Placement
Agent Warrants (1996) |
|
|
138,953
|
|
|
433,670
|
|
$ |
3.53 |
|
|
11/15/2006 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,839,674
|
|
|
3,197,454
|
|
|
|
|
|
|
|
Common
shares reserved for potential future issuance upon exercise of stock
options
The
Company’s
has a Stock Incentive Plan, which includes three equity programs. See Note 11 -
Stock Options. The Company had shares reserved for potential future issuance
under the Stock Incentive Plan of 7,331,000 and 5,587,000 as of December 31,
2004 and 2003, respectively, for stock options outstanding and stock options
available for future grants.
Common
shares reserved for potential future issuance under the
CEFF
The
Company entered into a CEFF with Kingsbridge pursuant to which Kingsbridge has
committed to finance up to $75.0 million of capital for newly-issued shares of
common stock. See - Liquidity and Capital Resources “Committed Equity Financing
Facility (CEFF)”. In October 2004, the Company filed a registration statement
pursuant to the CEFF, which reserved 15,000,000 shares of common stock for
future issuance under the CEFF calculated as the full amount available, $75.0
million, divided by the lowest price per share as determined by the CEFF
agreement, $5.00 per share. In December 2004, the Company entered into a
financing pursuant to the CEFF resulting in the issuance of 901,742 shares for
gross proceeds of $7.2 million. After giving effect to the shares issued in the
December CEFF financing, the Company had 14,098,000 shares of Common Stock
reserved for issuance under of the CEFF as of December 31, 2004. In connection
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Common
shares reserved for future issuance under the Shelf Registration
Statement
In 2003,
the Company filed a shelf registration statement with the SEC for the proposed
offering from time to time of up to an aggregate 6,500,000 million shares of
Common Stock. In April
2004, the Company completed an underwritten public offering of 2,200,000 million
shares of Common Stock pursuant to the shelf registration statement, resulting
in gross proceeds of $24.2 million. As of December 31, 2004 and 2003, the
Company had 4,300,000 and 6,500,000 shares reserved for issuance under the shelf
registration statement.
In
February 2005, the Company amended the original shelf registration statement,
increasing the shares of Common Stock available by 1,468,592 shares. Also in
February 2005, the Company completed a registered direct offering of 5,060,000
shares of Common Stock pursuant to the shelf registration statement, resulting
in gross proceeds of $29.1 million. There are currently 708,592 shares of Common
Stock reserved for potential future issuance under the shelf registration
statement.
Common
shares reserved for potential future issuance under the Company’s 401(k)
Plan
The
Company has a voluntary 401(k) savings plan covering eligible employees.
Effective January 1, 2003, the Company allows for periodic discretionary matches
as a percentage of each participant’s contributions in newly issued shares of
Company Stock. The Company match resulted in the issuance of 22,564 and 21,333
shares of common stock for the years ended December 31, 2004 and 2003,
respectively. The Company had shares reserved for potential future issuance
under the Company’s 401(k) Plan of 106,103 and 128,667 for the years ended
December 31, 2004 and 2003, respectively.
Treasury
stock/Common Stock issued for services
The
Company has a stock repurchase program wherein the Company may buy its own
shares on the open market and use such shares to settle indebtedness. Such
shares are accounted for as treasury stock. During the years ended December 31,
2004, 2003 and 2002, the Company did not repurchase its own shares on the open
market.
During
the twelve months ended December 31, 2004, certain members of the Company’s
management and certain consultants, pursuant to terms set forth in the Company’s
Amended and Restated 1998 Stock Incentive Plan, tendered shares of Common Stock
then held by such members in lieu of cash for payment for the exercise of
certain stock options previously granted to such parties. For the twelve months
ended December 31, 2004, 146,204 shares of our Common Stock were tendered to us
by such parties in lieu of cash at a weighted average price of $12.07 per share.
These shares are accounted for as treasury stock as follows.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
The
following chart details shares tendered to the Company in lieu of cash for the
exercise of stock options:
|
|
|
Number of shares
received in lieu of
cash for the exercise
of stock options |
|
|
Average price
Per share |
|
|
January
2004 |
|
97,226 |
|
$ |
12.44 |
|
|
March
2004 |
|
18,497 |
|
|
12.08 |
|
|
May
2004 |
|
24,702 |
|
|
11.27 |
|
|
July
2004 |
|
5,779 |
|
|
9.30 |
|
|
Total |
|
146,204 |
|
$ |
12.07 |
|
Note
11 - Stock Options
In March
1998, the Company adopted its 1998 Stock Incentive Plan, which includes three
equity programs (the "1998 Plan"):
Discretionary
Option Grant Program
Under the
Discretionary Option Grant Program, options to acquire shares of the Common
Stock may be granted to eligible persons who are employees, non-employee
directors, consultants and other independent advisors. Options granted under the
Discretionary Option Grant Program are granted at no less than one hundred
percent (100%) of the fair market value of the common stock on the date of the
grant; generally vest over a period of three years; and expire no later than 10
years from the date of the grant, subject to certain conditions. Options granted
and outstanding through November 2003 are exercisable immediately upon grant,
however, the shares issuable upon the exercise of such options are subject to
repurchase by the Company. Any such repurchase rights lapse as the options vest
according to their stated terms. All shares of Common Stock issuable upon such
non-vested options are subject to restrictions on transferability. Options
granted under the 1998 Plan after November 2003 are only exercisable upon
vesting.
Stock
Issuance Program
Under the
Stock Issuance Program, such eligible persons may be issued shares of the Common
Stock. The Company has not issued any such shares for the years ended December
31, 2004, 2003 and 2002.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Automatic
Option Grant Program
Under the
Automatic Option Grant Program, eligible non-employee directors will
automatically receive option grants at periodic intervals at an exercise price
equal to the fair market value per share on the date of the grant. Such options
usually vest upon the first anniversary of the date of the grant and expire no
later than 10 years from the date of the grant.
The
Company currently has 9,570,000 shares of Common Stock under the 1998 Stock
Incentive Plan, of which 7,331,000 remain reserved for issuance over the term of
the plan. The 1998 Plan was successively amended at each of the Annual Meetings
of Shareholders for the years 2004, 2003, and 2002, to increase the maximum
number of shares of Common Stock reserved for issuance over the term of the plan
by 3,000,000 shares, 1,420,000 shares, and 1,000,000 shares, respectively. In
addition, in 2002, the Board of Directors approved amendments to the 1998 Plan
that (i) increased the exercise price of options granted to non-employee
directors pursuant to the Automatic Option Grant Program from 60% to 100% of the
fair market value per share on the date of the grant and (ii) removed the Plan
Administrator’s authority to effect the cancellation and regrant of any
outstanding options under the Discretionary Option Grant Program.
A summary
of the Company’s stock option activity and related information is as
follows:
| |
Price
Per Share |
|
Shares |
|
Weighted
Average
Exercise
Price |
|
|
Weighted
Average Remaining
Contractual
Life |
|
Balance
at January 1, 2002 |
$0.0026
- $7.00 |
|
4,246,959 |
|
$3.15 |
|
8.01
years |
|
Options
granted |
1.26
- 3.65 |
|
1,786,000 |
|
2.14 |
|
|
|
Options
exercised |
0.0821
- 2.10 |
|
(77,925) |
|
0.77 |
|
|
|
Options
forfeited |
.3205
- 7.00 |
|
(349,850) |
|
3.34 |
|
|
|
Balance
at December 31, 2002 |
0.0026
- 5.375 |
|
5,605,184 |
|
2.85 |
|
7.81
years |
|
Options
granted |
1.70
- 9.17 |
|
1,111,750 |
|
6.75 |
|
|
|
Options
exercised |
0.0026
- 4.22 |
|
(993,001) |
|
1.95 |
|
|
|
Options
forfeited |
0.1923
- 5.06 |
|
(168,611) |
|
2.76 |
|
|
|
Balance
at December 31, 2003 |
0.0026
- 9.17 |
|
5,555,322 |
|
3.80 |
|
7.44
years |
|
Options
granted |
5.92
- 10.60 |
|
2,681,250 |
|
8.60 |
|
|
|
Options
exercised |
.3205
- 9.17 |
|
(1,271,493) |
|
3.41 |
|
|
|
Options
forfeited |
1.42
- 10.60 |
|
(120,425) |
|
5.64 |
|
|
| |
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 |
$.0026
- $10.60 |
|
6,844,654 |
|
$5.69 |
|
7.76
years |
Options
granted and outstanding through November 2003 are exercisable immediately upon
grant, however, the shares issuable upon the exercise of such options are
subject to repurchase by the Company. Any such repurchase rights lapse as the
options vest according to their stated terms. The following table provides
detail with regard to options outstanding and exercisable at December 31,
2004:
DISCOVERY LABORATORIES, INC. AND
SUBSIDIARY
|
Price
per share |
|
Shares
Outstanding |
|
Weighted
Average
Price
per
Share |
|
Weighted
Average
Remaining
Contractual
Life |
|
Shares
Exercisable |
|
Weighted
Average
Price
per
Share |
|
|
$0.0026
- $2.00 |
|
|
749,831 |
|
$ |
1.59 |
|
|
6.97
years |
|
|
749,831 |
|
$ |
1.59 |
|
|
$2.01
- $4.00 |
|
|
1,681,348 |
|
$ |
2.63 |
|
|
7.01
years |
|
|
1,681,348 |
|
$ |
2.63 |
|
|
$4.00
- $6.00 |
|
|
1,052,021 |
|
$ |
4.69 |
|
|
5.29
years |
|
|
1,050,021 |
|
$ |
4.68 |
|
|
$6.01
- $8.00 |
|
|
856,501 |
|
$ |
6.74 |
|
|
9.45
years |
|
|
341,488 |
|
$ |
6.84 |
|
|
$8.01
- $10.00 |
|
|
2,252,953 |
|
$ |
8.90 |
|
|
8.92
years |
|
|
1,342,203 |
|
$ |
8.67 |
|
|
$10.01
- $12.00 |
|
|
252,000 |
|
$ |
10.12 |
|
|
9.38
years |
|
|
25,000 |
|
$ |
10.43 |
|
| |
|
|
6,844,654 |
|
|
|
|
|
|
|
|
5,189,891 |
|
|
|
|
The
following table provides further detail with regard to options that are
exercisable and vested (therefore, not subject to repurchase rights and related
restrictions on transferability by the Company) at December 31,
2004:
|
Price
per share |
|
Shares
Exercisable |
|
Weighted
Average
Price
per
Share |
|
Vested
Shares not subject to Repurchase Rights |
|
Weighted
Average
Price
per
Share |
|
|
$0.0026
- $2.00 |
|
|
749,831 |
|
$ |
1.59 |
|
|
557,085 |
|
$ |
1.53 |
|
|
$2.01
- $4.00 |
|
|
1,681,348 |
|
$ |
2.63 |
|
|
854,273 |
|
$ |
2.52 |
|
|
$4.00
- $6.00 |
|
|
1,050,021 |
|
$ |
4.68 |
|
|
1,007,689 |
|
$ |
4.66 |
|
|
$6.01
- $8.00 |
|
|
341,488 |
|
$ |
6.84 |
|
|
322,720 |
|
$ |
6.81 |
|
|
$8.01
- $10.00 |
|
|
1,342,203 |
|
$ |
8.67 |
|
|
1,177,668 |
|
$ |
8.75 |
|
|
$10.01
- $12.00 |
|
|
25,000 |
|
$ |
10.43 |
|
|
25,000 |
|
$ |
10.43 |
|
| |
|
|
5,189,891 |
|
|
|
|
|
3,944,435 |
|
|
|
|
Prior to
2002, under the Automatic Option Grant Program, eligible directors automatically
received option grants at periodic intervals at an exercise price equal to 60%
of fair market value per share on the date of the grant. Since 2002, all stock
option grants to non-employee directors pursuant to the Automatic Option Grant
Program are required to be at 100% of the fair market value per share on the
date of the grant.
The
following table pertains to options granted to non-employee directors at less
than fair market value prior to 2002 that remain outstanding:
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Shares
outstanding |
|
|
200,000 |
|
|
240,000 |
|
|
480,000 |
|
|
Weighted
average exercise price |
|
$ |
2.11 |
|
$ |
2.09 |
|
$ |
2.00 |
|
|
Weighted
average fair value |
|
$ |
3.52 |
|
$ |
3.49 |
|
$ |
3.33 |
|
In
December 2004, the Board of Directors approved the issuance of options to
management to purchase up to 1,148,500 shares of Common Stock at an exercise
price of $9.02 per share. Such options are expressly subject to the requisite
approval of the Company’s shareholders, to be obtained no later than the
Company’s Annual Meeting of Shareholders for 2005, for an amendment to the 1998
Plan authorizing an increase in the number of shares issuable under the plan in
an amount equal to or greater than the aggregate amount of such options and an
increase in the total shares authorized for use by the Company. Accordingly,
such options are not included in the options outstanding at December 31, 2004.
Provided the shareholders of the Company approve such amendment, such options
shall vest over a three year period from the date of the grant.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
In
December 2003, the Board of Directors approved the issuance of options to
management to purchase up to 1,464,500 shares of Common Stock at an exercise
price of $9.17 per share, the fair market value on the
date the Board of Directors approved the grant. Such options were expressly
subject to the requisite approval of the Company’s shareholders, to be obtained
no later than the Company’s Annual Meeting of Shareholders for 2004, for an
amendment to the 1998 Plan authorizing an increase in the number of shares
issuable under the plan in an amount equal to or greater than the aggregate
amount of such options. Approval was obtained at the Company’s Annual Meeting of
Shareholders for 2004, at which time the fair market value of our Common Stock
was $9.80, which was greater than the fair market value on the date the options
were granted. The difference in fair market value on the date of grant versus
the date of subsequent shareholder approval was recorded as unearned portion of
compensatory stock options and will be recognized into expense as the options
vest. The Company incurred a non-cash charge of $461,000 related to the vesting
of such options in 2004.
In
December 2002, the Board of Directors approved the issuance of options to
management to purchase up to 800,000 shares of Common Stock at an exercise price
of $2.75 per share. Such options had been subject to the approval of the
Company’s shareholders, which was obtained at the time of the Company’s Annual
Meeting of Shareholders for 2003. Accordingly, such options are now included in
the options outstanding at December 31, 2002. Such options shall vest in their
entirety upon the fourth anniversary of the date of grant or at such earlier
time, if ever, upon the receipt by the Company of a NDA approval by the FDA for
Surfaxin for either RDS in premature infants, MAS in full-term infants or ARDS
in adults.
Note
12 - 401(k) Match
The
Company has a voluntary 401(k) savings plan covering eligible employees.
Effective January 1, 2003, the Company allows for periodic discretionary matches
as a percentage of each participant’s contributions in newly issued shares of
Common Stock. The total match for the year ended December 31, 2004 was $215,000,
resulting in the issuance of 25,683 shares. The total match for the year ending
December 31, 2003 was $119,000, resulting in the issuance of 25,470 shares.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
13 - Commitments
The
Company’s long-term contractual obligations include commitments and estimated
purchase obligations entered into in the normal course of business.
Payments
due under contractual obligations at December 31, 2004 are as
follows:
| |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009
|
|
Thereafter |
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facility |
|
$ |
— |
|
$ |
5,929,000 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
5,929,000 |
|
|
Capital
lease obligations |
|
|
1,073,000 |
|
|
886,000 |
|
|
747,000 |
|
|
225,000 |
|
|
— |
|
|
— |
|
|
2,931,000 |
|
|
Operating
lease obligations
|
|
|
1,214,000 |
|
|
1,161,000 |
|
|
1,193,000 |
|
|
1,078,000 |
|
|
957,000 |
|
|
160,000 |
|
|
5,763,000 |
|
|
Purchase
obligations |
|
|
4,947,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,947,000 |
|
|
Employment
agreements |
|
|
2,203,000 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
2,203,000 |
|
|
Total |
|
$ |
9,437,000 |
|
$ |
7,976,000 |
|
$ |
1,940,000 |
|
$ |
1,303,000 |
|
$ |
957,000 |
|
$ |
160,000 |
|
$ |
21,773,000 |
|
The
Company has a secured revolving credit facility of up to $8,500,000 with
Quintiles available for use until December 31, 2006, of which $5,929,000 was
outstanding at December 31, 2004. See Note 7 - Secured Credit Facility and
Capital Lease Financing Arrangement.
The
Company has a capital lease financing arrangement with the General Electric
Capital Corporation. The arrangement provides, subject to certain conditions, up
to an aggregate $9.0 million in financing for capital purchases. See Note 7 -
Secured Credit Facility and Capital Lease Financing Arrangement. As of December
31, 2004, approximately $2.5 million was outstanding under this financing
arrangement. Total future payments under the arrangement, including interest,
are approximately $2.9 million.
The
Company’s operating leases consist primarily of facility leases for the
Company’s operations in Pennsylvania and California.
The
Company maintains its headquarters in Warrington, Pennsylvania. The facility is
39,594 square feet and serves as the main operating facility for clinical
development, regulatory, sales and marketing, and administration. The lease
expires in February 2010 with total aggregate payments of $4.6 million.
The
Company also leases approximately 18,000 square feet of office and laboratory
space in Doylestown, PA. The Company intends to maintain a portion of the
Doylestown facility for the continuation of analytical laboratory activities and
sublease the remaining portions to the greatest extend possible. To the extent
that subleasing is not possible, the leases will expire according to their
terms. The leases expire in March 2005 and August 2005.
The
Company leases office and laboratory space in Mountain View, California. The
facility is 16,800 square feet and houses the Company’s aerosol development
operations. The lease expires in June 2008 with total aggregate payments of
$804,000.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Prior to
the Mountain View facility, the Company leased office and laboratory space in
Redwood City, CA. The facility was approximately 5,000 square feet and housed
the Company’s aerosol development operations. In December 2004, the Company
vacated the Redwood City facility and moved to the Mountain View facility. In
February 2005, the sublease agreement for the Redwood City facility was
terminated.
Payments
made under all of these existing leases for the years ended December 31, 2004,
2003, and 2002 were $585,000, $590,000 and $481,000, respectively.
The
Company’s purchase obligations include commitments entered in the ordinary
course of business, primarily commitments to purchase manufacturing equipment
and services for the enhancement of the Company’s manufacturing capabilities for
Surfaxin and sales and marketing services related to the potential launch of
Surfaxin in the United States.
At
December 31, 2004, the Company had employment agreements with eight officers
providing for an aggregate annual salary equal to $2,203,000. The agreements
expire in December 2005, however, commencing on January 1, 2006, and on each
January 1st thereafter, the term of these agreements shall automatically be
extended for one additional year, unless at least 90 days prior to such January
1st date, the Company or the Executive shall have given notice that it does not
wish to extend the agreement. All of the foregoing agreements provide for the
issuance of annual bonuses and the granting of options subject to approval by
the Board of Directors. All of the foregoing agreements provide that in the
event that the employment of any such officers is terminated without Cause or
should any such officers terminate employment for Good Reason, as defined in the
respective agreements, including in circumstances of a change of control, such
officer shall be entitled to certain cash compensation and benefits
continuation.
In
addition to the contractual obligations above, the Company has future milestone
commitments, aggregating $2,500,000, and royalty obligations to Johnson &
Johnson, Inc., and Ortho Pharmaceutical, a wholly-owned subsidiary of Johnson
& Johnson, Inc., related to the Company’s product licenses. To date, the
Company has paid $450,000 for milestones achieved.
Note
14 - Recently Issued Accounting Standards
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (SFAS No. 123(R)), which replaces SFAS No. 123 and supersedes APB
Opinion NO. 25. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first interim period
after June 15, 2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS No. 123 win no longer be an alternative to
financial statement recognition. The Company is required to adopt SFAS No.
123(R) in the third quarter of 2005. Under SFAS No. 123(R), the Company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at the date of adoption. The permitted transition methods
include either retrospective or prospective adoption. Under the retrospective
option, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options at the beginning
of the first quarter of adoption of SFAS No. 123F, while the retrospective
methods would record compensation expense for all unvested stock options
beginning with the first period presented. The Company is currently evaluating
the requirements of SFAS No. 123(R) and expects that adoption of SFAS No. 123(R)
will have a material impact on the Company's financial position and results of
operations. The Company has not yet determined the method of adoption or the
effect of adopting SFAS No. 123(R), and it has not determined whether the
adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS No. 123. See Note 2 - Summary of Significant Accounting
Policies - Stock-based Compensation.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
15 - Related Party Transactions
Laboratorios
del Dr. Esteve, S.A.
Dr.
Esteve serves as a member of the Company’s Board of Directors and is an
executive officer of Esteve. In December 2004, the Company and Laboratorios
Esteve restructured their corporate partnership for the development, marketing
and sales of Discovery’s products in Europe and Latin America. Under
the revised
collaboration, Discovery has regained full commercialization rights in key
European markets, Central America and South America for its SRT, including
Surfaxin for RDS in premature infants and ARDS in adults. Laboratorios Esteve
will focus on Andorra,
Greece, Italy, Portugal and Spain and now has development and marketing rights
to a broader portfolio of the Company’s potential SRT products. See Note 8 -
Corporate Partnership Agreements.
Note
16 - Income Taxes
Since its
inception, the Company has never recorded a provision or benefit for Federal and
state income taxes.
The
reconciliation of the income tax benefit computed at the Federal statutory rates
to the Company’s recorded tax benefit for the years ended December 31, 2004,
2003 and 2004 are as follows:
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Income
tax benefit, statutory rates |
|
$ |
15,739,000 |
|
$ |
8,255,000 |
|
$ |
5,938,000 |
|
|
State
taxes on income, net of federal benefit |
|
|
2,776,000 |
|
|
2,015,000 |
|
|
1,088,000
|
|
|
Research
and development tax credit |
|
|
623,000
|
|
|
441,000
|
|
|
274,000
|
|
|
Other |
|
|
(87,000 |
) |
|
92,000
|
|
|
(755,000 |
) |
|
Income
tax benefit |
|
|
19,051,000
|
|
|
10,803,000
|
|
|
6,545,000
|
|
|
Valuation
allowance |
|
|
(19,051,000 |
) |
|
(10,803,000 |
) |
|
(6,545,000 |
) |
|
Income
tax benefit |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
The tax
effects of temporary differences that give rise to deferred tax assets and
deferred tax liabilities, at December 31, 2004 and 2003, are as
follows:
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
Long-term
deferred tax assets: |
|
|
|
|
|
|
Net
operating loss carryforwards
(federal
and state) |
|
|
|
|
|
|
|
|
Research
and development tax credits |
|
|
2,832,000
|
|
|
1,868,000
|
|
|
Compensation
Expense on Stock |
|
|
524,000 |
|
|
— |
|
|
Charitable
Contribution Carryforward |
|
|
5,000 |
|
|
— |
|
|
Other
Accrued |
|
|
161,000 |
|
|
70,000 |
|
|
Deferred
Revenue |
|
|
55,000 |
|
|
273,000 |
|
|
Capitalized
research and development |
|
|
38,000
|
|
|
122,000
|
|
|
Total
long-term deferred tax assets |
|
|
59,440,000
|
|
|
37,940,000
|
|
|
Long-term
deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property
and equipment |
|
|
(651,000 |
) |
|
(272,000 |
) |
|
Net
deferred tax assets |
|
|
58,789,000
|
|
|
37,668,000
|
|
|
Less:
valuation allowance |
|
|
(58,789,000 |
) |
|
(37,668,000 |
) |
|
|
|
$ |
— |
|
$ |
— |
|
The
Company was in a net deferred tax asset position at December 31, 2004 and 2003
before the consideration of a valuation allowance. Due to the fact that the
Company has never realized a profit, management has fully reserved the net
deferred tax asset since realization is not assured.
At
December 31, 2004 and 2003, the Company had available carryforward net operating
losses for Federal tax purposes of $140,652,000 and $91,585,000, respectively,
and a research and development tax credit carryforward of $2,832,000 and
$1,868,000, respectively. The Federal net operating loss and research and
development tax credit carryforwards expire beginning in 2009 and continuing
through 2023. At December 31, 2004, the Company had available carryforward
federal and state net operating losses of $1,744,000 and $326,000 respectively
related to stock based compensation. Additionally, at December 31, 2004 and
2003, the Company had available carryforward losses of approximately
$121,876,000 and $82,483,000, respectively, for state tax purposes. The
utilization of the Federal net operating loss carryforwards is subject to annual
limitations in accordance with Section 382 of the Internal Revenue Code. Certain
state carryforward net operating losses are also subject to annual
limitations.
Federal
and state net operating losses, $5,129,000 and $4,969,000, respectively, relate
to stock based compensation, the tax effect of which will result in a credit to
equity as opposed to income tax expense to the extent these losses are utilized
in the future.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
17 - Subsequent Events
On
February 24, 2005, the Company completed
a registered direct offering of 5,060,000 shares of Common Stock. The shares
were priced at $5.75 per share resulting in the Company’s receipt of gross and
net proceeds equal to $29.1 million and $27.5 million,
respectively.
In
February 2005, the Company received an Approvable Letter from the FDA for
Surfaxin® for the prevention of RDS in premature infants. The Approvable Letter
is an official notification that the FDA is prepared to approve the Surfaxin New
Drug Application for Surfaxin and contains conditions that the applicant must
meet prior to obtaining final U.S. marketing approval. The conditions that the
Company must meet primarily involve finalizing labeling and correcting certain
manufacturing issues associated with an inspection report (Form FDA-483) from
the FDA issued to the Company’s contract manufacturer, Laureate. Most notably,
the FDA is not requiring additional preclinical or clinical trials for final
approval. Based on the nature of the observations contained in the Approvable
Letter, the Company currently anticipates that it will respond to the FDA with a
“Class 2” response. A “Class 2” response allows the FDA up to six months
following the completion of the labeling and manufacturing issues outlined in
the PDUFA letter. Therefore, the Company anticipates that the potential approval
of Surfaxin for RDS may occur in the fourth quarter of 2005 or the first quarter
of 2006.
In
February 2005, the Company borrowed the remaining available funds under the
secured credit facility with Quintiles and now has an outstanding balance of
$8.5 million. Outstanding principal and accrued interest is due and payable as a
balloon payment on December 31, 2006.
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Note
18 - Selected Quarterly Financial Data (unaudited)
The
following table contains unaudited statement of operations information for each
quarter of 2004 and 2003. The operating results for any quarter are not
necessarily indicative of results for any future period.
| 2004 Quarters Ended: |
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data) |
|
| |
|
|
Mar.
31 |
|
|
June
30 (1) |
|
|
Sept.
30 |
|
|
Dec.
31 |
|
|
Total
Year |
|
|
Revenues
from collaborative agreements |
|
$ |
142 |
|
$ |
697 |
|
$ |
236 |
|
$ |
134 |
|
$ |
1,209 |
|
|
Operating
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
6,710
|
|
|
6,373
|
|
|
5,673
|
|
|
7,037 |
|
|
25,793 |
|
|
General
and administrative |
|
|
2,281
|
|
|
3,175
|
|
|
2,908
|
|
|
4,958 |
|
|
13,322 |
|
|
Corporate
partnership restructuring charge |
|
|
— |
|
|
— |
|
|
— |
|
|
8,126 |
|
|
8,126 |
|
|
Total
expenses |
|
|
8,991 |
|
|
9,548 |
|
|
8,581 |
|
|
20,121 |
|
|
47,241 |
|
|
Operating
loss |
|
|
(8,849 |
) |
|
(8,851 |
) |
|
(8,345 |
) |
|
(19,987 |
) |
|
(46,032 |
) |
|
Other
expense, net |
|
|
(23 |
) |
|
(46 |
) |
|
(37 |
) |
|
(65 |
) |
|
(171 |
) |
|
Net
loss |
|
|
(8,872 |
) |
|
(8,897 |
) |
|
(8,382 |
) |
|
(20,052 |
) |
$ |
(46,203 |
) |
|
Net
loss per common share - basic and diluted |
|
|
(0.20 |
) |
|
(0.19 |
) |
|
(0.18 |
) |
|
(0.42 |
) |
$ |
(1.00 |
) |
|
Weighted
average number of common shares
outstanding |
|
|
43,320
|
|
|
46,683
|
|
|
46,988
|
|
|
47,236 |
|
|
46,179 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2003 Quarters Ended: |
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data) |
|
| |
|
|
Mar.
31 |
|
|
June
30 |
|
|
Sept.
30 |
|
|
Dec.
31 |
|
|
Total
Year |
|
|
Revenues
from collaborative agreements |
|
$ |
393 |
|
$ |
263 |
|
$ |
198 |
|
$ |
183 |
|
$ |
1,037 |
|
|
Operating
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
3,844
|
|
|
4,011
|
|
|
5,096
|
|
|
6,799
|
|
|
19,750
|
|
|
General
and administrative |
|
|
1,167
|
|
|
1,137
|
|
|
1,375
|
|
|
2,043
|
|
|
5,722
|
|
|
Total
expenses |
|
|
5,011 |
|
|
5,148 |
|
|
6,471 |
|
|
8,842 |
|
|
25,472 |
|
|
Operating
loss |
|
|
(4,618 |
) |
|
(4,885 |
) |
|
(6,273 |
) |
|
(8,659 |
) |
|
(24,435 |
) |
|
Other
income and (expense), net |
|
|
113
|
|
|
36
|
|
|
54
|
|
|
(48 |
) |
|
155
|
|
|
Net
loss |
|
|
(4,505 |
) |
|
(4,849 |
) |
|
(6,219 |
) |
|
(8,707 |
) |
$ |
(24,280 |
) |
|
Net
loss per common share - basic and diluted |
|
|
(0.14 |
) |
|
(0.14 |
) |
|
(0.15 |
) |
|
(0.21 |
) |
$ |
(0.65 |
) |
|
Weighted
average number of common shares
outstanding |
|
|
32,857
|
|
|
33,487
|
|
|
41,084
|
|
|
42,391
|
|
|
37,426
|
|
|
(1) |
A
reclassification has been made to the presentation of operating expenses
in the current second quarter of 2004. The expense associated with a
milestone payment related to the license of Surfaxin has been reclassifed
from general and administrative expenses and is currently reflected in
research and development expenses. |
Exhibit
10.21
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Amended and Restated Employment Agreement (the “Agreement”) is
made as of this 1st day of January, 2004, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”), and
ROBERT J. CAPETOLA, PH.D. (the “Executive”).
WHEREAS,
the Executive is currently employed by the Company as its President and Chief
Executive Officer pursuant to that certain employment agreement dated as of
January 1, 2001, by and between the Company and the Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement in its entirety as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions. Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement. The
term (“Term”) of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2005; provided, however, that commencing on January 1,
2006, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period. Notwithstanding the foregoing, this Agreement shall terminate prior to
the scheduled expiration date of the Term on the Date of Termination.
3. Executive’s
Duties and Obligations.
(a) Duties. The
Executive shall continue to serve as the Company’s President and Chief Executive
Officer. The Executive shall continue to be responsible for the overall
management of the Company and all duties customarily associated with his title
including, without limitation, activities regarding (i) day-to-day operational
affairs; (ii) the development and commercialization of the Company’s products;
(iii) proposed strategic alliances, joint ventures and other potential
collaborations; and (iv) all other appropriate functions for the Company. All of
the operating managers of the Company shall report to the Executive. The
Executive shall at all times report to, and shall be subject to the policies
established by, the Board and any executive committee thereof (the “Executive
Committee”). The
Executive hereby agrees to immediately resign from any Board position held by
him at the expiration or termination of the Term.
(b) Location
of Employment. The
Executive’s principal place of business shall continue to be at the Company’s
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Agreement. The
Executive has executed the Company’s standard form of Intellectual Property and
Confidential Information Agreement (the “Confidentiality
Agreement”) a copy
of which is attached to this Agreement as Exhibit B. The Executive shall comply
at all times with the terms and conditions of the Confidentiality Agreement and
all other reasonable policies of the Company governing its confidential and
proprietary information.
4. Devotion
of Time to Company’s
Business.
(a) Full-Time
Efforts. During
his employment with the Company, the Executive shall devote substantially all of
his time, attention and efforts to the proper performance of his implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of the
Company.
(b) No
Other Employment. During
his employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment. During
the Term and for 15 months from the Date of Termination, the Executive shall
not, directly or indirectly, without the prior written consent of the Company,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any other individual or
representative capacity (X) compete with the Company in the business of
developing or commercializing pulmonary surfactants or any other category of
compounds which forms the basis of the Company’s material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided, that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
(d) Injunctive
Relief. In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.
(e) Reformation. To the
extent that the restrictions imposed by Section 4(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not to
be unreasonable.
5. Compensation
and Benefits.
(a) Base
Compensation. During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”) of at
least $390,000, payable in accordance with the Company’s regular payroll
practices and less all required withholdings and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 5. The Base Salary
shall be reviewed at least annually for the purposes of determining increases,
if any, based on the Executive’s performance, the performance of the Company,
inflation, the then prevailing salary scales for comparable positions and other
relevant factors; provided,
however, that
any such increase in Base Salary shall be solely within the discretion of the
Company.
(b) Bonuses. During
the Term, the Executive:
(i)
shall be
eligible for such additional year-end bonus, which may be paid in either cash or
equity, or both, as is awarded solely at the discretion of the Compensation
Committee of the Board, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year; and
(ii)
may
receive additional incentive bonuses from time to time, at the discretion of the
Compensation Committee of the Board, which may be paid in either cash or equity,
or both, as is awarded solely at the discretion of the Compensation Committee of
the Board.
(c) Benefits. During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company’s
senior executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements. Anything contained herein
to the contrary notwithstanding, throughout the Term, the Executive shall be
entitled to receive (i) term life insurance on behalf of the Executive’s named
beneficiaries in the amount of $2,000,000 and (ii) long-term disability
insurance (subject to a combined annual premium cap of $18,000 for 2004, which
cap shall be increased by 5% for each successive calendar year of the Term),
each at no cost to the Executive, except the Company shall have no liability
whatsoever for any taxes (whether based on income or otherwise) imposed upon or
incurred by the Executive in connection with any such life or disability
insurance.
(d) Vacations. During
the Term, the Executive shall be entitled to 20 days paid vacation per year, to
be earned ratably throughout the year, 5 days of which may be carried over from
year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
(e) Reimbursement
of Business Expenses. The
Executive is authorized to incur reasonable expenses in carrying out his duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.
(f) Company
Leased Automobile. In
connection with the Executive’s employment hereunder, the Executive shall be
entitled to the use of a suitable automobile (to be determined in the good faith
discretion of the Executive) (the “Company
Car”) which
shall be leased on the Executive’s behalf by the Company or, in the Company’s
sole discretion, the costs therefor shall be reimbursed to the Executive. The
total annual costs incurred by the Company in connection with lease payments for
such Company Car shall not exceed $10,000; provided,
however, that
the Company shall be responsible for all other costs in connection with such
Company Car (including, without limitation, insurance, maintenance and repairs,
governmental and regulatory fees, gasoline, parking and tolls) in connection
with the Executive’s service to the Company. The Executive acknowledges and
agrees that the Company Car shall be for the Executive’s exclusive use primarily
with respect to Company business. At the Executive’s sole expense, the Executive
shall maintain a current United States driving license and shall immediately
inform the Company’s Controller if such license is revoked or suspended. Upon
any such revocation or suspension, the Executive will immediately forfeit any
and all entitlement to the Company Car. The Executive hereby agrees to at all
times comply with the Company’s written policies regarding Company automobiles
and shall have full responsibility for any fines incurred for motoring offenses
in respect of the Company Car whether such fines are incurred in his personal
use or in connection with Company activities.
6. Change
of Control Benefits.
(a) Bonus. The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for, or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise his options at a time and in a fashion that will entitle him to
receive, in exchange for any shares acquired pursuant to any such exercise, the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of the
Executive’s employment, a lump sum payment in respect of all accrued but unused
vacation days (provided, that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at his Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law).
(ii)
In the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for the remainder of their stated terms.
(b) Termination
by the Company without Cause or by the Executive for Good Reason. If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;
(vi)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control. If (i)
the Executive’s employment is terminated by the Company other than for Cause or
by the Executive for Good Reason during the Effective Period or (ii) the
Executive terminates his employment for any reason during the Window Period,
then the Executive shall be entitled to receive the following from the
Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of three (3) times the sum of (A) the Executive’s Base Salary
then in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For three
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;
(vi)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the other party hereto given in accordance with Section 12. For purposes of this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date. The
failure to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause will not waive any right of the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Cause
unless and until there has been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
(3/4) of the entire membership of the Board at a meeting of the Board called and
held for such purpose (after reasonable notice is provided to the Executive and
the Executive is given an opportunity, together with counsel, to be heard before
the Board), finding that, in the good faith opinion of the Board, the Executive
has engaged in the conduct described in Section 1(b) hereof, and specifying the
particulars of such conduct.
(c) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages. The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv), the
amount of any payment or benefit provided for under this Agreement will not be
reduced by any compensation or benefits earned by the Executive as the result of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”) would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the “Excise
Tax”), then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”) in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (“Underpayment”) or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees. All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11, each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the
Board or the Company:
Discovery
Laboratories, Inc.
350 South
Main Street, Suite 307
Doylestown,
PA 18901
Attn:
David Lopez, Esq.
(b) if to the
Executive:
Robert J.
Capetola, Ph.D.
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.
15. Arbitration.
(a) If the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”), then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time of
the arbitration hearing, such arbitration to be completed in a 60-day period. In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues to
be arbitrated has satisfied the conditions precedent to such party’s right to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority to
award punitive damages. No party shall seek punitive damages in relation to any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except as
provided in Section 11, the parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section 15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law. This
Agreement shall be interpreted, construed, governed and enforced according to
the laws of the State of New York without regard to the application of choice of
law rules.
(b) Amendments. No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties hereto.
(c) Severability. If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
(d) Binding
Effect. This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns. Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary in
the case of the death of the Executive, this Agreement is not assignable by any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver. No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement. This
Agreement sets forth the entire agreement of the parties hereto with respect to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment. Nothing
contained in this Agreement will be construed as a right of the Executive to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement. The
Executive hereby acknowledges that he has read and understands the provisions of
this Agreement, that he has been given the opportunity for his legal counsel to
review this Agreement, that the provisions of this Agreement are reasonable and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be
executed as of the date first above written.
DISCOVERY
LABORATORIES, INC.
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By: |
/s/ David L. Lopez |
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Name: David L. Lopez, Esq., CPA
Title:
Senior Vice President and General
Counsel |
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/s/ Robert J. Capetola |
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Robert J. Capetola,
Ph.D. |
EXHIBIT
A
(a) “Beneficiary” means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form. If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause” means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii) the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”), or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control” means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”) cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided, that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further, that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of the
Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”) other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date” means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code” means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination” means
the date specified in a Notice of Termination pursuant to Section 8 hereof, or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the case
may be.
(g) “Disability” means a
mental or physical condition that renders the Executive substantially incapable
of performing his duties and obligations under this Agreement, after taking into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties) for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period” means
the period beginning on the Change of Control Date and ending 36 months after
the date of the related Change of Control.
(i) “Good
Reason” means,
unless the Executive has consented in writing thereto, the occurrence of any of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii) a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; (vi) the
failure of the Company to nominate the Executive for election to the Board at
any relevant time during the Term; or (vii) the failure of the Company to obtain
the assumption in writing of the Company’s obligation to perform this Agreement
by any successor to all or substantially all of the assets of the Company within
15 days after a Business Combination or a sale or other disposition of all or
substantially all of the assets of the Company.
(j) “Highest
Annual Bonus” means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
(k) “Window
Period” means
the 30-day period commencing on the six-month anniversary of a Change of
Control.
Exhibit
10.22
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Employment Agreement (the “Agreement”) is
made as of this 1st day of January, 2004, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”), and
JOHN G. COOPER (the “Executive”).
WHEREAS,
the Executive is currently employed by the Company as its Executive Vice
President and Chief Financial Officer pursuant to that certain employment
agreement dated as of December 10, 2001, by and between the Company and the
Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions. Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement. The
term (“Term”) of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2005; provided, however, that commencing on January 1,
2006, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.
3. Executive’s
Duties and Obligations.
(a) Duties. The
Executive shall continue to serve as the Company’s Executive Vice President and
Chief Financial Officer. The Executive shall continue to be responsible for all
duties customarily associated with this title. The Executive shall at all times
report directly to the Company’s Chief Executive Officer.
(b) Location
of Employment. The
Executive’s principal place of business shall continue to be at the Company’s
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Agreement. The
Executive has executed the Company’s standard form of Intellectual Property and
Confidential Information Agreement (the “Confidentiality
Agreement. The
Executive shall comply at all times with the terms and conditions of the
Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information.
4. Devotion
of Time to Company’s Business.
(a) Full-Time
Efforts. During
his employment with the Company, the Executive shall devote substantially all of
his time, attention and efforts to the proper performance of his implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of the
Company.
(b) No
Other Employment. During
his employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment. During
the Term and for 12 months from the Date of Termination, the Executive shall
not, directly or indirectly, without the prior written consent of the Company,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any other individual or
representative capacity (X) compete with the Company in the business of
developing or commercializing pulmonary surfactants or any other category of
compounds which forms the basis of the Company’s material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided, that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
Notwithstanding the foregoing, the 12 month period described in the preceding
sentence shall be extended to 24 months in the event of any termination of the
Executive’s employment described in Section 7(c).
(d) Injunctive
Relief. In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.
(e) Reformation. To the
extent that the restrictions imposed by Section 4(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not to
be unreasonable.
5. Compensation
and Benefits.
(a) Base
Compensation. During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”) of at
least $240,000, payable in accordance with the Company’s regular payroll
practices and less all required withholdings and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 5. The Base Salary
shall be reviewed at least annually at the start of each calendar year for the
purposes of determining increases, if any, based on the Executive’s performance,
the performance of the Company, inflation, the then prevailing salary scales for
comparable positions and other relevant factors.
(b) Bonuses. During
the Term, the Executive shall be eligible for such year-end bonus, which may be
paid in either cash or equity, or both, as is awarded solely at the discretion
of the Compensation Committee of the Board after consultation with the Company’s
Chief Executive Officer, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. Any such equity bonus shall contain such rights and
features as are typically afforded to other Company employees of similar level
in connection with comparable equity bonuses awarded by the Company.
(c) Benefits. During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company’s
senior executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements. Anything contained herein
to the contrary notwithstanding, throughout the Term, Executive shall be
entitled to receive life insurance on behalf of Executive’s named beneficiaries
in the amount of Executive’s then current annual salary for the Term of this
Agreement at no cost to the Executive, except the Company shall have no
liability whatsoever for any taxes (whether based on income or otherwise)
imposed upon or incurred by Executive in connection with any such
insurance.
(d) Vacations. During
the Term, the Executive shall be entitled to 15 days paid vacation per year, to
be earned ratably throughout the year, 5 days of which may be carried over from
year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
(e) Reimbursement
of Business Expenses. The
Executive is authorized to incur reasonable expenses in carrying out his duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.
6. Change
of Control Benefits.
(a) Bonus. The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for, or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise his options at a time and in a fashion that will entitle him to
receive, in exchange for any shares acquired pursuant to any such exercise, the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of the
Executive’s employment, a lump sum payment in respect of all accrued but unused
vacation days (provided, that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at his Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law).
(ii)
In the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for one year from the Date of Termination (or, if shorter,
until the expiration of their stated terms).
(b) Termination
by the Company without Cause or by the Executive for Good Reason. If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vi)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control. If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;
(vi)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the other party hereto given in accordance with Section 12. For purposes of this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date. The
failure to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause will not waive any right of the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages. The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv), the
amount of any payment or benefit provided for under this Agreement will not be
reduced by any compensation or benefits earned by the Executive as the result of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”) would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the “Excise
Tax”), then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”) in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made (“Underpayment”) or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees. All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11, each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the
Board or the Company:
Discovery
Laboratories, Inc.
350 South
Main Street, Suite 307
Doylestown,
PA 18901
Attn:
David Lopez, Esq.
(b) if to the
Executive:
John G.
Cooper
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.
15. Arbitration.
(a) If the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”), then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time of
the arbitration hearing, such arbitration to be completed in a 60-day period. In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues to
be arbitrated has satisfied the conditions precedent to such party’s right to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority to
award punitive damages. No party shall seek punitive damages in relation to any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except as
provided in Section 11, the parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section 15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law. This
Agreement shall be interpreted, construed, governed and enforced according to
the laws of the State of New York without regard to the application of choice of
law rules.
(b) Amendments. No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties hereto.
(c) Severability. If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
(d) Binding
Effect. This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns. Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary in
the case of the death of the Executive, this Agreement is not assignable by any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver. No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement. This
Agreement sets forth the entire agreement of the parties hereto with respect to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment. Nothing
contained in this Agreement will be construed as a right of the Executive to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement. The
Executive hereby acknowledges that he has read and understands the provisions of
this Agreement, that he has been given the opportunity for his legal counsel to
review this Agreement, that the provisions of this Agreement are reasonable and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be
executed as of the date first above written.
DISCOVERY
LABORATORIES, INC.
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By: |
/s/ Robert J.
Capetola |
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|
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Name: Robert J. Capetola, Ph.D.
Title:
President and Chief Executive
Officer |
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/s/ John G.
Cooper |
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John G. Cooper |
EXHIBIT
A
(a) “Beneficiary” means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form. If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause” means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii) the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”), or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control” means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”) cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided, that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further, that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of the
Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”) other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date” means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code” means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination” means
the date specified in a Notice of Termination pursuant to Section 8 hereof, or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the case
may be.
(g) “Disability” means a
mental or physical condition that renders the Executive substantially incapable
of performing his duties and obligations under this Agreement, after taking into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties) for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period” means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason” means,
unless the Executive has consented in writing thereto, the occurrence of any of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii) a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus” means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Exhibit
10.23
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Employment Agreement (the “Agreement”) is
made as of this 1st day of January, 2004, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”), and
DAVID L.
LOPEZ, ESQ., CPA (the
“Executive”).
WHEREAS,
the Executive is currently employed by the Company as its Senior Vice President
and General Counsel pursuant to that certain employment agreement dated as of
April 20, 2000, by and between the Company and the Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions. Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement. The
term (“Term”) of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2005; provided, however, that commencing on January 1,
2006, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.
3. Executive’s
Duties and Obligations.
(a) Duties. The
Executive shall continue to serve as the Company’s Senior Vice President and
General Counsel. The Executive shall continue to be responsible for all duties
customarily associated with this title. The Executive shall at all times report
directly to the Company’s Chief Executive Officer.
(b) Location
of Employment. The
Executive’s principal place of business shall continue to be at the Company’s
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Agreement. The
Executive has executed the Company’s standard form of Intellectual Property and
Confidential Information Agreement (the “Confidentiality
Agreement. The
Executive shall comply at all times with the terms and conditions of the
Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information.
4. Devotion
of Time to Company’s Business.
(a) Full-Time
Efforts. During
his employment with the Company, the Executive shall devote substantially all of
his time, attention and efforts to the proper performance of his implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of the
Company.
(b) No
Other Employment. During
his employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment. During
the Term and for 12 months from the Date of Termination, the Executive shall
not, directly or indirectly, without the prior written consent of the Company,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any other individual or
representative capacity (X) compete with the Company in the business of
developing or commercializing pulmonary surfactants or any other category of
compounds which forms the basis of the Company’s material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided, that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
Notwithstanding the foregoing, the 12 month period described in the preceding
sentence shall be extended to 24 months in the event of any termination of the
Executive’s employment described in Section 7(c).
(d) Injunctive
Relief. In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.
(e) Reformation. To the
extent that the restrictions imposed by Section 4(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not to
be unreasonable.
5. Compensation
and Benefits.
(a) Base
Compensation. During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”) of at
least $230,000, payable in accordance with the Company’s regular payroll
practices and less all required withholdings and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 5. The Base Salary
shall be reviewed at least annually at the start of each calendar year for the
purposes of determining increases, if any, based on the Executive’s performance,
the performance of the Company, inflation, the then prevailing salary scales for
comparable positions and other relevant factors.
(b) Bonuses. During
the Term, the Executive shall be eligible for such year-end bonus, which may be
paid in either cash or equity, or both, as is awarded solely at the discretion
of the Compensation Committee of the Board after consultation with the Company’s
Chief Executive Officer, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. Any such equity bonus shall contain such rights and
features as are typically afforded to other Company employees of similar level
in connection with comparable equity bonuses awarded by the Company.
(c) Benefits. During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company’s
senior executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements. Anything contained herein
to the contrary notwithstanding, throughout the Term, Executive shall be
entitled to receive (i) life insurance on behalf of Executive’s named
beneficiaries in the amount of Executive’s then current annual salary for the
Term of this Agreement at no cost to the Executive, except the Company shall
have no liability whatsoever for any taxes (whether based on income or
otherwise) imposed upon or incurred by Executive in connection with any such
insurance and (ii) annual payments of up to (A) $7,000 solely to cover the cost
of tuition, fees, books and other materials related to professional courses
completed at state approved universities and (B) $1,500 solely to cover
professional legal and accounting dues, association fees and continuing
education costs, each of the foregoing payments shall be subject to
documentation in accordance with reasonable policies of the
Company.
(d) Vacations. During
the Term, the Executive shall be entitled to 15 days paid vacation per year, to
be earned ratably throughout the year, 5 days of which may be carried over from
year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
(e) Reimbursement
of Business Expenses. The
Executive is authorized to incur reasonable expenses in carrying out his duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.
6. Change
of Control Benefits.
(a) Bonus. The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for, or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise his options at a time and in a fashion that will entitle him to
receive, in exchange for any shares acquired pursuant to any such exercise, the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.
(c) Promissory
Note.
Notwithstanding any provision to the contrary contained in the Promissory Note
dated July 23, 2001, issued by Executive to the Company (the “Note”),
during the Effective Period the Note shall be callable by the Company, with
respect to the aggregate principal amount then outstanding, together with all
interest thereon accrued yet unpaid, upon 365 days prior written notice to
Executive.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of the
Executive’s employment, a lump sum payment in respect of all accrued but unused
vacation days (provided, that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at his Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law).
(ii)
In the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for one year from the Date of Termination (or, if shorter,
until the expiration of their stated terms).
(b) Termination
by the Company without Cause or by the Executive for Good Reason. If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vi)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control. If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;
(vi)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the other party hereto given in accordance with Section 12. For purposes of this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date. The
failure to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause will not waive any right of the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages. The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv), the
amount of any payment or benefit provided for under this Agreement will not be
reduced by any compensation or benefits earned by the Executive as the result of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”) would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the “Excise
Tax”), then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”) in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made (“Underpayment”) or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees. All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11, each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the
Board or the Company:
Discovery
Laboratories, Inc.
350 South
Main Street, Suite 307
Doylestown,
PA 18901
Attn:
David Lopez, Esq.
(b) if to the
Executive:
David L.
Lopez, Esq.
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.
15. Arbitration.
(a) If the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”), then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time of
the arbitration hearing, such arbitration to be completed in a 60-day period. In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues to
be arbitrated has satisfied the conditions precedent to such party’s right to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority to
award punitive damages. No party shall seek punitive damages in relation to any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except as
provided in Section 11, the parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section 15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law. This
Agreement shall be interpreted, construed, governed and enforced according to
the laws of the State of New York without regard to the application of choice of
law rules.
(b) Amendments. No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties hereto.
(c) Severability. If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
(d) Binding
Effect. This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns. Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary in
the case of the death of the Executive, this Agreement is not assignable by any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver. No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement. This
Agreement sets forth the entire agreement of the parties hereto with respect to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment. Nothing
contained in this Agreement will be construed as a right of the Executive to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement. The
Executive hereby acknowledges that he has read and understands the provisions of
this Agreement, that he has been given the opportunity for his legal counsel to
review this Agreement, that the provisions of this Agreement are reasonable and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be
executed as of the date first above written.
DISCOVERY
LABORATORIES, INC.
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By: |
/s/ Robert J.
Capetola |
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|
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Name: Robert J. Capetola, Ph.D.
Title:
President and Chief Executive
Officer |
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/s/ David L. Lopez |
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David L. Lopez, Esq.,
CPA |
EXHIBIT
A
(a) “Beneficiary” means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form. If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause” means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii) the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”), or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control” means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”) cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided, that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further, that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of the
Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”) other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date” means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code” means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination” means
the date specified in a Notice of Termination pursuant to Section 8 hereof, or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the case
may be.
(g) “Disability” means a
mental or physical condition that renders the Executive substantially incapable
of performing his duties and obligations under this Agreement, after taking into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties) for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period” means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason” means,
unless the Executive has consented in writing thereto, the occurrence of any of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii) a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus” means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Exhibit
10.24
[EXECUTION
COPY]
EMPLOYMENT
AGREEMENT
This
Employment Agreement (the “Agreement”) is
made as of this 24th day of May 2004, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”), and
MARK OSTERMAN (the “Executive”).
WHEREAS,
the Company and the Executive desire that Executive be employed by the Company
and that the terms and conditions of such employment be defined.
NOW,
THEREFORE, in consideration of the employment of Executive by the Company, the
Company and the Executive hereby agree as follows:
1. Certain
Definitions. Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement. The
term (“Term”) of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2005; provided, however, that commencing on January 1,
2006, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.
3. Executive’s
Duties and Obligations.
(a) Duties. The
Executive shall serve as the Company’s Senior Vice President, Sales and
Marketing. The Executive shall be responsible for all duties customarily
associated with this title. The Executive shall at all times report directly to
the Company’s Chief Executive Officer.
(b) Location
of Employment. The
Executive’s principal place of business shall be at the Company’s headquarters
to be located within thirty (30) miles of Doylestown, Pennsylvania; provided,
that the Executive acknowledges and agrees that the performance by the Executive
of his duties shall require frequent travel including, without limitation,
overseas travel from time to time.
4. Proprietary
Information and Inventions Agreement. Upon
execution of this Agreement, Executive shall execute the Company’s standard form
of Intellectual Property and Confidential Information Agreement (the
“Confidentiality
Agreement”) a copy
of which is attached to this Agreement as Exhibit
B.
Executive shall comply at all times with the terms and conditions of the
Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information
5. Devotion
of Time to Company’s Business.
(a) Full-Time
Efforts. During
his employment with the Company, the Executive shall devote substantially all of
his time, attention and efforts to the proper performance of his implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of the
Company.
(b) No
Other Employment. During
his employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment. During
the Term and for 12 months from the Date of Termination, the Executive shall
not, directly or indirectly, without the prior written consent of the Company,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any other individual or
representative capacity (X) compete with the Company in the business of
developing or commercializing pulmonary surfactants or any other category of
compounds which forms the basis of the Company’s material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided, that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
Notwithstanding the foregoing, the 12 month period described in the preceding
sentence shall be extended to 24 months in the event of any termination of the
Executive’s employment described in Section 7(c).
(d) Injunctive
Relief. In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.
(e) Reformation. To the
extent that the restrictions imposed by Section 4(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not to
be unreasonable.
6. Compensation
and Benefits.
(a) Base
Compensation. During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”) of at
least $230,000, payable in accordance with the Company’s regular payroll
practices and less all required withholdings, and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 5. The Base Salary
shall be reviewed at least annually at the start of each calendar year for the
purposes of determining increases, if any, based on the Executive’s performance,
the performance of the Company, inflation, the then prevailing salary scales for
comparable positions and other relevant factors.
(b) Bonuses. The
Company shall pay to Executive a one-time bonus of $25,000 upon the satisfactory
completion of 90 days of service. Thereafter, during the Term, the Executive
shall be eligible for such year-end bonus, which may be paid in either cash or
equity, or both, as is awarded solely at the discretion of the Compensation
Committee of the Board after consultation with the Company’s Chief Executive
Officer, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. Any such equity bonus shall contain such rights and
features as are typically afforded to other Company employees of similar level
in connection with comparable equity bonuses awarded by the Company.
(c) Benefits. During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company’s
senior executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements. Anything contained herein
to the contrary notwithstanding, throughout the Term, Executive shall be
entitled to receive life insurance on behalf of Executive’s named beneficiaries
in the amount of Executive’s then current annual salary for the Term of this
Agreement at no cost to the Executive, except the Company shall have no
liability whatsoever for any taxes (whether based on income or otherwise)
imposed upon or incurred by Executive in connection with any such
insurance.
(d) Vacations. During
the Term, the Executive shall be entitled to 20 days paid vacation per year, to
be earned ratably throughout the year, 5 days of which may be carried over from
year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
(e) Reimbursement
of Business Expenses. The
Executive is authorized to incur reasonable expenses in carrying out his duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.
(f) Stock
Options. The Company, subject to the approval of the Company’s Board of
Directors and its shareholders, as appropriate, shall grant to Executive non
qualified stock options under the Company’s Amended and Restated 1998 Stock
Incentive Plan (the “Plan”) to purchase 200,000 shares of Common Stock at
an exercise
price equal to the fair market value on the date of grant, which is intended to
be as promptly as practicable
following the full execution of this Agreement. Such stock options shall vest in
a series of three successive equal annual installments, provided, however that
such vesting shall be subject to the terms and conditions as set forth in the
Plan, except as may be otherwise provided for herein.
7. Change
of Control Benefits.
(a) Bonus. The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for, or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise his options at a time and in a fashion that will entitle him to
receive, in exchange for any shares acquired pursuant to any such exercise, the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.
8. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of the
Executive’s employment, a lump sum payment in respect of all accrued but unused
vacation days (provided, that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at his Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law).
(ii)
In the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for one year from the Date of Termination (or, if shorter,
until the expiration of their stated terms).
(b) Termination
by the Company without Cause or by the Executive for Good Reason. If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vi)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control. If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;
(vi)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
9. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the other party hereto given in accordance with Section 12. For purposes of this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date. The
failure to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause will not waive any right of the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
10. Mitigation
of Damages. The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv), the
amount of any payment or benefit provided for under this Agreement will not be
reduced by any compensation or benefits earned by the Executive as the result of
self-employment or employment by another employer or otherwise.
11. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”) would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the “Excise
Tax”), then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”) in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (“Underpayment”) or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
12. Legal
Fees. All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11, each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
13. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the
Board or the Company:
Discovery
Laboratories, Inc.
350 South
Main Street, Suite 307
Doylestown,
PA 18901
Attn:
David Lopez, Esq.
(b) if to the
Executive:
MARK
OSTERMAN
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
14. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
15. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes all other prior
agreements, written or oral, with respect thereto.
16. Arbitration.
(a) If the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”), then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time of
the arbitration hearing, such arbitration to be completed in a 60-day period. In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues to
be arbitrated has satisfied the conditions precedent to such party’s right to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority to
award punitive damages. No party shall seek punitive damages in relation to any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except as
provided in Section 11, the parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section 15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
17. Miscellaneous.
(a) Governing
Law. This
Agreement shall be interpreted, construed, governed and enforced according to
the laws of the State of New York without regard to the application of choice of
law rules.
(b) Amendments. No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties hereto.
(c) Severability. If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
(d) Binding
Effect. This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns. Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary in
the case of the death of the Executive, this Agreement is not assignable by any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver. No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement. This
Agreement sets forth the entire agreement of the parties hereto with respect to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
18. No
Contract of Employment. Nothing
contained in this Agreement will be construed as a right of the Executive to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge the Executive with or without Cause.
19. Executive
Acknowledgement. The
Executive hereby acknowledges that he has read and understands the provisions of
this Agreement, that he has been given the opportunity for his legal counsel to
review this Agreement, that the provisions of this Agreement are reasonable and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be
executed as of the date first above written.
DISCOVERY
LABORATORIES, INC.
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By: |
/s/ Robert J.
Capetola |
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Name: Robert J. Capetola, Ph.D.
Title:
President and Chief Executive
Officer |
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/s/ Mark Osterman |
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Mark Osterman |
EXHIBIT
A
(a) “Beneficiary” means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form. If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause” means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii) the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”), or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control” means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”) cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided, that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further, that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of the
Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”) other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date” means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code” means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination” means
the date specified in a Notice of Termination pursuant to Section 8 hereof, or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the case
may be.
(g) “Disability” means a
mental or physical condition that renders the Executive substantially incapable
of performing his duties and obligations under this Agreement, after taking into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties) for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period” means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason” means,
unless the Executive has consented in writing thereto, the occurrence of any of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii) a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus” means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Exhibit
10.25
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Employment Agreement (the “Agreement”) is
made as of this 1st day of January, 2004, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”), and
CHRISTOPHER J. SCHABER, PH.D. (the “Executive”).
WHEREAS,
the Executive is currently employed by the Company as its Executive Vice
President and Chief Operating Officer pursuant to that certain employment
agreement dated as of June 16, 2001, by and between the Company and the
Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions. Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement. The
term (“Term”) of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2005; provided, however, that commencing on January 1,
2006, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.
3. Executive’s
Duties and Obligations.
(a) Duties. The
Executive shall continue to serve as the Company’s Executive Vice President and
Chief Operating Officer. The Executive shall continue to be responsible for all
duties customarily associated with this title. The Executive shall at all times
report directly to the Company’s Chief Executive Officer.
(b) Location
of Employment. The
Executive’s principal place of business shall continue to be at the Company’s
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Agreement. The
Executive has executed the Company’s standard form of Intellectual Property and
Confidential Information Agreement (the “Confidentiality
Agreement. The
Executive shall comply at all times with the terms and conditions of the
Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information.
4. Devotion
of Time to Company’s
Business.
(a) Full-Time
Efforts. During
his employment with the Company, the Executive shall devote substantially all of
his time, attention and efforts to the proper performance of his implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of the
Company.
(b) No
Other Employment. During
his employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment. During
the Term and for 12 months from the Date of Termination, the Executive shall
not, directly or indirectly, without the prior written consent of the Company,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any other individual or
representative capacity (X) compete with the Company in the business of
developing or commercializing pulmonary surfactants or any other category of
compounds which forms the basis of the Company’s material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided, that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
Notwithstanding the foregoing, the 12 month period described in the preceding
sentence shall be extended to 24 months in the event of any termination of the
Executive’s employment described in Section 7(c).
(d) Injunctive
Relief. In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.
(e) Reformation. To the
extent that the restrictions imposed by Section 4(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not to
be unreasonable.
5. Compensation
and Benefits.
(a) Base
Compensation. During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”) of at
least $250,000, payable in accordance with the Company’s regular payroll
practices and less all required withholdings and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 5. The Base Salary
shall be reviewed at least annually at the start of each calendar year for the
purposes of determining increases, if any, based on the Executive’s performance,
the performance of the Company, inflation, the then prevailing salary scales for
comparable positions and other relevant factors.
(b) Bonuses. During
the Term, the Executive shall be eligible for such year-end bonus, which may be
paid in either cash or equity, or both, as is awarded solely at the discretion
of the Compensation Committee of the Board after consultation with the Company’s
Chief Executive Officer, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. Any such equity bonus shall contain such rights and
features as are typically afforded to other Company employees of similar level
in connection with comparable equity bonuses awarded by the Company.
(c) Benefits. During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company’s
senior executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements. Anything contained herein
to the contrary notwithstanding, throughout the Term, the Executive shall be
entitled to receive term life insurance on behalf of the Executive’s named
beneficiaries in the amount of $500,000 (subject to an annual premium cap of
$1,000 for 2004, which cap shall be increased by 5% for each successive calendar
year of the Term), at no cost to the Executive, except the Company shall have no
liability whatsoever for any taxes (whether based on income or otherwise)
imposed upon or incurred by the Executive in connection with any such life
insurance.
(d) Vacations. During
the Term, the Executive shall be entitled to 15 days paid vacation per year, to
be earned ratably throughout the year, 5 days of which may be carried over from
year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
(e) Reimbursement
of Business Expenses. The
Executive is authorized to incur reasonable expenses in carrying out his duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.
6. Change
of Control Benefits.
(a) Bonus. The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for, or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise his options at a time and in a fashion that will entitle him to
receive, in exchange for any shares acquired pursuant to any such exercise, the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of the
Executive’s employment, a lump sum payment in respect of all accrued but unused
vacation days (provided, that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at his Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law).
(ii)
In the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for one year from the Date of Termination (or, if shorter,
until the expiration of their stated terms).
(b) Termination
by the Company without Cause or by the Executive for Good Reason. If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vi)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control. If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;
(vi)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the other party hereto given in accordance with Section 12. For purposes of this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date. The
failure to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause will not waive any right of the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages. The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv), the
amount of any payment or benefit provided for under this Agreement will not be
reduced by any compensation or benefits earned by the Executive as the result of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”) would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the “Excise
Tax”), then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”) in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (“Underpayment”) or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees. All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11, each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the
Board or the Company:
Discovery
Laboratories, Inc.
350 South
Main Street, Suite 307
Doylestown,
PA 18901
Attn:
David Lopez, Esq.
(b) if to the
Executive:
Christopher
J. Schaber, Ph.D.
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.
15. Arbitration.
(a) If the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”), then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time of
the arbitration hearing, such arbitration to be completed in a 60-day period. In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues to
be arbitrated has satisfied the conditions precedent to such party’s right to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority to
award punitive damages. No party shall seek punitive damages in relation to any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except as
provided in Section 11, the parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section 15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law. This
Agreement shall be interpreted, construed, governed and enforced according to
the laws of the State of New York without regard to the application of choice of
law rules.
(b) Amendments. No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties hereto.
(c) Severability. If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
(d) Binding
Effect. This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns. Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary in
the case of the death of the Executive, this Agreement is not assignable by any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver. No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement. This
Agreement sets forth the entire agreement of the parties hereto with respect to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment. Nothing
contained in this Agreement will be construed as a right of the Executive to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement. The
Executive hereby acknowledges that he has read and understands the provisions of
this Agreement, that he has been given the opportunity for his legal counsel to
review this Agreement, that the provisions of this Agreement are reasonable and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be
executed as of the date first above written.
DISCOVERY
LABORATORIES, INC.
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By: |
/s/ Robert J.
Capetola |
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|
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Name: Robert J. Capetola, Ph.D.
Title:
President and Chief Executive Officer
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/s/ Christopher J.
Schaber |
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Christopher J. Schaber,
Ph.D. |
EXHIBIT
A
(a) “Beneficiary” means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form. If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause” means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii) the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”), or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control” means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”) cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided, that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further, that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of the
Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”) other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date” means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code” means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination” means
the date specified in a Notice of Termination pursuant to Section 8 hereof, or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the case
may be.
(g) “Disability” means a
mental or physical condition that renders the Executive substantially incapable
of performing his duties and obligations under this Agreement, after taking into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties) for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period” means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason” means,
unless the Executive has consented in writing thereto, the occurrence of any of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii) a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus” means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Exhibit
10.26
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Employment Agreement (the “Agreement") is
made as of this 1st day of January 2004, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the "Company"), and
ROBERT
SEGAL, MD (the
"Executive").
WHEREAS,
the Executive is currently employed by the Company as its Senior Vice President,
Clinical Research and Chief Medical Officer pursuant to that certain employment
agreement dated as of June 1, 2000, by and between the Company and the Executive
(the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend and
restate the Employment Agreement in its entirety to read as follows
1. Certain
Definitions. Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement. The
term (“Term”) of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2005; provided, however, that commencing on January 1,
2006, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.
3. Executive's
Duties and Obligations.
(a) Duties. The
Executive shall continue to serve as the Company's Senior Vice President,
Clinical Research and Chief Medical Officer. The Executive shall continue to be
responsible for all duties customarily associated with this title. The Executive
shall at all times report directly to the Company’s Chief Operating
Officer.
(b) Location
of Employment. The
Executive's principal place of business shall continue to be at the Company's
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Agreement. The
Executive has executed the Company's standard form of Intellectual Property and
Confidential Information Agreement (the "Confidentiality
Agreement") a copy
of which is attached to this Agreement as Exhibit B. The Executive shall comply
at all times with the terms and conditions of the Confidentiality Agreement and
all other reasonable policies of the Company governing its confidential and
proprietary information.
4. Devotion
of Time to Company's Business.
(a) Full-Time
Efforts. During
his employment with the Company, the Executive shall devote substantially all of
his time, attention and efforts to the proper performance of his implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of the
Company.
(b) No
Other Employment. During
his employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment. During
the Term and for 6 months from the Date of Termination, the Executive shall not,
directly or indirectly, without the prior written consent of the Company, either
as an employee, employer, consultant, agent, principal, partner, stockholder,
corporate officer, director, or in any other individual or representative
capacity (X) compete with the Company in the business of developing or
commercializing pulmonary surfactants or any other category of compounds which
forms the basis of the Company's material products or any material products
under development on the Date of Termination, or (Y) solicit, encourage, induce
or endeavor to entice away from the Company, or otherwise interfere with the
relationship of the Company with, any person who is employed or engaged by the
Company as an employee, consultant or independent contractor or who was so
employed or engaged at any time during the preceding six (6) months;
provided, that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
Notwithstanding the foregoing, the 6 month period described in the preceding
sentence shall be extended to 12 months in the event of any termination of the
Executive’s employment described in Section 7(c).
(d) Injunctive
Relief. In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.
(e) Reformation. To the
extent that the restrictions imposed by Section 4(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not to
be unreasonable.
5. Compensation
and Benefits.
(a) Base
Compensation. During
the Term, the Company shall pay to the Executive (i) base annual compensation
("Base
Salary") of at
least $237,000, payable in accordance with the Company's regular payroll
practices and less all required withholdings and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 5. The Base Salary
shall be reviewed at least annually at the start of each calendar year for the
purposes of determining increases, if any, based on the Executive's performance,
the performance of the Company, inflation, the then prevailing salary scales for
comparable positions and other relevant factors.
(b) Bonuses. During
the Term, the Executive shall be eligible for such year-end bonus, which may be
paid in either cash or equity, or both, as is awarded solely at the discretion
of the Compensation Committee of the Board after consultation with the Company’s
Chief Executive Officer, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. Any such equity bonus shall contain such rights and
features as are typically afforded to other Company employees of similar level
in connection with comparable equity bonuses awarded by the Company.
(c) Benefits. During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company's
senior executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements.
(d) Vacations. During
the Term, the Executive shall be entitled to 15 days paid vacation per year, to
be earned ratably throughout the year, 5 days of which may be carried over from
year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
(e) Reimbursement
of Business Expenses. The
Executive is authorized to incur reasonable expenses in carrying out his duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.
6. Change
of Control Benefits.
(a) Bonus. The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for, or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise his options at a time and in a fashion that will entitle him to
receive, in exchange for any shares acquired pursuant to any such exercise, the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of the
Executive's employment, a lump sum payment in respect of all accrued but unused
vacation days (provided, that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at his Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law).
(ii)
In the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for one year from the Date of Termination (or, if shorter,
until the expiration of their stated terms).
(b) Termination
by the Company without Cause or by the Executive for Good Reason. If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to fifty percent (50%) of the sum of (A) the Executive’s Base Salary then in
effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For six
months from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vi)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control. If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;
(vi)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the other party hereto given in accordance with Section 12. For purposes of this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date. The
failure to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause will not waive any right of the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages. The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv), the
amount of any payment or benefit provided for under this Agreement will not be
reduced by any compensation or benefits earned by the Executive as the result of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”) would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the “Excise
Tax”), then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”) in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (“Underpayment”) or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees. All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11, each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the
Board or the Company:
Discovery
Laboratories, Inc.
350 South
Main Street, Suite 307
Doylestown,
PA 18901
Attn:
David Lopez, Esq.
(b) if to the
Executive:
Robert
Segal, MD
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.
15. Arbitration.
(a) If the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”), then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked "Arbitration Demand". Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association ("AAA")
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time of
the arbitration hearing, such arbitration to be completed in a 60-day period. In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues to
be arbitrated has satisfied the conditions precedent to such party's right to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority to
award punitive damages. No party shall seek punitive damages in relation to any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except as
provided in Section 11, the parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section 15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law. This
Agreement shall be interpreted, construed, governed and enforced according to
the laws of the State of New York without regard to the application of choice of
law rules.
(b) Amendments. No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties hereto.
(c) Severability. If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
(d) Binding
Effect. This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns. Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary in
the case of the death of the Executive, this Agreement is not assignable by any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver. No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement. This
Agreement sets forth the entire agreement of the parties hereto with respect to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment. Nothing
contained in this Agreement will be construed as a right of the Executive to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement. The
Executive hereby acknowledges that he has read and understands the provisions of
this Agreement, that he has been given the opportunity for his legal counsel to
review this Agreement, that the provisions of this Agreement are reasonable and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be
executed as of the date first above written.
DISCOVERY
LABORATORIES, INC.
By:
/s/
Robert J. Capetola
Name:
Robert J. Capetola, Ph.D.
Title:
President and Chief Executive Officer
/s/
Robert Segal
Robert
Segal, MD
EXHIBIT
A
(a) “Beneficiary” means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form. If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause” means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii) the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”), or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control” means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”) cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided, that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further, that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of the
Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”) other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date” means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code” means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination” means
the date specified in a Notice of Termination pursuant to Section 8 hereof, or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the case
may be.
(g) “Disability” means a
mental or physical condition that renders the Executive substantially incapable
of performing his duties and obligations under this Agreement, after taking into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties) for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period” means
the period beginning on the Change of Control Date and ending 12 months after
the date of the related Change of Control.
(i) “Good
Reason” means,
unless the Executive has consented in writing thereto, the occurrence of any of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii) a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus” means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Exhibit
10.27
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Employment Agreement (the “Agreement”) is
made as of this 1st day of January, 2004, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”), and
DENI M.
ZODDA, PH.D. (the
“Executive”).
WHEREAS,
the Executive is currently employed by the Company as its Senior Vice President,
Business Development pursuant to that certain employment agreement dated as of
August 14, 2000, by and between the Company and the Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions. Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement. The
term (“Term”) of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2005; provided, however, that commencing on January 1,
2006, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.
3. Executive’s
Duties and Obligations.
(a) Duties. The
Executive shall continue to serve as the Company’s Senior Vice President,
Business Development. The Executive shall continue to be responsible for all
duties customarily associated with this title. The Executive shall at all times
report directly to the Company’s Chief Executive Officer.
(b) Location
of Employment. The
Executive’s principal place of business shall continue to be at the Company’s
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Agreement. The
Executive has executed the Company’s standard form of Intellectual Property and
Confidential Information Agreement (the “Confidentiality
Agreement. The
Executive shall comply at all times with the terms and conditions of the
Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information.
4. Devotion
of Time to Company’s Business.
(a) Full-Time
Efforts. During
his employment with the Company, the Executive shall devote substantially all of
his time, attention and efforts to the proper performance of his implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of the
Company.
(b) No
Other Employment. During
his employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment. During
the Term and for 12 months from the Date of Termination, the Executive shall
not, directly or indirectly, without the prior written consent of the Company,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any other individual or
representative capacity (X) compete with the Company in the business of
developing or commercializing pulmonary surfactants or any other category of
compounds which forms the basis of the Company’s material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided, that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
Notwithstanding the foregoing, the 12 month period described in the preceding
sentence shall be extended to 24 months in the event of any termination of the
Executive’s employment described in Section 7(c).
(d) Injunctive
Relief. In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.
(e) Reformation. To the
extent that the restrictions imposed by Section 4(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not to
be unreasonable.
5. Compensation
and Benefits.
(a) Base
Compensation. During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”) of at
least $220,000, payable in accordance with the Company’s regular payroll
practices and less all required withholdings and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 5. The Base Salary
shall be reviewed at least annually at the start of each calendar year for the
purposes of determining increases, if any, based on the Executive’s performance,
the performance of the Company, inflation, the then prevailing salary scales for
comparable positions and other relevant factors.
(b) Bonuses. During
the Term, the Executive shall be eligible for such year-end bonus, which may be
paid in either cash or equity, or both, as is awarded solely at the discretion
of the Compensation Committee of the Board after consultation with the Company’s
Chief Executive Officer, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. Any such equity bonus shall contain such rights and
features as are typically afforded to other Company employees of similar level
in connection with comparable equity bonuses awarded by the Company.
(c) Benefits. During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company’s
senior executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements. Anything contained herein
to the contrary notwithstanding, throughout the Term, Executive shall be
entitled to receive life insurance on behalf of Executive’s named beneficiaries
in the amount of Executive’s then current annual salary for the Term of this
Agreement at no cost to the Executive, except the Company shall have no
liability whatsoever for any taxes (whether based on income or otherwise)
imposed upon or incurred by Executive in connection with any such
insurance.
(d) Vacations. During
the Term, the Executive shall be entitled to 15 days paid vacation per year, to
be earned ratably throughout the year, 5 days of which may be carried over from
year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
(e) Reimbursement
of Business Expenses. The
Executive is authorized to incur reasonable expenses in carrying out his duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.
6. Change
of Control Benefits.
(a) Bonus. The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for, or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise his options at a time and in a fashion that will entitle him to
receive, in exchange for any shares acquired pursuant to any such exercise, the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of the
Executive’s employment, a lump sum payment in respect of all accrued but unused
vacation days (provided, that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at his Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law).
(ii)
In the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for one year from the Date of Termination (or, if shorter,
until the expiration of their stated terms).
(b) Termination
by the Company without Cause or by the Executive for Good Reason. If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vi)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control. If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;
(iii)
Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;
(vi)
Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the other party hereto given in accordance with Section 12. For purposes of this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date. The
failure to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause will not waive any right of the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages. The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv), the
amount of any payment or benefit provided for under this Agreement will not be
reduced by any compensation or benefits earned by the Executive as the result of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”) would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the “Excise
Tax”), then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”) in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made (“Underpayment”) or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees. All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11, each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the
Board or the Company:
Discovery
Laboratories, Inc.
350 South
Main Street, Suite 307
Doylestown,
PA 18901
Attn:
David Lopez, Esq.
(b) if to the
Executive:
Deni M.
Zodda, Ph.D.
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.
15. Arbitration.
(a) If the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”), then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time of
the arbitration hearing, such arbitration to be completed in a 60-day period. In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues to
be arbitrated has satisfied the conditions precedent to such party’s right to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority to
award punitive damages. No party shall seek punitive damages in relation to any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except as
provided in Section 11, the parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section 15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law. This
Agreement shall be interpreted, construed, governed and enforced according to
the laws of the State of New York without regard to the application of choice of
law rules.
(b) Amendments. No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties hereto.
(c) Severability. If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
(d) Binding
Effect. This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns. Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary in
the case of the death of the Executive, this Agreement is not assignable by any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver. No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement. This
Agreement sets forth the entire agreement of the parties hereto with respect to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment. Nothing
contained in this Agreement will be construed as a right of the Executive to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement. The
Executive hereby acknowledges that he has read and understands the provisions of
this Agreement, that he has been given the opportunity for his legal counsel to
review this Agreement, that the provisions of this Agreement are reasonable and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be
executed as of the date first above written.
DISCOVERY
LABORATORIES, INC.
| |
|
|
By: |
/s/ Robert J.
Capetola |
| |
|
| |
Name: Robert J. Capetola, Ph.D.
Title:
President and Chief Executive
Officer |
| |
|
|
|
/s/ Deni M.
Zodda |
| |
|
| |
Deni M. Zodda,
Ph.D. |
EXHIBIT
A
(a) “Beneficiary” means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form. If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause” means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii) the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”), or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control” means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”) cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided, that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further, that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of the
Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”) other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date” means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code” means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination” means
the date specified in a Notice of Termination pursuant to Section 8 hereof, or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the case
may be.
(g) “Disability” means a
mental or physical condition that renders the Executive substantially incapable
of performing his duties and obligations under this Agreement, after taking into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties) for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period” means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason” means,
unless the Executive has consented in writing thereto, the occurrence of any of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii) a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus” means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Exhibit
10.28
EXECUTION
COPY
AMENDED
AND RESTATED
SUBLICENSE
AND COLLABORATION AGREEMENT
between
DISCOVERY
LABORATORIES, INC.
and
LABORATORIOS
DEL DR. ESTEVE, S.A.
Concerning
Sinapultide
December
3, 2004
AMENDED
AND RESTATED
SUBLICENSE
AND COLLABORATION AGREEMENT
THIS
AMENDED AND RESTATED SUBLICENSE AND COLLABORATION AGREEMENT (this “Agreement” or
“Revised
Collaboration Agreement”) is
made as of December 3, 2004 (the “Effective
Date”),
between DISCOVERY LABORATORIES, INC. (“Licensor”), a
Delaware corporation, and LABORATORIOS
DEL DR. ESTEVE, S.A., a
corporation organized and existing under the laws of Spain (“Licensee”).
WHEREAS,
Licensor has the exclusive worldwide right, under a license from Johnson &
Johnson, Inc., to sublicense certain technology, including certain technology
relating to synthetic pulmonary surfactant peptides and proteins, one of which
is known as sinapultide;
WHEREAS,
Licensor owns certain technology and patent rights relating to synthetic
pulmonary surfactant formulations;
WHEREAS,
Licensor and Licensee have entered into a Sublicense Agreement and a Supply
Agreement, in each case dated March 6, 2002, for the commercialization of
Licensed Products (as such term is defined therein);
WHEREAS,
Licensor and Licensee desire to replace the aforementioned agreements by an
Amended and Restated Sublicense and Collaboration Agreement and an Amended and
Restated Supply Agreement, in order to modify the collaborative relationship
between the parties and the territories where Licensee shall be entitled to
commercialize the Licensed Products (as such term is hereinafter defined).
NOW,
THEREFORE, in consideration of the promises and the performance of the covenants
herein contained, the parties agree as follows:
ARTICLE
1
DEFINITIONS
For the
purposes of this Agreement, the following terms shall have the following
meanings:
“Affiliate(s)” of a
Person shall mean any Person which directly or indirectly Controls, is
Controlled by or is under common Control with such Person.
“Business
Day” shall
mean any day on which banking institutions are open or authorized to be open in
the Commonwealth of Pennsylvania and in Barcelona, Spain.
“Control” shall
mean direct or indirect beneficial ownership of at least fifty percent (50%) of
the voting stock of a Person having outstanding voting securities, or a fifty
percent (50%) or greater interest in the income of a Person not having
outstanding securities, or, in either
case, the power to direct or cause the direction of the management or policies
of such Person.
“Development” shall
refer to all activities relating to formulation, process development,
manufacturing scale-up, quality assurance/quality control, clinical studies and
regulatory affairs in connection with a Licensed Product.
“EMEA” shall
mean the European Medicines Evaluation Agency or any successor entity
thereof.
“FDA” shall
mean the United States Food and Drug Administration or any successor entity
thereof.
“Initial
Period” shall
mean, on a country by country and Licensed Product-by-Licensed Product basis,
the period beginning on the Effective Date and ending on that date that is the
latest of the following dates:
| |
(i)
|
the
expiration of the last Patent Rights containing a Valid Claim covering the
subject Licensed Product in such country; |
| (ii) |
the
first commercial sale of the first to appear generic formulation of the
subject Licensed Product in such country;
or |
| (iii) |
the
tenth (10th)
anniversary of the first commercial sale of the subject Licensed Product
in such country. |
“Licensed
Know-how” shall
mean all know-how, data, information or technology arising before or during the
course of this Agreement which are proprietary to the Licensor and/or with
respect to which Licensor has the power and right to grant the licenses provided
for herein and which relate to the development or therapeutic use of Licensed
Products.
“Licensed
Methods” shall
mean the methods for the Licensed Products arising before or during the course
of this Agreement which are proprietary to the Licensor and/or with respect to
which Licensor has the power and right to grant the licenses provided for herein
and which relate to the development or therapeutic use of Licensed Products.
“Licensee
Proprietary Information” shall
mean any scientific and technical information or data developed, possessed or
acquired by Licensee relating to Licensed Products, Patent Rights or Licensed
Know-how which Licensee is free to disclose other than such information that is
generally available to the public.
“Licensed
Products” shall
mean surfactant pharmaceutical compositions which are formulations of lipids and
solely the polypeptide sinapultide and, in no manner whatsoever in any
composition including any other pharmacological agents, that have been developed
by Licensor or that may be developed by Licensor during the term of this
Agreement limited to the following:
| (i) |
In
suspension for pulmonary instillation or in aerosol formulation, for the
prophylaxis and/or treatment of Respiratory Distress Syndrome (RDS),
Meconium Aspiration Syndrome (MAS), Acute Lung Injury (ALI), Acute
Respiratory Distress Syndrome (ARDS), and/or Bronchopulmonary Dysplasia
(BPD), in each case in the hospital setting; |
| |
|
| (ii) |
In
any formulations (including, without limitation, any associated devices/
apparatus) for use in conjunction with nasal continuous positive airway
pressure for neonatal pulmonary disorders solely treated in the Neonatal
Intensive Care Unit (NICU) (collectively, nCPAP Licensed Product(s));
and |
| |
|
| (iii) |
In any formulations which may be developed
for the treatment of asthma and/or chronic obstructive pulmonary disease
(COPD) diagnosed and treated in the hospital setting. |
| |
|
“Licensed
Rights” shall
mean collectively the Patent Rights, the Licensed Methods, the Trademarks and
the Licensed Know-how.
“Licensed
Territory” shall
mean Andorra, Greece, Italy (including the Republic of San Marino and the
Vatican City), Portugal, and Spain.
“Marketing
Regulatory Approvals” shall
mean all permissions and applications for such permissions from the regulatory
and/or governmental health authorities in the Licensed Territory which are
necessary for the importation of the Licensed Products and their marketing, use,
distribution and sale in the Licensed Territory.
“MAA” means a
Marketing Authorisation Application submitted to the EMEA or with any regulatory
authority of any country within the Licensed Territory.
“NDA” shall
mean a New Drug Application or Product License Application filed with the United
States Food and Drug Administration under 21 USC 355(b) (FDCA Section
505(b)).
“Original
License” shall
mean the Sublicense Agreement dated as of October 28, 1996 between the Original
Licensor and Licensor.
“Original
Licensor” shall
mean Johnson & Johnson, Inc.
“Patent
Rights” shall
mean any patents and/or patent applications which contain one or more Valid
Claims covering the Licensed Products whether owned by Licensor or to which
Licensor may have rights during the term of this Agreement, including (i) the
patents and patent applications set forth on Schedule I hereto; (ii) any other
patents or patent applications covering the surfactant pharmaceutical
compositions referenced in the patents and patent applications in Schedule I or
their use or administration owned by Licensor or under which Licensor has the
right, at any time while this Agreement is in effect, to license to Licensee;
and (iii) with respect to the foregoing letters patent and patent applications,
all corresponding national patents and patent applications, Patent Cooperation
Treaty and European Patent Convention filings and applications and filings and
applications under similar administrative international conventions, together
with any divisional, continuation, continuation-in-part, substitution, reissue,
extension, supplementary protection certificate or other application based
thereon. Notwithstanding the foregoing, “Patent Rights” shall not include any
patents or patent applications, filings, or applications under any treaty, or
any divisional, continuation, continuation-in-part, substitution, reissue,
extension, supplementary protection certificate or other application that do not
relate in whole or in part to any of the Licensed Products.
“Person” shall
mean any natural person, corporation, limited liability company, unincorporated
association, partnership, joint venture or other entity.
“Phase
2” shall
mean that portion of clinical trials of a candidate drug in the target patient
population of a sufficient number and sufficient length of time whereby adequate
safety data is provided and there is a clear indication of dosage effects with
respect to efficacy as defined in the study protocol for such drug
candidate.
“Phase
3 Development” means
those clinical trials intended to generate safety and efficacy data to support
regulatory approval in the proposed therapeutic indication.
“Pricing
Approvals” shall
mean approvals by the regulatory and/or governmental health authorities in the
Licensed Territory granting the prices of the Licensed Products and
reimbursement conditions for the sale thereof.
“Scripps
Patent Rights” shall
mean the Patent Rights identified in part (a) of Schedule I.
“Trademark” shall
mean Surfaxin® and such
other trademarks owned by Licensor that are selected by the Development
Committee (as defined in Section 5.6) for use within the Licensed Territory in
connection with one or more Licensed Products.
“Valid
Claim” shall
mean a claim of an unexpired patent within the Patent Rights which has matured
into an issued patent or a claim being prosecuted in a pending application
within the Patent Rights. In each case a claim shall be presumed to be valid
unless and until it has been held to be invalid by a final, unappealable
judgment of a court of competent jurisdiction.
ARTICLE
2
GRANT
Section
2.1. Grant
of License.
Licensor hereby grants to Licensee, and Licensee hereby accepts from Licensor,
upon the terms and conditions herein specified, an exclusive license under the
Patent Rights, the Licensed Know-how and the Trademark, and the right to
practice Licensed Methods, solely in connection with the importation, promotion,
distribution, use and sale of Licensed Products under the Trademark in the
Licensed Territory. Licensor hereby agrees that it shall not grant any other
licenses to exploit the Licensed Rights or the Licensed Products in the Licensed
Territory to any third party (including, without limitation, its Affiliates)
during the term of this Agreement. The license granted hereunder does not
include any right or license of Licensee to make or have made Licensed Products,
all such right and license being hereby retained by Licensor. The license
granted under this Article 2 shall be subject to the terms and conditions of
this Agreement and the following terms:
(a) The
rights of the Original Licensor to use the Scripps Patent Rights for educational
and research purposes;
(b) To the
extent applicable, the rights of the United States Government pursuant to 35
U.S.C. 202 et seq. and 37 C.F.R. 401.1 et seq. which may have arisen or resulted
from federal funding of research relating to the Scripps Patent Rights,
including the non-exclusive right of the United States Government to practice
the inventions covered by the Scripps Patent Rights;
(c) The
reserved right of Licensor, to use the Licensed Rights for research and
development purposes and, to the extent permitted by Section 7.2, for
publication purposes subject to approval by Licensee, which approval shall not
be unreasonable withheld; and
(d) The
Standard of Diligence (as such term is set forth in Section 5.6).
Licensee
shall have no right to sublicense or otherwise share its rights hereunder with
any other Person other than (i) Affiliates of Licensee (provided that Licensee
shall not be relieved of any of its obligations under this Agreement), as
provided for in Section 15.9, and (ii) third parties pursuant to a sublicense or
distribution agreement complying with Section 2.3.
Section
2.2 No
Active Sales Outside Licensed Territory.
Licensee shall neither directly nor indirectly carry out any active sales of or
actively seek customers for the Licensed Products outside the Licensed Territory
and it shall not advertise the Licensed Products or maintain branches for the
distribution of the Licensed Products outside the Licensed
Territory.
Section
2.3. Sublicense
Agreements. Subject
to prior determination by the Steering Committee (in accordance with Section
6.1) on a Licensed Product-by-Licensed Product and country-by-country basis that
any sublicensing, co-marketing or co-promotion, as applicable, is consistent
with maximizing the value of the subject Licensed Product, Licensee shall be
entitled to (X) sublicense its rights and obligations under the Agreement in any
country of the Licensed Territory, with the exception of the country of Spain or
(Y) co-market or co-promote in any country of the Licensed Territory, provided
that for each of (X) and (Y), above, (i) any such sublicense or co-marketing/
promotion agreement shall be under terms no less stringent than the ones
contained in this Agreement including, without limitation, Licensee’s
performance requirements set forth in Section 5.6; (ii) any such sublicense or
co-marketing/ promotion agreement shall not be an effective assignment of all of
Licensee’s rights and a delegation of all of its obligations under this
Agreement, (iii) Licensee shall have obtained the approval of the Steering
Committee (in accordance with Section 6.1) for the sublicense, co-marketing or
co-promotion partner, which approval shall not be unreasonably withheld or
delayed and (iv) Licensee hereby warrants and represents that any such
sublicensee or co-promotion/ co-marketing partner of Licensee will comply with
all applicable terms of this Agreement and, further, Licensee guarantees
performance of this Agreement by any such party.
The
parties hereto agree and acknowledge that the performance of the obligations
hereunder shall take into account the following: (A) that solely with respect to
the Licensed Product that is Surfaxin® for RDS
and/or BPD, it is the prior mutual strategic determination of Licensor and
Licensee that sublicensing shall be allowed for Italy and Greece, without any
further approval from the Steering Committee, except as may be provided for with
respect to the selection and approval of actual sublicensees in accordance with
this Section 2.3, and (B) in the event of co-promotion or co-marketing of
Licensed Products in Spain, Licensee shall be primarily responsible for the
promotional and marketing activities for any such Licensed Products through its
own marketing and sales forces.
Section
2.4. Consideration
for Licensed Products.
Licensee shall not accept as consideration for the sale or transfer of Licensed
Products any consideration other than cash except as consented to by Licensor
following agreement between Licensor and Licensee on the methodology for valuing
such non-cash consideration.
Section
2.5. Right
of First Negotiation on New Products. For a
period of [***] years from the Effective Date (“New Product Negotiation Term”),
subject, however, to prior termination as hereinafter provided in Article
8,
Licensor shall grant to Licensee an exclusive right of first negotiation to a
maximum of [***] future
products developed by Licensor (each a “New
Product”),
solely to the extent to which Licensor is not legally restricted or prevented
from licensing any such rights within the Licensed Territory, in accordance with
the following terms and conditions:
(a) Within
sixty (60) days of completion of Licensor’s written clinical study report(s) for
all Phase 2 clinical trials with respect to any such product opportunity,
Licensor shall present in
writing, including a copy of the relevant Phase II clinical study final
report(s), such product opportunity to Licensee together with any additional
information which, at Licensor’s judgment, is reasonably necessary for Licensee
to evaluate its possible interest in the New Product in a manner that is
reasonably intended to provide a basis for Licensee’s decision as to whether to
exercise its option hereunder (a “New
Product Presentation”). At
Licensee’s request, Licensor shall provide Licensee with any additional
information solely to the extent that such additional information is reasonably
necessary for Licensee to evaluate its possible interest in the New
Product.
(b) Within
sixty (60) days from the date of any such New Product Presentation, Licensee
shall notify Licensor in writing of Licensee’s intention to enter into
negotiations to license the rights to any such product. Should Licensee fail to
notify Licensor of Licensee’s intention to license such rights or should
Licensee notify Licensor of Licensee’s lack of intent to license such rights,
Licensor
shall have the immediate right to offer the New Product opportunity to any other
third party offeree(s) without any further obligation hereunder. In the
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
event
that Licensee has notified Licensor of its intent to license any such rights,
Licensee and Licensor hereby expressly agree that such license or any other
similar grant of rights in respect thereto shall contain, among other customary
terms and conditions, the following:
| |
(i) |
up-front
cash payment(s) to be paid by Licensee to Licensor in amounts that are
consistent with customary pharmaceutical industry practices and
appropriate with reference to the technology value and potential product
value of such New Product; |
| |
(ii) |
Licensor,
Licensee and other sublicensees of the Licensor shall share all future
clinical development work and or expenses with respect to any such New
Product opportunity, in relation with Phase 3 clinical trials necessary to
obtain and/or maintain the Marketing Regulatory Approvals in the Licensed
Territory, on a [***]
basis using the relevant IMS annual global pharmaceutical data relative to
the aggregate pharmaceutical market size of the proposed licensed
territory for all pharmaceutical products as the basis of determining the
amount of such costs to be borne by each of the parties at the
time.
Licensee and its sublicensees shall be responsible for the work and costs
associated with any and all clinical development activities that is
conducted in the Licensed Territory for the New Product that are not
necessary to obtain or maintain Marketing Regulatory Approval for any such
New Product; |
| |
(iii) |
payment
to Licensor of cash milestones in amounts that are consistent with
customary pharmaceutical industry practices and are reflective of the
value of such New Product created during the development process and which
amounts take into account Licensee’s contribution to development of any
such value; |
| |
(iv) |
Licensee
shall be responsible for customary commercialization costs associated with
the New Product including, without limitation, sales, marketing,
distribution, and safety and medical affairs expenses, in a manner similar
to that set forth in this Agreement with respect to Licensed Products;
and |
| |
(v) |
Licensor
shall be responsible for the manufacture of any such New Product. The
economic terms for the New Product, which shall duly take into account the
development expenses and cash milestones paid by Licensee for any such New
Product, shall ensure a reasonable profit for the parties in the light of
the prevailing and expected market conditions at that
time. |
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
(c) In cases
where Licensee has indicated its intention to enter into negotiations to license
rights to a New Product as provided hereunder and the parties fail to enter into
definitive agreements within hundred and twenty (120) days of the date of
Licensee’s notice, delivered to Licensor in accordance with Section 2.5(b)
(hereinafter, such event being defined as an “Unrealized New Product”),
Licensor
shall have the right to offer the Unrealized New Product opportunity to any
other third party offeree(s) at terms and conditions that are in substance no
more favorable for such other third party offeree(s) than those last offered to
Licensee in writing, provided, however, that Licensor shall not execute any
agreement on the New Product with any such third party offeree(s) without
previously offering Licensee the right to enter into an agreement on
substantially similar terms than those contained in the final agreement with the
relevant third party offeree.
(d) Should
senior executive officers of Licensor become aware of the possible interest of
any third party to enter into an agreement in relation with any New Product
prior to completion of all Phase 2
clinical trials, then Licensor shall promptly notify Licensee of such possible
interest of a third party. In such event, and notwithstanding
Section 2.5(a) herein, Licensor
and Licensee agree to initiate good faith negotiations with respect of such New
Product with a
view to enter into an agreement for the development and commercialization of
such New Product prior to the completion of the Phase 2 development for that New
Product; provided,
however, that in
any such event the parties agree that any negotiations hereunder shall be
performed within timeframes similar to those as set forth in Section 2.5 and
shall encompass terms and conditions similar to those set forth in Sections
2.5(b) and (c).
(e) Prior to
the expiration of the New Product Negotiation Term, Licensee’s rights hereunder
to New Products shall be terminated upon the occurrence of any two of the
following events, in any combination thereof: (i) a New Product license is
entered into by the parties; and (ii) An Unrealized New Product event
occurs.
ARTICLE
3
GRANT
BACK
In
consideration for Licensor (i) making the Licensed Know-how (including any
improvements thereto and solely to the extent provided for in Section 2.1)
available to Licensee on a continuing basis for the duration of this Agreement
and (ii) procuring, and making available to Licensee the benefit of, equivalent
grants from Licensor’s other licensees for the Licensed Products outside the
Licensed Territory Licensee hereby grants to Licensor and such other licensees
as Licensor may designate a royalty-free, nonexclusive license outside the
Licensed Territory, with the right to grant sublicenses, under any and all
inventions and Licensee Proprietary Information (whether patentable or not)
hereafter during the term of this Agreement, developed, possessed or acquired by
Licensee related to the Licensed Products, Patent Rights, Licensed Know-how or
Licensed Methods; provided that Licensee is not legally restricted or prevented
from granting such rights in connection with the relevant invention. Licensee
shall provide Licensor with a written enabling disclosure of each invention
(such as a patent application or internal docket reference) unambiguously
identifying it as an invention governed by this Article 3 prior to filing a
patent application or taking any other action disclosing or potentially
disclosing the same to third parties.
Licensee
shall promptly disclose all Licensee Proprietary Information to Licensor and,
subject to the execution of confidentiality undertakings comparable to those set
forth in Article 7, to Licensor’s other licensees (and or Affiliates and
permitted sublicensees) of Patent Rights outside the Licensed Territory on a
continuing basis during the term of this Agreement. Licensee hereby grants to
Licensor and such licensees a royalty-free nonexclusive license, with the right
to grant sublicenses, to use the Licensee Proprietary Information outside the
Licensed Territory. Licensee shall not disclose any such invention and or
Licensee Proprietary Information under circumstances that would reasonably be
expected to result in the loss of the protectible status of any such invention
and or Licensee Proprietary Information without the prior written consent of
Licensor, which consent shall not be unreasonably withheld or
delayed.
ARTICLE
4
CONSIDERATION
Section
4.1. Common
Stock Grant.
Contemporaneously with the execution of this Agreement, Licensor shall issue
500,000 shares of Licensor’s common stock, par value $.001 per share to Licensee
for no additional consideration. Licensee shall be entitled to the registration
rights for such shares of common stock that are provided for in the Common Stock
Letter Agreement between Licensor and Licensee dated as of December 3,
2004.
Section
4.2. Supply
Agreement.
Concurrently with the execution of this Agreement, Licensor and Licensee shall
enter into an amended and restated supply agreement for Licensed Products (the
“Revised
Supply Agreement”).
Section
4.3 Sharing
of Fees. With
respect to cash amounts
as provided for herein that are received by Licensor from third parties
regarding
any partnerships or alliances entered into in connection with the Development
and/or commercialization of the Licensed
Products (as such term is defined in this Revised Collaboration Agreement)
anywhere in the Licensed Territory (provided, however, that solely for the
purposes of this Section 4.3 that Licensed Territory shall be as defined in the
Collaboration Agreement dated March 6, 2002, between the parties), Licensor and
Licensee shall share in any such cash amounts according to the following ratio:
Licensor [***]%; Licensee [***]% (provided,
however, that
the aggregate of any amounts received by Licensee pursuant to this Section 4.3
shall not exceed $20 million (USD)).
Cash
amounts received by Licensor from third parties that shall be subject to sharing
under this Section 4.3 shall expressly be limited to
license fees, technology access fees and performance-based milestones (i.e.,
such milestones solely intended to reward the Licensor upon the occurrence of
events characteristic of the product development process and of the process of
application for and grant of regulatory approval to market the subject Licensed
Products and price approval therefor) for
licenses granted by Licensor and shall
exclude, without limitation, amounts received by Licensor: in return for
supplying or royalties and other revenues associated with the sale of Licensed
Products; as funding for product development, commercialization, manufacturing,
and regulatory activities; and with respect to any bona fide equity or loan
transactions). Licensor shall conduct negotiations with third parties with
respect to potential licenses in the greatest commercially practicable manner so
as the entering into of any such relationship would provide for cash license
fees, technology access fees and performance-based milestones that are
appropriate with reference to the technology and potential value of the Licensed
Products and the value created during the Development process.
For the
purposes of this Section, upon execution of any such agreement with a third
party, Licensor shall immediately notify Licensee as to the agreed upon
commercial terms with such party in order to enable Licensee to assess the cash
amounts to which it is entitled. Licensee may verify the information provided by
Licensor by means of the audit of an external consultant, acceptable to
Licensor, which, at reasonable business hours, may inspect Licensor’s premises
by giving prior reasonable notice. Any such inspections shall be at the sole
cost of Licensee, except in the event where the adjustment shown by such
inspection is greater than 10% of the amount incurred, then the Licensor shall
bear such costs.
Section
4.4 Cash
Payments to Licensor for Milestones.
Licensee shall pay to Licensor the following cash amounts upon the attainment of
the following:
| |
1. |
$
[***] upon EMEA Marketing Regulatory Approval for RDS. |
| |
2. |
$
[***] upon EMEA Marketing Regulatory Approval for BPD. |
| |
3. |
$
[***] upon price approval in the Territory for ARDS provided,
however,
that the parties have reached a mutually satisfactory Transfer Price in
accordance with the Amended and Restated Supply
Agreement. |
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
| |
4. |
$
[***] upon EMEA Marketing Regulatory Approval for ALI
prophylaxis. |
| |
5. |
$
[***] upon filing for EMEA Marketing Regulatory Approval of the nCPAP
Licensed Product. |
| |
6. |
$
[***] upon EMEA Marketing Regulatory Approval of the nCPAP Licensed
Product. |
| |
7. |
$
[***] upon filing for EMEA Marketing Regulatory Approval for asthma in the
hospital setting. |
| |
8. |
$
[***] upon EMEA Marketing Regulatory Approval for asthma in the hospital
setting. |
| |
9. |
$
[***] upon filing for EMEA Marketing Regulatory Approval for COPD in the
hospital setting. |
| |
10. |
$
[***] upon EMEA Marketing Regulatory Approval for COPD in the hospital
setting. |
Section
4.5 Manner
of Payment. The
amounts provided for in Section 4.3 and Section 4.4 shall be paid in United
States Dollars. Any and
all taxes that are levied on payments accruing under this Article 4 of the
Agreement in a country in which provision is made in the law or by regulation
for withholding may be deducted by the payor from such amounts and paid to the
proper taxing authority and evidence of such payment shall be secured and sent
to the payee as promptly as possible. The parties shall do all such lawful acts
and things and sign all such lawful deeds and documents as either party may
reasonably request from the other party to enable Licensee or Licensor, or their
respective Affiliates and/or sublicensees to take advantage of any applicable
legal provision or any double taxation treaties with the object of paying the
sums due to any payee hereunder without withholding any tax or as promptly as
practicable recovering any such withheld tax. Amounts
to be paid hereunder shall be paid: (i) with respect to amounts due to Licensee
pursuant to Section 4.3, as soon
as practicable following Licensor’s receipt of any such shareable amounts
received thereunder but in no event later than ten (10)
Business Days after such receipt; and
(ii) with respect to amounts due to Licensor pursuant to Section 4.4, as
promptly as practicable upon Licensee’s receipt of Licensor’s invoice issued
upon occurrence of any such event, but in no event later than ten (10)
Business Days after receipt of Licensor’s invoice.
ARTICLE
5
SCOPE
OF THE COLLABORATION
Section
5.1. Goals of
the Collaboration. Subject
to Section 8.6(b) hereinbelow, the parties hereto desire to collaborate in a
strategic relationship with regard to product Development and commercialization
programs for the Licensed Products with the following goals and in the following
manner:
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
(a) the
Development and clinical testing of Licensed Products;
(b) Marketing
Regulatory Approval of Licensed Products in the Licensed Territory; and
(c) the
manufacturing by Licensor and the marketing, sale, and distribution by Licensee
of Licensed Products in the Licensed Territory.
In
performance of the foregoing, Licensor and Licensee agree to collaborate
diligently in the overall strategic relationship and in the Development and
commercialization of Licensed Products in the Licensed Territory in accordance
with the terms and conditions contained in this Agreement including, without
limitation, the respective roles and responsibilities of the parties as set
forth in this Article 5.
Section
5.2. Roles
and Responsibilities. The
principal mechanism by which the parties contemplate coordinating their
respective clinical Development and sales and marketing activities will be
through consensus-based decision-making through: (i) a joint Development
Committee (established and governed pursuant to Section 6.2 of this Agreement)
and (ii) a joint Commercialization Committee (established and governed pursuant
to Section 6.3 of this Agreement); in each case, under the oversight of a joint
Steering Committee (established and governed pursuant to Section 6.1 of this
Agreement), provided, that the parties expressly acknowledge and agree that the
following shall apply:
(a) Conduct
of Clinical Investigations. The
Development Committee (as such term is defined in Section 6.2) shall be
responsible for the Development of Licensed Products in the Licensed Territory;
provided,
however, that
| (i) |
Licensor,
at its cost, shall be responsible for planning and managing the research
and development work related to Licensed Products that is necessary to
obtain EMEA approval, regardless of where conducted, subject to Section
5.2(a)(ii), below; |
| (ii) |
Subject
to Section 8.6(b) hereinbelow, Licensee
shall contribute for Phase 3 Development of Licensed Products in the
Licensed Territory by conducting, sponsoring, and funding the cost (up to
the amounts specified below for each category of Licensed Products) of
Phase 3 clinical trials that are conducted in the Licensed Territory (it
being acknowledged by the parties that any such trials are intended to be
a part of a global European development program for the Licensed
Products), as discussed and agreed to by the Development Committee.
Licensee’s contribution under this Section 5.2(a)(ii) shall be solely
limited to those costs that may be incurred with respect to Phase 3
Development conducted with respect to clinical sites located in the
Licensed Territory and shall solely include (x) shipping costs for
investigational product and other materials supplied to clinical sites;
and (y) external costs and payments for the subject Phase 3 clinical trial
including, without limitation, consultants, contract research
organizations, payments to clinical investigators and support staff,
insurance companies, clinical sites, and regulatory fees (“Phase 3
Costs”); provided,
however,
that with regards to each of (x) and (y), above, Licensee’s obligation for
contribution shall apply whether such costs are contracted for and/ or
initially paid by Licensor or Licensee. The Development Committee shall
(A) be responsible for developing and approving the budgets for Phase 3
Costs taking into account the nature of the Phase 3 Costs, and (B) approve
the selection, without limitation, of clinical sites and specific
consultants, contractors and clinical investigators to be used in the
performance of Phase 3 Development. Such approval by the Development
Committee shall constitute the parties’ commitment to undertake the
relevant Phase 3 Development and Licensee’s agreement to contribute to any
such Phase 3 Costs up to a maximum of the following amounts in U.S.
Dollars (“Licensee’s Maximum
Contribution”): |
| |
1. |
For
Licensed Products for the ARDS and/ or ALI indications, up to
$[***]; |
| |
2. |
For
Licensed Products for the BPD indication, up to $[***]; |
| |
3. |
For
nCPAP Licensed Product(s), up to $[***]; |
| |
4. |
For
Licensed Products for the asthma and COPD indication in the hospital
setting, up to $[***]; and |
| |
5. |
For
Licensed Products for the COPD indication in the hospital setting, up to
$[***], only if a separate Phase 3 pivotal trial is conducted for this
indication (i.e. independent from the Phase 3 pivotal trial for
asthma). |
Provided,
however, that the determination of whether separate Phase 3 Development has
occurred for the purposes of this Section 5.2(a)(ii) shall not be based upon the
existence of separate formulations of Licensed Product.
| (iii) |
Promptly
upon the completion of the experimental phase of the subject
Phase 3 clinical trial in the
Licensed Territory (i.e. when the last visit of the last patient has
occurred), a reconciliation of Licensee’s Phase 3 Cost contributions
determined hereunder (including, without limitation, those costs
previously invoiced, paid or still to be invoiced and paid) shall be made
with reference to Licensee’s Maximum Contribution for such trial. Both
parties shall keep such records as are necessary to determine accurately
the sums due under this Section 5.2(a). Such records shall be retained by
each party and, at any time during the Term of the Agreement, at the prior
written request and expense of the other party, shall be made available
for inspection, review, and audit during normal business hours, by an
internationally recognized independent certified public accounting firm
selected by the auditing Party and reasonably acceptable to the other
Party for the sole purpose of verifying the accounting reports
and
|
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
|
payments
made or to be made pursuant to this Section 5.2(a); provided,
however,
that such audits may not be performed more than once per contract year.
The auditing Party shall pay for such inspections, except that in the
event where the adjustment shown by such inspection is greater than 10% of
the amount incurred, then the audited Party shall pay for such
inspection. |
| (iv) |
Licensee
shall be the sponsor in the Licensed Territory of all Phase 3 clinical
trials to which it contributes in accordance with this Section 5.2 and,
subject to the prior approval of the Development Committee, Licensee shall
be entitled to conduct monitoring and auditing of the sites at its own
cost and expense. With respect to Licensee’s sponsorship, monitoring and
auditing, as applicable, Licensor, through the operation of the
Development Committee or directly, shall (i) have the sole authority to
approve the clinical site agreement that may be entered into by Licensee
and a clinical site prior to its signature and, to the greatest extent
possible with reference to then or future applicable law, be named as a
co-sponsor thereto; and (ii) be entitled to oversee and audit clinical
site operations including, without limitation, site interactions, site
initiation, and monitoring and auditing conducted by Licensee, all at
Licensor’s expense. |
| (v) |
Licensor
and Licensee shall keep each other fully informed on the progress of all
clinical trials of Licensed Products and shall promptly provide the other
with copies of all submissions to regulatory authorities in connection
therewith, all significant communications received from such regulatory
authorities and reasonably detailed descriptions (in English) of all
meetings with and verbal communications with such regulatory authorities
which are of significance. |
| (vi) |
Each
of Licensor and Licensee shall use its best commercial efforts to complete
all clinical trials for which it is responsible within the parameters
established by (and as such parameters may be modified by) the Development
Committee. |
(b) Commercialization
Activities. Through
the governance mechanism of the Commercialization Committee (as such term is
defined in Section 6.3), Licensor and Licensee shall actively participate in the
strategic marketing activities for Licensed Products in the Licensed Territory.
Without prejudice to Section 2.1 and 2.3, Licensee shall be responsible for
activities and associated costs and expenses involved in the pre-launch, launch
and post-launch marketing, sales, and distribution of Licensed Products in the
Licensed Territory including, without limitation, (i) providing country-specific
marketing resources including, but not limited to, personnel, marketing
materials and other customary marketing tools and methods; (ii) furnishing
sufficient sales personnel to adequately detail Licensed Products in the
Licensed Territory and achieve insertion of Licensed Products into hospital
formularies; (iii) managing and conducting order taking, storage and
distribution of Licensed Product in the Licensed Territory; (iv) performing
country-specific regulatory affairs activities and price and reimbursement
negotiations during the Regulatory Marketing Approval process; (v) managing
local medical affairs and reporting of drug safety issues to Licensor and
appropriate regulatory authorities; and (vi) periodically report to the
Commercialization Committee and Steering Committee on Licensee’s marketing and
sales activities related to pre-launch, launch and post-launch periods for all
Licensed Products.
(c) Licensee,
shall develop a sales and marketing plan, which shall be subject to the periodic
review and approval (no less frequently than every 12 months) of the Steering
Committee as provided hereunder, comprised of individual sales and marketing
(pre-launch, launch and post-launch) plans for each Licensed Product on a
country-by-country basis in the Licensed Territory in a form and content
consistent with general pharmaceutical industry practices (the “Marketing
Plan”).
Section
5.3 Regulatory
Approvals. (a)
Subject to the completion of requisite clinical investigations by the Licensor,
Licensor shall prepare and submit to the EMEA a MAA within 6 months of the date
of acceptance of filing of the applicable NDA by the FDA and shall use its
diligent efforts to obtain and maintain all EMEA Marketing Regulatory Approvals
for the term of this Agreement, all at the cost and expense of Licensor, except
as may otherwise be provided for in Section 5.2. When filing for MAA, Licensor
shall designate, as appropriate, Licensee or such Licensee’s Affiliates or
permitted sublicensees and/or partners designated by Licensee as its
distributors or local representatives for the Licensed Products in the Licensed
Territory. Licensor shall, upon the granting of each Marketing Regulatory
Approval obtained by Licensor, promptly supply Licensee with a copy of such
approval.
(b) Subject
to receipt of MAA Marketing Regulatory Approval by Licensor, Licensee, where
appropriate, shall prepare and submit to the regulatory authorities in the
Licensed Territory country-specific and Licensed Product specific applications
for Pricing Approvals as soon as practicable and shall use its diligent efforts
to obtain and maintain all Pricing Approvals that are obtained by Licensee for
the term of this Agreement, all at the cost and expense of Licensee. Licensee
shall, upon the granting of each Pricing Approval obtained by Licensee, promptly
supply Licensor with a copy of such approvals. The parties contemplate that
country-specific applications for Marketing Regulatory Approvals shall not be
necessary for any of the Licensed Products in the Licensed Territory, however,
should any such country-specific applications be required, Licensee shall be
responsible for all associated costs for filing and maintaining such Marketing
Regulatory Approvals.
(c) Each
party shall, in connection with any Marketing Regulatory Approvals and Pricing
Approvals obtained by such party in the Licensed Territory, grant to the other
party an irrevocable right of access and reference thereto and shall effect such
notifications to regulatory authorities as shall be reasonably necessary to
accomplish the foregoing. Each party shall assist the other party in maintaining
any such Marketing Regulatory Approvals and Pricing Approvals including
supplying to the other party any information in connection
therewith.
(d) In the
event of termination of this Agreement pursuant to Section 8.2 (only in the
event of termination by Licensor) and Sections 8.3, 8.4, and 8.6(a), Licensee
shall promptly transfer to Licensor or Licensor’s designee, possession, and
ownership of all governmental or regulatory correspondence, conversation logs,
filings, and approvals (including all country-specific Marketing Regulatory
Approvals, if any, and Pricing Approvals) relating to the Licensed Products and,
to the extent not already done, Licensee shall appoint Licensor as Licensee’s
agent for all Licensed Product-related regulatory matters in the Licensed
Territory. Licensee shall execute all documents and take all such further
actions as may be reasonably requested by Licensor in order to give effect to
the foregoing. Licensor shall reimburse Licensee for all reasonable costs
incurred in performance hereunder.
Section
5.4 Commencement
of Marketing.
Licensee shall consummate its first commercial sale of each Licensed Product in
each country of the Licensed Territory within six (6) months after official
publication of the obtaining of Pricing Approval (or if Pricing Approval is not
applicable, within six (6) months of Marketing Regulatory Approval in such
country); provided, however, that if Licensee has failed to meet such deadlines
in any country because of reasons beyond the control of Licensee, Licensor and
Licensee shall discuss in good faith a new deadline for such country. In the
event Licensee does not consummate a sale within such period, Licensor may
notify Licensee of a default under this Section 5.4 and, in the event such
default is not cured within thirty (30) days from such notice of default,
Licensor shall have the right to terminate the license granted to Licensee
hereunder with respect to such Licensed Product in such country.
Section
5.5. Post-Authorization
Studies. [***]
shall be responsible for conducting, at its own cost and expense such
post-authorization studies activities as may be useful or necessary for the
better knowledge and use of the Licensed Products in the Licensed Territory
provided that the protocol shall be approved in accordance with Section 5.2(a)
in advance of its commencement. The Development Committee shall monitor and
supervise the conduct thereof. Licensee shall purchase Licensed Product for any
such clinical trials at Licensor’s Cost of Goods (as set forth in the Revised
Supply Agreement). Licensor
shall be entitled, with reasonable prior notice and at reasonable times and
intervals, to (i) audit the clinical activities of Licensee; (ii) establish a
pharmacovigilance committee jointly with Licensee to monitor and assess the
safety outcomes of such clinical activities; and (iii) utilize the resulting
data for Licensor’s own purposes, subject, however to Licensee’s prior consent,
which consent shall not be unreasonably withheld.
Section
5.6. Standard
of Diligence. (a)
Should Licensee (or any sublicensees or co-promotion/ co-marketing partners of
Licensee) fail to satisfy [***]% of the annual sales targets (as such sales
targets are established in the Marketing Plan in accordance with Section 5.2(c))
with respect to the subject Licensed Product in a country of the Licensed
Territory for two (2) consecutive years, Licensor shall have the right to
terminate the exclusivity character of the rights granted hereunder with respect
to the relevant country(ies) and subject Licensed Product where such failure has
occurred with a prior notice of ninety (90) days addressed to Licensee;
provided, however, that such notice shall need to be sent, in order to be valid
and enforceable, within sixty (60) days after Licensor becoming aware of any
such failure. Should Licensee (or any sublicensees or co-promotion/ co-marketing
partners of Licensee) fail to satisfy
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
[***]% of
the annual sales targets (as such sales targets are established in the Marketing
Plan in accordance with Section 5.2(c)) with respect to the subject Licensed
Product in a country of the Licensed Territory for two (2) consecutive years,
Licensor shall have the right to terminate this Agreement with respect to the
relevant country(ies) and subject Licensed Product where such failure has
occurred with a prior notice of ninety (90) days addressed to Licensee;
provided, however, that such notice shall need to be sent, in order to be valid
and enforceable, within sixty (60) days after Licensor becoming aware of any
such failure.
(b) Licensee
shall use commercially reasonable efforts to commercialize the Licensed Products
in the Licensed Territory throughout the term of this Agreement in accordance
with all applicable legal and regulatory requirements, including promoting the
Licensed Products by accepted promotional practices consistent with those used
(i) by Licensee in connection with the promotion of its other products and (ii)
in the critical care pharmaceutical industry generally.
Section
5.7. Marketing
Plan.
Licensee, shall submit to the Steering Committee the Marketing Plan (as such
term is defined in Section 5.2(b) hereinabove) for:
| |
(i) |
The
Surfaxin® Licensed Product for RDS, the first action of the
Commercialization Committee shall be to establish the schedule for
submission of the applicable pre-launch market development plan by
Licensee. |
| |
(ii) |
Except
for as set forth in Section 5.7(i), for all Licensed Products Licensee
shall submit pre-launch market development plans as directed by the
Commercialization Committee. |
| |
(iii) |
For
all Licensed Products, Licensee shall submit within ninety (90) days prior
to the planned launch date for a subject Licensed Product for each country
of the Licensed Territory a Marketing Plan (i.e., a launch
plan). |
| |
(iv) |
For
all marketed Licensed Products, Licensee shall submit an updated Marketing
Plan for each country of the Licensed Territory before the end of each
calendar year. |
Section
5.8. Record-keeping.
Licensor shall maintain complete and accurate records for such periods as may be
required by applicable law, but in no event less than three (3) years, of all
Licensed Products sold by it, including distribution
data.
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
Section
5.9. Promotional
Material. (a)
Licensor shall supply free of charge to Licensee samples of all training aids
and literature used by Licensor and its Affiliates and distributors and
sublicensees thereof for training their sales representatives and samples of all
promotional and sales material used by Licensor or its Affiliates and
distributors and sublicensees thereof for the Licensed Products.
(b) Licensee
shall submit to Licensor, for Licensor’s prior review and written approval
(which approval is intended to ensure consistency with global strategic
marketing initiatives and regulatory requirements and which shall not be
unreasonably withheld or delayed), all training aids, promotional and sales
materials, literature, and other relevant media proposed to be used by Licensee
and its Affiliates and distributors and sublicensees thereof for training sales
representatives for the Licensed Products. In the event Licensor has not
provided its approval to the materials submitted for its review within a term of
ten (10) Business Days, such materials shall be deemed approved.
Section
5.10. Promotional
Claims. All
technical and scientific information and therapeutic claims referred to by
Licensee in promotional advertisements, promotional literature, sales aids,
training aids and literature and the like with respect to each Licensed Product
shall be consistent with any Marketing Regulatory Approval and the information
and claims made by Licensor with respect thereto insofar as the latter are
consistent with Marketing Regulatory Approvals or permitted practices in the
Licensed Territory. Licensee shall not employ any sales practice or display any
advertisement which the Commercialization Committee determines is detrimental to
Licensor’s interests and Licensor shall be entitled to require licensee to
promptly cease any such practice or withdraw any such
advertisement.
Section
5.11. Samples
of Licensee’s Promotional Material.
Licensee shall supply free of charge Licensor with samples of product labeling,
packages and/or cartons and the like and of all advertisements, promotional
literature, sales aids, training material for salesmen, used by Licensee in
connection with the promotion and sale of the Licensed Products.
Section
5.12. Adverse
Event Reporting. The
parties shall establish a procedure for the handling of adverse events as soon
as is practicable after the Effective Date, which procedure shall be in
conformance with all applicable laws, rules and regulations; provided,
however, that
(i) Licensee shall be responsible at its expense for collecting local safety
data on the Licensed Product in the Licensed Territory and the timely submission
thereof to Licensor, and (ii) Licensor shall be responsible for maintaining a
global adverse event reporting system and appropriate database at its sole cost
and expense and for the timely submission of required safety reports to
appropriate authorities. Each party shall advise the other, by telephone or
facsimile, within twenty-four (24) hours after it becomes aware of any serious
adverse event arising in connection with the use of any Licensed Products and
shall include the following information: a description of the patient (which
shall be made in compliance with any applicable data protection regulations),
the Licensed Product, the reporting source and a description of the event and/or
such other information as may be required by the relevant regulatory authorities
in the Licensed Territory at the time the serious adverse event occurs. No later
than five (5) days after its initial report, the party informing of a serious
adverse event shall provide the other with a written report delivered by
confirmed facsimile of any reported serious adverse event stating
the full
facts known to it, including but not limited to such information as may be
required by the relevant regulatory authorities in the Licensed Territory at the
time the serious adverse event occurs. The Adverse Event Reporting to the EMEA
and other regulatory agencies shall be made by Licensor at its sole cost and
expense. In any event, Licensor and Licensee shall promptly provide each other
with a copy of any Adverse Event notice that they may address to any regulatory
agency (including, without limitation, the FDA) in connection with the Licensed
Products.
Section
5.13. Licensed
Product Distribution. For the
Licensed Products, Licensee shall provide customary distribution services,
including, without limitation, storage, order taking, shipping, billing,
accounts receivable, returns/allowances in the Licensed Territory at its cost
and expense.
ARTICLE
6
GOVERNANCE
AND COMMITTEE STRUCTURE
Section
6.1 Steering
Committee. (a)
Licensee and Licensor shall jointly form an oversight committee (the
“Steering
Committee”) that
shall (i) manage the overall strategic relationship and the strategic marketing
and sales activities for Licensed Products in the Licensed Territory, (ii) to
review and approve the pre- and post-launch Marketing Plans as well as any other
matters required for the sales and promotion of Licensed Products in the
Licensed Territory (including, without limitation, the strategic decision-making
authority to authorize sublicensing, co-promotion or co-marketing and the
tactical decision to approve a recommended sublicensing, co-promotion or
co-marketing partner in the Licensed Territory), except to the extent that
certain matters are solely the responsibility of a single party under this
Agreement; (iii) to advise, provide input and determine strategy for future
clinical and/or marketing studies; (iv) have overall responsibility for the
success of such matters as established by this Agreement, and (v) be charged
with promptly resolving disputes of the parties, if any, subject to Section
15.4.
(b) The
Steering Committee will be comprised of [***] (unless otherwise mutually agreed)
that shall have the overall functional responsibility for corporate
operations/business development, commercial operations and product development
within their respective organizations. The Steering Committee shall be chaired
[***]. The initial members of the Steering Committee shall be designated by the
parties hereto not later than thirty (30) days after the Effective Date and the
first Chairperson shall be a designee of Licensor. [***] The Steering Committee
shall to the extent practicable seek to operate by consensus. In the event of
any deadlock or other inability of the Steering Committee to reach a
determination with respect to any matter within the authority of the Steering
Committee, the issue shall be referred to the respective Chief Executive
Officers (or equivalent position) of each party who shall use their best
endeavors to agree in good faith to a resolution of the dispute within thirty
(30) days of their receipt of notice as to such dispute. If they are unable to
resolve the dispute within such thirty
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
(30)-day
period, it shall be referred to the decision of an external expert suitably
qualified to resolve such dispute which is mutually acceptable to both parties,
whose decision shall be final. In resolving the dispute, the appointed expert
shall take into account development and marketing practices and procedures
common in the pharmaceutical industry and appropriate with reference to the
subject Licensed Products. Either party may appoint, substitute or replace
members of the Steering Committee to serve as their representatives upon notice
to the other party.
(c) The
Steering Committee shall meet within 60 days after the Effective Date and
thereafter at least every 6 months. The location of such meetings shall
alternate between Discovery’s Pennsylvania headquarters, United States and
Barcelona, Spain, unless otherwise agreed to by Licensor and Licensee. The
Steering Committee may also meet by means of a telephone or video conference
call with the consent of each of Licensor and Licensee. Licensee and Licensor
shall use reasonable efforts to cause their representatives to attend the
meetings of the Steering Committee. If a representative of either of the parties
hereto is unable to attend a meeting, such party may designate an alternate to
attend such meeting in place of the absent representative.
Section
6.2 Development
Committee. (a)
Licensee and Licensor shall jointly form a development committee (the
“Development Committee”) to oversee the Development of Licensed Products within
the Licensed Territory. The Development Committee shall have functional
responsibility for the success of the matters related to the Development of the
Licensed Products in the Licensed Territory and related medical and regulatory
activities as established by this Agreement, including without limitation: (i)
to determine and oversee the overall strategy for all such activities for
Licensed Products in the Licensed Territory; (ii) to plan and coordinate the
parties’ efforts hereunder related to all such activities for Licensed Products
in the Licensed Territory; and (iii) to facilitate the flow of information among
the parties, including coordinating all such activities with manufacturing
schedules and distribution.
(b) The
Development Committee will be comprised of [***] (unless otherwise mutually
agreed) that shall have the overall functional responsibility for Licensed
Product clinical Development and medical and regulatory operations. The
Development Committee shall be chaired [***]. The initial members of the
Development Committee shall be designated by the parties hereto not later than
thirty (30) days after the Effective Date. Upon resignation by or removal of any
member of the Development Committee, Licensee or Licensor, as appropriate, shall
have the sole right to appoint a successor. [***] The Development Committee
shall to the extent practicable seek to operate by consensus. In the event of
any deadlock or other inability of the Development Committee to reach a
determination with respect to any matter within the authority of the Development
Committee, the issue shall be submitted to the Steering Committee.
(c) The
Development Committee shall meet within 60 days after the Effective Date and
thereafter at least every 6 months. The location of such meetings shall
alternate between Discovery’s Pennsylvania headquarters, United States and
Barcelona, Spain, unless
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
otherwise
agreed to by Licensor and Licensee. The Development Committee may also meet by
means of a telephone or video conference call with the consent of each of
Licensor and Licensee. Licensee and Licensor shall use reasonable efforts to
cause their representatives to attend the meetings of the Development
Committee.
(d) The
Development Committee will report to the Steering Committee semi-annually in an
appropriately detailed manner and shall provide the Steering Committee annually
with a written comprehensive report on the execution of the clinical development
programs contemplated hereunder.
Section
6.3 Commercialization
Committee. (a)
Licensee and Licensor shall jointly form a commercialization committee (the
“Commercialization Committee”) to oversee the commercialization of Licensed
Products within the Licensed Territory. The Commercialization Committee shall
have functional responsibility for the success of the matters related to
commercialization of the Licensed Products in the Licensed Territory as
established by this Agreement, including without limitation: (i) the
overall Commercialization strategy to assure consistency with Licensor’s global
branding strategy; (ii) planning and coordinating commercialization activities;
(iii) submitting Marketing Plans to the Steering Committee for its review and
approval, (iv) facilitating the flow of appropriate commercial information among
the parties, including coordinating commercialization activities with
manufacturing schedules and distribution and (v) recommending to the Steering
Committee sublicensees, co-promoters and/or co-marketers for the Licensed
Products as set forth under Section 2.3 hereinabove.
(b) The
Commercialization Committee will number [***]. The initial members of the
Commercialization Committee shall be designated by the parties hereto not later
than (thirty) 30 days after the Effective Date. Upon resignation by or removal
of any member of the Commercialization Committee, Licensee or Licensor, as
appropriate, shall have the sole right to appoint a successor. The
representatives of Licensor shall collectively be entitled to one (1) vote and
the representatives of Licensee shall collectively be entitled to one (1) vote.
The Commercialization Committee shall to the extent practicable seek to operate
by consensus. In the event of any deadlock or other inability of the
Commercialization Committee to reach a determination with respect to any matter
within the authority of the Commercialization Committee, the issue shall be
submitted to the Steering Committee.
(c) The
Commercialization Committee shall meet within 60 days after the Effective Date
and thereafter at least every 6 months. The location of such meetings shall
alternate between Discovery’s Pennsylvania headquarters, United States and
Barcelona, Spain, unless otherwise agreed to by Licensor and Licensee. The
Commercialization Committee may also meet by means of a telephone or video
conference call with the consent of each of Licensor and Licensee. Licensee and
Licensor shall use reasonable efforts to cause their representatives to attend
the meetings of the Commercialization Committee.
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
(d) The
Commercialization Committee will report to the Steering Committee semi-annually
in an appropriately detailed manner and shall provide the Steering Committee
annually with a written comprehensive report on the execution of the
commercialization programs contemplated hereunder.
Section
6.4 General
Committee Procedures. (a)
Each party shall be responsible for all of its own expenses of participating in
any committee or any working group. If a representative of either of the parties
hereto is unable to attend a meeting, such party may designate an alternate to
attend such meeting in place of the absent representative.
(b) Meeting
Agendas and Minutes. Each
Party will disclose to the other proposed agenda items along with appropriate
information at least 10 Business Days in advance of each meeting of the
applicable Committee; provided that under exigent circumstances requiring
Committee input, a party may provide its agenda items to the other party within
a lesser period of time in advance of the meeting, or may propose that there not
be a specific agenda for a particular meeting, so long as such other party
consents to such later addition of such agenda items or the absence of a
specific agenda for such Committee meeting. The chairperson(s) of each Committee
shall be responsible for calling meetings, preparing, and circulating an agenda
in advance of each meeting of such Committee and preparing and issuing minutes
of each meeting within 15 days thereafter; provided that such minutes will not
be finalized until both parties review and confirm the accuracy of such minutes
in writing.
(c) Other
employees of each party involved in the Development, manufacture, or
commercialization of the Licensed Products may attend meetings of any of such
Committees as nonvoting participants, and, with the consent of each party,
consultants, representatives, or advisors involved in the Development,
manufacture, or commercialization of Licensed Products may attend meetings of
any of such Committees as nonvoting observers; provided that such third-party
representatives are under obligations of confidentiality and non-use applicable
to information of each party and that are at least as stringent as those set
forth in Article 7.
Section
6.5. Cost
Sharing of Global Marketing Activities. Each of
Licensor and Licensee hereby agree that the Commercialization Committee shall
discuss in good faith the
possibility for the parties to share in the cost and expense of any global
marketing activities which may beneficially effect Licensor’s commercialization
of Licensed Products. Any such agreement as to sharing of costs and expenses
shall take into account the value of the Licensed Territory relative to the
global value of the Licensed Product.
Section
6.6. Coordination
of Committee Activities with Licensor’s other Collaborators.
Licensee hereby acknowledges that Licensor intends to establish collaborative
arrangements substantially similar to those provided for by this Agreement with
third parties for Licensed Products outside of the Licensed Territory and agrees
that it shall be to the mutual benefit of each of Licensee, Licensor, and
potential other collaborators of Licensor to coordinate Development and
commercialization activities for Licensed Products on a global basis. Licensee
acknowledges that Licensor intends to establish global committees with
functional responsibilities similar to those committees outlined herein and that
Licensee shall participate on any such global committee.
Section
6.7. Global
Project Management.
Licensor shall have overall responsibility for management of global product
development and commercialization activities. Licensee hereby acknowledges and
agrees that Licensor shall be entitled to maintain oversight on all development
and commercialization activities conducted in connection with the Licensed
Products and the Licensed Territory in order to ensure consistency of all such
activities with Licensor’s global product and commercialization
plans.
ARTICLE
7
TRANSFER
OF LICENSED KNOW-HOW; CONFIDENTIALITY; PUBLICATION
Section
7.1. Transfer
of Licensed Know-How.
Promptly after the Effective Date and from time to time as it becomes available
during the term of this Agreement, Licensor shall provide Licensee with the
Licensed Know-How, subject, however, to the terms and conditions contained
herein including, without limitation, those set forth in Article 2 of this
Agreement.
Section
7.2. Confidentiality. Any
information disclosed by either party, its Affiliates or permitted licensees to
the other party hereunder shall be safeguarded by the recipient, shall not be
disclosed to third parties and shall be made available only to recipient’s
employees, Affiliates, licensees for the Licensed Products, independent
contractors or external counsels who agree to or are bound by equivalent
conditions and who have a need to know the information for the purposes
specified under this Agreement. Subject to the license granted under Article 2,
all confidential information shall remain the property of and shall be
immediately returned to the disclosing party, upon request, after any
termination of this Agreement. These mutual obligations of confidentiality shall
apply during and for a period of ten (10) years after the term of this
Agreement, but such obligations shall not apply to any information that can be
established by competent evidence:
(a) is or
hereafter becomes generally available to the public other than by reason of any
default with respect to a confidentiality obligation under this Agreement;
or
(b) was
already known to the recipient as evidenced by prior written documents in its
possession; or
(c) is
disclosed to the recipient by a third party who is not in default of any
confidentiality obligation to the disclosing party hereunder; or
(d) is
developed by or on behalf of the receiving party, without reliance on
confidential information received hereunder; or
(e) is
provided to third parties under appropriate terms and conditions including
confidentiality provisions equivalent to those in this Agreement for Development
purposes including, without limitation, consulting, manufacturing Development,
manufacturing, external testing and marketing trials with respect to the
Licensed Products; or
(f) is used
with the consent of the disclosing party (which consent shall not be
unreasonably withheld) in applications for patents or copyrights under the terms
of this Agreement; or
(g) has been
approved in writing for publication by each of the parties; or
(h) is
required to be disclosed in compliance with applicable laws or regulations in
connection with the manufacture or sale of Licensed Products; or
(i) is
otherwise required to be disclosed in compliance with applicable laws or
regulations or order by a court or other regulatory body having competent
jurisdiction; or
(j) is
product-related information which is reasonably required to be disclosed in
connection with marketing of Licensed Products.
Section
7.3. Procedures
for Obtaining Permission for Disclosure. In the
event that either party (the “Disclosing
Party”)
desires to publish or disclose, by written, oral or other presentation, any
confidential information or other information regarding the Licensed Rights, the
Disclosing Party shall notify the other party (the “Nondisclosing
Party”) in
accordance with Section 15.2 at least sixty (60) days before any written or
other publication or disclosure. The Disclosing Party shall include with such
notice a description of any proposed oral presentation or, in any proposed
written or other disclosure, a current draft of such proposed disclosure or
abstract. The Nondisclosing Party may, no later than thirty (30) days following
the receipt of such notice, notify the Disclosing Party that the Nondisclosing
Party will not consent to such disclosure of confidential information. If the
Disclosing Party does not receive any such objection to the proposed disclosure
of confidential information or other information regarding the Licensed Rights
within such 30-day period, the Disclosing Party shall be free to make such
disclosure in substantially the manner and form proposed at the time notice was
given to the Nondisclosing Party.
ARTICLE
8
TERMINATION
Section
8.1. Term. Unless
otherwise terminated by operation of law or by acts of the parties in accordance
with the provisions of this Agreement, this Agreement shall be in force from the
Effective Date and shall remain in effect with respect to each Licensed Product
in each country of the Licensed Territory for the duration of the Initial
Period. Upon expiry of the Initial Period with respect to each country in the
Licensed Territory, the license granted under Section 2.1 shall become fully
paid up in such country.
In such
case and in relation with each of such countries, the following shall
apply:
(a) Licensee
shall be entitled to continue to market the Licensed Products in the relevant
country under the Trademark and the Marketing Regulatory Approval;
(b) Should
Licensee decide not to purchase a Licensed Product from Licensor, Licensee shall
pay a running royalty of [***] percent
([***]%) of Net
Sales (as such term is defined in the Revised Supply Agreement) of such Licensed
Product so purchased and sold under the Trademark in consideration of the use of
the Trademark;
(c) Should
Licensee decide not to purchase a Licensed Product from Licensor, Licensor shall
promptly transfer free of charge the Marketing Regulatory Approval of the
relevant country for such Licensed Product to Licensee or to the third party
that may be indicated by Licensee, the transfer expenses being borne by
Licensee; provided, however, that the EMEA Marketing Regulatory Approval shall
only be transferred to Licensee upon expiry of the Initial Period in all the
countries of the European Union;
(d) Should
Licensee decide not to purchase the Licensed Products from Licensor, Licensor
shall transfer free of charge to Licensee all such know-how that is necessary to
enable Licensee to manufacture and/or have manufactured the Licensed Products,
and Licensee shall pay a running royalty of [***] percent
([***]%) of Net
Sales (as such term is defined in the Revised Supply Agreement) of such Licensed
Product so manufactured under such know-how, it being understood that Section
7.2 hereof shall continue to apply with respect to the use of such know-how by
Licensee or its subcontractors.
(e) Should
Licensee decide to continue purchasing the Licensed Products from Licensor,
Licensor shall maintain the Marketing Regulatory Approvals in force;
(f) Licensor
shall take all appropriate steps and shall timely and diligently cooperate with
Licensee so as to avoid any possible discontinuation in the commercialization of
the Licensed Products in each country of the Licensed Territory upon the expiry
of the Initial Period; and
(g) Should
Licensee decide not to purchase the Licensed Products from Licensor, Licensee
shall ensure that such purchased products conform with the Specifications (as
such term is defined in the Revised Supply Agreement) and all relevant
regulatory authority requirements.
Section
8.2. Termination
by Breach. Upon
any material breach of or default under this Agreement (including, without
limitation, as provided for in Section 7.2 of the
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
Revised
Supply Agreement) by either party, the non-infringing party may terminate this
Agreement upon ninety (90) days written notice to the infringing party. Said
notice shall become effective at the end of said period, unless during said
period the infringing party shall cure such breach or default.
In the
event that this Agreement is terminated by Licensee pursuant to Section 8.2 of
this Agreement, subsections (a) to (f) of Section 8.1 shall apply and, in
addition, (i) Licensor shall transfer free of charge to Licensee all such
know-how that is necessary to enable Licensee to manufacture and/or have
manufactured the Licensed Products, and (ii) Licensor shall promptly return and
cease to use any Licensee Proprietary Information and any other information
provided by Licensee to Licensor under Article 3 hereinabove.
Section
8.3. Termination
by Licensee.
Licensee may terminate this Agreement hereunder as follows:
(a) Prior to
the date of receipt of first Marketing Regulatory Approval, Licensee may
terminate this Agreement on sixty (60) days advance written notice to Licensor
for any reason, whereupon Licensee shall not be obligated to make any further
payments to Licensor other than those payments accruing prior to such
termination;
(b) After and
including the date of receipt of first Marketing Regulatory Approval, Licensee
may terminate this Agreement upon written notice to Licensor of such intention
to terminate, provided that (i) Licensee hereby agrees that in any such event,
in order to minimize disruption of the availability of Licensed Product in the
Licensed Territory, Licensee shall negotiate with Licensor and or Licensor’s
designee mutually agreeable terms and conditions providing for the transfer of
Licensee’s rights and obligations hereunder to Licensor and or appropriate third
parties and a mutually determined date of termination in accordance therewith
provided, however, that failing an agreement on the date of termination, this
Agreement will terminate six (6) months after the date of Licensee’s termination
notice sent under this Section 8.3.(b) and (ii) Licensee shall not be obligated
to make any further payments to Licensor other than those payments accruing
prior to such termination.
Section
8.4. Termination
Upon Bankruptcy Event. If (i)
Licensee files a petition in bankruptcy or for the appointment of a receiver or
trustee, (ii) Licensee proposes a written agreement of composition or extension
of its debts or makes an assignment for the benefit of its creditors, or (iii)
an involuntary petition against Licensee is filed in any insolvency proceeding
and such petition is not dismissed within sixty (60) days after filing, Licensor
may immediately terminate this Agreement.
Section
8.5. No
Automatic Termination upon Licensor’s Bankruptcy. If (i)
Licensor files a petition in bankruptcy or for the appointment of a receiver or
trustee; (ii) Licensor proposes a written agreement of composition or extension
of its debts or makes an assignment for the benefit of its creditors; or (iii)
an involuntary petition against Licensor is filed in any insolvency proceeding
and such petition is not dismissed within sixty (60) days after filing, Licensee
shall have the option, as permitted by applicable law, to either:
(a) Immediately
terminate this Agreement; or
(b) Continue
to market the Licensed Products under the Licensed Know-How, Patent Rights,
Marketing Regulatory Approvals and the Trademark, in which case the license
granted hereunder to Licensee pursuant to Section 2.1 shall become a license to
“make, have
made,
import, use, offer to sell and sell Licensed Products”, provided that such
license to make or have made Licensed Products shall be nonexclusive and that
Licensor shall be entitled to a royalty in an amount equal to the sum of (i) any
and all royalties owed by Licensor to third parties (including without
limitation, Original Licensor) with respect to Net Sales of Licensed Products
and (ii) [***] percent ([***]%) of such Licensed Product Net Sales. Licensee
shall be solely responsible for payment of the third party royalty obligations
under such circumstances; provided, however, that any royalties to be paid under
this Section 8.5 (b) shall be due only to the extent that Licensee’s cost of the
Licensed Product in finished, packaged and labeled form, quality controlled and
ready for resale to the ultimate customer plus the royalties hereinabove
established shall not exceed the applicable Transfer Price established in
Section 2.2 of the Revised Supply Agreement. In addition the parties agree that
in such event the intellectual property delivered to Licensee shall include all
know-how necessary or useful to give Licensee the capability of manufacturing
the Licensed Products and such know-how shall be delivered to Licensee in such a
way as to communicate it to Licensee promptly, effectively and
economically.
Section
8.6. Termination
by Licensor. During
the term of this Agreement, Licensor shall be entitled to terminate this
Agreement as follows:
(a) With
Respect to Competitive Activities. In the
event Licensee acquires marketing rights in the Licensed Territory for a
surfactant product suitable for use in any of the indications or applications
included in the definition of Licensed Products pursuant to Article 1 (including
off-label use) (a “Competitive
Product”), or in
the event Licensee becomes an Affiliate of a Person whose product line includes
a Competitive Product (an “Affiliation”),
Licensee shall notify Licensor within thirty (30) days of such acquisition or
Affiliation and of its intention to either (a) divest such Competitive Product
or Affiliation or (b) terminate this Agreement and the Revised Supply Agreement.
Any such termination shall be effective sixty (60) days after such notice
becomes effective in accordance with Section 14.2. Alternatively, Licensee may
notify Licensor that it intends to retain such Competitive Product in its
portfolio but does not wish to terminate this Agreement, in which event Licensor
can in its sole discretion, within ninety (90) days after receipt of such
notice, advise Licensee of its intent to terminate this Agreement, provided that
(i) Licensee hereby agrees that in any such event, in order to minimize
disruption of the availability of Licensed Product in the Licensed Territory,
Licensee shall negotiate with Licensor and or Licensor’s designee mutually
agreeable terms and conditions providing for the transfer of Licensee’s rights
and obligations hereunder to Licensor and or appropriate third parties and (ii)
Licensee shall not be obligated to make any further payments to
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
Licensor
other than those payments accruing prior to such termination (including, without
limitation, any payments owed by Licensee pursuant to Sections 4.4 and 5.2(a),
or pursuant to Section 8.8;
(b) Termination
for Lack of Development Support.
Licensee shall be entitled to choose not to provide Development support pursuant
to Section 5.2(a)(ii) at any time prior to approval of Phase 3 Development for
the subject Licensed Product by the Development Committee, provided,
however, that in
such event Licensee shall promptly provide Licensor with written notification
thereof and, further, solely with respect to the subject Licensed Product,
Licensee’s rights under this Agreement and the Revised Supply Agreement shall
immediately terminate without any compensation or indemnification being due to
Licensor from Licensee with respect thereto.
(c) As
provided for in Section 5.6 of this Agreement.
Section
8.7. Reversion
upon certain Early Termination Cases. Upon
termination of this Agreement for any reason, other than expiry of the Initial
Period (which shall be governed by Section 8.1 hereinabove) or the breach of
this Agreement by Licensor (which shall be governed by Section 8.2 hereinabove),
all rights granted to Licensee hereunder shall revert to Licensor and Licensee
undertakes:
(a) to
deliver to Licensor all copies of any Licensed Know-how in its
possession,
(b) not to
use the Licensed Know-how as long as it has to be kept confidential under
Article 7 hereof;
(c) to
transfer to Licensor, at Licensor’s request, a single copy of all Licensee
Proprietary Information and, at Licensor’s expense, all health regulatory
approvals and regulatory filings relating to Licensed Products in Licensee’s
possession;
(d) to the
extent requested by Licensor, to transfer to Licensor or its designee
responsibility for and control of ongoing Licensed Products Development work,
including control over contracts with third parties for such work, where
permissible in accordance with such contracts, in an expeditious and orderly
manner with the costs for such work to be assumed by Licensor or its designee as
of the date of such transfer; and
(e) to the
extent requested by Licensor, to transfer to Licensor or its designee all
inventory of Licensed Products at a price equal to Licensee’s fully amortized
standard cost.
Section
8.8. Survival. Upon
any termination of this Agreement, Articles 3, 7, 10, 11 and 12 and Sections
8.1, 8.2, 8.7 and 8.9, shall survive such termination and continue in force and
effect to the extent necessary to effectuate such provisions.
Section
8.9. Disposition. Upon
termination of this Agreement (other than by expiration of the Initial Period),
subject to Sections 8.4 and 8.6, Licensee shall have no right under the Patent
Rights to import, use or sell Licensed Products, except that Licensee shall have
the right for one hundred twenty (120) days following termination to dispose of
Licensed Products on hand and complete any existing contracts requiring rights
under the Patent Rights which can be completed within the one hundred twenty
(120) days.
ARTICLE
9
INFRINGEMENT
Section
9.1. Notice.
(a) In the
event that Licensee believes that there is an infringement of the Licensed
Rights by a third party hereto selling material quantities of products in the
Licensed Territory in competition with Licensee’s sale of Licensed Products
hereunder, Licensee shall promptly provide Licensor with written notice that
such infringement is occurring. In the event that Licensee believes that such
infringement is to Licensee’s substantial detriment, Licensee shall provide
Licensor with reasonable evidence of the infringement.
(b) Licensor
shall have the right, at Licensor’s sole expense (subject to Section 9.5(a)), to
bring suit against the infringer for infringement of the Licensed Rights.
However, if after six (6) months from the date of receipt of evidence of
infringement from Licensee, Licensor has not initiated suit against the
infringer, Licensee shall have the right, at Licensee’s sole expense (subject to
Section 9.5(b)), to bring such suit provided that the Original Licensor has
consented to Licensee bringing such suit. Licensor shall make its best efforts
to obtain the Original Licensor’s consent in favor of Licensee.
Section
9.2. Assistance. In the
event either party hereto shall initiate or carry on legal proceedings to
enforce the Licensed Rights against an alleged infringer, as provided herein,
the other party hereto shall render reasonable assistance to and cooperate with
the party initiating or carrying on such proceedings.
Section
9.3. Legal
Proceedings. In the
event that either party shall institute legal proceedings to enforce the
Licensed Rights, it shall have sole control of such suit and the other party
shall be entitled to be represented in any such suit by counsel of its choosing,
at its sole expense.
Section
9.4. Discontinuance. Neither
party hereto shall discontinue or settle any such proceedings brought by it
without obtaining the concurrence of the other party if such action would impose
any obligations on such other party or affect the exercise of the rights granted
hereunder to such other party (which concurrence shall not be unreasonably
withheld).
Section
9.5. Recoveries. All
damages, settlements and awards made or obtained in connection with any suit or
other legal proceeding under this Article 9 shall be distributed as
follows:
(a) If
Licensor initiated the suit and prosecuted it to its conclusion, Licensor shall
be entitled to retain the balance of any damages, settlements and awards,
provided that Licensee may elect (within thirty (30) days of initiation of such
suit) to fund up to [***] percent ([***]%) of Licensor’s litigation costs and to
share in the same proportion of net recoveries.
(b) If the
Licensee initiated the suit and prosecuted it to its conclusion, Licensee shall
be entitled to retain the balance of any damages, settlements and awards;
provided that Licensor may elect (within thirty (30) days of initiation of such
suit) to fund up to [***] percent ([***]%) of Licensee’s litigation costs and to
share in the same proportion of net recoveries received by Licensee.
ARTICLE
10
NON-USE
OF NAMES
Section
10.1. Non-Use. Subject
to the licenses expressly granted hereunder with respect to the Trademark,
nothing contained in this Agreement shall be construed as granting to Licensor
or Licensee any right to use in advertising, publicity, or other promotional
activities any name, trade name, trademark, or other designation of the other
(including contraction, abbreviation or simulation of any of the foregoing)
without the prior, written consent of the other.
Section
10.2. Relationship. Nothing
herein shall be deemed to establish a relationship of principal and agent
between Licensor and Licensee, nor any of their agents or employees for any
purpose whatsoever. This Agreement shall not be construed as constituting
Licensor and Licensee as partners, or as creating any other form of legal
association or arrangement which would impose liability upon one party for the
act or failure to act of the other party.
ARTICLE
11
REPRESENTATIONS
AND WARRANTIES
Section
11.1 Representations
of Licensor.
Licensor represents and warrants to Licensee that:
(a) it has
the right to grant the license granted and the Right of First Negotiation of New
Products granted under Sections 2.1. and 2.5, respectively, of this Agreement
and that it has full power and authority to execute, deliver and perform this
Agreement and the Revised Supply Agreement and the obligations hereunder and
thereunder.
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
(b) to
Licensor’s knowledge, there are no claims or potential claims by any third
parties (other than the Original Licensor and Scripps) to an ownership interest
in the Licensed Rights licensed to Licensee under this Agreement.
(c) Licensor
has obtained any required third-party consents under contracts to which Licensor
or any of its Affiliates is a party to Licensor’s entry into this Agreement and
the Revised Supply Agreement and the performance of its obligations hereunder
and thereunder.
(d) To
Licensor’s knowledge, based solely on a review of the records of the United
States Patent and Trademark Office and the corresponding offices in countries
other than the United States, the patents listed on Schedule I are
valid.
(e) No third
party has served on Licensor or any of its Affiliates any claim, lawsuit,
charge, complaint or other action alleging that the Licensed Rights are invalid
or unenforceable or that the Licensed Rights infringe any patent or other
proprietary or property rights of any third parties or advised Licensor or any
of its Affiliates that it intends to pursue any such claim, lawsuit, charge,
complaint or other action. Licensor has not, prior to the date hereof, entered
into any compulsory license with a third party with respect to the Patent
Rights.
(f) The
rights of the Original Licensor and of any subsequent licensor (excluding the
Licensor) of the Scripps Patent Rights do not prevent the grant of the license
made hereunder nor do such rights permit any such person to sell (directly or
indirectly) or license for sale surfactant pharmaceutical preparations based on
or embodying the Patent Rights in the Licensed Territory or enable such person
to demand any indemnity, royalty or compensation of whatever nature from
Licensee as a result of Licensee’s sales of Licensed Products in the Licensed
Territory in accordance with the terms of this Agreement.
(g) Licensor
is not in breach of any of its material obligations under the Original License
as of the date hereof.
(h) All of
Licensor’s employees having access to any confidential information with respect
to the Licensed Rights are subject to written confidentiality obligations with
respect to the disclosure of such information.
(i) Prior to
the execution of this Agreement it has disclosed to Licensee all material
information pertaining to the Licensed Products and the Patent Rights reasonably
relevant to Licensee in order to assess its interest in entering into this
Agreement, and that no material information pertaining to the Licensed Products
and the Patent Rights actually known to Licensor as of the Effective Date
regarding the foregoing has been withheld from Licensee by
Licensor.
Section
11.2. Mutual
Representation. Each
party hereby warrants that the execution, delivery and performance of this
Agreement and the Revised Supply Agreement has been duly approved and authorized
by all necessary corporate actions of both parties; does not require any
shareholder approval which has not been obtained or the approval and consent of
any trustee or the holders of any indebtedness of either party; does not
contravene any law, regulation rules or order binding on either party, and does
not contravene the provisions of or constitute a default under any indenture,
mortgage contract or other agreement or instrument to which either party is a
signatory.
Section
11.3. Validity. Subject
to the foregoing provisions of this Article 11, nothing in this Agreement shall
be construed as a representation or a warranty by Licensor that any process
practiced or anything imported, used or sold under any license granted under
this Agreement is or will be free from infringement of patents of third
parties.
Section
11.4. No
Consequential Damages. IN NO
EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, SPECIAL OR
CONSEQUENTIAL DAMAGES RESULTING FROM THE PERFORMANCE OF THIS
AGREEMENT.
ARTICLE
12
INDEMNIFICATION
Section
12.1. Indemnification
by Licensee. Subject
to Section 11.4 and to the extent not covered by Licensor’s indemnity under
Section 12.2, Licensee agrees to indemnify and hold harmless Licensor and its
Affiliates and their respective officers, directors, employees and agents from
and against any and all claims, damages and liabilities, including reasonable
attorneys fees and expenses, asserted by third parties, both government and
private (collectively, “Claims”),
arising from Licensee’s or its Affiliates’ or sublicensees’ import, use, offer
to sell or sale of Licensed Products pursuant to this Agreement, including
without limitation any claim for breach of warranty, negligence or strict
liability with respect to any Licensed Product. This Section shall apply to the
Revised Supply Agreement. In the event of any contradiction between the Revised
Supply Agreement and any of the terms contained in this Agreement, the terms of
this Agreement shall prevail.
Section
12.2. Indemnification
by Licensor. Subject
to Section 11.4, Licensor agrees to indemnify and hold harmless Licensee, its
Affiliates and sublicensees and their respective officers, directors, employees
and agents from and against any and all Claims arising from (a) any infringement
of any patent or other intellectual property interest in the Licensed Territory
by any Person other than the parties to this Agreement relating to the Licensed
Products; (b) any breach by Licensor of its representations and warranties set
forth in this Agreement; (c) any negligent act or omission of Licensor and (d)
any intrinsic or manufacturing defect of the Licensed Products existing when the
Licensed Products are placed by Licensor in the custody of the carrier for
transport to Licensee. This Section shall apply to the Revised Supply Agreement.
In the event of any contradiction between the Revised Supply Agreement and any
of the terms contained in this Agreement, the terms of this Agreement shall
prevail.
Section
12.3. Insurance.
Licensor and Licensee shall maintain during the term of this Agreement insurance
policies covering their respective obligations under this Article 12, issued by
reputable insurance companies under ordinary terms and conditions in the
pharmaceutical industry and will prove the existence thereof to the other party
if so requested.
ARTICLE
13
TRADEMARK
MATTERS; PATENT MARKING
Section
13.1. Trademarks
Used in Connection With Licensed Products. (a)
Licensed Products shall be marketed under the Trademark. Licensee admits the
validity of the Trademark and agrees that it shall not challenge the same in the
Licensed Territory or elsewhere.
(b) Licensor
shall be responsible, at its own cost and expense, to register, maintain and
renew registrations of the Trademark in the Licensed Territory, to the extent
that it is necessary for the purposes of obtaining Marketing Regulatory Approval
and for the marketing of the Licensed Products in the Licensed Territory.
Licensee agrees not to take any actions (including without limitation effecting
any trademark registrations) inconsistent with the foregoing and not to register
anywhere in the world any trademark confusingly similar to Surfaxin® or any
derivative thereof.
(c) Licensee
agrees to take such actions as may be reasonably requested by Licensor to assist
Licensor to register, maintain or renew any Trademark at the sole cost and
expense of Licensor.
Section
13.2. Patent
Marking.
Licensee shall mark all Licensed Products made, used, or sold under the terms of
this Agreement, or their containers, in accordance with the applicable patent
marking laws.
ARTICLE
14
PATENT
PROSECUTION AND MAINTENANCE
Section
14.1. Maintenance
of Patent Rights.
Licensor has obtained certain commitments from the Original Licensor of the
Scripps Patent Rights and the patent rights listed in Section (b) of Schedule I
(collectively, the “Third
Party Patent Rights”) that
the Original Licensor will maintain the Third Party Patent Rights or, in the
event that the Original Licensor does not do so, that Licensor shall be given
the right to do so. Licensor undertakes to enforce its rights with respect to
maintenance of the Third Party Patent Rights against the Original Licensor and,
to the extent Licensor succeeds to the maintenance of the Third Party Patent
Rights, to use all commercially reasonable efforts to do so. Licensor further
undertakes to maintain the Patent Rights owned by Licensor as well as to carry
out any and all necessary steps in order to enable such Patent Rights be
enforced and applicable in each country of the Licensed Territory. Licensor
shall provide Licensee with copies of all written materials received by Licensor
from the Original Licensor, the Original Licensor’s or Licensor’s counsel, or
any governmental agency or instrumentality relating to prosecution and/or
maintenance of Patent Rights and shall afford Licensee the opportunity to review
and comment upon any filings to be made with respect to the Patent Rights (in
the case of the Third Party Patent Rights, to the same extent Licensor is
entitled to do so).
Section
14.2. Cooperation
By Parties.
Licensor and Licensee agree to cooperate in order to avoid loss of any rights
which may be available to Licensor or the Original Licensor under the U.S. Drug
Price Competition and Patent Term Restoration Act of 1984, the Supplementary
Certificate of Protection of Member States of the European Community and other
similar measures in any country. Without limiting the foregoing, Licensee agrees
to timely supply Licensor with all information reasonably requested by Licensor
to file or have filed (or to permit the Original Licensor to file or have filed)
an application for patent term extension within the 60-day period following U.S.
NDA approval. The same shall apply with respect to the approval by health
regulatory authorities in any country in the Licensed Territory.
ARTICLE
15
GENERAL
Section
15.1. Entire
Agreement. This
Agreement, including the Schedules, Annexes and Exhibits hereto, constitutes the
entire agreement and understanding between the parties as to the subject matter
hereof. All prior negotiations, representations, agreements, contracts, offers
and earlier understandings of whatsoever kind, whether written or oral between
Licensor and Licensee in respect of the subject matter of this Agreement
including, without limitation, the Sublicense and Collaboration Agreement dated
March 6, 2002, and the Sublicense and Collaboration Agreement dated October 26,
1999, in each case between Licensee and Licensor, are superseded by, merged
into, extinguished by and completely expressed by this Agreement. No aspect,
part or wording of this Agreement may be modified except by mutual agreement
between the Licensor and Licensee taking the form of an instrument in writing
signed and dated by duly authorized representatives of both Licensor and
Licensee.
Section
15.2. Notices. Any
notice or communication or permitted to be given by this Agreement shall be
given by post-paid, first class, registered or certified mail or by reputable
courier service addressed to:
In the
case of Licensor: Discovery
Laboratories, Inc.
2600
Kelly Road
Warrington,
Pennsylvania 18976
Attention:
Robert J. Capetola, Ph.D,
Chief
Executive Officer
With a
copy
to:
Dickstein
Shapiro Morin & Oshinsky
1177
Avenue of the Americas, 41st Floor
New York,
NY 10036-2714
Attn: Ira
L. Kotel
Facsimile:
(212) 997-9880
In the
case of Licensee: Laboratorios
del Dr. Esteve, S.A.
Av. Mare
de Déu de Montserrat, 221
08041
Barcelona (Spain)
Attention:
Development Director
Facsimile:
(34) 93 433 00 72
With a
copy
to:
JAUSAS
Av.
Diagonal 407 bis, 10th Floor
08008
Barcelona (Spain)
Attention:
Hector Jausas
Facsimile:
(34) 93 415 20 51
Such
addresses may be altered by notice so given. If no time limit is specified for a
notice required or permitted to be given by this Agreement, the time limit
therefor shall be ten (10) Business Days, not including the day of mailing.
Notice shall be considered made as of the date of deposit with the appropriate
post office or courier service.
Section
15.3. Governing
Law. This
Agreement and its effect are subject and shall be construed and enforced in
accordance with the laws of the State of New York, United States (without giving
effect to the principles of conflict of laws), except as to any issue which
depends upon the validity, scope or enforceability of any patent within the
Patent Rights, which issue shall be determined in accordance with the applicable
patent laws of the country of such patent.
Section
15.4 Dispute
Resolution.
(a)
Internal
Review. In the
event that a dispute, difference, claim, action, demand, request, investigation,
controversy, threat, discovery request or request for testimony or information
or other question arises pertaining to any matters which arise under, out of, in
connection with, or in relation to this Agreement (a “Dispute”) and
either party so requests in writing, prior to the initiation of any formal legal
action, the Dispute will be submitted to the Chief Executive Officers (or
equivalent position) of Licensee and Licensor. For all Disputes referred to the
Chief Executive Officers (or equivalent position), the Chief Executive Officers
(or equivalent position) shall use their good faith efforts to meet in person
and to resolve the Dispute within two weeks after such referral.
(b)
Arbitration. If,
pursuant to Section 15.4(a), within two weeks or such other period as may be
agreed upon between the parties following such reference, the dispute remains
unresolved, it shall be settled on application by either party by arbitration
conducted in the English language, in Stockholm (Sweden) in accordance with the
Rules of Arbitration of the International Chamber of Commerce by one or more
arbitrators appointed in accordance with the said rules. The parties expressly
agree to abide the award rendered. This provision shall not prevent either party
from addressing any competent court or tribunal in order to seek for interim
measures.
(c)
Costs. The
parties shall bear their own costs in preparing for and participating in the
resolution of any Dispute, and the costs of mediator(s) and arbitrator(s) shall
be equally divided between the parties.
Section
15.5. Conflicts. Nothing
in this Agreement shall be construed so as to require the commission of any act
contrary to law, and whenever there is any conflict between any provision of
this Agreement or concerning the legal right of the parties to contract and any
statute, law, ordinance or treaty, the latter shall prevail, but in such event
the affected provisions of this Agreement shall be curtailed and limited only to
the extent necessary to bring it within the applicable legal
requirements.
Section
15.6. Registration.
Licensee shall take all reasonable and necessary steps to register this
Agreement in any country where such is required to permit the transfer of funds
and/or payment of royalties to Licensor hereunder or is otherwise required by
the government or law of such country to effectuate or carry out this Agreement.
Notwithstanding anything contained herein, Licensee shall not be relieved of any
of its obligations under this Agreement by any failure to register this
Agreement in any country, and, specifically, Licensee shall not be relieved of
its obligation to make any payment due to Licensor hereunder at Licensor’s
address specified in Article 15.2 hereof, where such payment is blocked due to
any failure to register this Agreement.
Section
15.7. Headings. As used
in this Agreement, singular includes the plural and plural includes the
singular, wherever so required by the context. The headings appearing at the
beginning of the numbered Articles and Sections hereof have been inserted for
convenience only and do not constitute a part of this Agreement.
Section
15.8. Force
Majeure.
Notwithstanding any other provisions of this Agreement, neither of the parties
hereto shall be liable in damages for any delay or default in performing
hereunder if such delay or default is caused by conditions beyond its control
including but not limited to acts of God, governmental restrictions, wars, or
insurrections, strikes, floods, work stoppages and/or lack of materials;
provided, however, that the party suffering such delay or default shall notify
the other party in writing of the reasons for the delay or default. If such
reasons for delay or default continuously exist for six (6) months and the
parties are unable to reasonably agree upon alternatives, this Agreement may be
terminated by either party.
Section
15.9. Assignment. Except
as otherwise set forth in Sections 2.1 and 2.3 of this Agreement with respect to
Licensee’s right to grant sublicenses and appoint co-marketers and/or
co-promoters, neither party hereto may assign or transfer this Agreement or any
rights or obligations hereunder without the prior written consent of the other,
except that a party may make such an assignment without the other party’s
consent to Affiliates or to a successor to substantially all of the business of
such party, whether in a merger, sale of stock, sale of assets or other
transaction. Any permitted successor or assignee of rights and/or obligations
hereunder shall, in a writing to the other party, expressly assume performance
of such rights and/or obligations. Any permitted assignment shall be binding on
the successors of the assigning party. Any assignment or attempted assignment by
either party in violation of the terms of this Section 15.9 shall be null and
void and of no legal effect.
Section
15.10. Successors
and Assigns. Subject
to Section 15.9, this Agreement shall be binding upon and inure to the benefit
of the permitted successors or permitted assigns of Licensor and Licensee
respectively.
Section
15.11. Counterparts. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
Section
15.12. Announcements. Neither
party shall make any public announcement or press release regarding the content
or signature of this Agreement without the other party’s prior written consent
other than as may be required by law or any stock exchange rules. If such public
announcement or press release is required by law or any stock exchange rules the
parties shall use their reasonable endeavors to agree to the text and content
thereof prior to making such public announcement or press release.
REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK
IN
WITNESS WHEREOF, the parties hereto have hereunto set their hands and duly
executed this Agreement on the date(s) indicated below, to be effective the day
and year first above written.
| |
DISCOVERY LABORATORIES,
INC. |
| |
|
|
By: |
/s/ Robert J.
Capetola |
| |
|
| |
Name: Robert J. Capetola, Ph.D.
Title:
President and Chief Executive
Officer |
| |
LABORATORIOS DEL DR. ESTEVE,
S.A. |
| |
|
|
By: |
/s/ Antonio Esteve |
| |
|
| |
Name:
Title: |
Exhibit
10.29
AMENDED
AND RESTATED SUPPLY AGREEMENT
AMENDED
AND RESTATED SUPPLY AGREEMENT dated as
of December 3, 2004, by and between DISCOVERY LABORATORIES, INC. (“Seller”) and
LABORATORIOS DEL DR. ESTEVE, S.A., a company organized and existing under the
laws of Spain (“Buyer”).
WHEREAS,
Seller and Buyer are parties to a Amended and Restated Sublicense and
Collaboration Agreement (the “Revised
Collaboration Agreement”) dated
as of the date hereof pursuant to which Buyer and Seller have agreed to
collaborate in a product development, commercialization and marketing effort for
the Licensed Products (such term and other capitalized terms used and not
otherwise defined herein having the meanings assigned to them in the Revised
Collaboration Agreement); and
WHEREAS,
Buyer hereby agrees to purchase one hundred percent (100%) of its requirements
of Licensed Products from Seller, and Seller hereby agrees to supply one hundred
percent (100%) of Buyer’s requirements of Licensed Products, pursuant to the
terms and conditions of this Agreement.
NOW,
THEREFORE, in consideration of the foregoing premises and the mutual promises
and covenants set forth below, Seller and Buyer mutually agree as
follows:
ARTICLE
I
DEFINITIONS
As used
in this Agreement, the following terms shall have the following
meanings:
“Current
Good Manufacturing Practices” or “cGMP” shall
mean (i) with respect to the United States, the good manufacturing practices
required by the FDA and set forth in the Federal Food, Drugs and Cosmetics Act
or FDA regulations, policies or guidelines in effect at a particular time for
the manufacture, testing and quality control of pharmaceutical materials and
(ii) with respect to any other country of the Licensed Territory, the standards
for the manufacture and testing of pharmaceutical materials that are imposed by
any regulatory authority having jurisdiction.
“Cost
of Goods”
means the
costs incurred (including, without limitation, costs incurred with respect to
Unrelated Third parties) for the Manufacture of Licensed Product (including, for
the avoidance of doubt, the Manufacture of any device and related apparatus for
administration thereof) for the Licensed Territory, all direct
costs, and a reasonable fully-absorbed allocation of indirect and overhead
expenses directly attributable to the Manufacture of the Licensed Product for
the Licensed Territory. Direct costs shall include, without limitation, raw
materials, equipment and labor and costs of plant operations, and plant support
services. Indirect and overhead expenses shall include, without limitation,
indirect charges incurred by or on behalf of Seller in connection with
Manufacturing process improvements, spoilage, waste, storage, manufacturing
scale up, Manufacturing site qualification, RA, QA and QC (including testing),
supply chain management, capital equipment, customs duties or excise taxes,
costs for plant operations and support services (including utilities,
maintenance, engineering, designing, redesigning, safety, human resources,
finance, and plant management) and similar activities to the extent reasonably
allocated to the Licensed Product in the Licensed Territory including
depreciation and amortization of capitalized costs of any of the foregoing;
provided, that the royalties, if any, payable by Seller to its licensor(s) shall
be deemed to not be a component of Cost of Goods. All components of Cost of
Goods shall be allocated on a basis consistent with United States GAAP and
consistent with the cost accounting policy applied by Seller to other products
that it produces and, if it does not Manufacture any other products, consistent
with the industry standard. The
parties will endeavor in good faith to establish a “standard cost” per unit for
purposes of ongoing cost accounting and invoicing purposes, which “standard
cost” shall be reviewed and updated periodically as appropriate. The parties
shall reconcile the standard cost charges against the standard cost per unit
actually paid by Buyer and appropriate credit or payment shall be made to effect
such reconciliation as directed by the Steering Committee not less than
annually.
“Facility” means
an Owned Facility or a Contract Facility (in each case as defined in Section
3.1).
“First
Commercial Sale” shall
mean the first commercial sale by Buyer, its Affiliates or sublicensees of any
Licensed Product following final EMEA or other regulatory approval required to
market such Licensed Product commercially in the Licensed Territory for use in
humans.
“Licensed
Product Purchase Price” shall
mean, on a Licensed Product-by-Licensed Product basis, the sum of (i) Cost of
Goods together with any markup as set forth in Section 2.2; and (ii) appropriate
insurance, freight charges and, where applicable, custom duties.
“Manufacture” or
“Manufacturing” shall
mean manufacturing, filling, processing, testing, engineering, designing,
redesigning, packaging, storing, quality control, quality assurance, releasing,
disposing, handling, shipping, and all other activities undertaken or required
to be undertaken in order to manufacture and supply Licensed Product in its
final packaging (including, without limitation, package inserts and components
reasonably necessary for sale of the finished Licensed Product to the ultimate
consumer) and related devices and apparatus for administration
thereof.
“Net
Sales”
shall
mean that sum determined by deducting from the gross amount billed for Licensed
Products by the Buyer or any of its Affiliates or sublicensees in an arms length
transaction to customers, that are Unrelated Third Parties of the Buyer or of
any of its sublicensees;
|
|
(i) |
transportation
charges or allowances, including freight pickup allowances, and packaging
cost, if any; |
|
|
(ii) |
trade,
quantity or cash discounts, services allowances and independent broker’s
or agent’s commissions, if any, allowed or
paid; |
|
|
(iii) |
credits
or allowances for the Licensed Products, if any, given or made on account
of price, adjustments, returns, bad debts, off-invoice promotional
discounts, rebates, chargebacks, any and all federal, state or local,
government rebates or discounts whether in existence now or enacted at any
time during the term of this Agreement, volume reimbursements, the gross
amount billed and collected for rejected Licensed Products or Licensed
Products subject to recall or destruction (voluntarily made or requested
or made by an appropriate
government agency, sub-division or department);
and |
|
|
(iv) |
any
tax, excise or other governmental charge upon or measured by the
production, sale, transportation, delivery or use of the Licensed
Product; |
|
|
(v) |
in
each case determined in accordance with generally accepted accounting
practices. |
“Specifications” shall
mean the Licensed Product specifications contained in the registration dossier
of the Licensed Product as approved by the EMEA and the other regulatory
authorities having jurisdiction in the Licensed Territory, as the same may be
amended from time to time in accordance with applicable regulatory procedures.
“Transfer
Price” shall
mean as defined in Section 2.2.
“Unrelated
Third Parties” shall
mean Persons other than Buyer and Seller and Affiliates and sublicensees of
Buyer and Seller or any other related Persons and shall include hospital
formularies and other similar critical and therapeutic care providers who
typically purchase and administer products and therapies such as the Licensed
Products.
ARTICLE
II
PURCHASE
AND SALE OF PRODUCTS
Section
2.1. Purchase
and Sale; Delivery; Acceptance or Rejection. (a)
Seller agrees to sell to Buyer such quantities of Licensed Products,
manufactured in conformity with cGMP and meeting the Specifications, as Buyer
may order in accordance with the terms and conditions of this Agreement. Subject
to the provisions of Section 7.2 hereof, so long as this Agreement shall remain
in effect, Buyer agrees, for itself and its Affiliates and sublicensees, to
satisfy solely through the purchase of Licensed Products from Seller under this
Agreement one hundred percent (100%) of Buyer’s and its Affiliates’ and
sublicensees’ requirements for Licensed Products.
(b) Purchase
orders issued by Buyer to Seller with respect to purchases of Licensed Products
shall be subject to, and governed exclusively by, the terms of this Agreement.
Buyer agrees not to issue to Seller any purchase order containing terms
different from those set forth herein and further agrees that no shipment of
Licensed Product by Seller in accordance with a nonconforming purchase order
shall be deemed to be acceptance of any terms of such purchase order conflicting
with the terms of this Agreement except to the extent such conflicting terms are
initialed by Seller with the words “change accepted” written thereon by Seller.
Except as aforesaid, this Agreement shall override all other conflicting terms
of purchase and/or sale contained in any purchase and/or sale document generated
by Seller or Buyer.
(c) Subject
to paragraphs (d) and (e) below, all Licensed Product sold to Buyer hereunder
shall be delivered FCA Seller’s
Facility or distribution warehouse (Incoterms 2000). Seller shall assist Buyer
in arranging transportation in the manner specified by Buyer, in accordance with
applicable regulatory requirements, to any destinations specified in writing
from time to time by Buyer.
(d) Buyer
shall bear all costs and expenses relating to transportation and delivery to
Buyer’s designated distribution sites in the Licensed Territory (including
without limitation all freight charges, customs, duties, taxes, insurance
premiums and all expenses relating to validation of temperature-controlled
shipment conditions), regardless of whether Seller delivers the Licensed
Products to Buyer from Seller’s Facility or distribution site/ warehouse whether
in Europe or the United States; provided,
however, that in
the event that Seller transports Licensed Products from its United States
Facility and/ or its United States distribution site/ warehouse to a European
distribution site/ warehouse or Facility, if any, then delivers such Licensed
Products to Buyer’s designated distribution sites in the Licensed Territory, the
Steering Committee shall promptly meet to establish in good faith a system
whereby Buyer does not bear any such costs in excess of those that would have
been incurred if Seller had delivered such Licensed Products directly from its
United States Facility or distribution site/ warehouse to Buyer’s designated
distribution sites in the Licensed Territory.
(e) Seller
shall maintain a cGMP quality control program, as required by governmental
regulations in the Licensed Territory, with respect to the Manufacture of
Licensed Products. Seller will perform appropriate testing programs, and provide
Buyer with documentation arising from such testing programs, as may be agreed to
by the parties or required by any applicable regulatory authority. Finished
Licensed Product testing for release in the Licensed Territory or required by
the EMEA for Licensed Product received by Buyer shall be performed by Seller at
its designated approved testing site and paid for by Seller for Licensed Product
shipped to Buyer. Seller shall provide Buyer with each Licensed Product shipment
with the corresponding certificate of analysis conducted in a country of the
European Union, certifying that each delivery of Licensed Product was produced
and tested in compliance with (i) the Specifications, (ii) cGMP requirements and
(iii) all applicable regulatory documents. The parties will discuss in good
faith the possibility that the quality control for Licensed Product in the
European Union (“EU-QC”) shall be conducted by Buyer for an agreed upon fee to
be paid by Seller. Should, ultimately, Buyer not be the agreed upon party to
conduct EU-QC, Seller shall use its best commercial efforts to provide that
certain equipment acquired, as of the date hereof, by Buyer for the purposes of
conducting such EU-QC shall be purchased by such agreed upon Unrelated Third
Party that shall conduct the EU-QC.
(f) Buyer may
reject any portion of any shipment of Licensed Product which does not conform
with the Specifications. In order to reject a shipment, Buyer must (i) give
notice to Seller of Buyer’s intent to reject the shipment within thirty (30)
days of receipt together with a detailed written indication of the reasons for
such possible rejection, and (ii) as promptly as reasonably possible thereafter,
but in any event within an additional thirty (30) days, provide Seller with
notice of final rejection and the full basis therefor. After notice of intent to
reject is given, Buyer shall cooperate with Seller in determining whether
rejection is necessary or justified. If such notices of intent to reject and
final rejection are not timely received, Buyer shall be deemed to have accepted
such delivery of Licensed Product and to have waived all claims for
non-conformity with the Specifications, damage, defect or shortage, other than
claims for latent defects not capable of discovery by Buyer upon physical
examination. In the event of latent defects not capable of discovery by Buyer
upon physical examination, Buyer shall inform Seller within fifteen (15) days of
discovering any such defect. Buyer shall be entitled to an offset of the
Licensed Product Purchase Price (reduced, however, by any customs or other
charges related thereto that are recoverable or avoidable by Buyer) of properly
rejected Licensed Products at the time they are ultimately rejected, provided
that if Seller disputes the rejection, refund shall be made, if at all, at the
time the dispute is finally resolved. Seller shall notify Buyer as promptly as
reasonably possible (but in any event no later than thirty (30) days after
receipt of Buyer’s final rejection notice) whether it accepts Buyer’s basis for
any rejection. In the event Seller disputes Buyer’s rejection, the parties will
select a mutually agreeable independent third party laboratory which shall
determine whether the rejected Licensed Products meet the applicable
Specifications and shall confirm or dissent from Buyer’s rejection of Licensed
Products. If the parties are unable to agree on a laboratory firm within thirty
(30) days after receipt of Buyer’s final rejection notice, the laboratory shall
be appointed by computer generation of a random number, with an even number
signifying Seller’s right to designate the laboratory and an odd number
designating Buyer’s right to designate the laboratory. If the independent tester
confirms Buyer’s rejection, Seller will pay the fees of the tester, and if the
tester dissents from Buyer’s rejection, Buyer will pay the fees.
(g) Whether
or not Seller accepts Buyer’s basis for rejection, promptly on receipt of a
notice of rejection, Seller shall use its commercially reasonable efforts, at
Buyer’s request, to provide replacement Licensed Product, which shall be
purchased by Buyer as provided in this Agreement as soon as reasonably
practicable.
(h) Unless
Seller requests the return to it of a rejected batch within sixty (60) days of
receipt of Buyer’s final notice of rejection, Buyer shall, at Seller’s cost,
destroy such batch promptly and provide Seller with certification of such
destruction. Buyer shall, upon receipt of Seller’s request for return, promptly
dispatch said batch to Seller, at Seller’s cost.
(i) No change
to the Specifications shall be effective unless the same shall be required or
permitted by any regulatory agency having jurisdiction over (i) any country in
the Licensed Territory, (ii) Buyer or (iii) the Licensed Products (and if not
required, shall be agreed to in writing by Buyer and Seller). Seller shall give
Buyer advance notice of any change to the Specifications required by a
regulatory agency.
2.2 Transfer
Pricing. Buyer
shall purchase Licensed Products from Seller at a “Transfer Price” that is
determined on a Licensed Product-by-Licensed Product basis and otherwise as
follows:
(a) With
respect to Surfaxin® for
RDS and/ or BPD, the
Transfer Price to be paid by Buyer to Seller will be the sum of the
following:
| (i) |
[***]%
of Seller’s Cost of Goods for the subject Licensed Product supplied for
the Licensed Territory; |
| (ii) |
Seller’s
royalty obligations due with respect to the subject Licensed Product sold
by Buyer in the Territory; and, |
| (iii) |
X%
of Net Sales of the subject Licensed Product in the Territory (to be
determined on a country-by-country basis). |
Provided,
however, that the Transfer Price determined in accordance with this Section
2.2(a) shall be equal to [***]% of Net
Sales of the subject Licensed Product in the Territory (to be determined on a
country-by-country basis).
(b) With
respect to the Licensed Product for the treatment of ARDS, the
Transfer Price to be paid by Buyer to Seller will be the sum of the
following:
| (i) |
[***]%
of Seller’s Cost of Goods for the subject Licensed Product supplied for
the Licensed Territory; |
| (ii) |
[***]%
of Seller’s royalty obligations due with respect to the subject Licensed
Product sold by Buyer in the Territory;
and, |
| (iii) |
X%
of Net Sales of the subject Licensed Product in the Territory (to be
determined on a country-by-country basis). |
Provided,
however, that the percentage to be determined pursuant to Section 2.2(b)(iii),
above, shall be mutually determined in good faith by
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
the
parties (X) within 6 months of the date of completion of a Phase 3 clinical
trial for the subject Licensed Product (defined as the date when all substantive
data shall be available to the parties) and (Y) based upon a methodology that is
intended to ensure that both Buyer and Seller achieve reasonable profits with
respect to the Licensed Product; provided,
however, that in
no case shall the Transfer Price be lower than [***]% or
higher than [***]% of Net
Sales of the subject Licensed Product in the Territory (to be determined on a
country-by-country basis).
(c) With
respect to all other Licensed Products, the
Transfer Price (determined on a Licensed Product-by-Licensed Product basis) to
be paid by Buyer to Seller will be the sum of the following (provided, however,
that this Section 2.2(c) shall specifically exclude any New Products, as such
term is defined in Section 2.5 of the Revised Collaboration
Agreement):
| (i) |
[***]%
of Seller’s Cost of Goods for the subject Licensed Product supplied for
the Licensed Territory; |
| (ii) |
[***]%
of Seller’s royalty obligations due with respect to the subject Licensed
Product sold by Buyer in the Territory;
and, |
| (iii) |
X%
of Net Sales of the subject Licensed Product in the Territory (to be
determined on a country-by-country basis). |
Provided,
however, that the percentage to be determined pursuant to Section 2.2(c)(iii),
above, shall be mutually determined in good faith by the parties (X) within 6
months of the date of completion of a Phase 3 clinical trial for the subject
Licensed Product (defined as the date when all substantive data shall be
available to the parties) and (Y) based upon a methodology that is intended to
ensure that both Buyer and Seller achieve reasonable profits with respect to the
Licensed Product; provided,
however, that
the parties acknowledge that it is their mutual intent that the target Transfer
Price determined pursuant to this Section 2.2(c) shall be [***]% and,
further, that in no case shall the Transfer Price be lower than [***]% or
higher than [***]% of Net
Sales of the subject Licensed Product in the Territory (to be determined on a
country-by-country basis).
For the
avoidance of doubt, the parties hereby acknowledge and agree that the Transfer
Price for each Licensed Product determined in accordance with this Section 2.2
shall be determined by the parties in good faith and shall be based upon a
mutually agreeable methodology that is intended to ensure that both Buyer and
Seller achieve reasonable profits with respect to sales thereof.
Information
marked by [***] has been omitted pursuant to a request for confidential
treatment. The omitted portion has been separately filed with the Securities and
Exchange Commission.
2.3 Reports,
Reconciliation and Audit, Transfer Price Payments.
(a) Seller
shall invoice Buyer on the date of each shipment of Licensed Products delivered
by Seller to Buyer, its Affiliates or sublicensees at the Licensed Product
Purchase Price. Buyer shall pay Seller’s invoices no later than thirty (30) days
following the date of the applicable invoice by
electronic funds transfer in immediately available funds to such bank account(s)
as Seller shall designate. Notification as to the date and amount of any such
electronic funds transfer shall be provided to Seller at least two (2) Business
Days prior to such transfer.
(b) Reports.
Buyer, within 30 days after the first day of January, April, July, and October
of each contract year, shall deliver to Seller a true and accurate report giving
such particulars on a monthly basis of each of the Licensed Products: (i)
shipped and invoiced by Seller to Buyer; (ii) invoiced by Buyer and its
Affiliates and sublicensees to Unrelated Third Parties; (iii) the gross sales of
such Licensed Products (disclosing the quantity of each of the Licensed
Products) and the calculation of Net Sales thereon; (iv) the calculation, in
accordance with Section 2.2 of this Agreement, of the Transfer Prices thereon,
in each case during the preceding 3 months under this Agreement (each a
“Contract Quarter”) as are pertinent to perform an accounting of amounts due
under this Agreement and (v) the difference between the Transfer Price and the
Licensed Product Purchase Price invoiced by Seller in the Contract Quarter (the
“Balance”). The reports referred to herein (each a “Report”) shall be separately
delineated not only with respect to the Licensed Products but also with respect
to the different countries of the Licensed Territory and shall be in a standard
format agreed by Buyer and Seller prior to the first Report
delivery. Transfer
Price amounts owed by Buyer to Seller shall be calculated on a
product-by-product and country-by-country basis taking into account, in each
instance, the average of the Euro/ U.S. Dollar exchange rate for the first and
last business day of each month of the Contract Quarter as quoted in the New
York version of the Wall Street Journal.
(c) Balance
Payments. Balance
amounts owed by Buyer to Seller under this Section 2.3 shall be paid in U.S.
Dollars and shall
be free of all withholdings of any nature whatsoever (including, without
limitation, withholding taxes, monetary transfer fees, or similar taxes and
charges), and in the event any withholding is required, Buyer shall pay the same
together with such additional amount as is required so that each such payment
shall be, under any circumstances and in any event, in the amount as set forth
or referred to herein. Balance amounts shall be payable within five (5) Business
Days of receipt by Buyer of the relevant invoice issued by Seller that shall be
in accordance with the applicable Report (as set forth in Section 2.3(b)) by
electronic funds transfer in immediately available funds to such bank account(s)
as Seller shall designate. Notification as to the date and amount of any such
electronic funds transfer shall be provided to Seller at least two (2) Business
Days prior to such transfer.
(d) Reconciliation
and Audit.
| (i) |
Reconciliation.
Within 15 days of Seller’s receipt of a Report provided by Buyer to Seller
in accordance with Section 2.3(b), Seller shall inform Buyer in writing of
Seller’s assent or non-assent with respect to the calculations contained
therein. In the event that Seller does not agree with such calculations,
it shall notify Buyer of the reasons therefor and the parties hereby agree
to promptly discuss and reconcile any material differences in the
calculation of Transfer Price amounts owed by Buyer to Seller and make
appropriate adjustment with respect
thereto. |
| (ii) |
Audit.
Each party shall keep such records as are necessary to determine
accurately the sums due under this Agreement. Such records shall be
retained by the party (in such capacity, the “Recording Party”) and, at
any time during the applicable contract year and for 3 contract years
thereafter, at the prior written request and expense of the other party,
shall be made available for inspection, review, and audit during normal
business hours, by an internationally recognized independent certified
public accounting firm appointed by such other party and reasonably
acceptable to the Recording Party for the sole purpose of verifying the
Recording Party’s accounting reports and payments made or to be made
pursuant to this Agreement; provided, however, that such audits may not be
performed by either party more than once per contract year.
The results of each inspection, if any, shall be binding on both parties
except in the event of fraud. The auditing party shall pay for such
inspections, except that in the event where the adjustment shown by such
inspection is greater than 10% of the amount incurred, then the Recording
Party shall pay for such inspection. |
ARTICLE
III
PRODUCTION
OF PRODUCTS
Section
3.1. Manufacturing
of Licensed Products.
(a) Until
such time, if any, as a Seller-owned manufacturing facility (an “Owned
Facility”) is
qualified for the manufacture of Licensed Products sold to Buyer hereunder,
Seller shall manufacture or have manufactured the Licensed Products sold to
Buyer hereunder at a contract manufacturing facility (a “Contract
Facility”)
selected by Seller and reasonably acceptable to Buyer. The parties hereby
acknowledge and agree that it is the intent of the Seller that as soon as it may
be practicable Seller shall maintain at least one alternate production site for
Licensed Products sold to Buyer hereunder, which alternate production site, if a
Contract Facility, shall also be selected by Seller and reasonably acceptable to
Buyer. Seller may also satisfy its obligation for an alternate manufacturing
facility through a sublicensing arrangement complying with Section
3.2.
(b) Seller
shall be responsible for obtaining and maintaining all necessary licenses,
registrations, authorizations and approvals (other than such licenses,
registrations, authorizations and approvals that are required to be obtained or
made by an owner or operator of a Contract Facility) which are necessary to
manufacture, handle, store, label, package, transport and ship Licensed Products
under cGMP conditions and in accordance with other regulatory requirements.
(c) Seller
shall provide Buyer with copies of any correspondence sent from Seller to
governmental entities relating to the manufacturing, handling, storage,
labeling, packaging, transportation or shipment of Licensed Products at the time
such correspondence is sent by Seller, purged of Seller proprietary and/or
confidential information and trade secrets. Seller shall provide Buyer with
copies of any comments, responses, notices or other correspondence received by
Seller from any governmental entity relating to the foregoing matters within
five (5) Business Days of receipt of such correspondence by Seller, purged of
any Seller proprietary information and/or trade secrets.
(d) Seller
shall furnish to Buyer (i) a summary of any report or correspondence issued by a
governmental entity (or a third party authorized by a governmental entity) in
connection with a visit or inquiry relating to any Owned Facility or, to the
extent Seller is provided with such information, any Contract Facility,
including but not limited to, any FDA Form 483 or warning letter and (ii) not
later than ten (10) Business Days after the time Seller provides such to a
governmental entity, summaries of any and all proposed responses or explanations
relating thereto, in each case purged of trade secrets or other confidential or
proprietary information of Seller. After the filing of a response with the
appropriate governmental entity, Seller will notify Buyer of any further oral
and/or written contacts with a governmental entity (or a third party authorized
by a governmental entity) relating to the manufacturing, handling, storage,
labeling, packaging, transportation or shipment of Licensed
Products.
(e) If
requested in writing by Buyer, Seller shall permit Buyer to inspect, once per
year, during normal business hours, Seller’s Facilities and manufacturing
records to the extent Buyer deems it reasonably necessary to enable Buyer to
verify compliance with any statutory or regulatory requirements to which Buyer
is subject and which are applicable to the manufacture and/or packaging of
Licensed Products. Notwithstanding the foregoing, Buyer shall have the right to
inspect Seller’s Facilities and manufacturing records at any time, in the event
that there is a quality or regulatory problem with any Licensed Product. If, as
a result of any such inspection, Buyer reasonably and in good faith concludes
that Seller is not in compliance with any regulatory obligations or requirements
applicable to Buyer, Buyer shall so notify Seller in writing, specifying such
areas of noncompliance in reasonable detail and Seller shall remedy the problems
identified.
(f) Seller
agrees to use all reasonable efforts to promptly rectify or resolve any
deficiencies noted by a governmental entity (or third party authorized by a
governmental entity) in a report or correspondence issued to Seller with respect
to an Owned Facility or a Contract Facility.
Section
3.2. Subcontracting. It is
understood and agreed that Seller shall have the right in connection with its
performance hereunder to contract with such third parties as Seller deems
advisable to manufacture Licensed Products, provided that (i) manufacture and/or
quality control by any such third party has been authorized by the competent
regulatory authorities in the Licensed Territory, (ii) Seller shall provide
Buyer with not less than fifteen (15) Business Days’ advance notice of its
intent to contract with any third party and shall identify such third party to
Buyer, (iii) Buyer may audit Seller’s contractor’s qualifications and (iv)
Seller shall remain fully liable for its performance hereunder to the same
extent as if such contractor had not been engaged.
Section
3.3. Exclusivity. On a
country-by country basis, for so long as the Revised Collaboration Agreement
remains in effect with respect to any such country in the Licensed Territory,
until such time as Buyer has a fully paid-up license in such country in
accordance with the terms of the Revised Collaboration Agreement, Seller shall
supply Licensed Products only to Buyer intended for distribution within such
country.
Section
3.4. Allocation
of Supplied Licensed Products. In the
event of shortage or inability to timely supply the required Licensed Product,
Seller undertakes and agrees that the amounts of Licensed Products available
shall be allocated on an equitable basis according to forecasts received and
that Buyer shall not be treated less favorably than Seller, its Affiliates and
other distributors and/or sublicensees.
ARTICLE
IV
QUANTITY
FORECASTS; ORDERS
Section
4.1. Forecasts. (a) In
order to assist Seller in planning its production, commencing sixty (60) days
prior to the calendar month in which the First Commercial Sale of Licensed
Products takes place in any country in the Licensed Territory, Buyer shall
provide Seller with a twelve (12) month rolling forecast of the quantities of
such Licensed Product required by Buyer, by month, for the following twelve (12)
months. The first three (3) months of such projections shall constitute a
binding commitment to order the quantity of such Licensed Product forecast for
such period, provided that with respect to the first twelve (12) months
following such First Commercial Sale of Licensed Products in any country in the
Licensed Territory, only the first month’s forecast with respect to such country
shall be binding provided that the portion of such forecast relating to such
country is separately stated and is so indicated. Projections for months four
(4) through twelve (12) (or, as provided above with respect to product launches
in the Licensed Territory, months two (2) through twelve (12)) shall be made in
good faith and shall constitute Buyer’s best estimates of future orders, but
shall not be binding on Buyer. Updated twelve (12) month forecasts will be
provided at the beginning of each succeeding calendar month for the twelve (12)
month period commencing sixty (60) days thereafter. Buyer’s forecast shall also
describe anticipated regulatory modifications to any English language version of
Licensed Product labeling proposed by Seller. Seller shall, no later than
fifteen (15) Business Days after receipt of each such forecast, notify Buyer in
writing of any prospective problems of which Seller is aware of that might
prevent Seller from meeting Buyer’s forecast order quantities or estimated
delivery dates.
(b) Notwithstanding
Buyer’s obligation to provide forecasts as set forth in Section 4.1(a), Buyer
hereby agrees that it shall provide Seller with its firm purchase orders for
Licensed Product in accordance with the lead-times and batch size increments to
be specified by Seller in writing as soon as reasonably practicable but in any
event before Buyer places its first order for Licensed Products, such lead-times
and batch sizes to be applicable during the term of this Agreement unless
otherwise agreed in writing by the parties; provided,
however, that
Buyer shall have the right, up to the date of manufacture, to issue binding
change orders to increase or decrease such purchase orders with the consent of
Seller, which shall not be unreasonably withheld so long as Buyer agrees to
compensate Seller for any damages suffered by Seller as a consequence of such
change order (including damages attributable to loss of allocable overhead
recoupment, but excluding loss of profit), provided that Seller shall advise
Buyer before carrying out any change order of Seller’s estimated increased cost
of doing so. Buyer agrees to accept partial shipments of Licensed Products
should, for any reason, it become necessary to ship in advance of order
completion, provided that Seller shall (i) give advance written notice to Buyer
of such shipment and (ii) bear any additional cost to Buyer of receiving
Licensed Products in partial shipments. Seller shall make all commercially
reasonable efforts to comply with any revisions to purchase order requirements
consistent with the provisions of Section 4.1(a) and this Section 4.1(b).
Seller, within ten (10) Business Days after the date that a purchase order is
issued to it, shall acknowledge receipt of Buyer’s order and confirm in writing
that the order can be supplied. For purposes hereof, a purchase order will be
deemed issued on the earlier of (i) the date that Seller receives the purchase
order via mail and (ii) the date of receipt of the telecopied purchase
order.
Section
4.2. Purchase
Order Contents. (a)
Each purchase order shall specify the quantity, concentration and container size
of Licensed Product ordered within the Specifications, and the required delivery
schedule. Seller shall use reasonable commercial efforts to deliver each
shipment of Licensed Product within five (5) days of the delivery dates
specified in the delivery schedule set forth in Buyer’s purchase order relating
thereto (provided that in no event shall any such delivery dates be less than
the lead time established pursuant to Section 4.1(b), unless otherwise consented
to by Seller) using carriers mutually agreeable to Buyer and Seller. Seller
shall use commercially reasonable efforts to accommodate “Rush” orders from
Buyer.
(b) When all
appropriate validation and quality control release criteria for a particular
shipment of Licensed Product have been met (the “Release
Date”),
Seller shall notify Buyer in writing of the expected delivery dates (including
details of destination, date and time) to enable delivery and receipt to be
coordinated. Title and risk of loss to Licensed Products shall pass to Buyer
upon delivery of Licensed Products by Seller to the carrier.
Section
4.3. Packaging. (a)
Licensed Products shall be delivered to Buyer as finished goods in final
packaged and labeled form, quality controlled in accordance with Section 2.1(e)
and ready for resale to the ultimate customer and in accordance with the
packaging requirements set forth in the Marketing Regulatory
Approvals.
(b) Buyer
shall distribute all Licensed Products as packaged by Seller in accordance with
Section 4.3(a). In no event shall any Licensed Products be repackaged or
reconfigured by Buyer without Seller’s prior written consent.
Section
4.4. Labeling. With
respect to each country in the Licensed Territory, prior to distribution of a
Licensed Product, Buyer shall provide Seller with evidence of the regulatory
approval of labeling specifications for such Licensed Product in such country
and any variations required by the applicable regulatory agency. All such
materials shall be provided to Seller together with a proper English
translation. Seller shall distribute Licensed Products bearing only labeling
supplied or approved by Buyer and in accordance with such regulatory
requirements.
ARTICLE
V
CERTAIN
OBLIGATIONS OF BUYER
Buyer
agrees to ascertain and comply with all applicable laws and regulations and
standards of industry or professional conduct in connection with the use,
distribution or promotion of the Licensed Products, including without
limitation, those applicable to product claims, labeling, approvals,
registrations and notifications, and also to obtain Seller’s prior written
consent to all claims, labels, instructions, packaging or the like, which
consent shall not be unreasonably withheld.
ARTICLE
VI
REGULATORY
MATTERS
Section
6.1. Information
Regarding Regulatory Approvals. Seller
shall promptly advise Buyer in matters pertaining to U.S. regulatory
requirements relating to Seller’s activities hereunder. Seller shall also
provide to Buyer reasonable advance notice of any regulatory submission
containing information or data provided by Buyer to Seller which Seller intends
to disclose to regulatory agencies under this Agreement.
Section
6.2. Quality
Control Program; Additional Testing Programs. Seller
shall maintain a quality control program consistent with cGMP, as required by
the FDA and/or any other governmental entity in the Licensed Territory, with
respect to Seller’s manufacture of Licensed Products hereunder. In addition,
Seller will perform such additional testing programs, and provide Buyer with
documentation arising from such testing programs, as may be agreed to by Buyer
and Seller or required by any applicable regulatory authority.
Section
6.3. Retention
of Samples. Seller
shall retain as samples such quantities of Licensed Products from each batch of
Licensed Product as Buyer shall reasonably request. Retained samples shall be
maintained in a suitable storage facility for one (1) year past the product’s
expiration date. All such samples shall be available for inspection and testing
by Buyer at reasonable times and upon reasonable notice.
Section
6.4. Recalls. Buyer
shall notify Seller promptly if any Licensed Product is the subject of a recall,
market withdrawal or correction within the Licensed Territory (a “Recall”), and
Buyer and/or its designee shall have sole responsibility for the handling and
disposition of such Recall. Buyer and/or its designee shall bear the costs of
all Recalls of Licensed Products except to the extent that such Recall shall
have been the result of Seller’s breach of any of the warranties set forth in
this Agreement and/or the Revised Collaboration Agreement, in which case Seller
will promptly reimburse Buyer to such extent for actual, direct costs sustained
as a result of the Recall. In the event that Seller disputes Buyer’s
determination that the fault is due to Seller and/or to its agent, the parties
will select a mutually agreeable outside consulting firm which will be
instructed to review the applicable information and data and to confirm or
dissent from Buyer’s determination. If the consulting firm confirms Buyer’s
determination, Seller will pay the fees of such consulting firm. Buyer and/or
its designee shall maintain records of all sales of Licensed Products and
customers sufficient to adequately administer a Recall, market withdrawal or
correction for a period of three (3) years after termination or expiration of
this Agreement. Except as required by law, Buyer and/or its designee shall serve
as the sole point of contact with the applicable governmental entity concerning
any Recall within the Licensed Territory with respect to Licensed Products and
Seller shall serve as the sole point of contact with the FDA with respect to any
Recall. In the event that Seller is required to communicate with the FDA with
respect to Recall of Licensed Products, Seller shall within one (1) Business Day
notify Buyer of such communication.
ARTICLE
VII
TERMINATION;
RIGHTS AND OBLIGATIONS UPON
TERMINATION
Section
7.1. Term. This
Agreement shall commence on the date hereof and shall continue in effect with
respect to each Licensed Product in each country in the Licensed Territory,
unless the parties mutually agree to extend such term, for so long as the
Revised Collaboration Agreement remains in effect with respect to such Licensed
Product in such country(ies).
Section
7.2. Termination
for Default. If
either party materially defaults in the performance of any material agreement,
condition or covenant of this Agreement and such default or noncompliance shall
not have been remedied, or steps initiated to remedy the same to the other
party’s reasonable satisfaction, within ninety (90) days (or thirty (30) days in
the case of non-payment) after receipt by the defaulting party of a notice
thereof from the other party, the party not in default may terminate this
Agreement. A material breach or default of this Agreement shall be considered as
a material breach or default under the Revised Collaboration Agreement, and
Section 8.2 of the Revised Collaboration Agreement shall apply.
Section
7.3 Rights
and Obligations on Expiration or Termination. Except
to the extent expressly provided to the contrary, the following provisions shall
survive the termination of this Agreement: Sections 6.3 and 6.4 and Articles I
and VIII through X. Any rights of Seller to payments accrued through termination
as well as obligations of the parties under firm orders for purchase and
delivery of Licensed Products at the time of such termination shall remain in
effect, except that in the case of termination under Section 7.2, the
terminating party may elect whether obligations under firm orders will remain in
effect and except that Seller will have no obligation with respect to delivery
dates more than three (3) months after termination.
ARTICLE
VIII
WARRANTIES;
REPLACEMENT OF PRODUCTS; INSURANCE
Section
8.1. Warranties. Seller
warrants to Buyer for itself and on behalf of its subcontractors and agents who
assume any of Seller’s obligations hereunder that (i) when shipped to Buyer by
Seller, the Licensed Products will conform to the Specifications, as then in
effect, and will not be (A) adulterated or misbranded within the meaning of the
Food, Drugs & Cosmetic Act or (B) be an article which may not, under the
provisions of the Food, Drugs & Cosmetic Act, be introduced into interstate
commerce, and (ii) any Facility used by Seller will remain in compliance with
cGMP at all times during the term of this Agreement and (iii) Seller shall
obtain and maintain all necessary permits, registrations and licenses necessary
to carry out its obligations pursuant to this Agreement. The foregoing
warranties are the only warranties made by Seller with respect to the Licensed
Products delivered hereunder, and may only be modified or amended by a written
instrument signed by a duly authorized officer of Seller and duly authorized
officer of Buyer. THE EXPRESS WARRANTIES CONTAINED IN THIS ARTICLE 8 ARE IN LIEU
OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY
WARRANTY OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR USE.
Section
8.2. Replacement
of Licensed Products. Any
Licensed Products delivered to Buyer by Seller which do not conform to the
Specifications and are properly rejected as set forth in Article 2, or which are
otherwise not in compliance with the warranties made in Section 8.1, shall be
replaced, or Buyer’s account may be credited, at Buyer’s
election. The remedy of replacement or credit shall not be available if and to
the extent that such nonconformance was caused by Buyer’s misuse, unauthorized
modification, neglect, improper testing or improper storage, including without
limitation storage at inappropriate temperatures, transportation, use beyond any
dating provided, by accident, fire or other hazard. THE EXPRESS OBLIGATIONS
STATED IN THIS SECTION 8.2 AND IN SECTIONS 2.1 AND 8.3 ARE IN LIEU OF ALL OTHER
LIABILITIES OR OBLIGATIONS OF SELLER FOR DAMAGES, INCLUDING BUT NOT LIMITED TO
DIRECT OR CONSEQUENTIAL DAMAGES, ARISING OUT OF OR IN CONNECTION WITH THE
DELIVERY, USE OR PERFORMANCE OF THE PRODUCTS.
Section
8.3. Insurance. Buyer
and Seller shall maintain during the term of this Agreement products liability
insurance policies, covering their respective obligations under this Agreement,
issued by reputable insurance companies under ordinary terms and conditions in
the pharmaceutical industry and will prove the existence thereof to the other
party if so requested.
ARTICLE
IX
MISCELLANEOUS
Section
9.1. Entire
Agreement This
Agreement constitutes the entire agreement and understanding between the parties
as to the subject matter hereof. All prior negotiations, representations,
agreements, contracts, offers and earlier understandings of whatsoever kind,
whether written or oral between Seller and Buyer in respect of the subject
matter of this Agreement, are superseded by, merged into, extinguished by and
completely expressed by this Agreement (including, without limitation, the
Supply Agreement dated March 6, 2002, and the Supply Agreement dated October 26,
1999, in each case between Buyer and Seller). No aspect, part or wording of this
Agreement may be modified except by mutual agreement between the Seller and
Buyer taking the form of an instrument in writing signed and dated by duly
authorized representatives of both Seller and Buyer. The representation and
warranties made by Licensor (i.e. Seller) and Licensee (i.e. Buyer) in the
Revised Collaboration Agreement are incorporated herein by reference, provided
that no breach of such representations and warranties shall be the basis for the
termination of this Agreement unless the Revised Collaboration Agreement is
terminated simultaneously.
Section
9.2. Notices Any
notice or communication or permitted to be given by this Agreement shall be
given by post-paid, first class, registered or certified mail or reputable
courier service addressed to:
In the
case of
Seller: Discovery
Laboratories, Inc.
2600
Kelly Drive
Warrington,
Pennsylvania 18976
Attention:
David L.
Lopez, Esq., CPA
Senior
Vice President and General
Counsel
With a
copy
to: Dickstein
Shapiro Morin & Oshinsky, LLP
1177
Avenue of the Americas,
New York,
NY 10036-2714
Attn: Ira
L. Kotel, Esq.
Facsimile:
(212) 997-9880
In the
case of Buyer:
Laboratorios
del Dr. Esteve, S.A.
Av. Mare
de Déu de Montserrat, 221
08041
Barcelona (Spain)
Attention:
Development Director
Facsimile:
(34) 93 433 00 72
With a
copy
to:
JAUSAS
Av.
Diagonal 407 bis, 10th Floor
08008
Barcelona (Spain)
Attention:
Hector Jausas
Facsimile:
(34) 93 415 20 51
Such
addresses may be altered by notice so given. If no time limit is specified for a
notice required or permitted to be given by this Agreement, the time limit
therefor shall be ten (10) Business Days, not including the day of mailing.
Notice shall be considered made as of the date of deposit with the appropriate
Post Office or courier service.
Section
9.3. Governing
Law. This
Agreement and its effect are subject and shall be construed and enforced in
accordance with the laws of the State of New York, United States (without giving
effect to the principles of conflict of laws), except as to any issue which
depends upon the validity, scope or enforceability of any patent within the
Patent Rights, which issue shall be determined in accordance with the applicable
patent laws of the country of such patent.
Section
9.4. Representations
regarding Authorization; Organization; Corporate
Action; No Conflicts. Each
party hereto severally represents and warrants that it is a duly organized and
validly existing corporation and/or partnership under the laws of its
jurisdiction of incorporation, and has taken all required corporate action to
authorize the execution, delivery and performance of this Agreement and the
Revised Collaboration Agreement and perform all of its obligations hereunder and
thereunder; the execution and delivery of this Agreement and the Revised
Collaboration Agreement and the consummation of the transactions contemplated
herein and therein do not violate, conflict with, or constitute a default under
its charter or similar organization document, its by-laws or the terms or
provisions of any material agreement or other instrument to which it is a party
or by which it is bound, or any order, award, judgment or decree to which it is
a party or by which it is bound; and upon execution and delivery, this Agreement
and the Revised Collaboration Agreement will constitute the legal, valid and
binding obligation of it. The persons signing on behalf of each of the parties
hereby warrant and represent that they have the authority to execute this
Agreement and the Revised Collaboration Agreement on behalf of the party for
whom they have signed.
Section
9.5. Registration. Buyer
shall take all reasonable and necessary steps to register this
Agreement in any country where such is required to permit the transfer of funds
and/or payment of amounts due to Seller hereunder or is otherwise required by
the government or law of such country to effectuate or carry out this Agreement.
Notwithstanding anything contained herein but subject to Section 9.4 hereof,
Buyer shall not be relieved of any of its obligations under this Agreement by
any failure to register this Agreement in any country, and, specifically, Buyer
shall not be relieved of its obligation to make any payment due to Seller
hereunder at Seller’s address specified in Section 9.2 hereof, where such
payment is blocked due to any failure to register this Agreement.
Section
9.6. Headings. As used
in this Agreement, singular includes the plural and plural includes the
singular, wherever so required by the context. The headings appearing at the
beginning of the numbered Articles and Sections hereof have been inserted for
convenience only and do not constitute a part of this Agreement.
Section
9.7. Agency. Nothing
herein shall be deemed to create an agency, joint venture or partnership between
the parties hereto.
Section
9.8 Dispute
Resolution. (a)
Internal
Review. In the
event that a dispute, difference, claim, action, demand, request, investigation,
controversy, threat, discovery request or request for testimony or information
or other question arises pertaining to any matters which arise under, out of, in
connection with, or in relation to this Agreement (a “Dispute”) and
either party so requests in writing, prior to the initiation of any formal legal
action, the Dispute will be submitted to the Steering Committee, which will use
its good faith efforts to resolve the Dispute within ten (10) Business Days. If
the Steering Committee is unable to resolve the Dispute in such period, the
Steering Committee will refer the Dispute to the Chief Executive Officers (or
equivalent position) of Buyer and Seller. For all Disputes referred to the Chief
Executive Officers (or equivalent position), the Chief Executive Officers (or
equivalent position) shall use their good faith efforts to meet in person and to
resolve the Dispute within ten (10) Business Days after such
referral.
(b)
Arbitration. If,
pursuant to Section 9.8(a), within such ten (10) Business Days or such other
period as may be agreed upon between the parties, the dispute remains
unresolved, it shall be settled on application by either party by arbitration
conducted in the English language, in Stockholm (Sweden) in accordance with the
Rules of Arbitration of the International Chamber of Commerce by one or more
arbitrators appointed in accordance with the said rules. The parties expressly
agree to abide the award rendered. This provision shall not prevent either party
from addressing any competent court or tribunal in order to seek interim
measures.
(c)
Costs. The
parties shall bear their own costs in preparing for and participating in the
resolution of any Dispute, and the costs of mediator(s) and arbitrator(s) shall
be equally divided between the parties.
Section
9.9. Force
Majeure.
Notwithstanding any other provisions of this Agreement, neither of the parties
hereto shall be liable in damages for any delay or default in performing
hereunder if such delay or default is caused by conditions beyond its control
including but not limited to acts of God, governmental restrictions, wars, or
insurrections, strikes, floods, work stoppages and/or lack of materials;
provided, however, that the party suffering such delay or default shall notify
the other party in writing of the reasons for the delay or default. If such
reasons for delay or default continuous exist for six (6) months, this Agreement
may be terminated by either party.
Section
9.10. Assignment. Except
as otherwise set forth in Sections 2.1 and 2.3 of the Revised Collaboration
Agreement with respect to Buyer’s right to grant sublicenses and appoint
co-marketers and/or co-promoters, neither party hereto may assign or transfer
this Agreement or any rights or obligations hereunder without the prior written
consent of the other, except that a party may make such an assignment without
the other party’s consent to Affiliates or to a successor to substantially all
of the business of such party, whether in a merger, sale of stock, sale of
assets or other transaction. Any permitted successor or assignee of rights
and/or obligations hereunder shall, in a writing to the other party, expressly
assume performance of such rights and/or obligations. Any permitted assignment
shall be binding on the successors of the assigning party. Any assignment or
attempted assignment by either party in violation of the terms of this Section
9.10 shall be null and void and of no legal effect.
Section
9.11. Successors
and Assigns. Subject
to Section 9.10, this Agreement shall be binding upon and inure to the benefit
of the permitted successors or permitted assigns of Seller and Buyer
respectively.
Section
9.12. Counterparts. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
ARTICLE
X
BASIS
OF BARGAIN
EACH
PARTY RECOGNIZES AND AGREES THAT THE WARRANTY DISCLAIMERS AND LIABILITY AND
REMEDY LIMITATIONS IN THIS AGREEMENT ARE MATERIAL, BARGAINED FOR BASES OF THIS
AGREEMENT AND THAT THEY HAVE BEEN TAKEN INTO ACCOUNT AND REFLECTED IN
DETERMINING THE CONSIDERATION TO BE GIVEN BY EACH PARTY UNDER THIS AGREEMENT AND
IN THE DECISION BY EACH PARTY TO ENTER INTO THIS
AGREEMENT.
IN
WITNESS WHEREOF, the parties have executed this Agreement to be effective as of
the date first written above.
| |
DISCOVERY LABORATORIES,
INC. |
| |
|
|
By: |
/s/ Robert J.
Capetola |
| |
|
| |
Name: Robert J. Capetola, Ph.D.
Title:
President and Chief Executive
Officer |
| |
LABORATORIOS DEL DR. ESTEVE,
S.A. |
| |
|
|
By: |
/s/ Antonio Esteve |
| |
|
| |
Name:
Title: |
Exhibit 23.1
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in the Registration Statements (Form
S-8 No. 333-100824, Form S-8 No. 333-109274, Form S-8 No. 333-110412 and Form
S-8 No. 333-116268) pertaining to the Amended and Restated 1988 Stock Incentive
Plan of Discovery Laboratories, Inc. and in the Registration Statements (Form
S-3 No. 333-101666, Form S-3 No. 333-35206, Form S-3 No. 333-86105, Form S-3 No.
333-72614, Form S-3 No. 333-82596, Form S-3 No. 107836, Form S-3 No. 333-111360,
Form S-3 No. 333-118595, Form S-3 No. 333-121297 and Form S-3 No. 333-122887) of
Discovery Laboratories, Inc. and in the related Prospectuses of our reports
dated March 11, 2005, with respect to the consolidated financial statements of
Discovery Laboratories, Inc., Discovery Laboratories, Inc. management’s
assessment of the effectiveness of internal control over financial reporting,
and the effectiveness of internal control over financial reporting of Discovery
Laboratories, Inc., included in this Annual Report (Form 10-K) for the year
ended December 31, 2004.
/s/ Ernst
& Young LLP
March 11,
2005
Philadelphia,
Pennsylvania
Exhibit 31.1
CERTIFICATIONS
CERTIFICATIONS
PURSUANT TO
SECTION
302 OF
THE
SARBANES-OXLEY ACT OF 2002
I, Robert
J. Capetola, certify that:
1.
I have
reviewed this Annual Report on Form 10-K of Discovery Laboratories,
Inc.;
2. Based on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the
registrant and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
| |
|
|
| |
|
|
|
|
| Date: March 16,
2005 |
|
/s/ Robert J.
Capetola |
| |
Robert J. Capetola, Ph.D. |
| |
President and Chief
Executive Officer |
Exhibit
31.2
CERTIFICATIONS
PURSUANT TO
SECTION
302 OF
THE
SARBANES-OXLEY ACT OF 2002
I, John
G. Cooper, certify that:
1.
I have
reviewed this Annual Report on Form 10-K of Discovery Laboratories,
Inc.;
2. Based on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the
registrant and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
| |
|
|
| |
|
|
|
|
| Date: March 16,
2005 |
|
/s/John
G. Cooper |
| |
John G. Cooper |
| |
Chief Financial
Officer |
Exhibit
32.1
CERTIFICATION
UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this periodic
report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in this periodic
report fairly presents, in all material respects, the financial condition and
results of operations of the issuer.
| |
|
| Date:
|
March
16, 2005 |
| |
|
| Name:
|
/s/
Robert J. Capetola |
| Name: |
Robert
J. Capetola, Ph.D. |
| Title:
|
President,
and Chief Executive Officer |
| |
|
| Name: |
/s/
John G. Cooper |
| Name: |
John
G. Cooper |
| Title:
|
Executive
Vice President, Chief Financial Officer |
| |
|
A signed
original of this written statement required by Section 906 of the Sarbanes-Oxley
Act of 2002 has been provided to the Company and will be retained by the Company
and furnished to the Commission or its staff upon request.
This
certification shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act, or otherwise subject to the liability of that section.
Such certification will not be deemed to be incorporated by reference into any
filing under the Securities Act or the Securities Exchange Act.
