-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KwIASZqtjnmPcaWc3nsW6lT7QFAOdNbguM6M4tiH7m7x0umT/5rrtH5YOux/qEYJ /BnE5VMEFaeNgi3bqnegmw== 0000950135-99-003354.txt : 19990630 0000950135-99-003354.hdr.sgml : 19990630 ACCESSION NUMBER: 0000950135-99-003354 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALKERMES INC CENTRAL INDEX KEY: 0000874663 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 232472830 STATE OF INCORPORATION: PA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-14131 FILM NUMBER: 99655224 BUSINESS ADDRESS: STREET 1: 64 SIDNEY ST CITY: CAMBRIDGE STATE: MA ZIP: 02139-4136 BUSINESS PHONE: 6174940171 10-K405 1 ALKERMES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 OR [ ] 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 0-19267 ALKERMES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2472830 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 64 Sidney Street, Cambridge, MA 02139-4234 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 494-0171 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share ("Common Stock") 1994 Class A Warrants to purchase shares of Common Stock $3.25 Convertible Exchangeable Preferred Stock -------------------------------------------- (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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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. [X ] Based upon the last sale price of the Registrant's Common Stock on June 10, 1999, the aggregate market value of the 23,918,428 outstanding shares of voting and non-voting common equity held by non-affiliates of the Registrant was $620,384,226. As of June 10, 1999, 25,064,387 shares of the Registrant's Common Stock were issued and outstanding, and no shares of the Registrant's Non-Voting Common Stock were issued or outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in this Report on Form 10-K: 1) Definitive Proxy Statement to be filed within 120 days after March 31, 1999 for the Registrant's Annual Shareholders' Meeting to be held on August 6, 1999 (Part III). 2 PART I ITEM 1. BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Registrant's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. See "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Statements." GENERAL Alkermes, Inc. (together with its subsidiaries, referred to as "we", "us" or the "Registrant"), a Pennsylvania corporation organized in 1987, is applying the tools of biotechnology to the development of sophisticated proprietary drug delivery systems. We are developing product candidates based on our independent drug delivery technologies: (i) controlled, sustained release of injectable drugs lasting several days to several weeks, utilizing our ProLease(R) and Medisorb(R) technologies; (ii) the delivery of drugs into the brain past the blood-brain barrier, utilizing the Cereport(TM) technology; (iii) oral delivery of drugs using our RingCap(TM) and dose sipping technologies ("DST"); and (iv) the development of pharmaceutical products based on proprietary pulmonary drug delivery technologies utilizing our Advanced Inhalation Research, Inc. ("AIR(TM)") technology. Utilizing these drug delivery systems, we are currently in various stages of preclinical and clinical development of several product candidates. OVERVIEW OF DRUG DELIVERY Drug delivery companies apply proprietary technologies to create new pharmaceutical products based on drugs developed by others. These products are generally novel, cost-effective dosage forms that provide any of several benefits including control of drug concentration in the blood, improved safety and efficacy, improved patient compliance and ease of use and expanded indications. Drug delivery technologies can provide pharmaceutical companies with a means of developing new products, as well as expanding existing drug franchises. The drug delivery industry emerged to address the opportunities for improved delivery of traditional pharmaceutical compounds. These compounds are generally stable, small molecules manufactured by conventional synthetic methods, for which oral or transdermal (through the skin) delivery could be enabled or enhanced by drug delivery technologies. Technologies such as passive transdermal systems (patches) and improved tablets and capsules have been developed and successfully applied to a range of pharmaceutical products. In addition, certain traditional small molecule pharmaceuticals are delivered by means of encapsulation in polymeric microspheres. With the advent of biotechnology, new opportunities in drug delivery have arisen. Advances in biotechnology have facilitated the development of a new generation of biopharmaceutical products based on proteins, peptides and nucleic acids. At the same time, the scientific tools of biotechnology have enabled new approaches to drug delivery based on exploiting particular biological phenomena, for example utilizing natural properties of the blood-brain barrier to facilitate drug delivery to the central nervous system. 2 3 Proteins and peptides present drug delivery challenges because they are often large molecules which degrade rapidly in the bloodstream, have limited ability to cross cell membranes and generally cannot be delivered orally. As a result, many biopharmaceuticals must be administered by injection, often multiple times per day or per week. Consequently, the methods of administration of biopharmaceuticals can limit their clinical applications to certain disease states that warrant the expense and inconvenience of frequent injection. Drug delivery to the central nervous system is complicated by the existence of the blood-brain barrier, the layer of tightly joined endothelial cells which comprise the walls of the capillaries of the brain and limit the free flow of many blood constituents into the brain. Many drugs cannot easily cross the blood-brain barrier, and therefore must be administered in relatively high doses that may result in systemic toxicity or high cost. Drugs with limited ability to cross the blood-brain barrier include many water soluble chemotherapeutic and anti-infective agents that are frequently used in the treatment of diseases outside of the central nervous system. Delivery of drugs via the lungs or by oral administration also presents challenges. The effectiveness of pulmonary dosage forms is often limited by the poor efficiency of pulmonary devices and the difficulty of administering high doses of certain drugs. In addition, drugs that act systemically require deposition in the deep lung, which can lead to the use of complicated and expensive devices. For certain oral medications, high doses of the drug are often necessary, requiring patients to swallow numerous large pills. In addition, many patients have difficulty swallowing pills. Often it is necessary to take a number of doses per day, which lowers patient compliance and may cause certain side effects associated with high drug concentrations in the blood. BUSINESS STRATEGY Our business strategy is to develop and acquire drug delivery systems to address significant new drug delivery opportunities arising in the pharmaceutical industry. There are four key elements to our strategy: Develop and Acquire Broadly Applicable Drug Delivery Systems and Apply Them to Multiple Pharmaceutical Products. We develop or acquire drug delivery systems that have the potential to be applied to multiple proteins, peptides and small molecule pharmaceutical compounds to create new product opportunities. For example, we have developed the Cereport technology independently and acquired the ProLease, Medisorb, AIR, DST and RingCap technologies. We currently have several product candidates utilizing these technologies in development. Collaborate to Develop and Finance Product Candidates. In addition to conducting product development activities on our own, we have entered into collaborations with pharmaceutical and biotechnology companies and others to develop product candidates incorporating our technologies, to provide capital for product development independent of capital markets and to share development risk. Currently, we are collaborating with major pharmaceutical companies, including ALZA Corporation ("ALZA"), Genentech, Inc. ("Genentech"), Johnson & Johnson and Janssen Pharmaceutica International ("Janssen"). Apply Drug Delivery Systems to Both Approved Drugs and Drugs in Development. We are applying our drug delivery technologies to novel applications and formulations of pharmaceutical products that have already been approved by the Food and Drug Administration ("FDA") or other 3 4 regulatory authorities. In such cases, we and our partners can develop a novel dosage form or application with the knowledge of a drug's safety and efficacy profile and a body of clinical experience from which to draw information for the design of clinical trials and for regulatory submissions. We are also applying our technologies to pharmaceuticals that require a sustained release delivery system for successful development. Establish Independent Product Development Capabilities. We have assembled our own product development organization to enable us to develop product candidates for ourselves and our collaborators based on our drug delivery technologies. This capability gives us flexibility in structuring development programs and the ability to conduct both feasibility studies and clinical development programs for ourselves and our collaborators. For example, we have developed Cereport independently and are conducting all of the clinical trials of Nutropin Depot(TM) (ProLease recombinant human growth hormone ("rhGH")) for Genentech. In addition, we are developing two proprietary product candidates utilizing our AIR technology. DRUG DELIVERY TECHNOLOGY Our current focus is on the development of broadly applicable drug delivery technologies addressing several important drug delivery opportunities, including injectable sustained release of proteins, peptides and small molecule pharmaceutical compounds, the pulmonary delivery of both small molecules and proteins and peptides, drug delivery to the brain across the blood-brain barrier, and oral drug delivery systems. ProLease: injectable sustained release of fragile proteins and peptides ProLease is our proprietary technology for the stabilization and encapsulation of fragile proteins and peptides in microspheres made of common medical polymers. Our proprietary expertise in this field lies in our ability to preserve the biological activity of fragile drugs over an extended period of time and to manufacture these formulations using components and processes believed to be suitable for human pharmaceutical use. ProLease is designed to enable novel formulations of proteins and peptides by replacing frequent injections with controlled, sustained release over time. We believe ProLease formulations have the potential to improve patient compliance and ease of use by reducing the need for frequent self-injection, to lower costs by reducing the need for frequent office visits and to improve safety and efficacy by reducing both the variability in drug levels inherent in frequent injections and the aggregate amount of drug given over the course of therapy. In addition, ProLease may provide access to important new markets currently inaccessible to drugs that require frequent injections or are administered orally. The ProLease formulation process has been designed to assure stability of fragile compounds during the manufacturing process, during storage and throughout the release phase in the body. The formulation and manufacturing process consists of two basic steps. First, the drug is formulated with stabilizing agents and dried to create a fine powder. Second, the powder is microencapsulated at very low temperatures. Incorporation of the drug substance as a stabilized solid under very low temperatures is critical to protecting fragile molecules from degradation during the manufacturing process and is a key element of the ProLease technology. The microspheres are suspended in a small volume of liquid prior to administration to a patient by injection under the skin or into a muscle. We believe drug release from the ProLease drug delivery system can be controlled to last from a few days to several months. 4 5 Drug release from the microsphere is controlled by diffusion of the drug through the microsphere and by biodegradation of the polymer. These processes can be modulated through a number of formulation and fabrication variables, including drug substance and microsphere particle sizing and choice of polymers and excipients. Our experience with the application of ProLease to a wide range of proteins and peptides has shown that high incorporation efficiencies and high drug loads can be achieved. Proteins and peptides incorporated into ProLease microspheres have maintained their integrity, stability and biological activity for up to 30 days in in vitro experiments conducted on formulations manufactured at the preclinical, clinical trial and commercial scale. Medisorb: injectable sustained release of traditional small molecule pharmaceuticals Medisorb is a proprietary technology for encapsulating traditional small molecule pharmaceuticals in microspheres made of common medical polymers. Like ProLease, Medisorb is designed to enable novel formulations of pharmaceuticals by providing controlled, sustained release over time. We believe Medisorb is suitable for encapsulating stable, water soluble, small molecule pharmaceuticals at a large scale. We believe that Medisorb formulations may have superior features of safety, efficacy, compliance and ease of use for drugs currently administered by frequent injection or administered orally. Drug release from the microsphere is controlled by diffusion of the pharmaceutical through the microsphere and by biodegradation of the polymer. These processes can be modulated through a number of formulation and fabrication variables, including drug substance and microsphere particle sizing and choice of polymers and excipients. The Medisorb drug delivery system uses manufacturing processes different from the ProLease manufacturing process. The formulation and manufacturing process consists of three basic steps. First, the drug is combined with a polymer solution. Second, the drug/polymer solution is mixed in water to form liquid microspheres (an emulsion). Third, the liquid microspheres are dried to produce finished product. The microspheres are suspended in a small volume of liquid prior to administration to a patient by injection under the skin or into a muscle. We believe drug release from the Medisorb system can be controlled to last from a few days to several months. Cereport: drug delivery across the blood-brain barrier Cereport, a member of a family of Receptor-Mediated Permeabilizers(TM) ("RMPs(TM)"), is a nine amino acid peptide based on bradykinin, a compound occurring naturally in the body and known to affect vascular permeability. Cereport is a proprietary, synthetic analog of bradykinin developed by us to increase transiently the permeability of the blood-brain barrier. Following injection, Cereport increases permeability by triggering a brief relaxation of the tight cellular junctions of the blood-brain barrier. During the time the tight junctions are relaxed, permeability is increased and drug molecules in the bloodstream can diffuse into the brain in concentrations greater than can usually be achieved without Cereport. Preclinical and clinical data also suggest that Cereport increases the uptake of pharmaceuticals in the region of brain tumor and other pathology. Cereport exerts a pharmacologic effect on the vasculature of the brain and does not itself bind to or serve as a carrier for the drug of which it is facilitating delivery. We are developing Cereport to be manufactured, packaged and dispensed as a standalone product. In the clinical setting, Cereport is administered in conjunction with the therapeutic or diagnostic agent. Timing of Cereport administration 5 6 relative to that of the therapeutic or diagnostic agent is determined on a drug-by-drug basis to optimize barrier permeability during the time of peak drug plasma concentrations. Cereport is intended to be marketed as an independent agent to increase the utility of other therapeutic and diagnostic compounds given with it. We believe Cereport may be administered along with cancer chemotherapeutic and anti-infective agents not currently used in the treatment of central nervous system disorders because of their limited ability to penetrate the blood-brain barrier. AIR: pulmonary drug delivery The AIR technology is our proprietary pulmonary delivery system that enables the delivery of both small molecules and macromolecules to the lungs. Our proprietary technology allows us to formulate drugs into dry powders made up of highly porous particles with low mass density. These particles can be efficiently delivered to the deep lung by a small, simple inhaler. The AIR technology is useful for small molecules, proteins or peptides and allows for both local delivery to the lungs and systemic delivery via the lungs. AIR particles can be aerosolized and inhaled efficiently with simple inhaler devices because low forces of cohesion allow the particles to deaggregate easily. AIR is developing a family of relatively inexpensive, compact, easy to use inhalers. The AIR devices are breath activated and made from injection molded plastic. The powders are designed to quickly discharge from the device over a range of inhalation flow rates, which may lead to low patient-to-patient variability and high lung deposition of the inhaled dose. By varying the ratio and type of excipients used in the formulation, we can deliver a range of drugs from the device that may provide both immediate and sustained release. DST (Dose Sipping Technology) and RingCap(TM): oral drug delivery systems Dose Sipping Technology DST provides a convenient, simple way to administer medication to patients who have difficulty swallowing tablets or capsules, such as children and the elderly. This proprietary system works by putting a granulated form of a drug in a specially designed straw. As the patient draws fluid through the disposable straw, the drug mixes with the fluid and the patient receives a precise dose of the drug. The system can be used with a wide variety of drugs in a granulated form. We manufacture the DST system using specially designed machinery and granulated drug provided by our collaborative partners. RingCap RingCap is a controlled release tablet dosage form which is designed to reduce the number of times per day that oral drugs must be taken. The RingCap system is unlike currently available controlled release tablets, which generally release decreasing amounts of a drug over time. Instead, RingCap is designed to deliver the total dose evenly over an extended period. The system works by imprinting the tablet with a series of insoluble rings made of polymers, which then control the erosion rate of a drug tablet in the gastrointestinal tract. By varying the number, width and placement of the bands on the tablets, we can change the release profile of the drug. We believe RingCap may provide a cost-effective way to manufacture controlled release tablets. 6 7 PRODUCT CANDIDATES IN DEVELOPMENT The following table summarizes the primary indications, delivery method, development status and collaborative partner for each of our product candidates. This table is qualified in its entirety by reference to the more detailed descriptions appearing elsewhere in this Form 10-K. The results from preclinical testing and early clinical trials may not be predictive of results obtained in subsequent clinical trials and there can be no assurance that our or our collaborators' clinical trials will demonstrate the safety and efficacy of any product candidates necessary to obtain regulatory approval.
PRODUCT Delivery Collaborative CANDIDATE Indication Method Status(1) Partner - --------- ---------- -------- --------- ------------- PROLEASE rhGH Growth Hormone Deficiency SR Injection(2) NDA submitted Genentech in Children Erythropoietin Anemia SR Injection Clinical trials Johnson & Johnson Others Undisclosed SR Injection Feasibility Undisclosed MEDISORB RISPERDAL Schizophrenia SR Injection Phase III Janssen Pharmaceutica Others Undisclosed SR Injection Feasibility Undisclosed CEREPORT(3) Cereport and Metastatic Brain Tumor Intravenous Phase II Alkermes Clinical Carboplatin Partners, L.P. (the "Partnership") Recurrent Malignant Intravenous Phase II complete Partnership Glioma Intra-arterial Pediatric Brain Tumor Intravenous Phase I/II(4) Partnership PULMONARY - AIR AlbuLast(TM) Asthma Pulmonary Phase I None EstroLast(TM) Hormone Replacement Pulmonary Phase I None Undisclosed Various Pulmonary Preclinical Undisclosed DST(DOSE SIPPING TECHNOLOGY) Undisclosed Various Oral Preclinical Undisclosed RINGCAP Undisclosed Various Oral Controlled Release Preclinical None
- ---------- (1) See "Government Regulation" for definitions of "NDA", "Phase III", "Phase II" and "Phase I" clinical trials. "Phase I/II" clinical trials indicates that the compound is being tested in humans for safety and preliminary indications of biological activity in a limited patient population. "Preclinical" indicates that we or our partners are conducting efficacy, pharmacology and/or toxicology testing of a lead compound in animal models or biochemical assays. (2) Sustained Release Injection. (3) ALZA has an option to obtain co-development and worldwide marketing rights to Cereport pursuant to an agreement entered into in September 1997. (4) These clinical trials are being sponsored and conducted by the Pediatric Branch of the National Cancer Institute ("NCI"). 7 8 PROLEASE Product Development Strategy. Our strategy is to generate multiple product opportunities by applying ProLease technology to the development of superior formulations of proteins and peptides that we believe address significant market opportunities. We believe these formulations have the potential to expand the utilization of these products and improve the competitive advantage of our collaborators in major markets. The product development plan for individual ProLease formulations is expected to proceed in several stages. First, we, either on our own or pursuant to a collaboration, conduct initial feasibility work to test various ProLease formulations for a particular drug in vitro and in vivo. Second, following the successful completion of the feasibility stage, preclinical development and manufacturing scale-up activities directed toward the initiation of clinical trials of the ProLease formulation would be conducted in collaboration with a partner. See "Collaborative Arrangements." ProLease Recombinant Human Growth Hormone. We are developing a ProLease formulation of Genentech's rhGH, known as Nutropin Depot, in collaboration with Genentech. Growth hormone deficiency ("GHD") results in short stature and potentially other developmental defects. Genentech is the leading supplier of rhGH in the United States. rhGH is approved for use in the treatment of children with growth hormone deficiency, Turner's syndrome, chronic renal insufficiency and other indications and is being tested in additional indications in adults. rhGH is currently administered frequently, often daily, by subcutaneous injection. On June 28, 1999 our collaborator Genentech submitted an NDA to the FDA for Nutropin Depot for the treatment of children with GHD. In September 1998, we completed a Phase III clinical trial of ProLease rhGH in 74 growth hormone deficient children at 27 sites in the United States. The Phase III trial was designed to test the efficacy, safety and tolerability of Nutropin Depot in the treatment of children with GHD who had not received any previous treatment with growth hormone. The study evaluated two dosing regimens of Nutropin Depot, once a month and twice a month, with both groups receiving the same total dose. There can be no assurance that the FDA will accept the NDA for review or that Nutropin Depot will be approved in a timely manner, if at all. Any significant delay or non-approval of the NDA would have a material adverse effect on our business and financial position. ProLease Erythropoietin. We are developing a ProLease formulation of erythropoietin ("EPO") with Johnson & Johnson. EPO is a naturally occurring protein that stimulates the production of red blood cells. In November 1998, Johnson & Johnson completed a first probative human study of ProLease EPO. Following this probative study in human volunteers, both parties agreed to proceed with the development of an appropriate formulation of ProLease EPO. The product development program was announced in January 1998 following the completion of a feasibility study in September 1997. Johnson & Johnson is conducting the clinical studies for the ProLease EPO program and will be responsible for further clinical development, if any. 8 9 Additional ProLease Formulations. We continue to develop Prolease formulations of other unspecified compounds pursuant to feasibility agreements with several pharmaceutical and biotechnology companies. MEDISORB Product Development Strategy. Our strategy is to generate multiple product opportunities by applying Medisorb technology to the development of superior formulations of small molecule pharmaceutical products. We believe these formulations have the potential to expand the utilization of these products and improve the competitive advantage of our collaborators in major markets. The product development plan for individual Medisorb formulations is expected to proceed in several stages. First, we, either on our own or pursuant to a collaboration, conduct initial feasibility work to test various Medisorb formulations for a particular drug in vitro and in vivo. Following the successful completion of the feasibility stage, preclinical development and manufacturing scale-up activities directed toward the initiation of clinical trials of the Medisorb formulation would be conducted in collaboration with a partner. See "Collaborative Arrangements." RISPERDAL. We are developing and manufacturing a Medisorb formulation of Janssen's anti-psychotic drug RISPERDAL. Janssen is an affiliate of Johnson & Johnson. In April 1999, Janssen announced its intention to proceed with a Phase III clinical trial of RISPERDAL, after completing Phase I and Phase II clinical trials. In addition, we have completed scale-up and Phase III manufacturing activities at the expected commercial scale. We will manufacture the Medisorb formulation of RISPERDAL for both the clinical trials and commercial sales, if any. Janssen is responsible for conducting all clinical trials. CEREPORT Product Development Strategy. Our strategy to date has been to advance Cereport through clinical trials while establishing its safety, permeability effects in humans and efficacy when used in combination with other drugs. To support the clinical development of Cereport, we formed and transferred substantially all of our rights to Cereport technology to Alkermes Clinical Partners, L.P. (the "Partnership"), which completed a $46 million unit offering in April 1992. We have the option to purchase all of the limited partnership interests in the Partnership. As of September 30, 1997, we entered into an agreement with ALZA relating to the development and commercialization of Cereport. Under the terms of the agreement, ALZA made an upfront payment of $10.0 million to Alkermes to fund clinical development in return for an option to obtain exclusive worldwide commercialization rights to Cereport, subject to the rights of the Partnership. See "Collaborative Arrangements--Alkermes Clinical Partners, L.P." and "Collaborative Arrangements--ALZA Corporation." Cereport has the potential to be used in combination with a variety of agents in various disease settings. Our goal is to expand the applications of Cereport through our own development activities and, when appropriate, collaborations with pharmaceutical companies, subject to any commercialization rights of ALZA. We may collaborate with companies having drugs whose uses could be expanded to include central nervous system indications. In such cases, we and our partner could collaborate in the clinical development of the combination without any exchange of product rights. 9 10 Newly-Diagnosed Brain Tumor. In April 1999, we announced our plans to discontinue study ALK01-040, which was a Phase III clinical trial of Cereport and carboplatin for the treatment of newly-diagnosed brain tumor patients. The study began enrollment in March 1998, and was designed to enroll patients with high grade primary brain tumors following surgical resection of the tumor and prior to the initiation of radiotherapy. The discontinuation of the study was not based on any issues related to the safety or potential efficacy of Cereport in this indication, but, based on our experience with the trial, we determined that elements of the study design were inappropriate and that the probability of successful completion was low. We are not planning to initiate another clinical trial in this indication in the near future. Metastatic Brain Tumors. We are conducting a Phase I/II clinical trial of Cereport and carboplatin in patients with metastatic brain tumors, or tumors that have spread to the brain from other sites in the body. The study also includes a dose escalation component, in which progressively larger doses of Cereport are being investigated in this patient population. The study is ongoing, and is expected to be completed in 1999. The results are expected to provide information useful for determining whether to proceed with further clinical trials in this indication. Pediatric Brain Tumors. The Pediatric Branch of the National Cancer Institute is conducting two separate studies of Cereport and carboplatin in pediatric patients with primary brain tumors. The first study began in August 1996 and enrolled 25 patients. The study is a non-controlled, open label Phase I/II clinical trial of intravenous Cereport and carboplatin in pediatric brain tumor patients who have failed other therapies. The second study began in June 1998, and is a Phase II multi-center study, in pediatric brain tumor patients. Ten centers will enroll up to a total of 146 children over two to four years. AIR Product Development Strategy. Our strategy is to generate multiple product opportunities by applying the AIR technology to the development of superior pulmonary formulations of small molecules and proteins and peptides. We believe these formulations have the potential to expand the utilization of these products and improve the competitive advantage of our collaborators in major markets. The product development plan for individual AIR formulations is expected to proceed in several stages. First, we, either on our own or pursuant to a collaboration, conduct initial feasibility work to test various AIR formulations for a particular drug in vitro and in vivo. Following the successful completion of the feasibility stage, preclinical development and manufacturing scale-up activities directed toward the initiation of clinical trials of the AIR formulation would be conducted in collaboration with a partner. We are currently collaborating with undisclosed partners on the development of certain pharmaceutical product candidates. In addition, we are developing two product candidates on our own that are in clinical trials. AlbuLast. AIR has formulated and is conducting a Phase I clinical trial for AlbuLast, its proprietary formulation of albuterol sulfate which is designed to provide both immediate and long-term relief from asthma symptoms. An undisclosed pharmaceutical company has an option to develop AlbuLast with AIR in exchange for certain development funding as well as milestones and royalties. 10 11 EstroLast. We are developing an AIR formulation of the generic drug estradiol for estrogen replacement therapy. Probative human studies are ongoing. We retain rights to commercialize all estradiol formulations. ORAL TECHNOLOGIES The RingCap and DST technologies, licensed from ALZA in April 1998, are both in the early stages of development. COLLABORATIVE ARRANGEMENTS Our business strategy includes forming collaborations to provide technological, financial, marketing, manufacturing and other resources. We have entered into several corporate collaborations. Genentech, Inc. In November 1996, we announced the completion of a Phase I clinical trial of a ProLease rhGH formulation in adults. Based in part on the successful completion of the Phase I trial, Genentech exercised its option to enter into a license agreement and obtained from us a license coexclusive in the United States and exclusive in the rest of the world for a ProLease formulation of rhGH. In April 1999, Alkermes and Genentech amended and restated the license agreement to conduct expanded development activities, including clinical trials in an additional indication, process and formulation development and manufacturing. We will be responsible for conducting additional clinical trials and manufacturing for Nutropin Depot and are to receive manufacturing revenues and royalties on sales. Genentech has the right to terminate the agreement for any reason upon 90 days' written notice or, if we have begun manufacturing the ProLease product for commercial sale, upon six months' written notice. In addition, either party may terminate the agreement upon the other party's material default which is not cured within 90 days of written notice, or upon the other party's insolvency or bankruptcy. In connection with the expanded collaboration in April 1999, Genentech purchased 3,500 shares of our 1999 Redeemable Convertible Exchangeable Preferred Stock for an aggregate purchase price of $35 million. We will use the proceeds from the preferred stock to fund the expanded rhGH program for calendar years 1999 and 2000. See "Market for Our Common Stock and Related Stockholder Matters." To fund our activities during the initial phase of the collaboration, Genentech loaned us the aggregate amount of $3.5 million pursuant to a Convertible Promissory Note dated January 31, 1995 (the "Note"). The outstanding principal amount of the Note accrues interest at the prime rate of interest as reported by the Bank of America NT & SA from time to time and is convertible into common stock based on the average closing price of the common stock for the 20 trading days ending the day before the conversion date. The outstanding principal amount of the Note and accrued but unpaid interest thereon becomes due and payable on January 31, 2000. Johnson & Johnson - Erythropoietin In January 1998, we entered into a development and license agreement and a supply and license agreement with Ortho Pharmaceutical, an affiliate of Johnson & Johnson, for the development of a 11 12 ProLease formulation of erythropoietin ("ProLease EPO"). We are developing a sustained release formulation of EPO for the treatment of various types of anemia. Pursuant to the development agreement, Johnson & Johnson obtained an exclusive, worldwide, royalty-bearing license to make, use and sell products resulting from such agreement. In exchange, Johnson & Johnson is to provide us with research and development funding, milestone payments and royalty payments based on sales, if any, of ProLease EPO. Johnson & Johnson will be responsible for conducting clinical trials, if any, and securing regulatory approvals and, together with its affiliates, will be responsible for the marketing of any products that result from the collaboration. We will manufacture any such products for commercial sale and are to receive manufacturing revenues and royalties on sales. Johnson & Johnson may terminate the development agreement for any reason, upon 90 days' written notice if such termination notice occurs prior to filing an NDA with the FDA, or upon six months' written notice if such notice occurs subsequent to such a filing. In addition, either party may terminate the development agreement and the related supply agreement upon a material default or breach by the other party of such agreement which is not cured within 60 days' notice, or upon the other party's insolvency or bankruptcy. Janssen Pharmaceutica International Pursuant to a development agreement, we are collaborating with Janssen, an affiliate of Johnson & Johnson, in the development of a sustained release formulation of RISPERDAL utilizing the Medisorb technology. In October 1996, we announced the expansion of the development agreement. Under the development agreement, we are responsible for production of RISPERDAL for clinical trials. Janssen is responsible for conducting clinical trials of RISPERDAL and securing all necessary regulatory approvals. Janssen provides development funding to us, assuming RISPERDAL continues in clinical development. We will manufacture any such products for commercial sale and are to receive manufacturing revenues and royalties on sales. Under related license agreements, Janssen and an affiliate have exclusive worldwide licenses from us to manufacture, use and sell the Medisorb formulation of RISPERDAL. If Janssen decides to employ third-party suppliers of RISPERDAL, we have a right of first refusal for the manufacture and supply of such product and component bio-absorbable polymers thereof. Under the license agreements, Janssen is required to pay us certain royalties with respect to all Medisorb formulations of RISPERDAL sold to customers. Janssen can terminate the development agreement or the license agreement upon 30 days' prior written notice. Alkermes Clinical Partners, L.P. In April 1992, units consisting of limited partnership interests in the Partnership and warrants to purchase our Common Stock were sold to investors in a private placement (the "Private Placement"). The proceeds of the $46 million Private Placement have been used to fund the further development and clinical testing of Cereport for human pharmaceutical use in the United States, Canada and Europe. Such funding was not sufficient to complete clinical trials and seek regulatory approval of Cereport. Since the completion of funding from the Partnership, which ended during the quarter ended June 30, 1996, we have used, and intend to continue to use, our own resources to develop Cereport, but may seek alternative sources of funding, including additional collaborators. 12 13 Pursuant to a product development agreement, dated March 6, 1992, we transferred substantially all of our rights to the RMP technology, including Cereport, to the Partnership. We have an option to purchase all of the limited partnership interests in the Partnership (the "Purchase Option") and thereby reacquire the transferred technology. We are required to fund the development of Cereport to maintain the Purchase Option. The Partnership may terminate the research program for any or all products upon the affirmative vote of 75% of the directors of the general partner of the Partnership, Alkermes Development Corporation II ("ADC II"), one of our wholly owned subsidiaries, that such research is not feasible or is uneconomic. The Partnership may terminate the marketing program for any or all products upon the affirmative vote of 75% of the directors of ADC II based on the directors' good faith business judgment. The Partnership may also terminate the research or marketing program if we have materially breached the agreement and not cured such breach within 30 days' written notice. Both parties may terminate the research or marketing program upon mutual consent to terminate or upon the insolvency or bankruptcy of the other party. The Partnership has granted us an exclusive interim license to manufacture and market Cereport for human pharmaceutical use in the United States and Canada. Upon the first marketing approval of Cereport by the FDA, we are obligated to make a payment to the Partnership equal to 20% of the aggregate capital contributions of all limited partners. Additionally, we will pay a 12% royalty on revenues from any sales of Cereport in the United States and Canada and, in certain circumstances, a 10% royalty on revenues from any sales of Cereport in Europe. The interim license will terminate if we do not exercise the Purchase Option. We can exercise the Purchase Option by making a payment to the Partnership equal to 80% of the aggregate capital contributions of all limited partners in addition to royalty payments in the same percentages as provided for under the interim license agreement. The general partner of the Partnership is ADC II. Fifty percent of the members of the board of directors of ADC II are persons not affiliated with us. Such non-affiliated persons were nominated by the sales agent for the Private Placement. The sales agent will continue to have the right to nominate at least half of the members of ADC II's board of directors until ADC II or some other affiliate of Alkermes ceases to be the general partner of the Partnership, the Partnership terminates in accordance with the terms of the Limited Partnership Agreement or the sales agent's venture capital investment partnership ceases to be a limited partner of the Partnership. ALZA Corporation In October 1997, we, along with ALZA, announced that we had entered into an agreement relating to the development and commercialization of Cereport. Under the terms of the agreement, ALZA made a $10.0 million upfront payment to us to fund clinical development; in return, ALZA has the option to acquire exclusive, worldwide, commercialization rights to Cereport, subject to the rights and obligations of the Partnership. If ALZA chooses to exercise its option, ALZA will make additional payments to cover costs associated with advanced clinical development. If Cereport is commercialized successfully by ALZA, ALZA will pay us certain milestone payments. We would be responsible for the manufacturing of Cereport and we would share approximately equally in profits from sales of the product. 13 14 MANUFACTURING The manufacture of our product candidates for clinical trials and commercial purposes is subject to current GMP and other federal regulations. We have never operated an FDA-approved manufacturing facility, and there can be no assurance that we will obtain necessary approvals for commercial manufacturing. If we are not able to develop manufacturing capacity and experience or to continue to contract for manufacturing capabilities on acceptable terms, our ability to conduct preclinical testing and clinical trials will be compromised. In addition, delays in obtaining regulatory approvals might result, as well as delays of commercial sales if approvals are not obtained on a timely basis. Such delays could materially adversely affect our competitive position and our business, financial condition and results of operations. Each of our drug delivery systems utilizes a distinct manufacturing process. ProLease ProLease manufacturing involves microencapsulation of drug substances provided to us by our collaborators in small polymeric microspheres using extremely cold processing conditions suitable for fragile molecules. The ProLease manufacturing process consists of two basic steps. First, the drug is formulated with stabilizing agents and dried to create a fine powder. Second, the powder is microencapsulated at very low temperatures. Pursuant to agreements with certain of our collaborators, we have the right to manufacture ProLease products for commercial sale. In October 1998, we completed the construction of a new commercial scale ProLease manufacturing facility of approximately 32,000 square feet. The facility includes two manufacturing suites, one of which we plan to dedicate to the production of Nutropin Depot for commercial scale. We have validated the facility and completed manufacturing of validation lots as part of the Nutropin Depot NDA submission, but the facility has not yet been inspected by the FDA. We also have an in-house clinical production facility that we have validated for manufacturing in accordance with GMP. The facility is being used to manufacture product candidates incorporating our ProLease sustained release delivery system for use in clinical trials. Medisorb The Medisorb manufacturing process is significantly different from the ProLease process and is based on a method of encapsulating small molecule drugs, provided by our collaborator(s), in polymers using a large-scale emulsification. The Medisorb manufacturing process consists of three basic steps. First, the drug is combined with a polymer solution. Second, the drug/polymer solution is mixed in water to form liquid microspheres (an emulsion). Third, the liquid microspheres are dried to produce finished product. In June 1998, we completed construction of a 20,000 square foot addition to and modification of our GMP manufacturing facility for commercial scale Medisorb manufacturing in Wilmington, Ohio. We are manufacturing the Medisorb formulation of RISPERDAL for use by Janssen in clinical trials at this facility. The facility has not been inspected by the FDA. 14 15 Cereport Cereport is a small peptide manufactured using standard synthetic techniques. We rely on an independent European pharmaceutical company for the manufacture and supply of Cereport. Scale-up of the Cereport manufacturing process to support international clinical trials and commercial launch has been completed. Other companies have been identified which could manufacture and supply our requirements for Cereport. AIR The AIR manufacturing process uses spray drying. We take drugs provided by our partners or purchased from generic manufacturers, combine the drugs with certain excipients commonly used in other aerosol formulations and spray dry the solution in commercial spray dryers. During the manufacturing process, solutions of drugs and excipients are spray dried to form a free flowing powder and the powder is filled and packaged into final dosage units. AIR has a manufacturing facility which is part of the 18,000 square foot facility AIR leases in Cambridge, Massachusetts, where powders and final dosage units are prepared under GMP for use in clinical trials. Our current manufacturing facility and equipment have the capacity to produce commercial scale quantities of certain product candidates. AIR's inhalation device is produced under GMP at a contract manufacturer in the United States. DST and RingCap We currently manufacture DST in our facility in Blue Ash, Ohio. The DST manufacturing process uses customized machinery which we have installed and which we currently operate at a scale capable of producing products for development and market research studies. The RingCap system combines conventional matrix tablet technology and capsule banding processes which permit large-scale production. We believe RingCap can provide a cost-effective way to manufacture controlled release tablets. MARKETING In October 1997, we entered into an agreement with ALZA pursuant to which ALZA made an upfront payment of $10.0 million to fund clinical development in exchange for an exclusive option to enter into a worldwide exclusive commercialization agreement for Cereport. If Cereport is successfully commercialized by ALZA, ALZA will pay us certain milestone payments. Under the terms of the agreement, we are responsible for the manufacture of Cereport, and we will share approximately equally in profits from the sale of the product. We intend to market any ProLease, Medisorb, AIR, DST or RingCap products through corporate partners. We have entered into development agreements, which include sales and marketing arrangements, for ProLease product candidates with Genentech and Johnson & Johnson, and for the Medisorb formulation of RISPERDAL with Janssen. See "Collaborative Arrangements." We currently have no experience in marketing or selling pharmaceutical products. In order to achieve commercial success for any product candidate approved by the FDA, we must either develop a marketing and sales force or enter into arrangements with third parties to market and sell our products. There can be no assurance that we will successfully develop such experience or that we will be able to 15 16 enter into marketing and sales agreements with others on acceptable terms, if at all. If we develop our own marketing and sales capability, we will compete with other companies that currently have experienced and well funded marketing and sales operations. To the extent we enter into co-promotion or other sales and marketing arrangements with other companies, any revenues received by us will be dependent on the efforts of others, and there can be no assurance that such efforts will be successful. COMPETITION The biotechnology and pharmaceutical industries are subject to rapid and substantial technological change. We face, and will continue to face, intense competition in the development, manufacturing, marketing and commercialization of our product candidates from academic institutions, government agencies, research institutions, biotechnology and pharmaceutical companies, including our collaborators, and drug delivery companies. There can be no assurance that developments by others will not render our product candidates or technologies obsolete or noncompetitive, or that our collaborators will not choose to use competing drug delivery methods. At the present time, we have no sales force or marketing or commercial manufacturing experience. In addition, many of our competitors and potential competitors have substantially greater capital resources, manufacturing and marketing experience, research and development resources and production facilities than we do. Many of these competitors also have significantly greater experience than we in undertaking preclinical testing and clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals. With respect to Cereport, we believe that there are currently no products approved by the FDA for increasing the permeability of the blood-brain barrier. There are, however, many novel experimental therapies for the treatment of brain tumors and central nervous system infections being tested in the United States and Europe. With respect to ProLease and Medisorb, we are aware that there are other companies developing sustained release delivery systems for pharmaceutical products. With respect to AIR we are aware that there are other companies marketing or developing pulmonary delivery systems for pharmaceutical products. There are also numerous companies marketing or developing oral technologies which will compete with DST and RingCap. In addition, other companies are developing new chemical entities which, if developed successfully, could compete against our formulations of the products of our collaborators. These chemical entities are being designed to have different mechanisms of action or improved safety and efficacy. In addition, our collaborators may develop, either alone or with others, products that compete with the development and marketing of our product candidates. There can be no assurance that we will be able to compete successfully with such companies. The existence of products developed by our competitors, or other products or treatments of which we are not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed by us. PATENTS AND PROPRIETARY RIGHTS Our success will be dependent, in part, on our ability to obtain patent protection for our product candidates and those of our collaborators, maintaining trade secret protection and operating without infringing upon the proprietary rights of others. 16 17 We have a proprietary portfolio of patent rights and exclusive licenses to patents and patent applications. We have filed numerous United States and international patent applications directed to composition of matter as well as processes of preparation and methods of use, including applications relating to permeabilizers, certain rights to which have been licensed to the Partnership and to each of our delivery technologies. We own a total of 42 issued patents. In the future, we plan to file further United States and foreign patent applications directed to new or improved products and processes. The United States patents issued to us will expire between 2000 and 2016. We intend to file additional patent applications when appropriate and intend to defend our patent position aggressively. We have exclusive rights through licensing agreements with several institutions to twelve issued United States patents, a number of United States patent applications and corresponding foreign patents and patent applications in many countries, subject in certain instances to the rights of the United States government to use the technology covered by such patents and patent applications. The United States patents that have been licensed to us will expire between the years 2007 and 2016. Under certain licensing agreements, we currently pay annual license fees and/or minimum annual royalties. During the fiscal year ended March 31, 1999, such fees were $127,000. In addition, under all licensing agreements, we are obligated to pay royalties on future sales of products, if any, covered by the licensed patents. We know of several U.S. patents issued to other parties that relate to our product candidates. One of those parties has asked us to compare our Medisorb technology to that party's patented technology. The manufacture, use, offer for sale, sale or importing of these product candidates might infringe on the claims of these patents. A party might file an infringement action against us. Our cost of defending such an action is likely to be high and we might not receive a favorable ruling. We also know of patent applications filed by other parties in the United States and various foreign countries that may relate to some of our product candidates if issued in their present form. If patents are issued to any of these applicants, we may not be able to manufacture, use, offer for sale, or sell some of our product candidates without first getting a license from the patent holder. The patent holder may not grant us a license on reasonable terms or it may refuse to grant us a license at all. This could delay or prevent us from developing, manufacturing or selling those of our product candidates that would require the license. We try to protect our proprietary position by filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of biopharmaceutical companies involves complex legal and factual questions, enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. And, if issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. 17 18 We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreement and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent were to be wrongly disclosed to a competitor, our business and financial condition could be adversely affected. GOVERNMENT REGULATION The manufacture and marketing of pharmaceutical products in the United States require the approval of the FDA under the Federal Food, Drug and Cosmetic Act. Similar approvals by comparable agencies are required in most foreign countries. The FDA has established mandatory procedures and safety standards which apply to the preclinical testing and clinical trials, manufacture and marketing of pharmaceutical products. Pharmaceutical manufacturing facilities are also regulated by state, local and other authorities. As an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animal models to assess the drug's efficacy and to identify potential safety problems. The results of these studies must be submitted to the FDA as part of an Investigational New Drug application ("IND"), which must be reviewed by the FDA before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. Phase I trials are conducted with a small number of subjects and are designed to provide information about both product safety and the expected dose of the drug. Phase II trials are designed to provide additional information on dosing and preliminary evidence of product efficacy. Phase III trials are large scale studies designed to provide statistical evidence of efficacy and safety in humans. The results of the preclinical testing and clinical trials of a pharmaceutical product are then submitted to the FDA in the form of a New Drug Application ("NDA"), or for a biological product in the form of a Product License Application ("PLA"), for approval to commence commercial sales. Preparing such applications involves considerable data collection, verification, analysis and expense. In responding to an NDA or PLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria. Prior to marketing, any product developed by us or our collaborators must undergo an extensive regulatory approval process, which includes preclinical testing and clinical trials of such product candidate to demonstrate safety and efficacy. This regulatory process can require many years and the expenditure of substantial resources. Data obtained from preclinical testing and clinical trials are subject to varying interpretations, which can delay, limit or prevent FDA approval. In addition, changes in FDA approval policies or requirements may occur or new regulations may be promulgated which may result in delay or failure to receive FDA approval. Similar delays or failures may be encountered in foreign countries. Delays and costs in obtaining regulatory approvals would have a material adverse effect on our business, financial condition and results of operations. Among the conditions for NDA or PLA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform on an ongoing basis with GMP. Before approval of an NDA or PLA, the FDA will perform a prelicensing inspection of the facility to determine its compliance with GMP and other rules and regulations. In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality 18 19 control to ensure full technical compliance. After the establishment is licensed, it is subject to periodic inspections by the FDA. The requirements which we must satisfy to obtain regulatory approval by governmental agencies in other countries prior to commercialization of its products in such countries can be as rigorous and costly as those described above. We are also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, experimental use of animals and use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research. Compliance with laws and regulations relating to the protection of the environment has not had a material effect on capital expenditures, earnings or our competitive position. However, the extent of government regulation which might result from any legislative or administrative action cannot be accurately predicted. EMPLOYEES As of June 10, 1999, we had approximately 300 full-time employees. A significant number of our management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. We believe that we have been highly successful in attracting skilled and experienced scientific personnel; however, competition for such personnel is intense. None of our employees are covered by a collective bargaining agreement. We consider our relations with employees to be good. EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers, who are elected to serve at the pleasure of the Board of Directors, are as follows:
Name Age Position ---- --- -------- Richard F. Pops 37 Chief Executive Officer and Director Robert A. Breyer 55 President, Chief Operating Officer and Director Raymond T. Bartus 52 Senior Vice President, Preclinical Research and Development Michael J. Fox 52 Former Senior Vice President, Medical and Regulatory Affairs James M. Frates 32 Vice President, Chief Financial Officer and Treasurer
Mr. Pops has been Chief Executive Officer and a Director since February 1991. From February 1991 to June 1994, Mr. Pops was also our President. Mr. Pops currently serves on the Board of Directors of Neurocrine Biosciences, Inc., the Biotechnology Industry Organization (BIO), The Brain Tumor Society (a non-profit organization) and Immulogic Pharmaceutical Corporation, a 19 20 biopharmaceutical company. Mr. Pops is President of the Massachusetts Biotechnology Council (MBC). Mr. Breyer has been President and Chief Operating Officer and a Director since July 1994. From August 1991 to December 1993, Mr. Breyer was President and General Manager of Eli Lilly Italy, a subsidiary of Eli Lilly & Co. Dr. Bartus has been Senior Vice President, Preclinical Research and Development since December 1996. From November 1992 to December 1996, Dr. Bartus served as our Senior Vice President, Neurobiology. He holds an M.S. in Experimental Psychology and a Ph.D. in Physiological Psychology from North Carolina State University. Dr. Fox was the Senior Vice President, Medical and Regulatory Affairs from July 1998 to April 1999, when he resigned. From 1997 to 1998, he was President of Healthcare Advisors. From 1991 to 1996 he was employed by Astra AB most recently as Senior Vice President, Astra USA. Mr. Frates has been Vice President, Chief Financial Officer and Treasurer since June 1998. From June 1996 to July 1998, he was employed at Robertson, Stephens & Company most recently as a Vice President in Investment Banking. Prior to that time he was employed at Robertson, Stephens & Company and Morgan Stanley & Co. In June 1996, he obtained his M.B.A. from Harvard University. 20 21 RISK FACTORS Any investment in our common stock offering is very risky. An investor should carefully consider the following risk factors in addition to the remainder of this annual report on form 10-K before purchasing any of our securities. OUR DELIVERY TECHNOLOGIES MAY NOT PRODUCE SAFE, EFFICACIOUS OR COMMERCIALLY VIABLE PRODUCTS We do not yet have a product that we can sell commercially and we cannot guarantee that we will have one in the future. All of our product candidates, except Nutropin Depot, need significant additional research and development. Nutropin Depot, like all of our product candidates, requires FDA approval before it can be marketed. To be profitable, we must develop, manufacture and market our products, either alone or by collaborating with others. This could take several years and we may never be successful in bringing our product candidates to the market. A new drug may appear promising at an early stage of development or after clinical trials and never reach the market, or it may reach the market and not sell, for a variety of reasons. The drug may: - Be shown to be ineffective or to cause harmful side effects during preclinical testing or clinical trials; - Fail to receive regulatory approval on a timely basis or at all; - Be hard to manufacture on a large scale; - Be uneconomical; - Not be prescribed by doctors or accepted by patients; or - Infringe on proprietary rights of another party. If our technology fails to generate product candidates that lead to the successful development and commercialization of products, or if our partners decide not to pursue one of our product candidates, our business and financial condition will be materially adversely affected. THE FDA MAY NOT APPROVE OUR PRODUCT CANDIDATES Approval from the FDA is required to manufacture and market pharmaceutical products in the United States. Other countries have similar requirements. The process that pharmaceutical products must undergo to get this approval is extensive and includes preclinical testing and clinical trials to demonstrate safety and efficacy and a review of the manufacturing process to ensure compliance with good manufacturing practices. This process can last many years and be very costly and still be unsuccessful. FDA approval can be delayed, limited or not granted at all for many reasons, including: - A product candidate may not be safe or effective; - Data from preclinical testing and clinical trials can be interpreted by FDA officials in different ways than we interpret it; 21 22 - The FDA might not approve our manufacturing processes or facilities; - The FDA may change its approval policies or adopt new regulations; and - A product candidate may not be approved for all the indications we requested. The process of getting approvals in foreign countries is subject to delay and failure for the same reasons. Any delay in, or failure to receive, approval will have a material adverse effect on our business and financial condition. Our collaborator Genentech submitted a new drug application for Nutropin Depot on June 28, 1999. This is the first new drug application submitted on one of our products. We cannot guarantee that the FDA will accept this application, that it will be approved in a timely manner, or that it will be approved at all. Most of our product candidates are drug delivery systems combined with a drug in a single formulation to treat a specific condition. In most cases, the FDA has already approved the drug used in these product candidates for treating the condition targeted by the product candidate. Cereport is a separate formulation from the drug it is intended to be used with but must be tested with that drug. We are conducting clinical trials on Cereport with carboplatin, which is a chemotherapeutic agent, in patients with a certain type of brain tumor. If the FDA approves Cereport based on these trials, it will be for its use in conjunction with carboplatin for the treatment of that type of brain tumor. Unlike the drugs used with many of our product candidates, the FDA has not approved carboplatin for treating the type of tumor that we are targeting, and this could result in the FDA requiring additional clinical trials. However, the FDA has approved carboplatin for the treatment of other types of cancerous tumors. Any delay in the approval process for any of our product candidates will result in increased costs that could materially and adversely affect our business and financial condition. Regulatory approval of a product candidate is limited to specific therapeutic uses for which the product has demonstrated safety and efficacy in clinical testing. Approval of a product candidate could also be contingent on post-marketing studies. In addition, any marketed drug and its manufacturer continue to be subject to strict regulation after approval. Any unforeseen problems with an approved drug or any violation of regulations could result in restrictions on the drug, including its withdrawal from the market. CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND THEIR OUTCOME IS UNCERTAIN Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any products, we or our partners must demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans. We have incurred and will continue to incur substantial expense for, and devote a significant amount of time to, preclinical testing and clinical trials. Historically, the results from preclinical testing and early clinical trials have often not predicted results of later clinical trials. A number of new drugs have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or 22 23 rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development. Clinical trials conducted by us, by our collaborators or by third parties on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for our product candidates. Regulatory authorities may not permit us to undertake any additional clinical trials for our product candidates. Clinical trials of each of our product candidates involve a drug delivery technology and a drug, either as a single formulation or, as in the case of Cereport, as two products administered in conjunction with each other. This makes testing more complex because the outcome of the trials depends on the performance of our technology in combination with a drug. We have other product candidates in preclinical development, and we have not submitted investigational new drug applications or begun clinical trials for these product candidates. Our preclinical and clinical development efforts may not be successfully completed. We may not file further investigational new drug applications. We or our collaborators may not begin clinical trials as planned. Completion of clinical trials may take several years or more. The length of time can vary substantially with the type, complexity, novelty and intended use of the product candidate. Our commencement and rate of completion of clinical trials may be delayed by many factors, including: - Our inability to recruit patients at the expected rate; - The failure of clinical trials to demonstrate a product candidate's efficacy; - Our inability to follow patients adequately after treatment; - Our inability to predict unforeseen safety issues; - Our inability to manufacture sufficient quantities of materials used for clinical trials; and - The potential for unforeseen governmental or regulatory delays. If a product candidate fails to demonstrate safety and efficacy in clinical trials, this failure may delay development of other product candidates and hinder our ability to conduct related preclinical testing and clinical trials. As a result of these failures, we may also be unable to find additional collaborators or to obtain additional financing. Our business and financial condition may be materially adversely affected by any delays in, or termination of, our clinical trials. WE ANTICIPATE WE WILL INCUR CONTINUED LOSSES FOR THE FORESEEABLE FUTURE We have had net operating losses since being founded in 1987. At March 31, 1999, our accumulated deficit was $180.9 million (after giving effect to our acquisition of Advanced Inhalation Research on February 1, 1999 which was accounted for as a pooling of interests). These losses principally consist of the costs of research and development, the costs of acquiring rights to research and development performed by others and general and administrative expenses. The majority of revenues that we have received have come from collaboration and development agreements, research grants and 23 24 interest income. We expect to incur substantial additional expenses over the next several years as our research and development activities, including clinical trials, accelerate and as we prepare to manufacture products for commercial sale. Because we do not expect to generate significant revenues from the sale of products, if any, for several years, we anticipate that additional expenses will result in losses. Our future profitability depends, in part, on: - Obtaining regulatory approval for our product candidates; - Entering into agreements to develop and commercialize products; - Developing the capacity to manufacture and market products or entering into agreements with others to do so; - Market acceptance of our products; - The ability to obtain additional research and development funding from collaborative partners; and - The ability to achieve certain product development milestones. We may not achieve any or all of these goals and, thus, cannot provide assurances that we will ever achieve significant revenues or profits. Even if we do receive regulatory approval of one or more of our products, we may not achieve significant commercial success. Our recently completed manufacturing facilities in Cambridge and Ohio require specialized personnel and are expensive to operate and maintain. Any delay in the approval of product candidates to be manufactured in these facilities will require us to continue to operate these expensive facilities and retain the specialized personnel, which may increase our expected losses. WE NEED TO SPEND SUBSTANTIAL FUNDS TO BECOME PROFITABLE We believe that our liquid assets, anticipated funding from our collaborators and interest income will satisfy our capital and operating requirements for the foreseeable future, but we cannot guarantee that this will be the case. We will need to spend substantial amounts of money before we can be profitable, if ever. The amount we will spend, and when we will spend it, will depend, in part, on: - How our research and development programs, including clinical trials, progress; - How much time and expense will be required to receive FDA approval for our product candidates; - The cost of building, operating and maintaining manufacturing facilities; - How many product candidates we pursue; - How much time and money we need to prosecute and enforce patent rights; 24 25 - How competing technological and market developments affect our product candidates; - The cost of possible acquisitions of drug delivery technologies, products or companies; - The cost of obtaining licenses to use technology owned by others; and - Whether and how we choose to exercise our option to purchase the limited partnership interests in Alkermes Clinical Partners. If we require additional funds to complete any of our programs, we may seek funds through arrangements with collaborators, by issuing securities or through debt financing. If we can only raise additional funds on terms that are not favorable to us, we may have to cut back significantly on one or more of our programs, give up some of our rights to our technologies or product candidates or agree to reduced royalty rates from collaborators. WE RELY HEAVILY ON COLLABORATORS Our arrangements with collaborators and licensors are critical to our success in bringing our product candidates to the market. In some cases, we depend on these parties to conduct preclinical testing and clinical trials and to provide funding for our development programs. Some of our collaborators can terminate their agreements with us for no reason and on limited notice. We cannot guarantee that any of these relationships will continue. Failure to make or maintain these arrangements or a delay in a collaborator's performance may materially and adversely affect our business and financial condition. We cannot control our collaborators' performance or the resources they devote to our programs. If a collaborator fails to perform, the research, development or commercialization program on which it is working will be delayed. If this happens, we may have to use funds, personnel, laboratories and other resources that we have not budgeted, and may not have, to continue the program, or we may have to stop the program entirely. The failure of a collaborator to perform or a loss of a collaborator may materially adversely affect our business and financial condition. Disputes may arise between us and a collaborator and may involve the issue of which of us owns the technology that is developed during a collaboration. Such a dispute could delay the program on which the collaborator or we are working. It could also result in expensive arbitration or litigation, which may not be resolved in our favor. A collaborator may choose to use its own or other technology to develop a way to deliver its drug and withdraw its support of our product candidate. Our collaborators could merge with or be acquired by another company or experience financial or other setbacks unrelated to our collaboration that could, nevertheless, adversely affect us. None of our drug delivery systems can be commercialized as stand-alone products but must be combined with a drug. To develop any new product candidate using one of these drug delivery systems, we must obtain the drug from another party. We cannot provide assurances that we will be able to negotiate any such drugs on reasonable terms. 25 26 OUR MANUFACTURING EXPERIENCE IS LIMITED AND WE HAVE NEVER MANUFACTURED AN APPROVED PRODUCT We currently manufacture each of our product candidates, except for Cereport. The manufacture of drugs for clinical trials and for commercial sale is subject to regulation by the FDA under good manufacturing practices (GMP) regulations and by other regulators under other laws and regulations. We have manufactured product candidates for use in clinical trials but otherwise have no manufacturing experience. We cannot assure you that we can successfully manufacture each of our product candidates in sufficient quantities for commercial sale, or in a timely or economical manner. In October 1998, we completed construction of a new commercial manufacturing plant for Nutropin Depot and future ProLease product candidates. In June 1998, we completed an expansion of our existing Medisorb manufacturing facility. Neither of these facilities nor any of our other manufacturing facilities has been inspected or validated by the FDA, a process by which the FDA approves a facility for the manufacture of products to be sold. We cannot guarantee that the FDA will approve either of these facilities or find them to be in compliance with good manufacturing practices. We rely on an unrelated party to manufacture Cereport for use in clinical trials. We expect to rely on the same party to manufacture Cereport for commercial sale if Cereport receives FDA approval. If we are unable to do so, or the manufacturer fails to perform as required, we may be unable to secure an alternative manufacturer on reasonable terms or in a timely manner. If more of our product candidates progress to late stage development, we will incur significant expenses in the expansion or construction of manufacturing facilities and increases in personnel in order to manufacture product candidates. The development of commercial scale manufacturing processes is complex and expensive. We can provide no assurances that we will be able to develop this manufacturing capability in a timely way or at all. If we fail to develop manufacturing capacity and experience, fail to continue to contract for manufacturing on acceptable terms, or fail to manufacture our product candidates at a commercial scale our development programs will be adversely affected. This may result in delays in receiving FDA approval for one or more of our product candidates or delays in the commercial production of a product that has already been approved. Any such delays could materially and adversely affect our business and financial condition. WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS AND WE MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVALS Our product candidates are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. If our products are marketed abroad, they will also be subject to extensive regulation by foreign governments. Certain material changes to an approved product, such as manufacturing changes or additional labeling claims, are subject to further FDA review and approval. Any required approvals, once obtained, may be withdrawn. Further, if we fail to comply with FDA and other regulatory requirements at any stage during the regulatory process, we may be subject to sanctions, including: 26 27 - Delays, warning letters and fines; - Product recalls or seizures and injunctions on sales; - Refusal of the FDA to review pending market approval applications or supplements to approval applications; - Total or partial suspension of production; - Withdrawals of previously approved marketing applications; and - Civil penalties and criminal prosecutions. We are also subject to federal, state and local government regulation in the conduct of our business, including regulations on employee safety and our handling and disposal of hazardous and radioactive materials. Any new regulation or change to an existing regulation could require us to implement costly capital or operating improvements for which we have not budgeted. We cannot assure you that these regulations will remain the same or that we will maintain compliance with these regulations. We and our contract manufacturer of Cereport also are required to comply with the FDA current good manufacturing practice regulations. Good manufacturing practice regulations include requirements relating to quality control, quality assurance and maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA and must be approved before we can use them in commercial manufacturing of our products. We or our contract manufacturer may be unable to comply with the applicable good manufacturing practice requirements and other FDA regulatory requirements. If Alkermes or our contract manufacturer fail to comply, our business and financial condition will be materially adversely affected. WE HAVE ONLY LIMITED RIGHTS TO CEREPORT We transferred to Alkermes Clinical Partners substantially all of our rights to certain technology that includes Cereport and then entered into an agreement with Alkermes Clinical Partners under which we perform research and development of Cereport. Alkermes Clinical Partners issued securities and used the proceeds from the sale of those securities to fund our research and development of Cereport. Funding provided by Alkermes Clinical Partners was insufficient to complete clinical trials and apply for FDA approval. Since June 1996, we have used our own funds to develop Cereport. So long as we continue this funding, we have an option to purchase the limited partnership interests in Alkermes Clinical Partners for cash or our common stock. If this purchase option terminates, we will have no rights to Cereport or the related technology in the United States or Canada. If we exercise this purchase option, we must make a substantial cash payment or issue a large number of shares of common stock. The exercise of the option may require us to record significant charges to earnings for the purchase of in-process research and development. If we acquire rights to the Cereport technology under the option, we will still be obliged to pay royalties to the limited partners. 27 28 COMPETITION IN THE BIOTECHNOLOGY INDUSTRY We can provide no assurance that we will be able to compete successfully against the competitive forces discussed below in developing, marketing or selling our products. WE FACE INTENSE COMPETITION We face intense competition from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies, including other drug delivery companies. Some of these competitors are also our collaborators. These competitors are working to develop and market other drug delivery systems, vaccines and other methods of preventing or reducing disease, and new small-molecule and other classes of drugs that can be used without a drug delivery system. We know of no products approved by the FDA or foreign regulatory authorities for increasing the permeability of the blood-brain barrier, which is the intended use of Cereport. However, there are other companies developing sustained release drug delivery systems, pulmonary delivery systems and oral delivery systems. In addition, we know of new chemical entities that are being developed that, if successful, could compete against our product candidates. These chemical entities are being designed to work differently than our product candidates and may turn out to be safer or to work better than our product candidates. Among the many experimental therapies being tested in the United States and Europe, there may be some that we do not now know of that may compete with our drug delivery systems or product candidates. Our collaborators could choose a competing drug delivery system to use with their drugs instead of one of our drug delivery systems. Many of our competitors have much greater capital resources, manufacturing and marketing experience, research and development resources and production facilities than we do. Many of them also have much more experience than we do in preclinical testing and clinical trials of new drugs and in obtaining FDA and foreign approvals. In addition, they may succeed in obtaining patents that would make it difficult or impossible for us to compete with their products. RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR DRUG DELIVERY SYSTEMS OBSOLETE OR NONCOMPETITIVE Major technological changes can happen quickly in the biotechnological and pharmaceutical industries; and the development by competitors of technologically improved or different products may make our product candidates obsolete or noncompetitive. THE COMPETITIVE NATURE OF OUR INDUSTRY COULD ADVERSELY AFFECT MARKET ACCEPTANCE OF OUR PRODUCTS Our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any product candidates that we develop will depend on a number of factors, including: - Demonstration of their clinical efficacy and safety; - Their cost-effectiveness; 28 29 - Their potential advantage over alternative treatment methods; - The marketing and distribution support they receive; and - Reimbursement policies of government and third-party payors. Our product candidates, if successfully developed, will compete with a number of drugs and therapies currently manufactured and marketed by major pharmaceutical and other biotechnology companies. Our products may also compete with new products currently under development by others or with products which may cost less than our products. Physicians, patients, third-party payors and the medical community may not accept or utilize our products. If our products do not achieve significant market acceptance, our business and financial condition will be materially adversely affected. PATENT PROTECTION FOR OUR PRODUCTS IS IMPORTANT AND UNCERTAIN The following factors are important to our success: - Receiving patent protection for our product candidates and those of our collaborators; - Maintaining our trade secrets; - Not infringing on the proprietary rights of others; and - Preventing others from infringing our proprietary rights. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We know of several U.S. patents issued to other parties that relate to our product candidates. One of those parties has asked us to compare our Medisorb technology to that party's patented technology. The manufacture, use, offer for sale, sale or importing of these product candidates might infringe on the claims of these patents. A party might file an infringement action against us. Our cost of defending such an action is likely to be high and we might not receive a favorable ruling. We also know of patent applications filed by other parties in the United States and various foreign countries that may relate to some of our product candidates if issued in their present form. If patents are issued to any of these applicants, we may not be able to manufacture, use, offer for sale, or sell some of our product candidates without first getting a license from the patent holder. The patent holder may not grant us a license on reasonable terms or it may refuse to grant us a license at all. This could delay or prevent us from developing, manufacturing or selling those of our product candidates that would require the license. We try to protect our proprietary position by filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of biopharmaceutical companies involves complex legal and factual questions, enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or 29 30 license from others may not provide any protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. And, if issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreement and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent were to be wrongly disclosed to a competitor, our business and financial condition could be adversely affected. EFFORTS TO KEEP DOWN THE COST OF HEALTHCARE MAY THREATEN OUR PROFITABILITY Third-party payors, which include governments and private health insurers, are increasingly challenging the prices charged for medical products and services. In their attempts to reduce healthcare costs, they have also been limiting their coverage and reimbursement levels for new drugs. In some cases, they are refusing to cover the costs of drugs that are not new but are being used for newly approved purposes. Patients who use a product that we may develop might not be reimbursed for its cost. If third-party payors do not provide adequate coverage and reimbursement for our products, if and when they reach the market, doctors may not prescribe them or patients may not use them. The federal government and various state governments have considered proposals to regulate the prices of prescription drugs, as is done in certain foreign countries. We expect that there will be more proposals like these. If any of these proposals are enacted, we may receive a lower price for our products, if and when they reach the market, than we currently estimate. Lack of adequate reimbursement or the enactment of price controls would have a material adverse effect on our business and financial condition. WE HAVE NO MARKETING OR SALES EXPERIENCE We currently have no experience in marketing or selling pharmaceutical products. To achieve commercial success for any product that may be approved by the FDA, we must either develop a marketing and sales force or contract with another party to perform these services for us. In either case, we will be competing with companies that have experienced and well-funded marketing and sales operations. We may not be successful in developing a marketing and sales force or in contracting with a third party on acceptable terms in selling our products at all. WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS We may be exposed to liability claims arising from the use of our product candidates in clinical trials and the commercial sale of any products. These claims may be brought by consumers, our collaborators or parties selling the products. We currently carry liability insurance for claims arising from the use of our product candidates during clinical trials in the amount of up to $10 million per occurrence 30 31 and $10 million in the aggregate. However, we cannot provide any assurance that this coverage will be sufficient to satisfy any liabilities that may arise. As our development activities progress, this coverage will be inadequate; and we may be unable to get adequate coverage at an acceptable cost or we may be unable to get adequate coverage at all. This could prevent or limit our commercialization of our product candidates. Even if we are able to continue to carry insurance that we believe is adequate, our financial condition may be materially and adversely affected by a product liability claim. WE MUST MEET CERTAIN FINANCIAL TESTS OR WE WILL DEFAULT UNDER OUR LOAN AGREEMENTS We must maintain minimum levels of working capital, net worth and liquid assets under the terms of our loan agreements. WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND DEVELOPMENT PERSONNEL Our success depends on the services of key employees in executive and research and development positions. The loss of the services of one or more of these employees could have a material adverse effect on us. WE DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK We have not paid cash dividends on our common stock and do not expect to do so in the foreseeable future. We currently have outstanding 2,303,500 shares of preferred stock in two separate series. We must pay cash dividends to the holders of the preferred stock, and any dividends that we do not pay will accrue and remain owing to the holders of the preferred stock but will not bear interest. We must pay the accumulated, unpaid dividends on 2,300,000 shares of the preferred stock before we can declare or pay cash dividends on the common stock. WE MAY ISSUE MORE COMMON STOCK As discussed above under "We Need to Spend Substantial Funds to Become Profitable," we may issue additional equity securities to raise funds, thus reducing the ownership share of the company of current holders of our common stock which may adversely affect the market price of the common stock. In addition, for consideration that we have already received, we must issue common stock to certain security holders and other parties under the circumstances described below. Any of these parties could sell all or a large number of its shares, which could adversely affect the market price of our common stock. Even if none of these sales happen, the perception by investors that sales might occur could adversely affect the market price of our common stock. CONVERTIBLE PREFERRED STOCK We may exchange our $3.25 convertible exchangeable preferred stock in whole for debentures, but have no current plans to do so. Any holder of this series of preferred stock, or the debentures for which it may have been exchanged, may convert its shares or debentures into shares of common stock. We have already registered for resale shares of our common stock for this purpose. Each share of this series of preferred stock is currently convertible into 1.6878 shares of common stock for a total of 3,881,940 shares of common stock. 31 32 Any holder of our 1999 redeemable convertible exchangeable preferred stock may convert its shares into common stock (and non-voting common stock which is convertible into common stock) at any time after September 1, 1999 that our common stock is trading above $45 per share for at least ten consecutive trading days. In addition, we may redeem all or a portion of the shares of this series of preferred stock for cash or common stock (and non-voting common stock which is convertible into common stock). We are obligated to register for resale all shares of common stock after conversion or redemption for common stock. Each share of this series of preferred stock is convertible into shares of common stock based on an average of the closing price of common stock over a ten-day period. CONVERTIBLE NOTE HELD BY GENENTECH In January 1995, we issued a Convertible Promissory Note in the principal amount of $3.5 million to Genentech, Inc. We have the option to pay in cash or convert the amount due on this note to our common stock. Under certain circumstances, Genentech can require us to convert the amount due to common stock and to register that stock. This note is due in January 2000. CONVERTIBLE NOTE HELD BY SCHERING In October 1998, we issued a promissory note in the principal amount of $6 million to Schering Corporation. We have the option to pay in cash or convert the amount due on this note to our common stock. If we convert the amount due into common stock, we must register the common stock. This note is due in October 2001. STOCK OPTIONS AND AWARDS; WARRANTS At June 10, 1999, we were obligated to issue the following shares of common stock under the circumstances described: - 3,231,804 shares upon the exercise of stock options and vesting of awards; and - 832,738 shares upon the exercise of warrants. We have already registered these shares. COMMON STOCK OWNED BY ALZA CORPORATION We issued and registered for resale 2 million shares of common stock to ALZA Corporation, of which they held 1,750,000 shares as of June 8, 1999. ALZA also has the right to include these shares in any underwritten public offering of our common stock. ALZA may sell all or any portion of these shares at any time. OUR COMMON STOCK PRICE IS HIGHLY VOLATILE The realization of any of the risks described in these "Risk Factors" or other unforeseen risks could have a dramatic and adverse effect on the market price of our common stock. Additionally, market prices for securities of biotechnology and pharmaceutical companies, including ours, have historically been very volatile. The market for these securities has from time to time experienced significant price and volume fluctuations for reasons that were unrelated to the operating performance of 32 33 any one company. In particular and in addition to circumstances described elsewhere under "Risk Factors," the following factors can adversely affect the market price of our common stock: - Announcements of technological innovations or new therapeutic products by us or others; - Public concern as to the safety of drugs developed by us or others; - General market conditions; - Changes in government regulations or patent decisions; and - Developments of our corporate partners. ANTI-TAKEOVER PROVISIONS MAY NOT BENEFIT SHAREHOLDERS We are a Pennsylvania corporation. Anti-takeover provisions of Pennsylvania law could make it more difficult for a person or group to acquire control of us, even if the change in control would be beneficial to shareholders. Our articles of incorporation and bylaws also contain certain provisions that could have a similar effect. The articles provide that our board of directors may issue, without shareholder approval, preferred stock having such voting rights, preferences and special rights as the board of directors may determine. The issuance of preferred stock could make it more difficult for a third party to acquire us. OUR SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT The Year 2000 problem concerns the application of computer systems written using six (e.g., 12/31/99) versus eight (e.g., 12/31/1999) digits to define the applicable date. This could result, among other things, in computer systems recognizing "00" as the year 1900 rather than the year 2000. Computer hardware, software and embedded chip equipment are potentially affected, and, if such systems and components are not remediated satisfactorily, could lead to operational interruptions and business misinformation. We are addressing the Year 2000 problem in these systems and continue our analysis of the Year 2000 readiness of key third parties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000." Our computer systems are complex, highly interdependent and there are a number of risks associated with the complexity and high degree of integration of the systems. For example, an incorrect classification of the importance of a system or systems, or the cumulative effect of a number of low priority systems that have not been remediated, could result in an unpredicted failure or shutdown in one or more of our business, processing or manufacturing systems, which could have a material adverse effect on production or cost of operations. Our current belief is that this has a relatively low probability of occurring. To minimize these risks, we are utilizing our skilled and knowledgeable internal resources and have employed contract personnel in our decision-making processes and to perform integrated systems testing. If the Year 2000 problem causes suppliers and utility providers to fail to deliver essential materials and services, multiple disruptions of our operations, computer infrastructure or telecommunications systems could result. Because of the inherent uncertainties associated with the Year 2000 problem, including understanding the Year 2000 readiness of these key third parties, it is not 33 34 possible to quantify the potential impact at this time. However, failure of key suppliers, utility providers or us to address properly and timely the Year 2000 problem could have a material adverse effect on our financial condition, results of operations or liquidity. Furthermore, there can be no guarantee that any contingency plans developed by us will prevent such failures from having a material adverse effect. We believe that there is a low probability that these multiple failures are likely to occur. 34 35 ITEM 2. PROPERTIES We lease and occupy approximately 120,000 square feet of laboratory, manufacturing and office space in Cambridge, Massachusetts under nine leases expiring in the years 2001 to 2008. Several of the leases contain provisions permitting us to extend the term of such leases for up to ten years. We have a GMP clinical suite at our Massachusetts facility, which is for the manufacture of product candidates incorporating the ProLease delivery system. We completed construction of a new 32,000 square foot commercial scale ProLease manufacturing facility in Cambridge, Massachusetts in October 1998. We operate a GMP manufacturing facility for our AIR technology at one of our Cambridge, Massachusetts facilities. We believe that our Massachusetts facilities are adequate for our preclinical, clinical and commercial operations. We do not manufacture and do not expect to manufacture Cereport for clinical trials. We have engaged a third party to manufacture preclinical, clinical and commercial supplies of Cereport. Alkermes Europe, Ltd., one of our wholly owned subsidiaries, leases and occupies approximately 4,600 square feet of office space in Cambridge, England under a lease expiring in the year 2002. We own and occupy approximately 35,000 square feet of manufacturing, office and laboratory space in Wilmington, Ohio. The facility contains a state-of-the-art GMP sterile production facility specifically designed for the production of Medisorb microspheres. Construction of a 20,000 square foot addition and renovation of this facility to support commercial scale manufacture of Medisorb product candidates was completed in June of 1998. We believe that our Wilmington facility is adequate for its preclinical, clinical and commercial operations. We also lease and occupy approximately 30,000 square feet of laboratory and office space in Blue Ash, Ohio under a lease expiring in 2001. We operate clinical scale manufacturing for our DST and RingCap technologies at this facility. We believe that the Blue Ash facility is adequate for our operations. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 35 36 PART II ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market under the symbol ALKS. There are no shares of our non-voting common stock issued or outstanding. Set forth below for the indicated periods are the high and low sale prices for our common stock.
Fiscal 1999 Fiscal 1998 --------------- -------------------- High Low High Low ---- --- ---- --- 1st Quarter $26 3/8 $16 3/4 $17 5/8 $10 3/8 2nd Quarter 21 7/8 10 1/8 23 3/8 12 1/2 3rd Quarter 23 7/8 11 25 15 7/8 4th Quarter 33 1/2 22 1/8 27 5/8 19
The number of shareholders of record on June 10, 1999 was 512. No dividends have been paid on the common stock to date and we do not expect to pay cash dividends thereon in the foreseeable future. 1999 Preferred Stock On April 14, 1999, we issued and sold 3,500 shares of 1999 Redeemable Convertible Exchangeable Preferred Stock, par value $.01 per share (the "1999 Preferred Stock"), to Genentech, Inc. for an aggregate purchase price of $35,000,000. The 1999 Preferred Stock was issued and sold in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") pursuant to Rule 506 of Regulation D promulgated under the Securities Act. We reasonably believed that Genentech, Inc. was and is an accredited investor, based on representations made to us by Genentech and by our review of Genentech's filings with the SEC under the Securities Exchange Act of 1934, as amended. Dividends on the 1999 Preferred Stock are cumulative from the date of original issue and are payable quarterly each March 1, June 1, September 1 and December 1, at the rate of the three-month London Interbank Offer Rate (LIBOR) and commenced June 1, 1999. The 1999 Preferred Stock has a liquidation preference of $10,000 per share, plus accrued and unpaid dividends. The 1999 Preferred Stock is redeemable at our option, in whole or in part, at any time at the redemption price of $10,000 per share plus accrued and unpaid dividends, if any (the "1999 Redemption Price"). There will be a mandatory redemption of any outstanding shares of the 1999 Preferred Stock on January 1, 2009 at the 1999 Redemption Price. The 1999 Redemption Price may be paid in cash or shares of our common stock or non-voting common stock at our option. The holders of 1999 Preferred Stock are entitled to convert their shares of 1999 Preferred Stock into shares of common stock and non-voting common stock during any period after September 1, 1999 that the closing price of the common stock on The Nasdaq National Market is listed above $45 per share for at least 10 consecutive trading days. We have the option to redeem the 1999 Preferred Stock for cash 36 37 prior to conversion. Each share of 1999 Preferred Stock would be converted into that number of shares of common stock and non-voting common stock obtained by dividing $10,000 plus accrued and unpaid dividends by the average closing price of the common stock for the 10 consecutive trading days prior to notice of conversion. Non-voting common stock is convertible into shares of common stock at the option of the holder and automatically upon the sale by the holder to a non-affiliate. In no event are we required to issue, for redemption for stock or on conversion, greater than 4,976,220 shares of common stock and non-voting common stock, unless we obtain the prior approval of our shareholders. We are obligated to register for resale any shares of common stock issued upon conversion or redemption upon such issuance. AIR Transaction As of February 1, 1999, we issued 3,680,508 shares of our common stock (the "AIR Shares") to the stockholders of Advanced Inhalation Research, Inc. ("AIR") in connection with the merger of one of our wholly owned subsidiaries with and into AIR. Each share of the common stock of AIR was converted into 1.1829754 shares of our common stock on the effective date of the merger. As of March 31, 1999, approximately 1,341,000 of the AIR Shares are restricted under various restricted stock purchase agreements and cannot be resold until such shares vest over a four year period at different amounts for each shareholder. The AIR Shares were issued in a transaction exempt from the registration requirements of the Securities Act pursuant to Rule 506 of Regulation D promulgated under the Securities Act to persons reasonably believed to be accredited investors or investors who, alone or with their purchaser representatives had such knowledge and experience in financial and business matters that he or she was capable of evaluating the merits and risks of the investment. The AIR Shares were issued to 34 purchasers. On April 2, 1999, we filed a registration statement on Form S-3 to register for resale the AIR Shares, which was declared effective on May 13, 1999. Also in February 1999 and in connection with the merger, we assumed stock options previously granted to certain persons by AIR. On April 2, 1999, we filed a registration statement on Form S-3 to register 119,454 shares of our common stock issuable upon exercise of such stock options, which was declared effective on May 13, 1999. $3.25 Preferred Stock In March 1998, we issued and sold 2,300,000 shares of $3.25 Convertible Exchangeable Preferred Stock, par value $.01 per share (the "$3.25 Preferred Stock"), to certain initial purchasers (the "Initial Purchasers"). The aggregate purchase price was $115,000,000, of which $4,025,000 constituted the underwriting discounts and commissions. The Initial Purchasers were BancAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC, Cowen & Company, Credit Suisse First Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J. P. Morgan Securities Inc., PaineWebber Incorporated and Smith Barney Inc. 37 38 The $3.25 Preferred Stock was issued and sold in transactions exempt from the registration requirements of the Securities Act to persons reasonably believed by the managers who placed the $3.25 Preferred Stock, the Initial Purchasers, to be "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) (each a "QIB") or institutional accredited investors or sophisticated investors. Dividends on the 2,300,000 shares of the $3.25 Preferred Stock are cumulative from the date of original issue and are payable quarterly each March 1, June 1, September 1 and December 1, at the annual rate of $3.25 per share of $3.25 Preferred Stock and commenced June 1, 1998. Prior to March 6, 2001, the $3.25 Preferred Stock is not redeemable at our option. Thereafter the $3.25 Preferred Stock is redeemable at our option, in whole or in part, at declining redemption prices, together with accrued dividends. The $3.25 Preferred Stock has a liquidation preference of $50 per share, plus accrued and unpaid dividends. The $3.25 Preferred Stock is exchangeable, in whole but not in part, at our option on any dividend payment date beginning March 1, 1999 (the "Exchange Date") for its 6-1/2% Convertible Subordinated Debentures (the "Debentures") at the rate of $50 principal amount of Debentures for each share of $3.25 Preferred Stock. The Debentures, if issued, will mature on the tenth anniversary of the Exchange Date. The Debentures, if issued, will contain conversion and optional redemption provisions substantially identical to those of the $3.25 Preferred Stock. Holders of the $3.25 Preferred Stock are entitled at any time, subject to prior redemption or repurchase, to convert any of the $3.25 Preferred Stock or portions thereof into common stock, at an initial conversion rate of 1.6878 shares of common stock for each share of $3.25 Preferred Stock, subject to certain adjustments. On April 15, 1998, we filed a registration statement on Form S-3 to register the 2,300,000 shares of the $3.25 Preferred Stock, the $115,000,000 Debentures and 3,881,940 shares of common stock, issuable upon conversion of the $3.25 Preferred Stock or upon conversion of the Debentures, if the Preferred Stock is exchanged for Debentures. The effective date of such registration statement was April 29, 1998. 38 39 ITEM 6. SELECTED FINANCIAL DATA ALKERMES, INC. AND SUBSIDIARIES (In thousands, except per share data)
YEAR ENDED MARCH 31, ----------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues $ 43,716 $ 31,367 $ 19,827 $ 15,919 $ 13,903 --------- --------- --------- -------- -------- Research and development expenses 48,457 31,762 29,554 21,586 18,955 --------- --------- --------- -------- -------- Total expenses (1) (2) 84,772 43,949 38,625 29,666 25,807 --------- --------- --------- -------- -------- Net loss (1) (2) $ (41,056) $ (12,582) $ (18,798) $(13,747) $(11,904) --------- --------- --------- -------- -------- Basic and diluted loss per common share $ (1.98) $ (0.55) $ (1.03) $ (0.93) $ (0.88) --------- --------- --------- -------- -------- Weighted average number of common shares outstanding 24,558 23,019 18,288 14,775 13,535 --------- --------- --------- -------- --------
MARCH 31, ----------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------------------------------------------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents and short-term investments $ 163,419 $ 194,257 $ 85,297 $ 32,374 $ 21,351 --------- --------- --------- -------- -------- Total assets 213,452 220,977 104,697 45,752 36,708 --------- --------- --------- -------- -------- Long-term obligations 28,417 12,933 10,914 9,876 8,376 --------- --------- --------- -------- -------- Shareholders' equity 156,206 181,455 79,151 23,513 21,163 --------- --------- --------- -------- --------
(1) Includes noncash compensation charges of $16,239, $2,183, $173, $179 and $331, respectively. (2) Includes a $3,221 nonrecurring charge in fiscal 1999 for RingCap and DST technologies licensed from ALZA Corporation. 39 40 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ALKERMES, INC. AND SUBSIDIARIES INTRODUCTION Alkermes is developing innovative pharmaceutical products based on sophisticated drug delivery systems. The Company has several areas of focus: (i) controlled, sustained release of injectable drugs lasting several days to several weeks, utilizing its ProLease(R) and Medisorb(R) technologies; (ii) the delivery of drugs into the brain past the blood-brain barrier, utilizing the Cereport(TM) technology; (iii) oral delivery of drugs using its RingCap(TM) and dose sipping technologies ("DST"); and (iv) the development of pharmaceutical products based on proprietary pulmonary drug delivery technologies utilizing its Advanced Inhalation Research, Inc. ("AIR") technology. Since its inception in 1987, the Company has devoted substantially all of its resources to its research and development programs. Alkermes has not received any revenue from the sale of products. The Company has been unprofitable since inception and expects to incur substantial additional operating losses over the next few years. At March 31, 1999, the Company had an accumulated deficit of $180.9 million. The consolidated financial statements give retroactive effect to the acquisition of AIR on February 1, 1999 (see Note 3 to the Consolidated Financial Statements), which has been accounted for as a pooling of interests. The Company has funded its operations primarily through public offerings and private placements of equity securities, bank loans and payments under research and development agreements with collaborators, including Alkermes Clinical Partners, L.P. ("Clinical Partners"), a research and development limited partnership whose operations commenced in April 1992. The Company generally develops its product candidates in collaboration with others on whom the Company will rely for funding, development, manufacturing and/or marketing. FORWARD-LOOKING STATEMENTS Any statements set forth below or otherwise made in writing or orally by the Company with regard to its expectations as to financial results and other aspects of its business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, the Company's business is subject to significant risks and there can be no assurance that actual results of the Company's development activities and its results of operations will not differ materially from its expectations. Factors which could cause actual results to differ from expectations include, among others: (i) the Company and its collaborators could not be permitted by regulatory authorities to undertake clinical trials for RingCap or DST or to undertake additional clinical trials for ProLease, Cereport, Medisorb or AIR product candidates or clinical trials could be delayed; (ii) product candidates could be 40 41 ineffective or unsafe during clinical trials; (iii) the Company's collaborators could elect to terminate or delay development programs; (iv) even if product candidates appear promising at an early stage of development, product candidates could fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical, fail to achieve market acceptance, be precluded from commercialization by proprietary rights of third parties or experience substantial competition in the marketplace; (v) the Company could incur difficulties or set-backs in obtaining the substantial additional funding required to continue research and development programs and clinical trials; (vi) even if clinical trials are completed and the data is submitted to the Food and Drug Administration ("FDA") as a New Drug Application ("NDA") for marketing approval and to other health authorities as a marketing authorization application, the NDA or marketing authorization application could fail to be accepted, or upon acceptance, could fail to receive approval on a timely basis, if at all; (vii) technological change in the biotechnology or pharmaceutical industries could render the Company's product candidates obsolete or noncompetitive; (viii) disputes with collaborators, termination of collaborations or failure to negotiate acceptable new collaborative arrangements for ProLease, Medisorb, AIR, RingCap or DST technologies, which are not generally developed independently, or for Cereport, could occur; (ix) disputes with Clinical Partners over rights to Cereport and related technology could occur; and (x) difficulties or set-backs in obtaining and enforcing Alkermes' patents and difficulties with the patent rights of others could occur. RESULTS OF OPERATIONS The Company's research and development revenue under collaborative arrangements was $33,892,107, $25,585,058 and $15,968,317 for the fiscal years ended in 1999, 1998 and 1997, respectively. The increase in such revenue for fiscal 1999 as compared to fiscal 1998 was mainly a result of the increased funding and milestones earned under collaborative agreements related to the Company's ProLease technology. The increase in such revenue for fiscal 1998 as compared to fiscal 1997 was mainly the result of the increased funding and milestones achieved under new or expanded collaborative agreements related to the Company's ProLease, Medisorb and Cereport technologies. The Company's research and development revenue under collaborative arrangement with related party ended during fiscal 1997. This revenue was received from Clinical Partners under a product development agreement entered into in March 1992. Interest and other income was $9,823,479, $5,781,511 and $2,443,317 for the fiscal years ended in 1999, 1998 and 1997, respectively. The increase in such revenue for fiscal 1999 as compared to fiscal 1998 was primarily a result of the interest income earned on the net proceeds of $110.5 million from the sale of 2,300,000 shares of the Company's $3.25 convertible exchangeable preferred stock (the "Preferred Stock") in March 1998. The increase in such revenue for fiscal 1998 as compared to fiscal 1997 was primarily a result of the interest income earned on $49.7 million of net proceeds from the sale of 2,000,000 shares of the Company's common stock to ALZA Corporation ("ALZA") in March 1997. 41 42 The Company's total operating expenses were $84,771,956 for the fiscal year ended in 1999 as compared to $43,948,770 and $38,624,765 for the fiscal years ended in 1998 and 1997, respectively. As part of total operating expenses in fiscal 1999, the Company recorded a $3.2 million nonrecurring charge in fiscal 1999 for RingCap and DST technologies licensed from ALZA which are not yet commercially viable. The total operating expenses for the Company also included noncash compensation expenses of $16,239,311, $2,183,373 and $173,094 during fiscal years ended 1999, 1998 and 1997, respectively. These noncash compensation charges primarily relate to equity transactions in the Company's subsidiary, AIR, with respect to common stock issued and stock options granted to certain employees, consultants and others. The Company's research and development expenses were $48,456,824 for the fiscal year ended in 1999 compared to $31,761,541 and $29,553,988 for the fiscal years ended in 1998 and 1997, respectively. The increase for fiscal 1999 as compared to fiscal 1998 was mainly the result of expanded clinical and manufacturing work performed by the Company and the increase in salary and related benefits and other costs associated with an increase in personnel as the Company advances its product candidates through development and clinical trials and prepares for commercial scale manufacturing. In addition, the Company had an increase in occupancy costs and depreciation and amortization expense related to the expansion of its Medisorb manufacturing facility in Wilmington, Ohio and the construction of its new ProLease manufacturing facility in Cambridge, Massachusetts (see Liquidity and Capital Resources below). The increase for fiscal 1998 as compared to fiscal 1997 was mainly as a result of an increase in salary and related benefits and other costs as the Company advanced its product candidates through development and clinical trials and prepared for process development and commercial scale manufacturing. General and administrative expenses were $14,556,102, $8,374,931 and $7,516,531 for the fiscal years ended in 1999, 1998 and 1997, respectively. The increase for fiscal 1999 as compared to fiscal 1998 was mainly the result of an increase in salary and related benefits and other costs relating primarily to an increase in the number of employees of the Company, as well as an increase in professional fees and consulting costs. In addition, the Company recorded approximately $1.3 million in merger costs as a result of its acquisition of AIR in February 1999. The increase for fiscal 1998 as compared to fiscal 1997 was mainly the result of an increase in salary and related benefits and consulting costs. The Company does not believe that inflation and changing prices have had a material impact on its results of operations. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term investments were approximately $163.4 million at March 31, 1999 as compared to $194.3 million at March 31, 1998. The primary uses of cash and investments were to finance the Company's operations, capital expenditures, the payment for the license from ALZA for the RingCap and DST technologies and the payment of dividends on the Company's Preferred Stock. In addition, Investments include $7 million principal amount of high grade corporate notes with maturities ranging from 13 to 17 months. The Company invests in cash equivalents, U.S. Government obligations, high grade corporate notes and commercial paper. The Company's investment objectives taken as a whole are, first, to assure conservation of capital and liquidity, and second, to obtain investment income. 42 43 During fiscal 1999, the Company amended its loan agreement with a bank to increase the principal amount of the loan by an aggregate of $20 million and to grant a security interest in certain building, equipment and leasehold improvements as security for the entire principal of, and interest on, the loan. Subsequent to year end, the Company amended its license agreement with Genentech, Inc. to expand their collaboration for Nutropin Depot(TM), an injectable sustained release formulation of Genentech's human growth hormone based on Alkermes' ProLease drug delivery system. The expanded agreement includes potential milestone payments to the Company of approximately $40 million. The terms of the collaboration included the purchase by Genentech of $35 million (3,500 shares) of redeemable convertible exchangeable preferred stock of the Company (the "1999 Preferred Stock"). The 1999 Preferred Stock is convertible at Genentech's option into shares of common stock during any period after September 1, 1999 that the closing price of the Company's common stock is above $45 per share for at least 10 consecutive trading days. The 1999 Preferred Stock may be redeemed at any time by the Company at a liquidation preference of $10,000 per share in cash, common stock or non-voting common stock, at the Company's option. Dividends on the 1999 Preferred Stock are payable quarterly at a floating three-month LIBOR rate. The Company's research and development costs to date have been financed primarily by sales of equity securities and payments under research and development collaborative arrangements. The Company expects to incur significant additional research and development and other costs, including costs related to preclinical studies, clinical trials and facilities expansion. Therefore, the Company expects that its costs, including research and development costs for all of its product candidates, will exceed revenues significantly for the next few years, which will result in continuing losses from operations. Since the research and development revenue from Clinical Partners ended during the quarter ended June 30, 1996, Alkermes has been using its own resources to continue to develop Cereport. The Company is required to fund the development of Cereport to maintain its option to purchase the limited partnership interests in Clinical Partners. Effective September 30, 1997, the Company entered into an agreement with ALZA relating to the development and commercialization of Cereport. ALZA made a $10 million upfront payment to Alkermes to fund clinical development of Cereport, of which $5.8 million has been recorded as deferred revenue at March 31, 1999. In return, ALZA will have the option to acquire exclusive worldwide commercialization rights to Cereport. If ALZA exercises its option, ALZA will make additional payments to cover costs associated with advanced clinical development. If Cereport is commercialized successfully by ALZA, ALZA will pay the Company certain milestone payments. Alkermes would be responsible for the manufacturing of Cereport, and the two companies would share approximately equally in profits from sales of products. Capital expenditures were approximately $24.1 million for the year ended March 31, 1999, principally reflecting the costs of the expansion of the Wilmington, Ohio facility and related equipment purchases and the cost of construction of the new commercial scale ProLease manufacturing facility in Cambridge, Massachusetts, both of which properties were completed in fiscal 1999. The Company's capital expenditures for equipment, facilities and building improvements have been financed to date primarily with proceeds from bank loans and the sales of equity securities. 43 44 The Company will continue to pursue opportunities to obtain additional financing in the future. Such financing may be sought through various sources, including equity offerings, bank borrowings, lease arrangements relating to fixed assets or other financing methods. The source, timing and availability of any financings will depend on market conditions, interest rates and other factors. The Company's future capital requirements will depend on many factors, including continued scientific progress in its research and development programs, the magnitude of these programs, progress with preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the establishment of additional collaborative arrangements, the cost of manufacturing facilities and of commercialization activities and arrangements and the cost of product in-licensing and any possible acquisitions. The Company believes its current cash and cash equivalents and short-term investments, combined with anticipated interest income and research and development revenues under collaborative arrangements, will be sufficient to meet its anticipated capital requirements through at least March 31, 2001. The Company may need to raise substantial additional funds for longer-term product development, regulatory approvals and manufacturing or marketing activities that it might undertake in the future. There can be no assurance that additional funds will be available on favorable terms, if at all. If adequate funds are not available, the Company may be required to curtail significantly one or more of its research and development programs and/or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or future products. As disclosed in Note 2 to the Consolidated Financial Statements, the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," during fiscal 2001 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company has not yet assessed the impact of SFAS No. 133 on its financial position and results of operations. YEAR 2000 The Year 2000 problem concerns the application of computer systems written using six (e.g., 12/31/99) versus eight (e.g., 12/31/1999) digits to define the applicable date. This could result, among other things, in computer systems recognizing "00" as the year 1900 rather than the year 2000. Computer hardware, software and embedded chip equipment are potentially affected, and, if such systems and components are not remediated satisfactorily, could lead to operational interruptions and business misinformation. The Company has identified its mission critical and medium priority internal systems which will require remediation to provide for the Company's continuing business operations after January 1, 2000. The remaining systems are considered to be of low priority because they are judged to have no direct impact on safety or the business. The Company's Year 2000 Compliance Plan provides for a four-phase process: inventory, assessment, remediation and preparation of contingency plans. 44 45 The initial inventory phase is essentially completed. The assessment phase is substantially completed, except for information not yet received from external suppliers, vendors and manufacturers. Progress continues to be made in the remediation phase of the Company's plan in which systems that are not Year 2000 compliant are repaired, replaced or retired, and remediated systems are tested and returned to active use. There has been a 50% response rate to the Company's requests for information sent to vendors and manufacturers of equipment, hardware and software. Based on the responses received as of June 16, 1999, the Company has confirmed that 4% of its mission critical systems are not compliant. The Company has requested all suppliers of mission critical equipment containing embedded chip technology to provide the Company with each supplier's Year 2000 testing methodology and results and/or the Company has performed in-house testing on such equipment. For the 4% of noncompliant mission critical systems, the Company has determined what is required to make the system compliant and is either in the process of remediation or will begin remediation soon. The Company believes its mission critical and medium priority internal computer systems will be Year 2000 compliant in a timely manner. However, the Company's computer systems are complex, highly interdependent and there are a number of risks associated with the complexity and high degree of integration of the systems. For example, an incorrect classification of the importance of a system or systems, or the cumulative effect of a number of low priority systems that have not been remediated, could result in an unpredicted failure or shutdown in one or more of the Company's business, processing or manufacturing systems, which could have a material adverse effect on production or cost of operations. The Company's current belief is that this has a relatively low probability of occurring. To minimize these risks, the Company is utilizing its skilled and knowledgeable internal resources and has employed contract personnel in its decision-making processes and to perform integrated systems testing. The Company is continuing a process of requesting and assessing compliance information from its key suppliers, including strategic partners and organizations with which the Company does business. Certain of these suppliers may refuse to respond to a readiness survey or request for information. It is possible that these suppliers may, in fact, be prepared to address Year 2000 concerns, but simply refuse to respond. Conversely, various suppliers may respond that they are Year 2000 ready, when, in fact, they are not ready. As of June 16, 1999, approximately 83% of key supplier recipients have responded to the survey. Approximately 80% of those surveyed have responded that they are or will be Year 2000 compliant on a timely basis. If the Year 2000 problem causes suppliers and utility providers to fail to deliver essential materials and services, multiple disruptions in the Company's operations, computer infrastructure or telecommunications systems could result. Because of the inherent uncertainties associated with the Year 2000 problem, including understanding the Year 2000 readiness of these key third parties, it is not possible to quantify the potential impact at this time. However, failure of key suppliers, utility providers or the Company to address properly and timely the Year 2000 problem could have a material adverse effect on the Company's financial condition, results of operations or liquidity. Furthermore, there can be no guarantee that any contingency plans developed by the Company will prevent such failures from having a material adverse effect. The Company believes that there is a low probability that these multiple failures are likely to occur. 45 46 Contingency plans are being formulated by each of the Company's various departments. The plans are to be completed by September 30, 1999 for each of the Company's mission critical systems. These plans may be updated or revised during the remainder of 1999. The Company currently expects total external expenditures to become Year 2000 compliant to be less than $1 million. In addition, the Company has dedicated significant internal resources, including staff and equipment, to Year 2000 projects, but does not track such costs and therefore cannot provide an estimate of the amount of such internal costs. The Company will fund Year 2000 expenditures from cash and expects that total remediation costs, including the reallocation of internal resources, will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. The foregoing information reflects management's best estimates. These estimates are based upon many assumptions, including: assumptions about cost, availability and ability of resources to identify and classify systems properly; properly identifying them as needing remediation; locating, remediating and modifying affected systems; and making various assessments of Year 2000 readiness of key third parties. Based upon its activities to date, the Company does not believe that these factors will cause its current cost and timetable projections to differ significantly from those estimated. However, the Company cannot reasonably estimate the potential impact on its financial condition, results of operations or liquidity if critical third parties, including suppliers and governments, do not become Year 2000 compliant on a timely basis. 46 47 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Our Investments consist of U.S. Treasuries and other government securities, commercial paper and corporate notes. Substantially all Investments mature within one year, are not callable by the issuer and have fixed interest rates. A 10% decline in the average yield of the Investments would not have a material effect on our results of operations or cash flows. Our debt instruments approximate fair value and generally have fixed interest rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 47 48 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND 1998 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED MARCH 31, 1999 AND INDEPENDENT AUDITORS' REPORT 48 49 INDEPENDENT AUDITORS' REPORT The Board of Directors of Alkermes, Inc.: We have audited the accompanying consolidated balance sheets of Alkermes, Inc. and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1999. 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. The consolidated financial statements give retroactive effect to the acquisition of Advanced Inhalation Research, Inc., which has been accounted for as a pooling of interests as described in Note 3 of notes to the consolidated financial statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Alkermes, Inc. and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP May 21, 1999 Boston, Massachusetts 49 50 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND 1998 - -------------------------------------------------------------------------
ASSETS 1999 1998 CURRENT ASSETS: Cash and cash equivalents $ 9,115,432 $ 3,699,950 Short-term investments 154,303,220 190,556,898 Prepaid expenses and other current assets 5,745,047 8,562,166 ------------- ------------- Total current assets 169,163,699 202,819,014 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT: Land 235,000 235,000 Building 3,483,862 1,275,000 Furniture, fixtures and equipment 31,302,274 15,332,236 Leasehold improvements 12,635,756 2,507,973 Construction in progress -- 4,275,985 ------------- ------------- 47,656,892 23,626,194 Less accumulated depreciation and amortization (14,292,146) (9,620,769) ------------- ------------- 33,364,746 14,005,425 ------------- ------------- INVESTMENTS 8,436,067 3,422,726 ------------- ------------- OTHER ASSETS 2,487,757 730,112 ------------- ------------- $ 213,452,269 $ 220,977,277 ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 CURRENT LIABILITIES: Accounts payable and accrued expenses $ 6,642,005 $ 7,311,843 Accrued interest 1,570,201 121,933 Deferred revenue 9,587,933 7,478,480 Long-term obligations - current portion 10,700,000 4,604,533 ------------- ------------- Total current liabilities 28,500,139 19,516,789 ------------- ------------- LONG-TERM OBLIGATIONS 28,416,625 12,933,333 ------------- ------------- OTHER LONG-TERM LIABILITIES 329,614 2,072,212 ------------- ------------- DEFERRED REVENUE -- 5,000,000 ------------- ------------- COMMITMENTS (Note 10) SHAREHOLDERS' EQUITY: Capital stock, par value $.01 per share: authorized, 2,700,000 shares; none issued Convertible exchangeable preferred stock, par value $.01 per share: authorized and issued, 2,300,000 shares at March 31, 1999 and 1998 (liquidation preference of $115,000,000) 23,000 23,000 Common stock, par value $.01 per share: authorized, 40,000,000 shares; issued, 24,982,459 and 24,027,976 shares at March 31, 1999 and 1998, respectively 249,825 240,280 Additional paid-in capital 346,849,432 316,592,909 Deferred compensation (9,932,199) (2,926,484) Accumulated other comprehensive loss (46,873) (48,138) Accumulated deficit (180,937,294) (132,426,624) ------------- ------------- Total shareholders' equity 156,205,891 181,454,943 ------------- ------------- $ 213,452,269 $ 220,977,277 ============= =============
See notes to consolidated financial statements. 50 51 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS YEARS ENDED MARCH 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1999 1998 1997 CONSOLIDATED STATEMENTS OF OPERATIONS: REVENUES: Research and development revenue under collaborative arrangements $ 33,892,107 $ 25,585,058 $ 15,968,317 Research and development revenue under collaborative arrangement with related party -- -- 1,415,313 Interest and other income 9,823,479 5,781,511 2,443,317 ------------ ------------ ------------ Total revenues 43,715,586 31,366,569 19,826,947 ------------ ------------ ------------ EXPENSES: Research and development 48,456,824 31,761,541 29,553,988 General and administrative 14,556,102 8,374,931 7,516,531 Noncash compensation expense 16,239,311 2,183,373 173,094 Interest expense 2,298,466 1,628,925 1,381,152 Purchase of in-process research and development 3,221,253 -- -- ------------ ------------ ------------ Total expenses 84,771,956 43,948,770 38,624,765 ------------ ------------ ------------ NET LOSS (41,056,370) (12,582,201) (18,797,818) PREFERRED STOCK DIVIDENDS 7,454,300 -- -- ------------ ------------ ------------ NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(48,510,670) $(12,582,201) $(18,797,818) ============ ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE $ (1.98) $ (0.55) $ (1.03) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 24,557,500 23,018,876 18,288,334 ============ ============ ============ CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS: NET LOSS $(41,056,370) $(12,582,201) $(18,797,818) Cumulative foreign currency translation adjustments (36,235) 6,231 7,485 Carrying value adjustments (37,500) -- -- Unrealized loss on marketable securities -- (108,750) (431,250) ------------ ------------ ------------ COMPREHENSIVE LOSS $(41,130,105) $(12,684,720) $(19,221,583) ============ ============ ============
See notes to consolidated financial statements. 51 52 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
RECEIVABLE FOR CONVERTIBLE EXCHANGEABLE ADDITIONAL WARRANTS AND PREFERRED STOCK COMMON STOCK PAID-IN DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION BALANCE, APRIL 1, 1996 -- $ -- 15,966,942 $159,669 $124,239,023 $ (317,682) Issuance of common stock, April 1996 through March 1997, net of issuance costs of $390,705 -- -- 4,751,848 47,519 74,605,168 -- Amortization of receivable for warrants -- -- -- -- -- 34,687 Amortization of noncash compensation -- -- -- -- -- 173,094 Cumulative foreign currency translation adjustments -- -- -- -- -- -- Unrealized loss on marketable securities -- -- -- -- -- -- Net loss for year -- -- -- -- -- -- ---------- ---------- ---------- -------- ------------ ------------- BALANCE, MARCH 31, 1997 -- -- 20,718,790 207,188 198,844,191 (109,901) Issuance of common stock, April 1997 through March 1998 -- -- 3,309,186 33,092 2,230,210 -- Issuance of convertible exchangeable preferred stock, March 1998, net of issuance costs of $441,043 2,300,000 23,000 -- -- 110,510,956 -- Noncash compensation -- -- -- -- 5,007,552 (5,007,552) Amortization of noncash compensation -- -- -- -- -- 2,190,969 Cumulative foreign currency translation adjustments -- -- -- -- -- -- Unrealized loss on marketable securities -- -- -- -- -- -- Net loss for year -- -- -- -- -- -- ---------- ---------- ---------- -------- ------------ ------------- BALANCE, MARCH 31, 1998 2,300,000 23,000 24,027,976 240,280 316,592,909 (2,926,484)
OTHER COMPREHENSIVE INCOME (LOSS) ---------------------------- FOREIGN UNREALIZED CURRENCY GAIN (LOSS) ON TRANSLATION MARKETABLE ACCUMULATED ADJUSTMENTS SECURITIES DEFICIT TOTAL BALANCE, APRIL 1, 1996 $(24,354) $ 502,500 $(101,046,605) $ 23,512,551 Issuance of common stock, April 1996 through March 1997, net of issuance costs of $390,705 -- -- -- 74,652,687 Amortization of receivable for warrants -- -- -- 34,687 Amortization of noncash compensation -- -- -- 173,094 Cumulative foreign currency translation adjustments 7,485 -- -- 7,485 Unrealized loss on marketable securities -- (431,250) -- (431,250) Net loss for year -- -- (18,797,818) (18,797,818) -------- --------- ------------- ------------- BALANCE, MARCH 31, 1997 (16,869) 71,250 (119,844,423) 79,151,436 Issuance of common stock, April 1997 through March 1998 -- -- -- 2,263,302 Issuance of convertible exchangeable preferred stock, March 1998, net of issuance costs of $441,043 -- -- -- 110,533,956 Noncash compensation -- -- -- -- Amortization of noncash compensation -- -- -- 2,190,969 Cumulative foreign currency translation adjustments 6,231 -- -- 6,231 Unrealized loss on marketable securities -- (108,750) -- (108,750) Net loss for year -- -- (12,582,201) (12,582,201) -------- --------- ------------- ------------- BALANCE, MARCH 31, 1998 (10,638) (37,500) (132,426,624) 181,454,943
(Continued) 52 53 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
RECEIVABLE FOR CONVERTIBLE EXCHANGEABLE ADDITIONAL WARRANTS AND PREFERRED STOCK COMMON STOCK PAID-IN DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION BALANCE, MARCH 31, 1998 (CARRIED FORWARD) 2,300,000 23,000 24,027,976 240,280 316,592,909 (2,926,484) Issuance of common stock, April 1998 through March 1999 -- -- 954,483 9,545 7,011,497 -- Noncash compensation -- -- -- -- 23,245,026 (23,245,026) Amortization of noncash compensation -- -- -- -- -- 16,239,311 Cumulative foreign currency translation adjustments -- -- -- -- -- -- Carrying value adjustments -- -- -- -- -- -- Net loss for year -- -- -- -- -- -- Preferred stock dividends -- -- -- -- -- -- --------- ------- ---------- -------- ------------ ------------ BALANCE, MARCH 31, 1999 2,300,000 $23,000 24,982,459 $249,825 $346,849,432 $ (9,932,199) ========= ======= ========== ======== ============ ============
OTHER COMPREHENSIVE INCOME (LOSS) ------------------------------ FOREIGN UNREALIZED CURRENCY GAIN (LOSS) ON TRANSLATION MARKETABLE ACCUMULATED ADJUSTMENTS SECURITIES DEFICIT TOTAL BALANCE, MARCH 31, 1998 (CARRIED FORWARD) (10,638) (37,500) (132,426,624) 181,454,943 Issuance of common stock, April 1998 through March 1999 -- -- -- 7,021,042 Noncash compensation -- -- -- -- Amortization of noncash compensation -- -- -- 16,239,311 Cumulative foreign currency translation adjustments (36,235) -- -- (36,235) Carrying value adjustments -- 37,500 -- 37,500 Net loss for year -- -- (41,056,370) (41,056,370) Preferred stock dividends -- -- (7,454,300) (7,454,300) -------- -------- ------------- ------------- BALANCE, MARCH 31, 1999 $(46,873) $ -- $(180,937,294) $ 156,205,891 ======== ======== ============= =============
See notes to consolidated financial statements. (Concluded) 53 54 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(41,056,370) $ (12,582,201) $(18,797,818) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 5,385,404 2,601,793 2,358,843 Amortization of amounts receivable for warrants and compensation relating to issuance of common stock and grant of stock options and awards made 16,239,311 2,190,969 207,781 Adjustments to other assets 250,500 60,026 14,502 Gain on sale of equipment (5,375) (567,623) -- Changes in assets and liabilities: Prepaid expenses and other current assets 2,820,972 (3,992,733) (2,617,365) Accounts payable and accrued expenses 766,069 2,785,413 1,143,447 Deferred revenue 2,109,453 7,478,480 -- Other long-term liabilities (759,306) 641,380 515,591 ------------ ------------- ------------ Net cash used by operating activities (14,249,342) (1,384,496) (17,175,019) ------------ ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (24,064,521) (8,544,168) (2,243,476) Disposals of equipment 5,375 1,080,815 -- Maturities (purchases) of short-term investments, net 36,253,678 (108,058,959) (50,568,725) (Purchases) maturities of long-term investments, net (5,013,341) 1,943,565 (3,993,502) (Increase) decrease in other assets (2,638,025) (17,320) 10,500 ------------ ------------- ------------ Net cash provided by (used by) investing activities 4,543,166 (113,596,067) (56,795,203) ------------ ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of convertible exchangeable preferred stock, net -- 110,533,956 -- Proceeds from issuance of common stock, net 7,021,042 2,263,302 74,652,687 Proceeds from issuance of long-term debt 20,000,000 7,000,000 5,000,000 Payment of preferred stock dividends (7,454,300) -- -- Payment of long-term obligations (4,404,648) (3,923,366) (3,338,054) ------------ ------------- ------------ Net cash provided by financing activities 15,162,094 115,873,892 76,314,633 ------------ ------------- ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (40,436) 7,609 9,451 ------------ ------------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 5,415,482 900,938 2,353,862 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,699,950 2,799,012 445,150 ------------ ------------- ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,115,432 $ 3,699,950 $ 2,799,012 ============ ============= ============ SUPPLEMENTARY INFORMATION: Interest paid $ 2,513,208 $ 915,808 $ 788,102 ============ ============= ============ Deferred revenue and accrued interest converted to long-term obligations $ 5,983,292 $ -- $ -- ============ ============= ============
See notes to consolidated financial statements. 54 55 ALKERMES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999, 1998 AND 1997 1. FORMATION OF THE COMPANY Alkermes, Inc. (the "Company") was incorporated in July 1987 and is a leader in the development of products based on sophisticated drug delivery technologies. The Company has several areas of focus: (i) controlled, sustained release of injectable drugs lasting several days to several weeks, utilizing its ProLease(R) and Medisorb(R) technologies; (ii) the delivery of drugs into the brain past the blood-brain barrier, utilizing the Cereport(TM) technology; (iii) oral delivery of drugs using its RingCap(TM) and dose sipping technologies ("DST"); and (iv) the development of pharmaceutical products based on proprietary pulmonary drug delivery technologies utilizing its Advanced Inhalation Research, Inc. ("AIR") technology. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements give retroactive effect to the acquisition of AIR on February 1, 1999 (see Note 3), which has been accounted for as a pooling of interests. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Alkermes, Inc. and its wholly owned subsidiaries, Alkermes Controlled Therapeutics, Inc. ("ACTI"), Alkermes Controlled Therapeutics Inc. II ("ACT II"), Alkermes Investments, Inc., Alkermes Development Corporation II ("ADC II"), Alkermes Europe, Ltd. and AIR. ADC II serves as the one percent general partner of Alkermes Clinical Partners, L.P. ("Clinical Partners"), a limited partnership engaged in a research and development project with the Company (see Note 8). ADC II's investment in Clinical Partners is accounted for under the equity method of accounting. Such carrying value was zero at March 31, 1999 and 1998 (see Note 8). All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES - The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. The carrying amounts of cash, cash equivalents, accounts payable and accrued expenses approximate fair value because of their short-term nature. Marketable equity securities are recorded in the consolidated financial statements at fair value. The carrying amounts of the Company's debt instruments approximate fair value. 55 56 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET LOSS PER SHARE - Basic and diluted net loss per share are computed using the weighted average number of common shares outstanding during the period. The Company accounts for earnings per share in accordance with the provisions of SFAS No. 128, "Earnings per Share." Basic earnings per share exclude any dilutive effect from stock options, warrants and convertible exchangeable preferred stock. The Company continues to be in a net loss position and, therefore, diluted earnings per share is the same amount as basic earnings per share. Stock options and warrants (see Notes 8 and 11) were not included in the computation of diluted earnings per share because to do so would have been antidilutive for all periods presented. RESEARCH AND DEVELOPMENT REVENUES - Research and development revenues are recorded as services are performed. Revenue earned upon the achievement of research and development milestones is recorded when achieved. RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses are charged to operations as incurred. NONCASH COMPENSATION EXPENSE - Noncash compensation expense primarily relates to equity transactions in the Company's subsidiary, Advanced Inhalation Research, Inc., and has been recorded at the difference between fair market value at the measurement date and the issuance price for common stock issued and stock options granted to certain employees, consultants and others. In addition, the Company has also recorded noncash charges for stock options and stock awards granted to certain other employees, consultants and others for the difference between fair market value at the measurement date and the issuance price. The measurement date is generally the issuance date for employees and the vesting date for consultants. The noncash charge has been recorded in the statements of operations upon issuance or over the vesting period of the common stock, stock option or award. INCOME TAXES - The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred tax assets and liabilities relating to the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements and tax returns (see Note 7). CASH EQUIVALENTS - Cash equivalents, with purchased maturities of three months or less, consist of money market accounts, mutual funds and an overnight repurchase agreement. The repurchase agreement is fully collateralized by U.S. Government securities. INVESTMENTS - Debt securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost and are classified as "held-to-maturity." All Short-Term Investments and Investments consist of U.S. Treasury and other government securities, commercial paper and corporate notes and are classified as "held-to-maturity" and reported at amortized cost. Short-Term Investments have maturity dates within one year of the balance sheet date. Investments classified as long-term have maturity dates up to sixteen months from March 31, 1999 and include securities held as collateral. The carrying value of all Short-Term Investments and Investments, individually and in the aggregate, approximated market value at March 31, 1999 and 1998. 56 57 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives of the assets: buildings - 25 years; furniture, fixtures and equipment - 3 to 7 years; or, in the case of leasehold improvements, over the lease terms - 2 to 10 years. DEFERRED REVENUE - SHORT-TERM - During fiscal 1998, the Company received a $10,000,000 upfront payment from ALZA Corporation ("ALZA") to fund clinical development of Cereport. This amount has been recorded as deferred revenue and is being amortized based on actual costs incurred for the clinical development of Cereport. In addition, the Company received prepayments for research and development costs under other collaborative research projects which are being amortized over the minimum term of the agreements using the straight-line method. DEFERRED REVENUE - LONG-TERM - During fiscal 1996, the Company received a $5,000,000 prepayment of royalties under a collaborative agreement. This amount was recorded as deferred revenue at March 31, 1998 and accrued interest (included in other long-term liabilities) at a rate (6.16875% at March 31, 1998) equal to 0.20% above the one-year LIBOR rate. During fiscal 1999, the principal and accrued interest were converted to a note payable (see Note 6). PURCHASED PATENTS - Purchased patents, included in other assets, are amortized on a straight-line basis over a period of five years. DEFERRED COMPENSATION - Deferred compensation is related to awards under the Company's 1991 Restricted Common Stock Award Plan, compensatory stock options and common stock and is amortized over vesting periods ranging from one to five years. 401(k) PLAN - The Company's 401(k) Retirement Savings Plan (the "401(k) Plan") covers substantially all of its employees. Eligible employees may contribute up to 17% of their eligible compensation, subject to certain Internal Revenue Service limitations. The Company began matching a portion of employee contributions on April 1, 1998. The match is equal to 50% of the first 6% of deferrals and is fully vested when made. During fiscal 1999, the Company provided approximately $307,000 to match employee deferrals under the 401(k) Plan. RECLASSIFICATIONS - Certain reclassifications have been made in fiscal 1998 and 1997 to conform to the presentation used in fiscal 1999. COMPREHENSIVE INCOME - The Company adopted SFAS No. 130, "Reporting Comprehensive Income," on April 1, 1998. SFAS No. 130 requires companies to display comprehensive income and its components as part of the Company's full set of consolidated financial statements. Comprehensive income is comprised of net income and other comprehensive income. The measurement and presentation of net loss did not change. Other comprehensive income includes certain changes in equity of the Company that are excluded from the net loss. Specifically, SFAS No. 130 requires unrealized holding gains and losses on the Company's available-for-sale securities and cumulative foreign currency translation adjustments, which are currently reported in shareholders' equity, to be included in other comprehensive income. 57 58 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SEGMENTS - The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," on April 1, 1998. Under SFAS No. 131, the Company's operations are treated as one operating segment reporting to the chief operating decision-makers of the Company. Accordingly, the adoption of SFAS No. 131 did not have an effect on the Company's financial position or results of operations or its footnotes disclosures. NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting under SFAS No. 133. Management has not yet assessed the impact of SFAS No. 133 on its financial position and results of operations. 3. ACQUISITION OF ADVANCED INHALATION RESEARCH, INC. ("AIR") In February 1999 the Company acquired AIR, a private company focused on the development of pharmaceutical products based on proprietary pulmonary drug delivery technologies. The acquisition was accomplished by merging a newly formed, wholly owned subsidiary of the Company with and into AIR and has been accounted for as a tax-free pooling of interests. No adjustments to conform accounting policies of AIR were required. The Company has recorded merger costs of approximately $1,300,000 which have been charged to operations primarily in the quarter ended March 31, 1999. Pursuant to the merger agreement, the Company issued 3,680,508 shares of its common stock to the stockholders of AIR (see Note 5). An additional 119,474 shares of common stock were reserved for issuance upon the exercise of unvested stock options granted to employees and consultants of AIR which were assumed by the Company. Revenues and net loss of AIR for the periods before the merger were approximately $40,000 and $2,811,000, respectively, for the period from May 7, 1997 (date of incorporation) through March 31, 1998 and were $1,286,000 and $16,033,000, respectively, for the period April 1, 1998 to February 1, 1999, the date the merger was consummated. For the same periods, the net loss included noncash compensation charges of approximately $2,100,000 and $13,115,000, respectively. 4. ALZA AGREEMENT In April 1998, Alkermes entered into an exclusive license agreement with ALZA, a pharmaceutical and drug delivery company, for two of ALZA's oral drug delivery technologies: RingCap and DST. The Company also acquired equipment to be used in the development of the technologies. A nonrecurring charge of approximately $3,200,000 for technology licensed but not yet commercially viable was recorded by the Company at the acquisition date. This charge represents that portion of the acquisition price of the acquired technology that was allocated to in-process research and development. 58 59 5. SHAREHOLDERS' EQUITY RESTRICTED STOCK PURCHASE AGREEMENTS/COMMON STOCK - During fiscal 1999, the Company issued 3,680,508 shares of its common stock in conjunction with its acquisition of AIR. Of these shares, 2,401,115 shares of common stock were issued to key employees and consultants of AIR and are subject to restricted stock purchase agreements. The Company assumed these restricted stock purchase agreements entered into by AIR. The agreements state that if the consulting or employment relationship terminates within four years of issuance, the Company shall have the right, but not the obligation, to repurchase the nonvested shares from the shareholder at the share price initially paid by the shareholder. The restricted stock vests quarterly over a four-year period at different amounts for each shareholder. At March 31, 1999 and 1998, approximately 1,060,000 and 447,000 shares of restricted stock, respectively, had vested. In May 1996, the Company completed a direct public offering of 2,300,000 shares of its common stock at $10.00 per share. Net proceeds to the Company were approximately $22,900,000. In March 1997, the Company completed a private placement of 2,000,000 shares of its common stock at $25.00 per share. Net proceeds to the Company were approximately $49,700,000. PREFERRED STOCK - In March 1998, the Company completed a private placement of 2,300,000 shares of its convertible exchangeable preferred stock (the "Preferred Stock") at $50.00 per share. Net proceeds to the Company were approximately $110,500,000. The Preferred Stock is convertible at the option of the holder at any time, unless previously redeemed or exchanged, into the Company's common stock at an initial conversion rate of 1.6878 shares of common stock for each share of Preferred Stock. The initial conversion rate is subject to adjustment in certain events. The Company has reserved 3,881,940 shares of its common stock for issuance upon conversion. Dividends on the Preferred Stock will be cumulative from the date of original issue and have been paid quarterly, commencing June 1, 1998 and payable each September 1, December 1, March 1 and June 1 thereafter, at the annual rate of $3.25 per share of Preferred Stock. Prior to March 6, 2001, the Preferred Stock is not redeemable at the option of the Company. Thereafter the Preferred Stock is redeemable at the option of the Company, in whole or in part, at declining redemption prices, together with accrued dividends. If redeemed during the 12-month period beginning March 1 (beginning March 6, 2001 and ending on February 28, 2002, in the case of the first such period) the per share redemption prices are $52.275 in 2001, $51.950 in 2002, $51.625 in 2003, $51.300 in 2004, $50.975 in 2005, $50.650 in 2006, $50.325 in 2007 and $50 at March 1, 2008 and thereafter. The Preferred Stock has a liquidation preference of $50 per share, plus accrued and unpaid dividends. The Preferred Stock is exchangeable, in whole but not in part, at the option of the Company on any dividend payment date beginning March 1, 1999 (the "Exchange Date") for the Company's 6-1/2% Convertible Subordinated Debentures (the "Debentures") at the rate of $50 principal amount of Debentures for each share of Preferred Stock. The Debentures, if issued, will mature on the tenth anniversary of the Exchange Date and will contain conversion and optional redemption provisions substantially identical to those of the Preferred Stock. 59 60 6. LONG-TERM OBLIGATIONS Long-term obligations at March 31 consist of:
1999 1998 Notes payable to a bank bearing interest at fixed rates (6.97%-8.58%), payable in monthly or quarterly installments, maturing in fiscal 2001 through 2004 $28,133,333 $10,533,333 Note payable to a bank bearing interest at a fixed rate (7.96%), payable in quarterly installments of $375,000, maturing in fiscal 2000 1,500,000 3,000,000 Note payable to a corporate partner bearing interest at the prime rate (7.75% at March 31, 1999), maturing in fiscal 2000 3,500,000 3,500,000 Note payable to a corporate partner bearing interest at 2.5% above the one-year LIBOR (7.72% at March 31, 1999), maturing in fiscal 2002 5,983,292 -- Notes payable - stockholders bearing interest at 7%, payable on demand -- 500,000 Other -- 4,533 ----------- ----------- 39,116,625 17,537,866 Less current portion 10,700,000 4,604,533 ----------- ----------- $28,416,625 $12,933,333 =========== ===========
The first bank note listed above is secured by a building and real property pursuant to a mortgage and certain of the Company's equipment pursuant to security agreements. One tranche of this bank loan totalling $11,000,000 is payable in seventeen equal quarterly installments of $275,000 and a balloon payment of $6,325,000 due on September 30, 2003. The loan is also secured by cash collateral (included in long-term investments at March 31, 1999) having a minimum market value of the lesser of $1,000,000 or the outstanding principal amount of the loan. Under the terms of the loan agreement, the Company is required to maintain a minimum unencumbered balance of cash and permitted investments and a minimum ratio of unencumbered cash and net quick assets to total liabilities as well as a minimum consolidated capital base. The second bank note listed above requires the Company to maintain a minimum net worth, a maximum ratio of total liabilities to net worth, a minimum current ratio and a minimum unencumbered balance of cash and permitted investments. Upon the breach of any of these financial covenants or the occurrence of any other event of default under the loan agreement, the Company would be required to deposit an amount equal to the then outstanding principal balance of the loan plus three months' interest into a restricted account at the bank. Under the terms of the loan agreement, the bank would have the right to liquidate such account and apply the proceeds to repayment of the loan if the Company's unencumbered cash and investment balance falls below $5,000,000. 60 61 6. LONG-TERM OBLIGATIONS (CONTINUED) In January 1995, the Company borrowed $3,500,000 from a corporate partner. The principal amount of the loan, together with interest, is payable in the Company's common stock or cash, at the Company's option. In October 1998, the Company converted a prepayment of royalties from a former corporate partner, plus accrued interest, to a promissory note in the principal amount of $5,983,292 as a result of the discontinuation of a collaboration. The principal amount of the note, together with interest, is payable in the Company's common stock or cash, at the Company's option. At March 31, 1999, the maturities of the long-term obligations are as follows:
NOTES PAYABLE AND OTHER 2000 $10,700,000 2001 5,625,000 2002 10,966,625 2003 4,025,000 2004 7,800,000 ----------- $39,116,625 ===========
7. INCOME TAXES At March 31, 1999, the Company has approximately $76,995,000 of net operating loss ("NOL") carryforwards for U.S. federal income tax purposes and approximately $7,884,000 of research and development tax credits available to offset future federal income tax, subject to limitations for alternative minimum tax. The NOL and research and development credit carryforwards are subject to examination by the tax authorities and expire in various years from 2002 through 2019. The components of the net deferred income tax assets at March 31 are as follows:
1999 1998 Acquired technology $ -- $ 884,000 Capitalized research and development expenses, net of amortization 11,750,000 13,471,000 NOL carryforwards, federal and state 30,120,000 24,525,000 Tax credit carryforwards 11,220,000 6,961,000 Alkermes Europe NOL carryforward 4,120,000 3,030,000 Other 5,154,000 1,064,000 Less valuation allowance (62,364,000) (49,935,000) ------------ ------------ $ -- $ -- ============ ============
The valuation allowance has been provided because of the uncertainty of realizing the future benefits of the net deferred income tax assets. The valuation allowance increased by $4,959,000 from March 31, 1997 to March 31, 1998. 61 62 7. INCOME TAXES (CONTINUED) The ACTI NOL and research and development credit carryforwards (included in the table above) of approximately $4,780,000 and $790,000, respectively, acquired from Enzytech, Inc. are only available to offset future taxable income of ACTI. 8. RELATED-PARTY TRANSACTIONS On April 10, 1992, the Company and Clinical Partners, a limited partnership of which ADC II is the general partner, sold in a private placement (i) 920 Class A units, each unit (a "Class A Unit") consisting of one Class A limited partnership interest in Clinical Partners, a 1992 warrant (a "Class A 1992 Warrant") to purchase 2,800 shares of the Company's common stock and a 1995 warrant (a "Class A 1995 Warrant") to purchase 300 shares of the Company's common stock; and (ii) one Class B unit (the "Class B Unit"), consisting of one Class B limited partnership interest in Clinical Partners, a 1992 warrant (the "Class B 1992 Warrant") to purchase 5,600 shares of the Company's common stock and a 1995 warrant (the "Class B 1995 Warrant") to purchase 600 shares of the Company's common stock. The purchase price was $50,000 for each Class A Unit and $100,000 for the Class B Unit. The Company completed an exchange offer on January 27, 1995 with respect to the warrants issued in 1992 in connection with the formation of Clinical Partners. Pursuant to the exchange offer, Class A limited partners had the option to exchange both their Class A 1992 Warrants and Class A 1995 Warrants for a new 1994 Class A Warrant to purchase, at $5.00 per share, and during the period beginning on April 1, 1995 and ending on March 31, 2000, 1,700 shares of the Company's common stock for every 3,100 shares of common stock issuable upon exercise of the Class A 1992 Warrant and Class A 1995 Warrant exchanged therefor. The Class B limited partner had the option to exchange both the Class B 1992 and Class B 1995 Warrants for a new 1994 Class B Warrant to purchase 3,400 shares of the Company's common stock at $5.00 per share. The 1994 Class B Warrant is exercisable during the same period as the 1994 Class A Warrants. The net proceeds of the offering were used primarily to fund the further development and clinical testing of a family of molecules designated by the Company as Receptor-Mediated Permeabilizers(TM) ("RMPs"(TM)), including Cereport, for human pharmaceutical use in the United States and Canada. Proprietary RMP(TM) molecules developed by the Company may enhance the passage of small drug molecules from the bloodstream into the brain. Pursuant to the Product Development Agreement entered into in March 1992, the Company licensed to Clinical Partners certain of its technology relating to RMPs. Research and development of RMPs is being conducted by the Company for Clinical Partners pursuant to the Product Development Agreement. The Company was reimbursed by Clinical Partners for its actual costs incurred in conducting such research and development and also received a management fee of 10% of such costs. Such funding ended during the quarter ended June 30, 1996. None of the partners of Clinical Partners is obligated to make any further capital contributions. Since the funding was not sufficient to complete clinical trials and seek regulatory approval of Cereport, Alkermes has used its own resources, and intends to continue to use its own resources, to develop Cereport. Alkermes has obtained and intends to continue to obtain such resources through equity offerings, bank borrowings and collaborative arrangements. The Company is required to fund the development of Cereport to maintain its Purchase Option, as defined below, with the limited partners. 62 63 8. RELATED-PARTY TRANSACTIONS (CONTINUED) Clinical Partners has granted the Company an exclusive interim license to manufacture and market RMPs for human pharmaceutical use in the United States and Canada. Upon the first marketing approval of an RMP product by the United States Food and Drug Administration, the Company is obligated to make a payment (approximately $8,300,000) to Clinical Partners equal to 20% of the aggregate capital contributions of all partners (the "milestone payment"). Additionally, the Company will make royalty payments to Clinical Partners equal to 12% of United States and Canadian revenues and 10% of European revenues, in certain circumstances, from any sales of RMPs by the Company. The interim license will terminate if the Company does not exercise the Purchase Option. The 1992 Warrants, the 1995 Warrants (collectively, the "Class A Warrants"), the Class B 1992 Warrant and the Class B 1995 Warrant (collectively, the "Class B Warrants") were issued by the Company in consideration of the grant by each limited partner to the Company of an option to purchase (the "Purchase Option"), under certain circumstances, the limited partnership interests in Clinical Partners held by such limited partner. Upon exercise of such Purchase Option, each Class A limited partner will be entitled to receive an initial payment, at the Company's option, of $40,000 in cash or approximately $42,100 in the Company's common stock, as well as certain additional payments (which are subject to certain limitations) based on the Company's net revenues from sales of RMPs in the United States, Canada and Europe as follows: - 12% of net revenues to the Company on sales of RMPs in the United States and Canada and 10% of net revenues to the Company on sales of RMPs in Europe, until each Class A limited partner has received an aggregate of $400,000 per interest from the initial payment and the royalty stream; thereafter, - 9% of net revenues to the Company on sales of RMPs in the United States, Canada and Europe, until each Class A limited partner has received an aggregate of $500,000 per interest from the initial payment and the royalty stream; and thereafter, - 4% of net revenues to the Company on sales of RMPs in the United States, Canada and Europe. 63 64 8. RELATED-PARTY TRANSACTIONS (CONTINUED) Royalties on sales of RMPs in Europe will be payable only to the extent necessary to pay projected distributions in any year. If royalties on sales of RMPs in the United States and Canada in any year equal or exceed the projected distributions for such year, no royalties on European sales will be paid in that year. At March 31, 1999, warrants to purchase shares of the Company's common stock were outstanding as follows:
EXERCISE NUMBER OF COMMON PRICE SHARES ISSUABLE UPON EXPIRATION WARRANT PER EXERCISE OF WARRANTS DATE CLASS SHARE 137,200 July 31, 1999 Class A 1992 Warrants $ 20.03 760,694 March 31, 2000 1994 Class A and B Warrants 5.00 13,950 April 14, 2000 Class A 1995 Warrants 3.54 ------- 911,844 =======
9. RESEARCH AND DEVELOPMENT ARRANGEMENTS The Company has entered into several collaborative agreements with corporate partners (the "Partners") to provide research and development activities relating to the partners' products. In connection with these agreements, the Company has granted certain licenses or the right to obtain certain licenses to technology developed by the Company. In return for such grants, the Company will receive certain payments upon the achievement of certain milestones and will receive royalties on sales of products developed under the terms of the agreements. Additionally, the Company has or may obtain the right to manufacture and supply products developed under certain of these agreements. During fiscal 1999, 1998 and 1997, research and development revenue under collaborative arrangements from Genentech, Inc. ("Genentech") amounted to 33%, 30% and 28%, and Johnson & Johnson amounted to 28%, 36% and 47%, respectively, of total revenues. 64 65 10. COMMITMENTS LEASE COMMITMENTS - The Company leases certain of its offices, research laboratories and manufacturing facilities under operating leases with initial terms of two to ten years expiring between 2001 and 2008. Several of the leases contain provisions for extensions for up to ten years. Total annual future minimum lease payments are as follows: 2000 $ 3,564,000 2001 2,486,000 2002 1,470,000 2003 396,000 2004 322,000 Thereafter 1,339,000
Rent expense charged to operations was approximately $4,237,000, $3,618,000 and $3,342,000 for the years ended March 31, 1999, 1998 and 1997, respectively. Additionally, a U.S. Treasury Bill with a total principal amount of $250,000 is being held by a bank in the Company's name as a security deposit on the leases and, accordingly, has been classified as a long-term investment at March 31, 1999. LICENSE AND ROYALTY COMMITMENTS - The Company has entered into license agreements with certain corporations and universities which require the Company to pay annual license fees and royalties based on a percentage of revenues from sales of certain products and royalties from sublicenses granted by the Company. Amounts paid under these agreements were approximately $127,000, $112,000 and $92,000 for the years ended March 31, 1999, 1998 and 1997, respectively. 11. STOCK OPTIONS AND AWARDS The Company's Stock Option Plans (the "Plans") include the Amended and Restated 1989 Non-Qualified Stock Option Plan (the "1989 Plan"), the Amended and Restated 1990 Omnibus Stock Option Plan, as amended (the "1990 Plan"), the 1992 Non-Qualified Stock Option Plan (the "1992 Plan") and the 1998 Equity Incentive Plan (the "1998 Plan") which provide for the granting of stock options to employees, officers and directors of, and consultants to, the Company. In addition, the Stock Option Plan for Non-Employee Directors (the "Director Plan") provides for the granting of stock options to nonemployee directors of the Company. Nonqualified options to purchase up to 225,000 shares of the Company's common stock may be granted under the 1989 Plan, nonqualified and incentive options to purchase up to 3,250,000 shares of the Company's common stock may be granted under the 1990 Plan, nonqualified options to purchase up to 1,000,000 shares of the Company's common stock may be granted under the 1992 Plan, nonqualified and incentive stock options and restricted stock to purchase up to 591,487 shares may be granted under the 1998 Plan and nonqualified options to purchase up to 150,000 shares of the Company's common stock may be granted under the Director Plan. Unless sooner terminated, the 1989 Plan will terminate on July 18, 1999, the 1990 Plan will terminate on September 19, 2000, the 1992 Plan will terminate on November 11, 2002, the 1998 Plan will terminate on April 1, 2008 and the Director Plan will terminate on March 18, 2006. The Company has reserved a total of 4,211,033 shares of common stock for options outstanding and available for future grant under the six plans. 65 66 11. STOCK OPTIONS AND AWARDS (CONTINUED) The Compensation Committee of the Board of Directors administers the Plans and determines who is to receive options and the exercise price and terms of such options. The Compensation Committee has delegated its authority to the Compensation Sub-Committee to make grants and awards under the Plans to "officers." The Board of Directors administers the Director Plan. The option exercise price of stock options granted under the 1989 Plan, the 1990 Plan, the 1998 Plan and the Director Plan may not be less than 100% of the fair market value of the common stock on the date of grant. Under the terms of the 1992 Plan, the option exercise price may be below the fair market value, but not below par value, of the underlying stock at the time the option is granted. The 1989 Plan, the 1990 Plan and the 1992 Plan also provide that the Compensation Committee may grant Limited Stock Appreciation Rights ("LSARs") with respect to all or any portion of the shares covered by stock options granted to directors and executive officers. LSARs may be granted with the grant of a nonqualified stock option or at any time during the term of such option but may only be granted with the grant of an incentive stock option. The grant of LSARs will not be effective until six months after their date of grant. Upon the occurrence of certain triggering events, including a change of control, the options with respect to which LSARs have been granted shall become immediately exercisable and the persons who have received LSARs will automatically receive a cash payment in lieu of shares. At March 31, 1999, there are 400,750 LSARS outstanding which have been granted under the 1990 Plan. No LSARS were granted during fiscal 1999, 1998 and 1997. The Company has also adopted the 1991 Restricted Common Stock Award Plan (the "Award Plan"). The Award Plan provides for the award to certain eligible employees, officers and directors of, and consultants to, the Company of up to a maximum of 250,000 shares of common stock. The Award Plan is administered by the Compensation Committee. Awards generally vest over five years. During fiscal 1999, 1998 and 1997, no shares of common stock were awarded under the Award Plan and 2,850, 2,400 and 2,400 shares, respectively, ceased to be subject to forfeiture and were issued. In addition, 2,000, 1,800 and zero shares were canceled during the years ended March 31, 1999, 1998 and 1997, respectively. At March 31, 1999, 1998 and 1997 there were 30,400, 35,250 and 35,200 awards outstanding under the Award Plan, respectively. The Award Plan will terminate on November 15, 2001, unless sooner terminated by the Board of Directors. The Company has elected to continue to follow Accounting Principles Board ("APB") No. 25 for accounting for its employee stock options. Under APB No. 25, no compensation expense is recognized with respect to the grant of any stock options to employees if the exercise price of the Company's employee stock options equals the fair market price of the underlying stock on the date the option is granted. Pro forma information regarding net loss and basic and diluted loss per common share in fiscal 1999, 1998 and 1997 has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123. The resulting effect on pro forma net loss and basic and diluted loss per common share is not necessarily likely to be representative of the effects on net loss and basic and diluted loss per common share on a pro forma basis in future years, due to (i) grants made prior to fiscal 1996 being excluded from the calculation and (ii) the uncertainty regarding the magnitude of future grants. The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates ranging from 4.79% - 5.68% for fiscal 1999, 5.56% - 5.90% for fiscal 1998 and 6.60% - 6.84% for fiscal 1997; dividend yields of 0% in fiscal 1999, 1998 and 1997; volatility factors of the expected market price of the Company's common stock of 67% in fiscal 1999, 65% in fiscal 1998 and 67% in fiscal 1997; and a weighted average expected life of 4 years in fiscal 1999 and 5 years in fiscal years 1998 and 1997. Using the Black-Scholes option pricing model, the weighted average fair value of options granted in fiscal 1999, 1998 and 1997 was $7.90, $10.39 and $8.00, respectively. 66 67 11. STOCK OPTIONS AND AWARDS (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of options is amortized to pro forma expense over the vesting period of the option. Pro forma information for the years ended March 31 is as follows:
1999 1998 1997 Net loss - as reported $ (48,510,670) $ (12,582,201) $ (18,797,818) Net loss - pro forma (53,654,009) (15,112,287) (19,971,317) Basic and diluted loss per common share - as reported (1.98) (0.55) (1.03) Basic and diluted loss per common share - pro forma (2.18) (0.66) (1.09)
A summary of option activity under the 1989, 1990, 1992, 1998 and Director Plans is as follows:
EXERCISE WEIGHTED NUMBER PRICE AVERAGE OF PER EXERCISE SHARES SHARE PRICE Balance, April 1, 1996 1,736,004 $0.56 - $14.875 $ 3.78 Granted 449,650 9.31 - 28.75 14.53 Exercised (142,575) 0.56 - 14.875 3.43 Canceled (70,670) 1.00 - 14.88 4.90 --------- --------------- ------ Balance, March 31, 1997 1,972,409 0.56 - 28.75 6.22 Granted 487,800 12.81 - 26.94 17.33 Exercised (183,648) 0.56 - 14.75 5.02 Canceled (153,613) 2.13 - 28.75 13.58 --------- --------------- ------ Balance, March 31, 1998 2,122,948 0.56 - 27.69 8.34 Granted 1,331,967 0.59 - 31.84 14.83 Exercised (68,408) 0.56 - 23.00 4.26 Canceled (74,691) 0.59 - 25.25 18.21 --------- --------------- ------ Balance, March 31, 1999 3,311,816 $0.56 - $31.84 $10.81 ========= ================ ======
Options granted generally vest over four years, except options granted under the Director Plan which vest after six months. 67 68 11. STOCK OPTIONS AND AWARDS (CONTINUED) The following table summarizes information concerning outstanding and exercisable options at March 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- ---------------------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED CONTRACTUAL AVERAGE AVERAGE RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE $ 0.56 - $ 6.50 1,186,589 5.07 $ 3.38 1,111,463 $ 3.29 6.88 - 14.31 1,144,202 8.92 12.19 186,716 12.32 14.44 - 31.84 981,025 8.74 18.19 181,094 16.83 ---------------- --------- ----- ------- --------- ------ $ 0.56 - $31.84 3,311,816 7.49 $ 10.81 1,479,273 $ 6.09 ================ ========= ===== ======= ========= ======
12. SUBSEQUENT EVENT GENENTECH AGREEMENT, 1999 PREFERRED STOCK - In April 1999, the Company amended its license agreement with Genentech to expand their collaboration for Nutropin Depot(TM), an injectable sustained release formulation of Genentech's human growth hormone based on Alkermes' ProLease drug delivery system. Under the agreement, the companies will conduct expanded development activities, including clinical trials in an additional indication, process and formulation development and manufacturing. The agreement includes potential milestone payments to the Company of approximately $40 million. The terms of the collaboration included the purchase by Genentech of $35 million (3,500 shares) of newly issued redeemable convertible exchangeable preferred stock of the Company (the "1999 Preferred Stock"). The 1999 Preferred Stock is convertible at Genentech's option into shares of common stock and non-voting common stock during any period after September 1, 1999 that the closing price of the Company's common stock is above $45 per share for at least 10 consecutive trading days. The Company has the option to redeem the 1999 Preferred Stock, in whole or in part, at any time at the redemption price of $10,000 per share plus accrued and unpaid dividends (the "1999 Redemption Price"). There will be a mandatory redemption of any outstanding shares of the 1999 Preferred Stock on January 1, 2009 at the 1999 Redemption Price. The Company has the option to pay the 1999 Redemption Price in cash, common stock or non-voting common stock. The 1999 Preferred Stock will be junior to the Company's outstanding $115 million of convertible exchangeable preferred stock that was issued by the Company in March 1998. The 1999 Preferred Stock has a liquidation preference of $10,000 per share, plus accrued and unpaid dividends. Dividends on the 1999 Preferred Stock are payable quarterly at a floating three-month LIBOR rate. * * * * * * 68 69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors. The information with respect to directors required by this item is incorporated herein by reference to pages 2, 3, 4, 13, 20 and 21 of our Proxy Statement for our annual shareholders' meeting to be held on August 6, 1999 (the "1999 Proxy Statement"). (b) Executive Officers. The information with respect to executive officers required by this item is set forth in Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to pages 10 through 19 of the 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to pages 20 and 21 of the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to page 22 of the 1999 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of the Report: (1) Consolidated Financial Statements of the Registrant and Independent Auditors' Report thereon: Consolidated Balance Sheets, March 31, 1999 and 1998. Consolidated Statements of Operations and Comprehensive Loss for the Years Ended March 31, 1999, 1998 and 1997. 69 70 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. (2) Financial Statement Schedules: Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto. (3) Exhibits Exhibit No. 3.1(a) Second Amended and Restated Articles of Incorporation of Alkermes, Inc. effective July 23, 1991. (Incorporated by reference to Exhibit 4.1(a) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1991.) 3.1(b) Statement of Change of Registered Office of Alkermes, Inc. effective July 23, 1991. (Incorporated by reference to Exhibit 4.1(b) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1991.) 3.1(c) Amendment to Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on November 1, 1991. (Incorporated by reference to Exhibit 4.1(c) to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1991.) 3.1(d) Amendment to the Second Amended and Restated Articles of Incorporation, as amended, as filed with the Pennsylvania Secretary of State on February 12, 1993. (Incorporated by reference to Exhibit 4.1(d) to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1992.) 3.1(e) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on February 26, 1998. (Incorporated by reference to Exhibit 4.6 to the Registrant's Registration Statement on Form S-3, as amended (File No. 333-50157).) 3.1(f) Amendment to Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on April 12, 1999 (1999 Preferred Stock Terms). 70 71 3.1(g) Amendment to Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on April 12, 1999 (Non-Voting Common Stock Terms). 3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of June 2, 1999. 4.1 Specimen of Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-40250).) 4.2 Specimen of Preferred Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3, as amended (File No. 333-50157).) 4.3 Specimen of 1999 Preferred Stock Certificate of Alkermes, Inc. 4.4 Specimen of Non-Voting Common Stock Certificate of Alkermes, Inc. 4.5 Form of 1992 Warrant to purchase 2,800 shares of the Registrant's Common Stock. (Incorporated by reference to Exhibit 4.2 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 4.6 Form of 1995 Warrant to purchase 300 shares of the Registrant's Common Stock. (Incorporated by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 4.7 Form of Global Warrant Certificate for 1994 Class A Warrants. (Incorporated by reference to Exhibit 4.6 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.8 Form of Global Warrant Certificate for 1994 Class B Warrants. (Incorporated by reference to Exhibit 4.7 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.9 Form of Global Warrant Certificate for 1994 Affiliate Warrants. (Incorporated by referenced to Exhibit 4.8 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.10 Form of Global Warrant Certificate for 1994 Incentive Warrants. (Incorporated by reference to Exhibit 4.9 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.11 Warrant Agreement, dated as of November 18, 1994, by and between the Registrant and The First National Bank of Boston. (Incorporated by reference to Exhibit 4.10 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 71 72 4.12 Indenture, dated as of March 1, 1998, between Alkermes, Inc. and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.7 to the Registrant's Registration Statement on Form S-3, as amended (File No. 333-50157).) 10.1 Amended and Restated 1989 Non-Qualified Stock Option Plan, as amended. (Incorporated by reference to Exhibit 4.2(c) to the Registrant's Registration Statement on Form S-8 (File No. 33-44752).)+ 10.2 Amended and Restated 1990 Omnibus Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.)+ 10.3 1991 Restricted Common Stock Award Plan. (Incorporated by reference to Exhibit 4.2(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-58330).)+ 10.4 1992 Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.26 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)+ 10.5 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.)+ 10.6 Alkermes, Inc. 1998 Equity Incentive Plan.+ 10.7 1999 Stock Option Plan.+ 10.8 Lease, dated as of September 18, 1991, between Forest City 64 Sidney Street, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.19 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.8(a) First Amendment of Lease, dated September 18, 1992, between Forest City 64 Sidney Street, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.9 Lease, dated as of March 16, 1990, between Forest City 64 Sidney Street, Inc. and Enzytech, Inc. (Incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.10 Lease, dated July 26, 1993, between the Massachusetts Institute of Technology and Alkermes, Inc. (Incorporated by reference to Exhibit 10.8 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 10.10(a) First Amendment of Lease, dated June 9, 1997, between the Massachusetts Institute of Technology and Alkermes, Inc. (Incorporated by reference to Exhibit 10.8(a) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 72 73 10.11 Product Development Agreement, dated as of March 6, 1992, between the Partnership and the Registrant. (Incorporated by reference to Exhibit 10.21 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.12 Purchase Agreement, dated as of March 6, 1992, by and among the Registrant and each of the Limited Partners, from time to time, of the Partnership. (Incorporated by reference to Exhibit 10.22 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.13 Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of February 7, 1992. (Incorporated by reference to Exhibit 10.23 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.13(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of September 29, 1992. (Incorporated by reference to Exhibit 10.22(a) to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.13(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of March 30, 1993. (Incorporated by reference to Exhibit 10.22(b) to the Registrant's Registration Statement on Form S-3, as amended (File No. 33-64964).) 10.14 Class A Note of Alkermes Development Corporation II, dated April 10, 1992, to PaineWebber Development Corporation in the amount of $100.00. (Incorporated by reference to Exhibit 10.24 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.15 License Agreement, dated February 5, 1990, between Enzytech, Inc. and Massachusetts Institute of Technology. (Incorporated by reference to Exhibit 10.36 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)* 10.16 Note Purchase Agreement, dated as of January 9, 1995, by and between the Registrant and Genentech, Inc. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.17 Convertible Promissory Note of the Registrant dated January 31, 1995. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.18 License Agreement, dated as of April 14, 1999, by and between Genentech, Inc. and Alkermes Controlled Therapeutics, Inc. (Diamond) 10.19 Discontinuation Agreement, dated as of April 14, 1999, by and between the Registrant and Genentech, Inc. (Diamond) 73 74 10.20 Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International. (Incorporated by reference to Exhibit 10.18 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.)(Cross) 10.20(a) First Amendment to Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International. (Incorporated by reference to Exhibit 10.18(a) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.)(Cross) 10.20(b) Second Amendment to the Development Agreement, dated April 28, 1997, by and between Alkermes Controlled Therapeutics Inc. II, Janssen Pharmaceutica International and Janssen Pharmaceutica Inc. (Incorporated by reference to Exhibit 10.22(b) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 10.21 License Agreement, dated as of February 13, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (United States). (Incorporated by reference to Exhibit 10.19 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.)(Cross) 10.22 License Agreement, dated as of February 21, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (worldwide except United States). (Incorporated by reference to Exhibit 10.20 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.)(Cross) 10.23 Development and License Agreement, dated as of January 19, 1998, between The R.W. Johnson Pharmaceutical Research Institute, a division of Ortho Pharmaceutical Corporation, Alkermes, Inc. and Alkermes Controlled Therapeutics, Inc. (Incorporated by reference to Exhibit 10.25 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.) +++ 10.24 Supply and License Agreement dated as of January 19, 1998, between The R.W. Johnson Pharmaceutical Research Institute, a division of Ortho Pharmaceutical Corporation, Janssen Pharmaceutica International, a division of Cilag AG International, Alkermes, Inc. and Alkermes Controlled Therapeutics, Inc. (Incorporated by reference to Exhibit 10.26 of the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.)+++ 10.25 Patent License Agreement, dated as of August 11, 1997, between Massachusetts Institute of Technology and Advanced Inhalation Research, Inc., as amended. (Diamond) 10.26 Loan Agreement, dated December 30, 1993, among the Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited. (Incorporated by reference to Exhibit 10.33 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1993.) 74 75 10.26(a) Amendment No. 1 to Loan Agreement, dated as of December 31, 1994, among the Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited. (Incorporated by reference to Exhibit 10.21(a) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.) 10.26(b) Amendment to Loan Agreement, dated as of December 29, 1995, by and among Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1995.) 10.26(c) Omnibus Amendment to Loan Documents, dated as of July 26, 1996, among the Registrant, Alkermes Investments, Inc. and The Sumitomo Bank, Limited (as assignee of The Daiwa Bank, Limited). (Incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1996.) 10.27 Second Amended and Restated Note, dated July 26, 1996, by Registrant and Alkermes Investments, Inc. to The Sumitomo Bank, Limited. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1996.) 10.28 Letter Agreement, dated September 27, 1996, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutic Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.)++ 10.28(a) Loan Supplement and Modification Agreement, dated as of June 2, 1997, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.27(a) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 10.28(b) Second Loan Supplement and Modification Agreement, dated as of March 19, 1998, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.29(b) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.) 10.28(c) Third Loan Supplement and Modification Agreement, dated as of September 24, 1998, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1998.) 10.29 Security Agreement, dated as of September 27, 1996, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutic Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 75 76 10.30 Pledge Agreement, dated as of September 27, 1996, from the Registrant to Fleet National Bank. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.31 Mortgage and Security Agreement, dated as of September 27, 1996, from Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.6 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.32 Environmental Indemnity Agreement, dated as of September 27, 1996, from the Registrant and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.7 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.33 Promissory Note of the Registrant, dated December 23, 1994, to Fleet Bank of Massachusetts, N.A. (Incorporated by reference to Exhibit 10.20 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.33(a) Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.34 Promissory Note, dated December 19, 1995, by Registrant to Fleet Bank of Massachusetts, N.A. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1995.) 10.34(a) Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.35 Promissory Note, dated September 27, 1996, from the Registrant and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.8 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.36 Promissory Note, dated June 2, 1997, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.35 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 10.37 Promissory Note, dated March 19, 1998, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibits 10.38 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.) 76 77 10.38 Promissory Note, dated September 24, 1998, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank ($11,000,000). (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1998.) 10.39 Promissory Note, dated September 24, 1998, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank ($9,000,000). (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1998.) 10.40 Employment Agreement, entered into as of February 7, 1991, between Richard F. Pops and the Registrant. (Incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-40250).)+ 10.41 Employment Agreement, entered into as of June 13, 1994, by and between Robert A. Breyer and the Registrant. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1994.)+ 10.42 Incentive Loan Program.+ 21 Subsidiaries of the Registrant. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. * Confidential status has been granted for certain provisions thereof pursuant to a Commission Order granted January 8, 1993. Such provisions have been filed separately with the Commission. (Cross) Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 3, 1996. Such provisions have been filed separately with the Commission. ++ Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted April 17, 1997. Such provisions have been filed separately with the Commission. 77 78 +++ Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted August 7, 1998. Such provisions have been filed separately with the Commission. (Diamond) Confidential status has been requested for certain portions thereof pursuant to a Confidential Treatment Request filed June 29, 1999. Such provisions have been filed separately with the Commission. + Constitutes a management contract or compensatory plan required to be filed as an Exhibit to this Report pursuant to Item 14(c) of Form 10-K. (b) Since the beginning of the quarter ended March 31, 1999, the Registrant filed a report on Form 8-K, dated February 1, 1999, amended by Forms 8-K/A filed on April 19, 1999 and May 12, 1999, and reports on Form 8-K, dated April 7, 1999 and April 15, 1999. 78 79 UNDERTAKING For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Form S-8, Nos. 33-44752, 33-58330, 33-97468, 333-13283, 333-50357 and 333-71011 and on Form S-3, Nos. 333-75645, 333-75649, 333-50157, 333-19955 and 33-90736. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 79 80 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. ALKERMES, INC. June 29, 1999 By: /s/ Richard F. Pops -------------------------------- Richard F. Pops Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, 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 Title Date - --------- ----- ---- /s/ Michael A. Wall Director and Chairman of the June 29, 1999 - ------------------------- Board Michael A. Wall /s/ Richard F. Pops Director and Chief Executive Officer June 29, 1999 - ------------------------- (Principal Executive Officer) Richard F. Pops /s/ James M. Frates Vice President, Chief June 29, 1999 - ------------------------- Financial Officer and James M. Frates Treasurer (Principal Financial and Accounting Officer) /s/ Floyd E. Bloom Director June 29, 1999 - ------------------------- Floyd E. Bloom /s/ Robert A. Breyer President and Chief Operating June 29, 1999 - ------------------------- Officer and Director Robert A. Breyer /s/ John K. Clarke Director June 29, 1999 - ------------------------- John K. Clarke
80 81 /s/ Alexander Rich Director June 29, 1999 - ------------------------- Alexander Rich /s/ Paul Schimmel Director June 29, 1999 - ------------------------- Paul Schimmel
81 82 EXHIBIT INDEX 3.1(a) Second Amended and Restated Articles of Incorporation of Alkermes, Inc. effective July 23, 1991. (Incorporated by reference to Exhibit 4.1(a) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1991.) 3.1(b) Statement of Change of Registered Office of Alkermes, Inc. effective July 23, 1991. (Incorporated by reference to Exhibit 4.1(b) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1991.) 3.1(c) Amendment to Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on November 1, 1991. (Incorporated by reference to Exhibit 4.1(c) to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1991.) 3.1(d) Amendment to the Second Amended and Restated Articles of Incorporation, as amended, as filed with the Pennsylvania Secretary of State on February 12, 1993. (Incorporated by reference to Exhibit 4.1(d) to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1992.) 3.1(e) Amendment to the Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on February 26, 1998. (Incorporated by reference to Exhibit 4.6 to the Registrant's Registration Statement on Form S-3, as amended (File No. 333-50157).) 3.1(f) Amendment to Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on April 12, 1999 (1999 Preferred Stock Terms). 3.1(g) Amendment to Second Amended and Restated Articles of Incorporation, as filed with the Pennsylvania Secretary of State on April 12, 1999 (Non-Voting Common Stock Terms). 3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of June 2, 1999. 4.1 Specimen of Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-40250).) 4.2 Specimen of Preferred Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3, as amended (File No. 333-50157).) 4.3 Specimen of 1999 Preferred Stock Certificate of Alkermes, Inc. 4.4 Specimen of Non-Voting Common Stock Certificate of Alkermes, Inc. 82 83 4.5 Form of 1992 Warrant to purchase 2,800 shares of the Registrant's Common Stock. (Incorporated by reference to Exhibit 4.2 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 4.6 Form of 1995 Warrant to purchase 300 shares of the Registrant's Common Stock. (Incorporated by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 4.7 Form of Global Warrant Certificate for 1994 Class A Warrants. (Incorporated by reference to Exhibit 4.6 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.8 Form of Global Warrant Certificate for 1994 Class B Warrants. (Incorporated by reference to Exhibit 4.7 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.9 Form of Global Warrant Certificate for 1994 Affiliate Warrants. (Incorporated by referenced to Exhibit 4.8 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.10 Form of Global Warrant Certificate for 1994 Incentive Warrants. (Incorporated by reference to Exhibit 4.9 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.11 Warrant Agreement, dated as of November 18, 1994, by and between the Registrant and The First National Bank of Boston. (Incorporated by reference to Exhibit 4.10 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 4.12 Indenture, dated as of March 1, 1998, between Alkermes, Inc. and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.7 to the Registrant's Registration Statement on Form S-3, as amended (File No. 333-50157).) 10.1 Amended and Restated 1989 Non-Qualified Stock Option Plan, as amended. (Incorporated by reference to Exhibit 4.2(c) to the Registrant's Registration Statement on Form S-8 (File No. 33-44752).)+ 10.2 Amended and Restated 1990 Omnibus Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.)+ 10.3 1991 Restricted Common Stock Award Plan. (Incorporated by reference to Exhibit 4.2(a) to the Registrant's Registration Statement on Form S-8 (File No. 33-58330).)+ 10.4 1992 Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.26 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)+ 83 84 10.5 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.)+ 10.6 Alkermes, Inc. 1998 Equity Incentive Plan.+ 10.7 1999 Stock Option Plan.+ 10.8 Lease, dated as of September 18, 1991, between Forest City 64 Sidney Street, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.19 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.8(a) First Amendment of Lease, dated September 18, 1992, between Forest City 64 Sidney Street, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.9 Lease, dated as of March 16, 1990, between Forest City 64 Sidney Street, Inc. and Enzytech, Inc. (Incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 10.10 Lease, dated July 26, 1993, between the Massachusetts Institute of Technology and Alkermes, Inc. (Incorporated by reference to Exhibit 10.8 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 10.10(a) First Amendment of Lease, dated June 9, 1997, between the Massachusetts Institute of Technology and Alkermes, Inc. (Incorporated by reference to Exhibit 10.8(a) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 10.11 Product Development Agreement, dated as of March 6, 1992, between the Partnership and the Registrant. (Incorporated by reference to Exhibit 10.21 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.12 Purchase Agreement, dated as of March 6, 1992, by and among the Registrant and each of the Limited Partners, from time to time, of the Partnership. (Incorporated by reference to Exhibit 10.22 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.13 Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of February 7, 1992. (Incorporated by reference to Exhibit 10.23 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.13(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of September 29, 1992. (Incorporated by reference to Exhibit 10.22(a) to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).) 84 85 10.13(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement of Limited Partnership, dated as of March 30, 1993. (Incorporated by reference to Exhibit 10.22(b) to the Registrant's Registration Statement on Form S-3, as amended (File No. 33-64964).) 10.14 Class A Note of Alkermes Development Corporation II, dated April 10, 1992, to PaineWebber Development Corporation in the amount of $100.00. (Incorporated by reference to Exhibit 10.24 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992.) 10.15 License Agreement, dated February 5, 1990, between Enzytech, Inc. and Massachusetts Institute of Technology. (Incorporated by reference to Exhibit 10.36 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932).)* 10.16 Note Purchase Agreement, dated as of January 9, 1995, by and between the Registrant and Genentech, Inc. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.17 Convertible Promissory Note of the Registrant dated January 31, 1995. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.18 License Agreement, dated as of April 14, 1999, by and between Genentech, Inc. and Alkermes Controlled Therapeutics, Inc. (Diamond) 10.19 Discontinuation Agreement, dated as of April 14, 1999, by and between the Registrant and Genentech, Inc. (Diamond) 10.20 Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International. (Incorporated by reference to Exhibit 10.18 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.) (Cross) 10.20(a) First Amendment to Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International. (Incorporated by reference to Exhibit 10.18(a) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.) (Cross) 10.20(b) Second Amendment to the Development Agreement, dated April 28, 1997, by and between Alkermes Controlled Therapeutics Inc. II, Janssen Pharmaceutica International and Janssen Pharmaceutica Inc. (Incorporated by reference to Exhibit 10.22(b) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 10.21 License Agreement, dated as of February 13, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (United States). 85 86 (Incorporated by reference to Exhibit 10.19 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.) (Cross) 10.22 License Agreement, dated as of February 21, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (worldwide except United States). (Incorporated by reference to Exhibit 10.20 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.) (Cross) 10.23 Development and License Agreement, dated as of January 19, 1998, between The R.W. Johnson Pharmaceutical Research Institute, a division of Ortho Pharmaceutical Corporation, Alkermes, Inc. and Alkermes Controlled Therapeutics, Inc. (Incorporated by reference to Exhibit 10.25 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.)+++ 10.24 Supply and License Agreement dated as of January 19, 1998, between The R.W. Johnson Pharmaceutical Research Institute, a division of Ortho Pharmaceutical Corporation, Janssen Pharmaceutica International, a division of Cilag AG International, Alkermes, Inc. and Alkermes Controlled Therapeutics, Inc. (Incorporated by reference to Exhibit 10.26 of the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.)+++ 10.25 Patent License Agreement, dated as of August 11, 1997, between Massachusetts Institute of Technology and Advanced Inhalation Research, Inc., as amended. (Diamond) 10.26 Loan Agreement, dated December 30, 1993, among the Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited. (Incorporated by reference to Exhibit 10.33 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1993.) 10.26(a) Amendment No. 1 to Loan Agreement, dated as of December 31, 1994, among the Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited. (Incorporated by reference to Exhibit 10.21(a) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1996.) 10.26(b) Amendment to Loan Agreement, dated as of December 29, 1995, by and among Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1995.) 10.26(c) Omnibus Amendment to Loan Documents, dated as of July 26, 1996, among the Registrant, Alkermes Investments, Inc. and The Sumitomo Bank, Limited (as assignee of The Daiwa Bank, Limited). (Incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1996.) 10.27 Second Amended and Restated Note, dated July 26, 1996, by Registrant and Alkermes Investments, Inc. to The Sumitomo Bank, Limited. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1996.) 86 87 10.28 Letter Agreement, dated September 27, 1996, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutic Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.)++ 10.28(a) Loan Supplement and Modification Agreement, dated as of June 2, 1997, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.27(a) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 10.28(b) Second Loan Supplement and Modification Agreement, dated as of March 19, 1998, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.29(b) to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.) 10.28(c) Third Loan Supplement and Modification Agreement, dated as of September 24, 1998, by and among Fleet National Bank, Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II and the Registrant. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1998.) 10.29 Security Agreement, dated as of September 27, 1996, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutic Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.30 Pledge Agreement, dated as of September 27, 1996, from the Registrant to Fleet National Bank. (Incorporated by reference to Exhibit 10.5 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.31 Mortgage and Security Agreement, dated as of September 27, 1996, from Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.6 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.32 Environmental Indemnity Agreement, dated as of September 27, 1996, from the Registrant and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.7 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.33 Promissory Note of the Registrant, dated December 23, 1994, to Fleet Bank of Massachusetts, N.A. (Incorporated by reference to Exhibit 10.20 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994.) 10.33(a) Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and the Registrant. 87 88 (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.34 Promissory Note, dated December 19, 1995, by Registrant to Fleet Bank of Massachusetts, N.A. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1995.) 10.34(a) Allonge to Promissory Note, dated as of September 27, 1996, executed by Fleet National Bank, Alkermes Controlled Therapeutics, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.35 Promissory Note, dated September 27, 1996, from the Registrant and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.8 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996.) 10.36 Promissory Note, dated June 2, 1997, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibit 10.35 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1997.) 10.37 Promissory Note, dated March 19, 1998, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank. (Incorporated by reference to Exhibits 10.38 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1998.) 10.38 Promissory Note, dated September 24, 1998, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank ($11,000,000). (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1998.) 10.39 Promissory Note, dated September 24, 1998, from the Registrant, Alkermes Controlled Therapeutics, Inc. and Alkermes Controlled Therapeutics Inc. II to Fleet National Bank ($9,000,000). (Incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1998.) 10.40 Employment Agreement, entered into as of February 7, 1991, between Richard F. Pops and the Registrant. (Incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-40250).)+ 10.41 Employment Agreement, entered into as of June 13, 1994, by and between Robert A. Breyer and the Registrant. (Incorporated by reference to Exhibit 10.28 to the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1994.)+ 10.42 Incentive Loan Program.+ 88 89 21 Subsidiaries of the Registrant. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. * Confidential status has been granted for certain provisions thereof pursuant to a Commission Order granted January 8, 1993. Such provisions have been filed separately with the Commission. (Cross) Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 3, 1996. Such provisions have been filed separately with the Commission. ++ Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted April 17, 1997. Such provisions have been filed separately with the Commission. +++ Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted August 7, 1998. Such provisions have been filed separately with the Commission. (Diamond) Confidential status has been requested for certain portions thereof pursuant to a Confidential Treatment Request filed June 29, 1999. Such provisions have been filed separately with the Commission. + Constitutes a management contract or compensatory plan required to be filed as an Exhibit to this Report pursuant to Item 14(c) of Form 10-K. 89 EX-3.1(F) 2 1999 PREFERRED STOCK TERMS 1 Exhibit 3.1(f) ALKERMES, INC. EXHIBIT A TO STATEMENT WITH RESPECT TO SHARES RESOLUTIONS ESTABLISHING 1999 REDEEMABLE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK ($.01 Par Value) (Cumulative Dividend, Liquidation Preference $10,000 per Share) ---------- RESOLVED, that pursuant to authority expressly granted to and vested in the Board of Directors of Alkermes, Inc. (the "Company"), a Pennsylvania corporation, by the provisions of the Second Amended and Restated Articles of Incorporation, as amended, of the Company (the "Articles of Incorporation"), there is hereby established a series of the preferred stock, par value $.01 per share, which shall consist of 3,500 of the 700,000 unissued shares of the preferred stock class of the Company, and which shall have the following designation and voting rights, preferences, limitations and special rights: 1. NUMBER OF SHARES AND DESIGNATION. 3,500 shares of the preferred stock, par value $.01 per share, of the Company are hereby constituted as a series of the preferred stock designated as 1999 Redeemable Convertible Exchangeable Preferred Stock (the "1999 Preferred Stock"). 2. DEFINITIONS. For purposes of the 1999 Preferred Stock, in addition to those terms otherwise defined herein, the following terms shall have the meanings indicated: "AFFILIATE" of any specified person shall mean any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control," when used with respect to any specified person means the power to direct or cause the direction of the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company or a committee of such Board duly authorized to act for it hereunder. "BOARD RESOLUTION" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Transfer Agent. 2 "BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which the banking institutions in the City of New York, New York or Boston, Massachusetts are authorized or obligated by law or executive order to close or be closed. "CLOSING PRICE" with respect to any securities on any day shall mean the closing sale price on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, in each case on The Nasdaq National Market or New York Stock Exchange, as applicable, or, if such security is not listed or admitted to trading on such National Market or Exchange, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution. "COMMON STOCK" shall mean the class of capital stock of the Company designated as Common Stock, par value $.01 per share, at the date hereof. "COMPANY" shall mean Alkermes, Inc., a Pennsylvania corporation, and, shall include its successors and assigns. "CONVERSION PRICE" shall mean the average Closing Price of the Common Stock on The Nasdaq National Market or a national securities exchange registered as such pursuant to the Exchange Act and on which the Common Stock is listed for the 10 consecutive Trading Days immediately preceding the date of notice of conversion or optional redemption, or January 1, 2009 in the case of mandatory redemption, of shares of 1999 Preferred Stock into or for shares of Common Stock in accordance with Section 5 or Section 7 hereof. "DEBENTURES" shall mean the Company's 1999 Redeemable Convertible Subordinated Debentures, issued under an indenture to be negotiated, authorized and executed pursuant to Section 11 (the "Indenture"). "DIVIDEND PAYMENT DATE" shall have the meaning specified in Section 3(a). "DIVIDEND PAYMENT RECORD DATE" shall have the meaning specified in Section 3(a). "DIVIDEND PERIODS" shall mean quarterly dividend periods commencing on the first day of March, June, September and December of each year and ending on and including 2 3 the day preceding the first day of the next succeeding Dividend Period (other than the initial Dividend Period which shall commence on the Issue Date and end on and include May 31, 1999 and the final Dividend Period which shall conclude on the day preceding the day that the last outstanding share of 1999 Preferred Stock is converted or redeemed). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "EXCHANGE DATE" shall have the meaning specified in Section 11(b). "HOLDER," "HOLDER OF SHARES OF 1999 PREFERRED STOCK," or "HOLDER OF 1999 PREFERRED STOCK," as applied to any share of 1999 Preferred Stock, or other similar terms (but excluding the term "beneficial holder"), shall mean any person in whose name at the time a particular share of 1999 Preferred Stock is registered on the Company's stock records, which shall include the books of the Transfer Agent in respect of the Company and any stock transfer books of the Company. "ISSUE DATE" shall mean the first date on which shares of 1999 Preferred Stock are issued. "LIBOR RATE" shall mean, for a particular quarter, the three-month London Interbank Offer Rate (LIBOR) published in the eastern edition of THE WALL STREET JOURNAL on January 25, April 25, July 25 or October 25 (or the next succeeding business day) in such quarter or 15 business days prior to the last day of the final Dividend Period. "NON-VOTING COMMON STOCK" shall mean the class of capital stock of the Company designated as Non-Voting Common Stock, par value $.01 per share, at the date hereof. "PERSON" shall mean a corporation, an association, a partnership, an individual, a joint venture, a joint stock company, a trust, a limited liability company, an unincorporated organization or a government or an agency or a political subdivision thereof. "RULE 144(k)" means Rule 144(k) as promulgated under the Securities Act, or any successor rule. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SUBSIDIARY" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of 3 4 directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "TRADING DAY" shall mean (x) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national security exchange, a day on which the New York Stock Exchange or another national security exchange is open for business or (y) if the applicable security is quoted on The Nasdaq National Market, a day on which trades may be made thereon or (z) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "TRANSFER AGENT" means BankBoston, N.A. or such other agent or agents of the Company as may be designated by the Board of Directors of the Company as the transfer agent for the 1999 Preferred Stock. 3. DIVIDENDS. (a) Holders of 1999 Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors, out of the funds of the Company legally available therefor, cash dividends per share of 1999 Preferred Stock at the LIBOR Rate, payable on March 1, June 1, September 1 and December 1 (each a "Dividend Payment Date"), commencing June 1, 1999 (and, in the case of any accrued but unpaid dividends, at such additional times and for such interim periods, if any, as determined by the Board of Directors). If June 1, 1999 or any other Dividend Payment Date shall be on a day other than a Business Day, then the Dividend Payment Date shall be on the next succeeding Business Day. Dividends on the 1999 Preferred Stock will be cumulative from the Issue Date, whether or not in any Dividend Period or Periods there shall be funds of the Company legally available for the payment of such dividends and whether or not such dividends are declared, and will be payable to holders of record as they appear on the stock books of the Company on such record dates (each such date, a "Dividend Payment Record Date"), which shall be not more than 60 days nor less than 10 days preceding the Dividend Payment Dates thereof, as shall be fixed by the Board of Directors. Dividends on the 1999 Preferred Stock shall accrue (whether or not declared) on a daily basis from the Issue Date, and accrued dividends for each Dividend Period shall accumulate to the extent not paid on the Dividend Payment Date first following the Dividend Period for which they accrue. As used herein, the term "accrued" with respect to dividends includes both accrued and accumulated dividends. (b) The amount of dividends payable for each Dividend Period on the 1999 Preferred Stock shall be computed on the basis of actual days elapsed. Holders of shares of 1999 Preferred Stock called for redemption on a redemption date falling between the close of business on a Dividend Payment Record Date and the opening of business on the corresponding Dividend Payment Date shall, in lieu of receiving such dividend on the 4 5 Dividend Payment Date fixed therefor, receive such dividend payment together with all other accrued and unpaid dividends on the date fixed for redemption (unless such holders convert such shares in accordance with Section 7 hereof). Holders of shares of 1999 Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the 1999 Preferred Stock which may be in arrears. (c) Notwithstanding the accumulation of dividends on the 1999 Preferred Stock, whether or not declared or paid, the Company may (i) declare or pay or set apart for payment dividends, in cash or shares of capital stock, on any class or series of stock of the Company; (ii) redeem, purchase or otherwise acquire for any consideration (or any monies paid to or made available for a sinking fund or otherwise for the purchase or redemption of any shares of any such stock) any other capital stock of the Company. 4. LIQUIDATION PREFERENCE. (a) In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Company (for the purposes of this Section 4, a "Liquidation"), before any distribution of assets shall be made to the holders of Common Stock or the holders of any other stock of the Company that ranks junior to the 1999 Preferred Stock upon Liquidation, the holder of each share of 1999 Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its shareholders, an amount equal to liquidation preference of $10,000 per share plus all dividends accrued and unpaid on such share up to the date of distribution of the assets of the Company to the holders of 1999 Preferred Stock, and the holders of any class or series of preferred stock ranking on a parity with the 1999 Preferred Stock as to Liquidation shall be entitled to receive the full respective liquidation preferences (including any premium) to which they are entitled and shall receive all accrued and unpaid dividends with respect to their respective shares through and including the date of distribution. (b) If upon any Liquidation of the Company, the assets available for distribution to the holders of 1999 Preferred Stock and any other stock of the Company ranking on a parity with the 1999 Preferred Stock upon Liquidation which shall then be outstanding shall be insufficient to pay the holders of all outstanding shares of 1999 Preferred Stock and all other such parity stock the full amounts (including all dividends accrued and unpaid) of the liquidating distribution to which they shall be entitled, then the holders of each series of such stock will share ratably in any such distribution of assets first in proportion to their respective liquidation preferences (including accrued and unpaid dividends in the case of 1999 Preferred Stock) until such preferences are paid in full, and then in proportion to their respective amounts of accrued but unpaid dividends. After payment of any such liquidating preference and accrued dividends, the holders of shares of 1999 Preferred Stock will not be entitled to any further participation in any distribution of assets by the Company. 5 6 (c) For purposes of this Section 4, a Liquidation shall not include (i) any consolidation or merger of the Company with or into any other corporation, (ii) any liquidation, dissolution, winding up or reorganization of the Company immediately followed by reincorporation of another corporation or (iii) a sale or other disposition of all or substantially all of the Company's assets to another corporation unless in connection therewith the Liquidation of the Company is specifically approved. (d) The holder of any shares of 1999 Preferred Stock shall not be entitled to receive any payment owed for such shares under this Section 4 until such holder shall cause to be delivered to the Company (i) the certificate(s) representing such shares of 1999 Preferred Stock and (ii) transfer instrument(s) satisfactory to the Company and sufficient to transfer such shares of 1999 Preferred Stock to the Company free of any adverse interest. No interest shall accrue on any payment upon Liquidation after the due date thereof. 5. REDEMPTION. (a) OPTIONAL REDEMPTION. The Company, at its option, may redeem the shares of 1999 Preferred Stock, in whole or in part, out of funds legally available therefor, at any time or from time to time, subject to the notice provisions and provisions for partial redemption described below at the redemption price of $10,000 per share plus an amount equal to accrued and unpaid dividends, if any, to (but excluding) the date fixed for redemption, whether or not earned or declared in cash or by delivering fully paid and nonassessable shares of Common Stock, and Non-Voting Common Stock, if any, on the terms and conditions in this Section 5 and Section 8, or any combination thereof at the sole option of the Company; PROVIDED that, if the applicable redemption date is a Dividend Payment Date, the quarterly payment of dividends becoming due on such date shall be payable to the holders of such shares of 1999 Preferred Stock registered as such on the relevant record date subject to the terms and provisions of Section 3. If fewer than all the outstanding shares of the 1999 Preferred Stock are to be redeemed, shares to be redeemed shall be selected by the Company from outstanding shares of 1999 Preferred Stock not previously called for redemption by lot or pro rata (as near as may be) or by any other equitable method determined by the Company in its sole discretion. If fewer than all the shares of 1999 Preferred Stock represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. If a part of a share of 1999 Preferred Stock is redeemed, then the Company will issue a certificate representing a fractional share of 1999 Preferred Stock evidencing the remaining interest of such holder. (b) MANDATORY REDEMPTION. On January 1, 2009, the Company will redeem all of the outstanding shares of the 1999 Preferred Stock, out of funds legally available therefor, at the redemption price of $10,000 per share plus an amount equal to accrued and unpaid dividends, if any, to (but excluding) the date fixed for redemption, whether or not 6 7 earned or declared, in cash or by delivering shares of Common Stock, and Non-Voting Common Stock, if any, on the terms and conditions in this Section 5 and Section 8, or any combination thereof at the sole option of the Company. (c) No sinking fund or other similar provision shall apply to the 1999 Preferred Stock. (d) In case the Company shall desire to exercise the right to redeem the shares of 1999 Preferred Stock, in whole or in part, pursuant to Section 5(a), it shall fix a date for redemption. In the case of any redemption, the Company will notify, at least two (2) Business Days prior the date fixed for redemption, the Transfer Agent and the holders of 1999 Preferred Stock so to be redeemed at their last addresses and facsimile numbers as the same appear on the Company's stock records. Such mailing shall be by facsimile and by overnight courier. The notice if delivered in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by courier or any defect in the notice to the holder of any share of 1999 Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other share of 1999 Preferred Stock. Each such notice of redemption shall specify the number of shares of 1999 Preferred Stock to be redeemed, the date fixed for redemption, the redemption price at which such shares of 1999 Preferred Stock are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of certificate or certificates representing such shares of 1999 Preferred Stock and in what form consideration will be paid, that dividends accrued to (but excluding) the date fixed for redemption will be paid as specified in said notice, and that on and after said date dividends thereon or on the portion thereof to be redeemed will cease to accrue. If payment of the redemption price shall be in shares of Common Stock, and Non-Voting Common Stock, if any, such notice shall also state the Conversion Price applicable to the redemption and the date on which the right to convert such shares of 1999 Preferred Stock into Common Stock, and Non-Voting Common Stock, if any, will expire. (e) REDEMPTION IN CASH. If payment will be made in cash, the following terms shall apply: On or prior to the redemption date specified in the notice of redemption given as provided in Section 5(d), the Company will deposit with the Transfer Agent, or a bank or trust company acting as escrow agent for the Company an amount of money sufficient to redeem on the redemption date all of the shares of 1999 Preferred Stock so called for redemption at the appropriate redemption price, together with accrued dividends (whether or not declared) to (but excluding) the date fixed for redemption. The Company shall be entitled to make any deposit of funds contemplated by this Section 5 under arrangements designed to permit such funds to generate interest or other income for the Company, and the Company 7 8 shall be entitled to receive all interest and other income earned by any funds while they shall be deposited as contemplated by this Section 5. (f) REDEMPTION IN COMMON STOCK. If payment will be made in shares of Common Stock, and Non-Voting Common Stock, if any, the following terms shall apply: On the redemption date specified in the notice of redemption given as provided in Section 5(b), the Company will deliver to holders of 1999 Preferred Stock either (x) a certificate for Common Stock, and Non-Voting Common Stock, if any, registered in the name(s) of each holder of 1999 Preferred Stock or (y) a confirmation issued by the Transfer Agent to the effect that Common Stock, and Non-Voting Common Stock, if any, in uncertificated form has been registered in the name(s) of each holder of 1999 Preferred Stock on the books of the Company, in either case evidencing or confirming the registration of that full number of shares which, when multiplied by the Conversion Price, shall equal the sum of the redemption price, together with accrued dividends (whether or not declared) to (but excluding) the date fixed for redemption. No fractional shares of Common Stock or NonVoting Common Stock shall be issued by the Company. If any fractional share of Common Stock or Non-Voting Common Stock otherwise would be issuable upon the redemption of the 1999 Preferred Stock, the Company shall make an adjustment therefor in an amount of cash (without interest) determined by multiplying such fraction by the Conversion Price of one share of Common Stock. (g) TERMS APPLICABLE TO REDEMPTION IN CASH OR COMMON STOCK. If notice of redemption has been given as above provided, on and after the date fixed for redemption (unless the Company shall default in the payment of the redemption price, together with accrued and unpaid dividends to (but excluding) said date), dividends on such shares of 1999 Preferred Stock so called for redemption shall cease to accrue and such shares of 1999 Preferred Stock shall be deemed no longer outstanding and the holders thereof shall have no right in respect of such shares of 1999 Preferred Stock except the right to receive the redemption price thereof and accrued and unpaid dividends (whether or not declared) to (but excluding) the date fixed for redemption, without interest thereon. On presentation and surrender of certificate or certificates representing such shares of 1999 Preferred Stock to the Transfer Agent or escrow agent, which shall be specified in the notice to holders, such shares of 1999 Preferred Stock to be redeemed shall be redeemed by the Company at the applicable redemption price, together with dividends accrued thereon (whether or not declared) to (but excluding) the date fixed for redemption; PROVIDED that, if the applicable redemption date is a Dividend Payment Date, the quarterly payment of dividends becoming due on such date shall be payable to the holders of such shares of 1999 Preferred Stock registered as such on the relevant record date subject to the terms and provisions of Section 3. 6. SHARES TO BE RETIRED. Any share of 1999 Preferred Stock converted, redeemed or otherwise acquired by the Company shall be retired and canceled and shall upon cancellation be restored to the status of authorized but unissued shares of 1999 Preferred 8 9 Stock, subject to reissuance by the Board of Directors as shares of 1999 Preferred Stock of one or more series. 7. CONVERSION. Holders of shares of 1999 Preferred Stock shall have the right to convert all or a portion of such shares into shares of Common Stock, and Non-Voting Common Stock, if any, as follows: (a) Subject to and upon compliance with the provisions of this Section 7 and Section 8, a holder of shares of 1999 Preferred Stock shall have the right, at his option, after September 1, 1999 and during any period that the Closing Price of Common Stock on The Nasdaq National Market or a national securities exchange registered as such pursuant to the Exchange Act and on which the Common Stock is listed is above $45 per share for at least 10 consecutive Trading Days (except that, with respect to shares of 1999 Preferred Stock which shall be called for redemption, such right shall terminate at the close of business on the next succeeding Business Day after the date notice is sent to the holders, unless the Company shall default in payment due upon redemption thereof) to convert any share of 1999 Preferred Stock into that number of fully paid and nonassessable shares of Common Stock, and Non-Voting Common Stock, if any, (as such shares shall then be constituted) obtained by dividing $10,000 plus any accrued dividends (whether or not declared) to (but excluding) the date fixed for conversion by the Conversion Price, by surrender of certificate or certificates representing such share of 1999 Preferred Stock so to be converted in the manner provided in Section 7(b); PROVIDED that, in the event that a third party, who is not an affiliate of the Company, acquires greater than 49% of the voting stock of the Company and the holder could otherwise convert his shares of 1999 Preferred Stock, the holder may convent such shares of 1999 Preferred Stock prior to September 1, 1999. If a part of a share of 1999 Preferred Stock is converted, then the Company shall convert such share into the appropriate number of shares of Common Stock, and Non-Voting Common Stock, if any, and issue a certificate representing a fractional share of 1999 Preferred Stock evidencing the remaining interest of such holder. A holder of 1999 Preferred Stock is not entitled to any rights of a holder of Common Stock or Non-Voting Common Stock until such holder has converted his 1999 Preferred Stock to Common Stock or Non-Voting Common Stock and only to the extent such 1999 Preferred Stock is deemed to have been converted to Common Stock or Non-Voting Common Stock under this Section 7. (b) In order to exercise the conversion right, the holder of 1999 Preferred Stock who intends to convert shall send a written notice (the "Conversion Notice"), at least thirty (30) Business Days prior to an intended conversion, to the Company and the Transfer Agent of his, her or its election to convert such number of shares of 1999 Preferred Stock specified in said notice. The holder of the 1999 Preferred Stock to be converted shall surrender certificate or certificates (with the Conversion Notice, the form of which is set forth in Section 15(a), on the reverse of the certificate or certificates duly completed) representing the number of shares to be so converted, duly endorsed, to the Transfer Agent. The Conversion Notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock, and Non-Voting Common Stock, if any, issuable on 9 10 such conversion shall be issued, and shall be accompanied by transfer taxes, if required pursuant to Section 8(b). Each such share of 1999 Preferred Stock surrendered for conversion shall, unless the shares of Common Stock, and Non-Voting Common Stock, if any, issuable on conversion are to be issued in the same name in which such share of 1999 Preferred Stock is registered, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or his duly authorized attorney. As promptly as practicable after satisfaction of the requirements for conversion set forth above, the Company shall issue and shall deliver to such holder or, if shares of Common Stock, and Non-Voting Common Stock, if any, issuable on conversion are to be issued in a name other than that in which such share of 1999 Preferred Stock to be converted is registered (as if such transfer were a transfer of the share of 1999 Preferred Stock so converted), to such other person, at the Transfer Agent, certificate or certificates representing the number of shares of Common Stock, and Non-Voting Common Stock, if any, issuable upon the conversion of such share of 1999 Preferred Stock or a portion thereof in accordance with the provisions of this Section 7 and a check or cash in respect of any fractional interest in respect of a share of Common Stock or Non-Voting Common Stock, if any, arising upon such conversion, as provided in Section 7(c) (which payment, if any, shall be paid no later than five Business Days after satisfaction of the requirements for conversion set forth above). Each conversion shall be deemed to have been effected on the date on which the requirements set forth above in the first paragraph of this Section 7(b) have been satisfied as to such share of 1999 Preferred Stock so converted, and the person in whose name any certificate or certificates for the shares of Common Stock, and Non-Voting Common Stock, if any, shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; PROVIDED, HOWEVER, that if any such surrender occurs on any date when the stock transfer books of the Company shall be closed, the conversion shall be effected on the next succeeding day on which such stock transfer books are open, and the person in whose name the certificates are to be issued shall be the record holder thereof for all purposes, but such conversion shall be at the Conversion Price. In the case of any share of 1999 Preferred Stock which is converted after any Dividend Payment Record Date with respect to the payment of a dividend on the 1999 Preferred Stock and prior to the close of business on the Business Day prior to the next succeeding Dividend Payment Date, the dividend due on such Dividend Payment Date shall be payable on such Dividend Payment Date to the holder of record of such share as of such Dividend Payment Record Date notwithstanding such conversion. Except as provided in this paragraph, no payment or adjustment shall be made upon any conversion on account of any dividends accrued on shares of 1999 Preferred Stock surrendered for conversion or on account of any dividends on the Common Stock or Non-Voting Common Stock issued upon conversion. 10 11 (c) In connection with the conversion of any shares of 1999 Preferred Stock, a portion of such shares may be converted; however no fractional shares of Common Stock or Non-Voting Common Stock or scrip representing fractional shares shall be issued upon conversion of the 1999 Preferred Stock. If any fractional share of stock otherwise would be issuable upon the conversion of the 1999 Preferred Stock, the Company shall make an adjustment therefor in an amount of cash (without interest) determined by multiplying such fraction by the Conversion Price of one share of Common Stock. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock, and Non-Voting Common Stock, if any, issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of 1999 Preferred Stock so surrendered. (d) Upon receipt of a holder's notice of its intention to convert (as provided in Section 7(b)), the Company shall have the option, in its sole discretion, of redeeming the 1999 Preferred Stock to be converted into Common Stock, and Non-Voting Common Stock, if any, for cash prior to such conversion. 8. TERMS OF ISSUANCE OF COMMON STOCK, AND NON-VOTING COMMON STOCK, IF ANY, ON REDEMPTION OR CONVERSION. (a) SHARE ISSUANCE LIMITATION. In no event shall the Company issue or be required to issue, for redemption for stock or on conversion, greater than 4,976,220 shares of Common Stock, and Non-Voting Common Stock, if any, unless the Company has obtained the prior approval of a majority of the holders of Common Stock (excluding any shares issued to holders of 1999 Preferred Stock hereunder), which approval the Company may seek in its sole discretion at any time. (b) LIMITATION ON COMMON STOCK ISSUANCE; ISSUANCE OF NON-VOTING COMMON STOCK. In the event of a redemption for stock or conversion, whether in whole or in part, the Company shall issue only that number of shares of Common Stock so that the holder of 1999 Preferred Stock shall beneficially own, together with any other shares of the Company's stock entitled to vote for the election of directors ("Voting Stock"), (a) no more than 49.99% of the issued and outstanding shares of Voting Stock and (b) an amount of Voting Stock, the aggregate value (as defined in the Hart-Scott-Rodino Antitrust Improvement Act (16 C.F.R. Section 801.10)) of which, is no greater than $15 million. In the event that the number of shares of Common Stock issued in accordance with the foregoing limitation do not equal the full amount of shares of Common Stock otherwise issuable to such holder upon such conversion or redemption, then the Company shall issue that number of shares of Non-Voting Common Stock which makes up the difference between the number of shares of Common Stock actually issued and the number of shares issuable. (c) The issue of stock certificates representing the shares of Common Stock, and Non-Voting Common Stock, if any, on conversions or redemption of the 1999 Preferred 11 12 Stock shall be made without charge to the relevant holder of 1999 Preferred Stock for any tax in respect of the issue thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than the name in which the shares of 1999 Preferred Stock with respect to which such shares of Common Stock, and Non-Voting Common Stock, if any, are issued are registered, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (d) The Company covenants that all shares of Common Stock and NonVoting Common Stock which may be delivered upon conversion or redemption of shares of 1999 Preferred Stock will upon delivery be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. (e) The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock and Non-Voting Common Stock or its issued shares of Common Stock held in its treasury, or both, a sufficient number of shares of Common Stock and NonVoting Common Stock for the purpose of effecting conversions of shares of 1999 Preferred Stock not theretofore converted into Common Stock or Non-Voting Common Stock. For purposes of this reservation of Common Stock and Non-Voting Common Stock, the number of shares of Common Stock and Non-Voting Common Stock which shall be deliverable upon the conversion of all outstanding shares of 1999 Preferred Stock shall be computed as if at the time of computation all outstanding shares of 1999 Preferred Stock were held by a single holder. The issuance of shares of Common Stock, and Non-Voting Common Stock, if any, upon conversion or redemption of shares of 1999 Preferred Stock is authorized in all respects. The Company shall from time to time, in accordance with the laws of the Commonwealth of Pennsylvania, use its best efforts to increase the authorized number of shares of Common Stock or Non-Voting Common Stock if at any time the number of shares of authorized and unissued Common Stock or Non-Voting Common Stock shall not be sufficient to permit the conversion or redemption of all the then outstanding shares of 1999 Preferred Stock. (f) The Company further covenants that if at any time the Common Stock shall be listed on The Nasdaq National Market or any other national securities exchange or automated quotation system the Company will, if permitted by the rules of such exchange or automated quotation system, list and keep listed, so long as the Common Stock shall be so listed on such exchange or automated quotation system, all Common Stock issuable upon conversion or redemption upon such conversion into or redemption for Common Stock. 12 13 9. RANKING. (a) the 1999 Preferred Stock ranks junior to the $3.25 Convertible Exchangeable Preferred Stock and prior to the Common Stock and the Non-Voting Common Stock as to dividends (except as provided in Section 3(c) hereof) or as to distribution of assets upon liquidation, dissolution or winding up; (b) As to any future classes of capital stock of the Company, as to dividends or as to the distribution of assets upon liquidation, dissolution or winding up, the 1999 Preferred Stock will rank prior to, on parity with or junior to, such capital stock if the Second Amended and Restated Articles of Incorporation, as amended from time to time, provide that the holders of such capital stock are entitled to receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference to, on a parity with, or junior to the holders of shares of 1999 Preferred Stock. 10. VOTING RIGHTS. (a) The holders of 1999 Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. In connection with any right to vote, each holder of 1999 Preferred Stock will have one vote for each share of 1999 Preferred Stock held. Any shares of 1999 Preferred Stock held by the Company or any entity controlled by the Company shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum. (b) So long as the 1999 Preferred Stock is outstanding, the Company shall not, without the affirmative vote or consent of the holders of at least a majority (unless a higher percentage shall then be required by applicable law) of all outstanding shares of 1999 Preferred Stock voting separately as a class, amend, alter or repeal any provision of the Articles of Incorporation (including, without limitation, these resolutions) or the Bylaws of the Company so as to affect adversely the relative rights, preferences, qualifications, limitations or restrictions of the 1999 Preferred Stock; PROVIDED, HOWEVER, that no such vote shall be required to create, authorize or issue, or reclassify any authorized stock of the Company into, or increase the authorized amount of, any class or series of the Company's capital stock ranking senior to, on parity with, or junior to the 1999 Preferred Stock as to dividends or as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or any obligation or security convertible into shares of such a class or series. In addition, so long as the 1999 Preferred Stock is outstanding, the Company shall not, without the affirmative vote or consent of the holders of at least a majority (unless a higher percentage shall then be required by applicable law) of all outstanding shares of 1999 Preferred Stock voting separately as a class, enter into a share exchange pursuant to which the 1999 Preferred Stock would be exchanged for any other securities or merge or consolidate with or into any other person or permit any other person to merge or consolidate with or into 13 14 the Company, unless in such case each share of 1999 Preferred Stock shall remain outstanding or unaffected or shall be converted into or exchanged for redeemable convertible exchangeable preferred stock of the surviving entity having voting rights, preferences, limitations or special rights thereof substantially similar (but no less favorable) to a share of 1999 Preferred Stock. A class vote on the part of the 1999 Preferred Stock shall, without limitation, specifically not be deemed to be required (except as otherwise required by law or resolution of the Company's Board of Directors) in connection with the authorization, issuance or increase in the amount of any bonds, mortgages, debentures or other obligations of the Company. 11. EXCHANGE. (a) The 1999 Preferred Stock shall be exchangeable, in whole but not in part, at the option of the Company on any Dividend Payment Date beginning June 1, 1999, for the Debentures at the rate of $10,000 principal amount of Debentures for each share of 1999 Preferred Stock outstanding at the time of exchange; PROVIDED that the Debentures will be issuable in denominations of $10,000 and integral multiples thereof. If the exchange results in an amount of Debentures that is not an integral multiple of $10,000, the amount in excess of the closest integral multiple of $10,000 will be paid in cash by the Company. (b) The Company will mail to each record holder of 1999 Preferred Stock written notice of its intention to exchange the 1999 Preferred Stock for the Debentures no less than 60 days prior to the proposed date of the exchange (the "Proposed Exchange Date"). The notice shall include the proposed form of indenture which shall have terms substantially similar to the terms of the 1999 Preferred Stock with such other terms as are reasonable or customary in indentures for corporate debt and shall specify the Proposed Exchange Date, the place or places where certificates for shares of 1999 Preferred Stock are to be surrendered for Debentures and shall state that dividends on the 1999 Preferred Stock will cease to accrue on and after the actual date of the exchange (the "Exchange Date"). Upon receipt of the notice and the form of indenture, the holders shall promptly and in good faith review and negotiate the indenture with the understanding that time is of the essence. While the Company, the holders and proposed trustee are negotiating the indenture, the Company may set a new Proposed Exchange Date by notifying the holders. (c) If (i) the holders have agreed to the terms of the indenture, which shall not be unreasonably withheld, (ii) the Company and a reputable trustee have properly authorized and executed the indenture and (iii) the Company has caused the Debentures to be authenticated on or prior to the Exchange Date and has complied with the other provisions of this Section 11, then, notwithstanding that any certificates for shares of 1999 Preferred Stock have not been surrendered for exchange, on the Exchange Date dividends shall cease to accrue on the 1999 Preferred Stock and at the close of business on the Exchange Date the holders of 1999 Preferred Stock shall cease to be shareholders with respect to the 1999 Preferred Stock and shall have no interest in or other claims against the Company by virtue thereof and shall have no voting or other rights with respect to the 1999 Preferred Stock, except the right to 14 15 receive the Debentures issuable upon such exchange and the right to accumulated and unpaid dividends as of the Exchange Date, without interest thereon, upon surrender (and endorsement, if required by the Company) of their certificates, and the shares evidenced thereby shall no longer be deemed outstanding for any purpose. The Company will cause the Debentures to be authenticated on or before the Exchange Date, and the Company will pay interest on the Debentures at the rate and on the dates specified in such Indenture from and after the Exchange Date. (d) Notwithstanding the foregoing, if notice of exchange has been given pursuant to this Section 11 and any holder of shares of 1999 Preferred Stock shall, prior to the close of business on the Exchange Date, give written notice to the Company pursuant to Section 7 of the conversion of any or all of the shares held by the holder (accompanied by a certificate or certificates for such shares, duly endorsed or assigned to the Company), then the exchange shall not become effective as to the shares to be converted and the conversion shall become effective as provided in Section 7. (e) The Debentures will be delivered to the persons entitled thereto upon surrender to the Company or its agent appointed for that purpose of the certificates for the shares of 1999 Preferred Stock being exchanged therefor. (f) Notwithstanding the other provisions of this Section 11, if on the Exchange Date the Company has not paid full cumulative dividends on the 1999 Preferred Stock (or set aside a sum therefor) or an Event of Default under the Indenture shall have occurred and be continuing, the Company may not exchange the 1999 Preferred Stock for the Debentures and any notice previously given pursuant to this Section 11 shall be of no effect. (g) Prior to the Exchange Date, the Company will comply with any applicable securities and blue sky laws with respect to the exchange of the 1999 Preferred Stock for the Debentures. (h) Dividends with respect to the shares of 1999 Preferred Stock to be exchanged which are due on the quarterly Dividend Payment Date on which the exchange is effected will be mailed to holders in the regular course. 12. RECORD HOLDERS. The Company and the Transfer Agent may deem and treat the record holder of any shares of 1999 Preferred Stock as the true and lawful owner thereof for all purposes and neither the Company nor the Transfer Agent shall be affected by any notice to the contrary. 13. NOTICE. Except as may otherwise be provided for herein, all notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of receipt of such notice or three Business Days after the mailing of such notice if sent by registered mail (unless first-class mail shall be specifically permitted for such notice 15 16 under the terms of this resolution) with postage prepaid, addressed, if to the Company, to its offices at 64 Sidney Street, Cambridge, Massachusetts 02139-4136 (Attention: Chief Financial Officer) or to an agent of the Company designated as permitted by this certificate, or, if to any holder of 1999 Preferred Stock, to such holder at the address of such holder of 1999 Preferred Stock as listed in the Company's stock records or to such other address as the Company or holder, as the case may be, shall have designated by notice similarly given. 14. RESTRICTIONS ON TRANSFER. (a) RESTRICTED SECURITIES. The shares of 1999 Preferred Stock have not been registered under the Securities Act and therefore are "restricted securities" under the federal securities laws. Under such laws and applicable regulations, such shares may be resold without registration under the Securities Act only in certain limited circumstances pursuant to the resale limitations imposed thereby. (b) LIMITATIONS ON DISPOSITIONS. Under the Securities Act, dispositions of all or any portion of the shares of 1999 Preferred Stock cannot be made unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) There exists an exemption under the Securities Act so that such disposition will not require registration of such shares under the Securities Act, including a disposition made in accordance with Rule 144. (d) LEGEND. Certificates evidencing the shares of 1999 Preferred Stock may bear the following legend: "The Securities evidenced by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), and are "restricted securities" as defined in Rule 144 promulgated under the Act. The securities may not be sold or offered for sale or otherwise distributed except (i) pursuant to an effective registration statement for the securities under the Act; (ii) in compliance with Rule 144; or (iii) after receipt of an opinion of counsel reasonably satisfactory to Alkermes that such registration or compliance is not required as to said sale, offer or distribution." 16 17 15. FORM OF NOTICE OF CONVERSION. The following is the form of Conversion Notice to be set forth on the reverse of the 1999 Preferred Stock certificate: [FORM OF CONVERSION NOTICE] CONVERSION NOTICE To: Alkermes, Inc. BankBoston, N.A. The undersigned registered owner of the 1999 Preferred Stock hereby irrevocably exercises the option to convert the 1999 Preferred Stock, or the portion hereof below designated, into shares of Common Stock or Non-Voting Common Stock in accordance with the terms of the 1999 Preferred Stock Statement, and directs that the shares issuable and deliverable upon such conversion, together with any check in payment for fractional shares and any 1999 Preferred Stock representing any unconverted amount of shares hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of the 1999 Preferred Stock not converted are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: Signature(s) Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17AD-15 if shares of Common Stock are to be issued, or the 1999 Preferred Stock to be delivered, other than to and in the name of the registered holder. 17 18 Signature Guarantee Fill in for registration of shares if to be issued, and the 1999 Preferred Stock if to be delivered, other than to and in the name of the registered holder: - ------------------------------------ (Name) - ------------------------------------ (Street Address) - ------------------------------------ (City, State and Zip Code) Please print name and address Number of shares to be converted (if less than all): ----------------------------------------- Social Security or Other Taxpayer Identification Number 18 EX-3.1(G) 3 NON-VOTING COMMON STOCK TERMS 1 Exhibit 3.1(g) ALKERMES, INC. EXHIBIT A TO STATEMENT WITH RESPECT TO SHARES RESOLUTIONS ESTABLISHING NON-VOTING COMMON STOCK ($.01 Par Value) ---------- RESOLVED, that pursuant to authority expressly granted to and vested in the Board of Directors of Alkermes, Inc. (the "Company"), a Pennsylvania corporation, by the provisions of the Second Amended and Restated Articles of Incorporation, as amended, of the Company (the "Articles of Incorporation"), there is hereby established a series of common stock, par value $.01 per share, which shall consist of 450,000 of the 2,000,000 shares of the undesignated and unissued capital stock of the Company, and which shall have the following designation and voting rights, limitations and special rights: 1. NUMBER OF SHARES AND DESIGNATION. 450,000 shares of capital stock, par value $.01 per share, of the Company are hereby constituted as a series of the common stock designated as Non-Voting Common Stock (the "Non-Voting Common Stock"). 2. VOTING RIGHTS. (a) The holders of Non-Voting Common Stock will not have any voting rights except as set forth below or as otherwise from time to time required by law. In connection with any right to vote, each holder of Non-Voting Common Stock will have one vote for each share of Non-Voting Common Stock held. Any shares of Non-Voting Common Stock held by the Company or any entity controlled by the Company shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum. (b) So long as the Non-Voting Common Stock is outstanding, the Company shall not, without the affirmative vote or consent of the holders of at least a majority (unless a higher percentage shall then be required by applicable law) of all outstanding shares of Non-Voting Common Stock voting separately as a class, amend, alter or repeal any provision of the Articles of Incorporation (including, without limitation, these resolutions) or the Bylaws of the Company so as to affect adversely the rights of the Non-Voting Common Stock; PROVIDED, HOWEVER, that no such vote shall be required to create, authorize or issue, or reclassify any authorized stock of the Company into, or increase the authorized amount of, any class or series of the Company's capital stock ranking senior to, or on parity with, the Non-Voting Common Stock as to dividends or as to distributions of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or any obligation or security convertible into shares of such a class or series. 3. DIVIDEND, LIQUIDATION AND OTHER RIGHTS; SUBDIVISION AND COMBINATIONS. The holders of shares of Non-Voting Common Stock (a) shall be entitled to receive the same 2 dividends or distributions, in cash, shares of stock or other property, as the holders of Common Stock receive; (b) shall be entitled to the same liquidation rights as, and on a parity with, the holders of Common Stock; and (c) shall be entitled to any other rights or privileges as, and on a parity with, the holders of the Common Stock. If the outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, or shall be combined into a smaller number of shares of Common Stock, the shares of Non-Voting Common Stock shall be similarly subdivided or combined. 4. AUTOMATIC CONVERSION. Each share of Non-Voting Common Stock shall automatically be converted into one share of Common Stock immediately upon the transfer of ownership by the initial holder or an "affiliate" of the initial holder to a third party which is not an "affiliate" of such holder. In the event of such an automatic conversion, the outstanding shares of Non-Voting Common Stock shall be converted automatically without any further action by the holder of such shares and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent. The Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Non-Voting Common Stock are delivered to the Company or its transfer agent. Such conversion shall be deemed to have been made on the date of transfer to such third party holder and the person(s) entitled to receive shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. For purposes of this section 4, "affiliate" means a person or an entity that directly or indirectly controls, is controlled by or is under common control with the holder, where "control" means the direct or indirect ownership of fifty percent or more of the stock having the right to vote for directors thereof or the ability to otherwise control the management of the holder. 5. CONVERSION AT HOLDER'S OPTION. (a) Subject to the limitation in Section 5(c) below, each share of Non-Voting Common Stock shall be convertible, at the option of the holder of such share, into one share of Common Stock, by surrender of certificate or certificates representing the share or shares of Non-Voting Common Stock to be converted in the manner provided in Section 5(b). A holder of Non-Voting Common Stock is not entitled to any rights of a holder of Common Stock until such holder has converted his Non-Voting Common Stock to Common Stock and only to the extent such Non-Voting Common Stock is deemed to have been converted to Common Stock under this Section 5. (b) In order to exercise the conversion right, the holder of Non-Voting Common Stock who intends to convert shall send a written notice (the "Conversion Notice"), at least thirty (30) business days prior to an intended conversion, to the Company and the Transfer Agent of his, her or its election to convert such number of shares of Non-Voting Common Stock specified in said notice. The holder of the Non-Voting Common Stock to be converted shall surrender certificate or certificates (with the Conversion Notice) representing the number of shares to be so converted, duly endorsed, to the Transfer Agent. The Conversion Notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock issuable on such conversion shall be issued, and shall be accompanied by 3 transfer taxes, if required. Each such share of Non-Voting Common Stock surrendered for conversion shall, unless the shares of Common Stock issuable on conversion are to be issued in the same name in which such share of Non-Voting Common Stock is registered, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or his duly authorized attorney. As promptly as practicable after satisfaction of the requirements for conversion set forth above, the Company shall issue and shall deliver to such holder or, if shares of Common Stock issuable on conversion are to be issued in a name other than that in which such share of Non-Voting Common Stock to be converted is registered (as if such transfer were a transfer of the share of Non-Voting Common Stock so converted), to such other person, at the Transfer Agent, certificate or certificates representing the number of shares of Common Stock issuable upon the conversion of such share of Non-Voting Common Stock in accordance with the provisions of this Section 5. Each conversion shall be deemed to have been effected on the date on which the requirements set forth above in the first paragraph of this Section 5(b) have been satisfied as to such share of Non-Voting Common Stock so converted, and the person in whose name any certificate or certificates for the shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; PROVIDED, HOWEVER, that if any such surrender occurs on any date when the stock transfer books of the Company shall be closed, the conversion shall be effected on the next succeeding day on which such stock transfer books are open, and the person in whose name the certificates are to be issued shall be the record holder thereof for all purposes. (c) Any holder of Non-Voting Common Stock may only convert into Common Stock that number of shares of Non-Voting Common Stock so that such converting holder of Non-Voting Common Stock shall beneficially own, together with any other shares of the Company's stock entitled to vote for the election of directors ("Voting Stock"), (a) no more than 49.99% of the issued and outstanding shares of Voting Stock and (b) an amount of Voting Stock, the aggregate value (as defined in the Hart-Scott-Rodino Antitrust Improvement Act (16 C.F.R. Section 801.10)) of which, is no greater than $15 million. EX-3.2 4 BY-LAWS 1 Exhibit 3.2 As amended and restated and approved by the Board of Directors at a meeting held June 2, 1999 BY-LAWS OF ALKERMES, INC. SHAREHOLDERS' MEETINGS ---------------------- 1.1 PLACE. Meetings of shareholders shall be held at the principal office of the Corporation or at such other place within or without the Commonwealth of Pennsylvania as may be fixed by the Board of Directors. 1.2 ANNUAL MEETING. An annual meeting of shareholders for the election of directors and the transaction of such other business as may properly come before the meeting shall be held in each calendar year. The Board of Directors shall, by resolution, set the date, time and place of the annual meeting. 1.3 SPECIAL MEETINGS. Special meetings of shareholders may be called at any time by the Chief Executive Officer or by the Board of Directors. 1.4 NOTICE. Written notice, stating the place, day and hour of each meeting of shareholders and, in the case of a special meeting, the general nature of the business to be transacted, shall be given by, or at the direction of, the person calling the meeting to each shareholder of record entitled to vote at the meeting at least five days prior to the day named for the meeting, or ten days in the case of a meeting that will 2 consider a fundamental change under Chapter 19 of the Pennsylvania Business Corporation Law of 1988, as amended. 1.5 QUORUM, ADJOURNMENT AND ACTION BY SHAREHOLDERS. A quorum at any meeting of shareholders shall consist of the presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast on a particular matter, except that in the case of a meeting called for the election of directors and adjourned for the lack of a quorum, shareholders entitled to vote who attend a second adjourned meeting, although less than a quorum, shall constitute a quorum for the election of directors. When a quorum is present, except as may be otherwise specified in the Articles of Incorporation, these by-laws, or provided by law, each matter shall be decided by the vote of the holders of a majority of the votes cast on such matter by the shareholders present in person or by proxy at the meeting and entitled to vote thereon. The Board of Directors may provide by resolution with respect to a specific meeting or with respect to a class of meetings that shareholders may participate in any shareholders' meeting by means of conference telephone or other communications equipment by which all persons participating in the meeting can hear each other. Shareholders so participating shall be deemed present at the meeting. 1.6 SHAREHOLDERS LIST. The officer or agent having charge of the transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order with the 2 3 address of and the number of shares held by each such shareholder. The list shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof. 1.7 RECORD DATE. The Board of Directors may fix a time, not more than ninety days prior to a) the date of any meeting of shareholders, b) the date fixed for the payment of any dividend or distribution, c) the date for the allotment of rights or d) the date when any change or conversion or exchange of shares will be made or will go into effect, as a record date for the determination of the shareholders i) entitled to notice of or to vote at any such meeting, ii) entitled to receive payment of any such dividend or distribution, iii) entitled to receive any such allotment of rights or iv) entitled to exercise the rights in respect to any such change, conversion or exchange of shares. DIRECTORS --------- 2.1 BOARD OF DIRECTORS. The business and affairs of the Corporation shall be managed under the direction of a Board of Directors, which shall consist of not more than fifteen (15) nor less than five (5) natural persons at least eighteen (18) years of age as fixed from time to time by the Board of Directors. 2.2 ELECTION AND TERM OF OFFICE. Except as provided herein, directors shall be elected by the shareholders at each annual meeting to hold office until the next succeeding annual 3 4 meeting and until their successors shall have been elected and qualified. 2.3 VACANCIES. Vacancies in the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by a majority of the remaining directors though less than a quorum. A director elected to fill a vacancy shall serve until the next annual meeting of shareholders and until his successor is elected and qualified. 2.4 ANNUAL MEETING. An annual meeting of the Board of Directors shall be held each year as soon as practicable after the annual meeting of shareholders, at the place where such meeting of shareholders was held or at such other place as the Board of Directors or the Chairman may determine, for the purpose of organization of the Board, election of officers and the transaction of any other business as may properly be brought before the meeting. No notice of any kind of the annual meeting of the Board of Directors need be given to either old or new directors. 2.5 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such times and at such places as the directors may determine from time to time. Notice of regular meetings need not be given. 2.6 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman, the Chief Executive Officer or by a majority of the directors then in office and shall be held on notice by letter or telegram mailed or delivered for transmission not later than on the second day immediately 4 5 preceding the day of such meeting, or by word of mouth or telephone or other means received not later than during the day immediately preceding the day of such meeting. Neither the business to be transacted at nor the purpose of any special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 2.7 TELEPHONE MEETINGS. The Board of Directors may participate in meetings of the Board by conference telephone or similar communications equipment by means of which all persons participating in the meetings can hear each other. Directors so participating will be deemed present. 2.8 QUORUM. A majority of the directors in office shall be necessary to constitute a quorum for the transaction of business, and the acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the Board of Directors. 2.9 UNANIMOUS CONSENT. Any action which may be taken at a meeting of the directors, or members of one of the committees appointed by the Board, may be taken without a meeting if, prior or subsequent to the action, a consent or consents in writing setting forth the action so taken shall be signed by all the directors or members of the Committee, as the case may be, and shall be filed with the Secretary of the Corporation. 2.10 PAYMENTS TO DIRECTORS. The directors may be reimbursed for the expenses of attending Board meetings and committee meetings and may be paid a fixed sum for attendance at each meeting or such other compensation for their services as 5 6 may, from time to time, be fixed by the Board of Directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 2.11 SALARIES. The salaries and other compensation of officers and assistant officers shall be fixed by the Board of Directors. 2.12 DIVIDENDS. The directors may, subject to the laws of the Commonwealth of Pennsylvania, declare and pay dividends from time to time. 2.13 LIABILITY OF DIRECTORS. A director of the Corporation shall not be personally liable, as such, for monetary damages for any action taken, or any failure to take any action, on or after January 27, 1987 unless he has breached or failed to perform the duties of his office as provided for under Section 1713 of the Pennsylvania Business Corporation Law of 1988, as amended, and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Any repeal, amendment, or modification of this Section shall be prospective only and shall not increase, but may decrease a director's liability with respect to actions or failures to act occurring prior to such change. 2.14 NOMINATIONS. Nominations for election to the Board of Directors may be made by the Board of Directors, or if delegated by the Board to such committee, by a Nominating Committee of the Board of Directors, or by any holder of any outstanding shares of the Corporation entitled to vote for the 6 7 election of directors. Nominations, other than those made by or on behalf of the Board of Directors, shall be made in writing and shall be delivered or mailed to the Chairman of the Board not later than 90 days in advance of the anniversary date of the Corporation's proxy statement for the Corporation's annual meeting of shareholders in the previous calendar year. Such notification shall contain the following information to the extent known to the notifying shareholder(s): (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of the Corporation's voting stock that will be voted for each proposed nominee by the notifying shareholder(s); (d) the name and residence address of the notifying shareholder(s); (e) the number of shares of the Corporation owned by the notifying shareholder(s); (f) such other information about each nominee proposed by such shareholder(s) as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated or intended to be nominated by the Board of Directors; and (g) the consent of each nominee to serve as a director of the Corporation if so elected. Nominations not made in accordance herewith shall be disregarded by the Chairman of the meeting and votes cast for such nominee shall not be counted. 7 8 COMMITTEES ---------- 3.1 ELECTION. The by-laws or the Board of Directors may establish one or more committees consisting in each case of one or more directors, and may designate one or more directors as alternate members of such a committee. Any such committee shall have power to manage the business and affairs of the Corporation to the extent provided in the resolution by which it is established, provided, however, that no such committee shall have any power to a) submit to the shareholders any action requiring approval of the shareholders under the Pennsylvania Business Corporation Law of 1988, as amended, b) create or fill vacancies on the Board, c) amend or repeal these by-laws or adopt new by-laws, d) amend or repeal any resolution of the Board that by its terms is amendable or repealable only by the Board or e) act on any matter committed by these by-laws or by resolution of the Board to another committee of the Board. In the absence or disqualification of any member of a committee, the other member or members who are not themselves disqualified, whether or not they constitute a quorum, may unanimously appoint another director to act at the meeting in place of the absent or disqualified member. 3.2 QUORUM. A majority of the directors appointed to a committee shall constitute a quorum for the transaction of business, and the acts of a majority of the directors appointed to a committee present at a meeting of the committee at which a quorum is present shall be the acts of the committee. 8 9 3.3 MEETINGS AND NOTICES. A committee may, by resolution, fix regular meeting dates of which no notice need be given to members of the committee. Special meetings of a committee may be held at the call of the chairman of the committee upon such notice as is provided in these by-laws for special meetings of the Board of Directors. 3.4 BOARD SUBMISSION. All action taken by the committees shall be reported to the Board not later than the next succeeding regular meeting of the Board. OFFICERS -------- 4.1 NUMBER. The officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, a Secretary, a Treasurer and, in addition, may include one or more Vice Presidents and such other officers and assistant officers as the Board of Directors may elect. Any two or more offices may be held by the same person. None of the officers need be a member of the Board of Directors. 4.2 ELECTION. The officers and assistant officers shall be elected by the Board of Directors at its annual meeting, or as soon thereafter as possible, and shall hold office until their successors are elected and qualified or until their death, resignation or removal by the Board of Directors. 4.3 VACANCIES. A vacancy by reason of death, resignation or removal of any officer or assistant officer or by reason of the creation of a new office may be filled by the Board of Directors. 9 10 4.4 GENERAL DUTIES. All officers and assistant officers, as between themselves and the Corporation, shall have such authority and perform such duties in the management of the property and affairs of the Corporation as may be provided in these by-laws and as may be determined by resolution of the Board of Directors not inconsistent with these by-laws. 4.5 CHAIRMAN OF THE BOARD. The Chairman of the Board ("Chairman") shall preside at all meetings of the Board of Directors. The Chairman shall, in general, perform all other duties incident to the office of Chairman of the Board and such other duties as may be assigned by the Board of Directors. 4.6 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall preside at all meetings of the shareholders. The Chief Executive Officer shall, in general, perform all duties incident to the office of the chief executive and such other duties as may be assigned by the Board of Directors. In the absence or disability of the Chairman, he shall preside at all meetings of the Board of Directors and shall otherwise perform the duties and exercise the powers of the Chairman. 4.7 PRESIDENT. The President shall be the Chief Operating Officer of the Corporation. The President shall, in the absence or disability of the Chief Executive Officer, perform the duties and exercise the powers of the Chief Executive Officer and shall perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. 10 11 4.8 VICE PRESIDENTS. The Vice President, or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer may from time to time prescribe. 4.9 SECRETARY. The Secretary shall be custodian of the books and records of the Corporation other than those in the custody of the Treasurer. He shall be custodian of the seal and is hereby authorized to affix the seal to all documents, the execution and delivery of which are duly authorized. The Secretary shall record the minutes of all meetings of shareholders and of the Board of Directors and shall be responsible for the giving of all notices of such meetings in accordance with these by-laws. The Secretary shall, in general, perform such other duties as are incident to the office of Secretary and as may be assigned to him by the Board of Directors or by the Chief Executive Officer. 4.10 TREASURER. The Treasurer shall be the financial officer of the Corporation. He shall have charge and custody of, and be responsible for, all funds of the Corporation and the books and records relating to the same, and shall deposit all such funds in the name of the Corporation in depositories selected by the Board of Directors. He shall render to the Chief Executive Officer and the Board of Directors, upon request, an account of all his transactions as Treasurer and of the financial 11 12 condition of the Corporation. The Treasurer shall, in general, perform such other duties as are incident to the office of Treasurer and as may be assigned to him by the Board of Directors or by the Chief Executive Officer. The Treasurer shall, if required to do so by the Board of Directors, furnish a bond in such form and amount and to cover such risks as the Board of Directors may determine. INDEMNIFICATION OF DIRECTORS, OFFICERS, AND OTHER PERSONS --------------------------------------------------------- 5.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, AND OTHER PERSONS. The Corporation shall indemnify any director, officer, employee or agent of the Corporation or any of its subsidiaries who was or is an "authorized representative" of the Corporation (which shall mean, for the purpose of this Article, a director or officer of the Corporation, or a person serving at the request of the Corporation as a director, officer, partner, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and who was or is a "party" (which shall include for purposes of this Article the giving of testimony or similar involvement) or is threatened to be made a party to any "proceeding" (which shall mean for purposes of this Article any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil, criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the Corporation, its shareholders or otherwise) by reason of the fact that such person was or is an authorized representative of the 12 13 Corporation to the fullest extent permitted by law, including without limitation indemnification against expenses (which shall include for purposes of this Article attorneys' fees and disbursements), damages, punitive damages, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding unless the act or failure to act giving rise to the claim is finally determined by a court to have constituted willful misconduct or recklessness. If an authorized representative is not entitled to indemnification in respect of a portion of any liabilities to which such person may be subject, the Corporation shall nonetheless indemnify such person to the maximum extent for the remaining portion of the liabilities. 5.2 ADVANCEMENT OF EXPENSES. The Corporation shall pay the expenses (including attorneys' fees and disbursements) actually and reasonably incurred in defending a proceeding on behalf of any person entitled to indemnification under Section 5.1 in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article and may pay such expenses in advance on behalf of any employee or agent on receipt of a similar undertaking. The financial ability of such authorized representative to make such repayment shall not be prerequisite to the making of an advance. 13 14 5.3 EMPLOYEE BENEFIT PLANS. For purposes of this Article, the Corporation shall be deemed to have requested an officer, director, employee or agent to serve as fiduciary with respect to an employee benefit plan where the performance by such person of duties to the Corporation also imposes duties on, or otherwise involves services by, such person as a fiduciary with respect to the plan; excise taxes assessed on an authorized representative with respect to any transaction with an employee benefit plan shall be deemed "fines"; and action taken or omitted by such person with respect to an employee benefit plan in the performance of duties for a purpose reasonably believed to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Corporation. 5.4 SECURITY FOR INDEMNIFICATION OBLIGATIONS. To further effect, satisfy or secure the indemnification obligations provided herein or otherwise, the Corporation may maintain insurance, obtain a letter of credit, act as self-insurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the Corporation, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the Board of Directors shall deem appropriate. 5.5 RELIANCE UPON PROVISIONS. Each person who shall act as an authorized representative of the Corporation shall be 14 15 deemed to be doing so in reliance upon the rights of indemnification provided by this Article. 5.6 AMENDMENT OR REPEAL. All rights of indemnification under this Article shall be deemed a contract between the Corporation and the person entitled to indemnification under this Article pursuant to which the Corporation and each such person intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not limit, but may expand, any rights or obligations in respect of any proceeding whether commenced prior to or after such change to the extent such proceeding pertains to actions or failures to act occurring prior to such change. 5.7 SCOPE OF ARTICLE. The indemnification, as authorized by this Article, shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in any other capacity while holding such office. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall continue as to a person who has ceased to be an officer, director, employee or agent in respect of matters arising prior to such time, and shall inure to the benefit of the heirs, executors and administrators of such person. 15 16 FINANCIAL STATEMENTS TO SHAREHOLDERS ------------------------------------ 6.1 FINANCIAL STATEMENTS. Except as otherwise provided in this section, shareholders shall not be entitled to receive annual financial statements from the Company. Nevertheless, the Board of Directors may, from time to time in its discretion, and will, so long as it is obligated under any agreement or contract with its shareholders, cause the Company to send financial statements to the shareholders. Such financial statements may be consolidated with the financial statements of one or more of the Company's subsidiaries and may present such financial data regarding the Company as the Board of Directors may determine in its discretion. Except as otherwise provided by agreement with its shareholders, such financial statements shall not be required to be prepared on the basis of generally accepted accounting principles, shall not be required to be audited or reviewed and shall not be required to be accompanied by either a report of a public accountant engaged to audit or review such financial statements or a statement of the person in charge of the financial records of the Company. CERTIFICATES ------------ 7.1 ISSUANCE. Any or all classes or series of shares or other securities of the Corporation, or any part thereof, may be represented by certificates or may be uncertificated securities, provided, however, that securities represented by a certificate may not be uncertificated until such certificate is surrendered to the Corporation. Certificates shall be signed by the Chief Executive Officer, the President or any Vice President 16 17 and the Secretary or Assistant Secretary or the Treasurer or Assistant Treasurer, or by such other officers as the Board of Directors may direct, and shall be sealed with the corporate seal which may be a facsimile, engraved or printed. Where the certificates are signed by a transfer agent or a registrar, the signature of any officer of the Corporation appearing thereon may be a facsimile, engraved or printed. The fact that an officer whose signature, manual or in facsimile, appears on any certificate shall cease to be an officer of the Corporation, either before or after such certificate is issued, shall not invalidate such certificate. 7.2 LOSS OR DESTRUCTION OF CERTIFICATES. In case of loss or destruction of a certificate, no new certificate shall be issued in lieu thereof except upon satisfactory proof to the Board of Directors of such loss or destruction and, in the discretion of the Board of Directors, upon the posting of a bond or other indemnity in an amount satisfactory to the Board. NOTICES ------- 8.1 WAIVER OF NOTICE. Any notice required to be given under these by-laws may be effectively waived by the person entitled thereto by written waiver signed before or after the meeting to which such notice would relate or by attendance at such meeting otherwise than for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened. 17 18 8.2 MANNER OF GIVING NOTICE. Whenever written notice is required to be given to any person, it may be given to such person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram with messenger service specified, telex or TWX (with answerback received) or courier service, charges prepaid, or by facsimile transmission to the address (or the telex, TWX or facsimile number) appearing on the books of the Corporation next to his name or to the address supplied by him to the Corporation for the purpose of notice. If the notice is sent by mail or by telegraph or by courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to such person or, in the case of telex or TWX, when dispatched. Such notice shall specify the place, day and hour of the meeting and, in the case of a special meeting of shareholders, the general nature of the business to be transacted. MISCELLANEOUS PROVISIONS ------------------------ 9.1 SIGNING AUTHORITY. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate. 9.2 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 9.3 SHARE STATUS. The Board of Directors may, by resolution, restore any or all of the previously issued shares of 18 19 the Corporation owned by it to the status of authorized but unissued shares. AMENDMENTS ---------- 10.1 AMENDMENTS. These by-laws may be altered, amended or repealed and new by-laws may be adopted a) at any annual, regular or special meeting of the Board of Directors by the vote of a majority of all the directors of the Corporation in office or b) by a majority of the votes cast at any annual, regular or special meeting of shareholders, after notice to the shareholders or directors, as the case may be, of that purpose; PROVIDED, HOWEVER, that, no alteration, amendment or repeal of these by-laws that limits indemnification rights, increases the liability of directors or changes the manner or vote required to make such alteration, amendment or repeal, shall be made except by the affirmative vote of the shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast thereon. 19 EX-4.3 5 SPECIMEN CERIFICATE, 1999 PREFERRED STOCK 1 Exhibit 4.3 INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA NUMBER SHARES SPECIMEN SPECIMEN ALKERMES, INC. 1999 Redeemable Convertible Exchangeable Preferred Stock 3,500 Shares Authorized $.01 Par Value THIS CERTIFIES THAT ___ SPECIMEN ___ is the registered holder of _______________ ___________________________________________________________ Shares of the 1999 Redeemable Convertible Exchangeable Preferred Stock of ALKERMES, Inc. transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. In Witness Whereof, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this _______________ day of _________________________ A.D. ________. ________________________________ __________________________________ Secretary Chief Executive Officer [SEAL] 2 THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER, UPON REQUEST AND WITHOUT CHARGE, A STATEMENT OF THE DESIGNATIONS, VOTING RIGHTS, PREFERENCES, LIMITATIONS AND SPECIAL RIGHTS OF THE SHARES OF EACH CLASS OR SERIES AUTHORIZED TO BE ISSUED SO FAR AS THEY HAVE BEEN FIXED AND DETERMINED AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND DETERMINE THE DESIGNATIONS, VOTING RIGHTS, PREFERENCES, LIMITATIONS AND SPECIAL RIGHTS OF THE CLASSES AND SERIES OF SHARES OF THE CORPORATION. For Value Received, _____________________________ hereby sell, assign and transfer unto_______________________________________________________________ ________________________________________________________________________ Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint: __________________________________________________________________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated: ____________________ In presence of _______________________________________________________ _______________________________________________________________________________ NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. 2 EX-4.4 6 SPECIMEN CERTIFICATE, NON-VOTING COMMON SHARES 1 Exhibit 4.4 INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA NUMBER SHARES SPECIMEN SPECIMEN ALKERMES, INC. Non-Voting Common Stock 450,000 Shares Authorized $.01 Par Value THIS CERTIFIES THAT ___ SPECIMEN ___ is the registered holder of________________ ________________________________ Shares of the Non-Voting Common Stock of ALKERMES, Inc. transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. In Witness Whereof, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this _______________ day of _________________________ A.D. ________. ________________________________ __________________________________ Secretary Chief Executive Officer [SEAL] 2 THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER, UPON REQUEST AND WITHOUT CHARGE, A STATEMENT OF THE DESIGNATIONS, VOTING RIGHTS, PREFERENCES, LIMITATIONS AND SPECIAL RIGHTS OF THE SHARES OF EACH CLASS OR SERIES AUTHORIZED TO BE ISSUED SO FAR AS THEY HAVE BEEN FIXED AND DETERMINED AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND DETERMINE THE DESIGNATIONS, VOTING RIGHTS, PREFERENCES, LIMITATIONS AND SPECIAL RIGHTS OF THE CLASSES AND SERIES OF SHARES OF THE CORPORATION. For Value Received, _____________________________ hereby sell, assign and transfer unto_______________________________________________________________ ________________________________________________________________________ Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint: __________________________________________________________________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated: ____________________ In presence of _______________________________________________________ _______________________________________________________________________________ NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. 2 EX-10.6 7 1998 EQUITY INCENTIVE PLAN 1 Exhibit 10.6 This Plan was initially approved on April 3, 1998 and, as assumed by the Company, was approved by its Board of Directors on April 7, 1999. ALKERMES, INC. 1998 EQUITY INCENTIVE PLAN 1. Purpose The purpose of the Alkermes, Inc. 1998 Equity Incentive Plan (the "PLAN") is to attract and retain key employees and consultants of the Company and its Affiliates, to provide an incentive for them to achieve long-range performance goals, and to enable them to participate in the long-term growth of the Company by granting Awards with respect to the Company's Common Stock. Certain capitalized terms used herein are defined in Section 8 below. 2. Administration The Plan shall be administered by the Committee. The Committee shall select the Participants to receive Awards and shall determine the terms and conditions of the Awards. The Committee shall have authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time consider advisable, and to interpret the provisions of the Plan. The Committee's decisions shall be final and binding. To the extent permitted by applicable law, the Committee may delegate to one or more executive officers of the Company the power to make Awards to Participants who are not Covered Employees. 3. Eligibility All employees and consultants of the Company or any Affiliate capable of contributing significantly to the successful performance of the Company, other than a person who has irrevocably elected not to be eligible, are eligible to be Participants in the Plan. Incentive Stock Options were granted only to persons eligible to receive such Options under the Code. 4. Stock Available for Awards (a) Amount. Subject to adjustment under subsection (b), Awards may be made under the Plan for up to 591,487 shares of Common Stock, of which shares Options to purchase 119,474 shares of Common Stock and 53,327 shares of Restricted Stock were awarded prior to the assumption of the Plan, leaving 418,686 shares of Common Stock available for Awards. If any Award expires or is terminated unexercised or is forfeited or settled in a manner that results in fewer shares outstanding than were awarded, the shares subject to such Award, to the extent of such expiration, termination, forfeiture or decrease, shall again be available for award under the Plan. Common Stock issued through the assumption or substitution of outstanding grants from an acquired company shall not reduce the shares available for Awards under the Plan. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. 2 (b) Adjustment. In the event that the Committee determines that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares or other transaction affects the Common Stock such that an adjustment is required in order to preserve the benefits intended to be provided by the Plan, then the Committee (subject in the case of Incentive Stock Options to any limitation required under the Code) shall equitably adjust any or all of (i) the number and kind of shares in respect of which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards, (iii) the exercise price with respect to any of the foregoing, provided that the number of shares subject to any Award shall always be a whole number, and (iv) if considered appropriate, the Committee may make provision for a cash payment with respect to an outstanding Award; provided that in the case (i) or (ii) above the number of shares subject to any Award shall always be a whole number. 5. Stock Options (a) Grant of Options. Subject to the provisions of the Plan, after the assumption of the Plan by the Company the Committee may grant options ("OPTIONS") to purchase shares of Common Stock not intended to comply with the requirements of Section 422 of the Code or any successor provision and any regulations thereunder ("NONSTATUTORY STOCK OPTIONS"). The Committee shall determine the number of shares subject to each Option and the exercise price therefor. Prior to the date of the assumption of the Plan by the Company, Options to purchase shares of Common Stock complying with the requirements of Section 422 of the Code or any successor provision and any regulations thereunder ("INCENTIVE STOCK OPTIONS") were granted as authorized under the Plan and such granted Incentive Stock Options remain in full force and effect. Incentive Stock Options had or shall have an exercise price of at least 100% of the Fair Market Value of the Common Stock on the date of grant. No Incentive Stock Option may be granted hereunder after the effective date of the assumption of the Plan by the Company. (b) Terms and Conditions. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may specify in the applicable grant or thereafter. The Committee may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. (c) Payment. No shares shall be delivered pursuant to any exercise of an Option until payment in full of the exercise price therefor is received by the Company. Such payment for shares to be delivered pursuant to any exercise of an Option may be made in whole or in part in cash or, to the extent permitted by the Committee at or after the grant of the Option, by delivery of a note or other commitment satisfactory to the Committee or shares of Common Stock owned by the optionee, including Restricted Stock, or by retaining shares otherwise issuable pursuant to the Option, in each case valued at their Fair Market Value on the date of delivery or retention, or such other lawful consideration, including a payment commitment of a financial or brokerage institution, as the Committee may determine. 6. Restricted Stock (a) Grant of Restricted Stock. Subject to the provisions of the Plan, the Committee may grant shares of Common Stock subject to forfeiture ("RESTRICTED STOCK") and determine the duration of the period (the "RESTRICTED PERIOD") during which, and the conditions under which, the shares may be forfeited to the Company and the other terms and conditions of such Awards. Shares of Restricted Stock may be issued for no cash consideration, such minimum consideration as may be required by applicable law or such other consideration as the Committee may determine. 2 3 (b) Restrictions. Shares of Restricted Stock (may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Committee, during the Restricted Period. Shares of Restricted Stock shall be evidenced in such manner as the Committee may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and unless otherwise determined by the Committee, deposited by the Participant, together with a stock power endorsed in blank, with the Company. At the expiration of the Restricted Period, the Company shall deliver such certificates to the Participant or if the Participant has died, to the Participant's Designated Beneficiary. 7. General Provisions Applicable to Awards (a) Documentation. Each Award under the Plan shall be evidenced by a writing, delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or to comply with applicable tax and regulatory laws and accounting principles. (b) Committee Discretion. Each type of Award may be made alone, in addition to or in relation to any other Award. The terms of each type of Award need not be identical, and the Committee need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Committee at the time of grant or at any time thereafter. (c) Dividends and Cash Awards. In the discretion of the Committee, any Award under the Plan may provide the Participant with (i) dividends or dividend equivalents payable (in cash or in the form of Awards under the Plan) currently or deferred with or without interest and (ii) cash payments in lieu of or in addition to an Award. (d) Termination of Employment. The Committee shall determine the effect on an Award of the disability, death, retirement or other termination of employment of a Participant and the extent to which, and the period during which, the Participant's legal representative, guardian or Designated Beneficiary may receive payment of an Award or exercise rights thereunder. (e) Change in Control. In order to preserve a Participant's rights under an Award in the event of a "CHANGE IN CONTROL" (as defined by the Committee) of the Company, the Committee in its discretion may, at the time an Award is made or at any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise or payment of the Award, (ii) provide for payment to the Participant of cash or other property with a Fair Market Value equal to the amount that would have been received upon the exercise or payment of the Award had the Award been exercised or paid upon the change in control, (iii) adjust the terms of the Award in a manner determined by the Committee to reflect the change in control, (iv) cause the Award to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to Participants and in the best interests of the Company. (f) Loans. The Committee may authorize the making of loans or cash payments to Participants in connection with the grant or exercise of any Award under the Plan, which loans may be secured by any security, including Common Stock, underlying or related to such Award (provided that the loan shall not exceed the Fair Market Value of the security subject to such Award), and which may be forgiven upon such terms and conditions as the Committee may establish at the time of such loan or at any time thereafter. 3 4 (g) Transferability. In the discretion of the Committee, any Award may be made transferable upon such terms and conditions and to such extent as the Committee determines, provided that Incentive Stock Options may be transferable only to the extent permitted by the Code. The Committee may in its discretion waive any restriction on transferability. (h) Withholding Taxes. The Participant shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. In the Committee's discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value on the date of delivery. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. (i) Foreign Nationals. Awards may be made to Participants who are foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or to comply with applicable laws. (j) Amendment of Award. The Committee may amend, modify or terminate any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect the Participant. 8. Certain Definitions "AFFILIATE" means any business entity in which the Company owns directly or indirectly 50% or more of the total voting power or has a significant financial interest as determined by the Committee. "AWARD" means any Option or Restricted Stock granted under the Plan, provided, that after the date of the assumption of the Plan by the Company, "Award" shall not mean granting of Incentive Stock Options. "BOARD" means the Board of Directors of the Company. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor law. "COMMITTEE" means the Board or one or more committees each comprised of not less than two members of the Board appointed by the Board to administer the Plan or a specified portion thereof. "COMMON STOCK" or "STOCK" means the Common Stock, par value $0.01, of the Company. "COMPANY" means Alkermes, Inc., a Pennsylvania corporation. "COVERED EMPLOYEE" means a "covered employee" within the meaning of Section 162(m) of the Code. 4 5 "DESIGNATED BENEFICIARY" means the beneficiary designated by a Participant, in a manner determined by the Committee, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, "DESIGNATED BENEFICIARY" means the Participant's estate. "FAIR MARKET VALUE" means, with respect to Common Stock or any other property, the fair market value of such property as determined by the Committee in good faith or in the manner established by the Committee from time to time. "PARTICIPANT" means a person selected by the Committee to receive an Award under the Plan. 9. Miscellaneous (a) No Right To Employment. No person shall have any claim or right to be granted an Award. Neither the Plan nor any Award hereunder shall be deemed to give any employee the right to continued employment or to limit the right of the Company to discharge any employee at any time. (b) No Rights As Shareholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a shareholder with respect to any shares of Common Stock to be distributed under the Plan until he or she becomes the holder thereof. A Participant to whom Common Stock is awarded shall be considered the holder of the Stock at the time of the Award except as otherwise provided in the applicable Award. (c) Effective Date. The Plan shall be effective as of April 1, 1998. (d) Assumption Date. The outstanding Awards granted under the Plan were assumed by the Company in connection with the merger transaction among the Company, Advanced Inhalation Research, Inc. and Alkermes Acquisition Sub, Inc. effective February 1, 1999, and the Plan was assumed by the Company on April 7, 1999. (e) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, subject to such shareholder approval as the Board determines to be necessary or advisable to comply with any tax or regulatory requirement. (f) Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of Pennsylvania. 5 6 EXHIBIT L-1 No. ISO-___ _____ Shares ALKERMES, INC. 1998 EQUITY INCENTIVE PLAN INCENTIVE STOCK OPTION CERTIFICATE* Alkermes, Inc. (the "Company"), a Pennsylvania corporation, hereby grants to the person named below an option to purchase shares of Common Stock, par value $0.01, of the Company (the "Option") under and subject to the Company's 1998 Equity Incentive Plan (the "Plan") exercisable on the following terms and conditions and those set forth on the reverse side of this certificate: Name of Optionholder: _________________________ Address: _________________________ Social Security No. _________________________ Number of Shares: ____________________ Option Price: ____________________ Date of Grant: ____________________ Exercisability Schedule: [to be set at the time of Grant] Expiration Date: [not more than ten years from the Date of Grant as stated above] This Option is intended to be treated as an Incentive Stock Option under section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). By acceptance of this Option, the Optionholder agrees to, the terms and conditions hereof. ALKERMES, INC. By:_______________________________ * To be used after the assumption of the Plan by the Company only to reflect the exchange of Incentive Stock Options of the Company for Incentive Stock Options previously granted by Advanced Inhalation Research, Inc. pursuant to the Plan. 7 ALKERMES, INC. 1998 EQUITY INCENTIVE PLAN Incentive Stock Option Terms And Conditions 1. PLAN INCORPORATED BY REFERENCE . This option is issued pursuant to the terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Company. 2. OPTION PRICE. The price to be paid for each share of Common Stock issued upon exercise of the whole or any part of this Option is the Option Price set forth on the face of this certificate. 3. EXERCISABILITY SCHEDULE. This Option may be exercised at any time and from time to time for the number of shares and in accordance with the exercisability schedule set forth on the face of this certificate, but only for the purchase of whole shares. This Option may not be exercised as to any shares after the Expiration Date. 4. METHOD OF EXERCISE. To exercise this Option. the Optionholder shall deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form, including shares of Common Stock of the Company valued at their Fair Market Value on the date of delivery or a payment commitment of a financial or brokerage institution. Promptly following such notice, the Company will deliver to the Optionholder a certificate representing the number of shares with respect to which the Option is being exercised. 5. RIGHTS AS A SHAREHOLDER OR EMPLOYEE. The Optionholder shall not have any rights in respect of shares as to which the Option shall not have been exercised and payment made as provided above. The Optionholder is an employee-at-will unless, and only to the extent, provided in a separate written agreement executed by the chief executive officer of the Company or his duly authorized designee, and neither the Plan nor the grant of this Option shall be deemed to give the Optionholder the right to continued employment or to limit the right of the Company to discharge the Optionholder at any time. 6. RECAPITALIZATION, MERGERS, ETC. As provided in the Plan, in the event of corporate transactions affecting the Company's outstanding Common Stock, the Committee shall equitably adjust the number and kind of shares subject to this Option and the exercise price hereunder or make provision for a cash payment. If such transaction involves a consolidation or merger of the Company with another entity, the sale, lease or exchange of all or substantially all of the assets of the Company or a reorganization or liquidation of the Company, then in lieu of the foregoing, the Committee may upon written notice to the Optionholder provide that this Option may terminate on a date not less than 20 days after the date of such notice unless theretofore exercised. In connection with such notice the Committee may accelerate or waive any deferred exercise period. 7. OPTION NOT TRANSFERABLE. This Option is not transferable by the Optionholder otherwise than by will or the laws of descent and distribution, and is exercisable, during the Optionholder's lifetime, only by the Optionholder. The naming of a Designated Beneficiary does not constitute a transfer. 8. EXERCISE OF 0PTION AFTER TERMINATION OF EMPLOYMENT. If the Optionholder's employment with (a) the Company, (b) an Affiliate, or (c) a corporation (or parent or subsidiary corporation of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies, is terminated for any reason other than by disability (within the meaning of section 22(e)(3) of the Code) or death, the Optionholder may exercise the rights which were available to the Optionholder at the time of such termination only within three months from the date of termination. If the Optionholder's employment is terminated as a result of disability, such rights may be exercised within twelve months from the date of termination. Upon the death of the Optionholder, his or her Designated Beneficiary shall have the right, at any time within twelve months after the date of death, to exercise in whole or in part any rights that were available to the Optionholder at the time of death. Notwithstanding the foregoing, no rights under this Option may be exercised after the Expiration Date. 9. COMPLIANCE WITH SECURITIES LAWS. It shall be a condition to the Optionholder's right to purchase shares of Common Stock hereunder that the Company may, in its discretion, require (a) that the shares of Common Stock reserved for issue upon the exercise of this Option shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Company's Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed purchase shall be exempt from registration under that Act and the Optionholder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any laws applicable to the issue of such shares by the Company shall have been taken by the Company or the Optionholder, or both. The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law. 10. PAYMENT OF TAXES. The Optionholder shall pay to the Company, or make provision satisfactory to the Company for payment of, any taxes required by law to be withheld with respect to the exercise of this Option. The Committee may, in its discretion, require any other Federal or state taxes imposed on the sale of the shares to be paid by the Optionholder. In the Committee's discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the exercise of this Option, valued of their Fair Market Value on the date of delivery. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Optionholder. 11. NOTICE OF SALE OF SHARES REQUIRED. The Optionholder agrees to notify the Company in writing within 30 days of the disposition of any shares purchased upon exercise of this Option if such disposition occurs within two years of the date of the grant of this Option or within one year after such purchase. 8 No. NSO-____ _____ Shares ALKERMES, INC. 1998 EQUITY INCENTIVE PLAN NONSTATUTORY STOCK OPTION CERTIFICATE Alkermes, Inc. (the "Company"), a Pennsylvania corporation, hereby grants to the person named below an option to purchase shares of Common Stock, par value $0.01, of the Company (the "Option") under and subject to the Company's 1998 Equity Incentive Plan (the "Plan") exercisable on the following terms and conditions and those set forth on the reverse side of this certificate: Name of Optionholder: _________________________ Address: _________________________ [Social Security No. _________________________] Number of Shares: ____________________ Option Price: ____________________ Date of Grant: ____________________ Exercisability Schedule: [to be set at the time of Grant) Expiration Date: [not more than ten years from the Date of Grant as stated above) This Option shall not be treated as an Incentive Stock Option under section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). By acceptance of this Option, the Optionholder agrees to the terms and conditions hereof. ALKERMES, INC. By: ______________________________ 9 ALKERMES, INC. 1998 EQUITY INCENTIVE PLAN Nonstatutory Stock Option Terms And Conditions 1. PLAN INCORPORATED BY REFERENCE. This Option is issued pursuant to the terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Company. 2. OPTION PRICE. The price to be paid for each share of Common Stock issued upon exercise of the whole or any part of this Option is the Option Price set forth on the face of this certificate. 3. EXERCISABILITY SCHEDULE. This Option may be exercised at any time and from time to time for the number of shares and in accordance with the exercisability schedule set forth on the face of this certificate, but only for the purchase of whole shares. This Option may not be exercised as to any shares after the Expiration Date. 4. METHOD OF EXERCISE. To exercise this Option, the Optionholder shall deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form. including shares of Common Stock of the Company valued at their Fair Market Value on the date of delivery or a payment commitment of a financial or brokerage institution. Promptly following such notice, the Company will deliver to the Optionholder a certificate representing the number of shares with respect to which the Option is being exercised. 5. RIGHTS AS A SHAREHOLDER OR EMPLOYEE. The Optionholder shall not have any rights in respect of shares as to which the Option shall not have been exercised and payment made as provided above. The Optionholder is an employee-at-will unless, and only to the extent, provided in a separate written agreement executed by the chief executive officer of the Company or his duly authorized designee, and neither the Plan nor the grant of this Option shall be deemed to give the Optionholder the right to continued employment or to limit the right of the Company to discharge the Optionholder at any time. 6. RECAPITALIZATION, MERGERS, ETC. As provided in the Plan, in the event of corporate transactions affecting the Company's outstanding Common Stock, the number and kind of shares subject to this Option and the exercise price hereunder shall be equitably adjusted. If such transaction involves a consolidation or merger of the Company with another entity, the sale, lease or exchange of all or substantially all of the assets of the Company or a reorganization or liquidation of the Company, then in lieu of the foregoing, the Committee may upon written notice to the Optionholder provide that this Option may terminate on a date not less than 20 days after the date of such notice unless theretofore exercised. In connection with such notice, the Committee may accelerate or waive any deferred exercise period. 7. OPTION NOT TRANSFERABLE. This Option is not transferable by the Optionholder otherwise than to the extent permitted by the Plan, and is exercisable. during the Optionholder's lifetime, only by the Optionholder or the Optionholder's immediate transferee as permitted by the Plan. The naming of a Designated Beneficiary does not constitute a transfer. 8. EXERCISE OF OPTION AFTER TERMINATION OF EMPLOYMENT. If the Optionholder's status as an employee or consultant of (a) the Company, (b) an Affiliate, or (c) a corporation (or parent or subsidiary corporation of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies, is terminated for any reason other than by disability (within the meaning of section 22(e) (3) of the Code) or death, the Optionholder may exercise the rights which were available to the Optionholder at the time of such termination only within three months from the date of termination. If such status is terminated as a result of disability, such rights may be exercised within twelve months from the date of termination. Upon the death of the Optionholder, his or her Designated Beneficiary shall have the right, at any time within twelve months after the date of death, to exercise in whole or in part any rights that were available to the Optionholder at the time of death. Notwithstanding the foregoing, no rights under this Option may be exercised after the Expiration Date. 9. COMPLIANCE WITH SECURITIES LAWS. It shall be a condition to the Optionholder's right to purchase shares of Common Stock hereunder that the Company may, in its discretion, require (a) that the shares of Common Stock reserved for issue upon the exercise of this Option shall have been duty listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Company's Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed purchase shall be exempt from registration under that Act and the Optionholder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Optionholder, or both. The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law. 10. PAYMENT OF TAXES. The Optionholder shall pay to the Company, or make provision satisfactory to the Company for payment of, any taxes required by law to be withheld with respect to the exercise of this Option. The Committee may, in its discretion, require any other Federal or state taxes imposed on the sale of the shares to be paid by the Optionholder. In the Committee's discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the exercise of this Option, valued at their Fair Market Value on the date of delivery. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Optionholder. EX-10.7 8 1999 STOCK OPTION PLAN 1 Exhibit 10.7 ALKERMES, INC. 1999 STOCK OPTION PLAN ARTICLE I PURPOSE The purpose of the 1999 Stock Option Plan (the "Plan") is to enable Alkermes, Inc. (the "Company") to offer to certain officers, employees, directors and consultants of the Company or any of its Subsidiaries options to acquire equity interests in the Company, thereby helping to attract, retain and reward such persons, and strengthen the mutuality of interests between such persons and the Company's shareholders. ARTICLE II DEFINITIONS For purposes of the Plan, the following terms shall have the following meanings: 2.1 "ADMINISTRATOR" shall mean the Board or, if the Board has delegated its responsibility to administer the Plan pursuant to Section 3.1, the committee and/or subcommittee of the Board to which such responsibility has been delegated. 2.2 "BOARD" shall mean the Board of Directors of the Company. 2.3 "CHANGE OF CONTROL" shall mean (a) the consolidation or merger of the Company or any of its Subsidiaries holding or controlling a majority of the assets relating to the business of the Company, with or into any third party (other than a Subsidiary); (b) the assignment, sale, transfer, lease or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole; or (c) the acquisition by any third party or group of third parties acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended) of shares of voting stock of the Company, the result of which in the case of any transaction described in clauses (a), (b) and (c) above is that immediately after the transaction the shareholders of the Company immediately before the transaction own less than fifty percent 2 (50%) of the outstanding shares of the surviving corporation in a transaction specified in clause (a) above or the acquiror in a transaction specified in clause (b) or (c) above. 2.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 2.5 "COMMON STOCK" shall mean the Common Stock, par value $.01 per share, of the Company. 2.6 "DISABILITY" shall mean a disability that results in a Participant's Termination of Employment, as determined pursuant to standard Company procedures. 2.7 "EFFECTIVE DATE" shall mean the date on which the Plan is adopted by the Board. 2.8 "FAIR MARKET VALUE" for purposes of the Plan, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, shall mean, as of any date, the average of the high and low sales prices of a share of Common Stock as reported on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or traded on any such exchange, on the Nasdaq Stock Market ("Nasdaq"), or, if such sales prices are not available, the average of the bid and asked prices per share reported on Nasdaq, or, if such quotations are not available, the fair market value as determined by the Board, which determination shall be conclusive. 2.9 "INCENTIVE STOCK OPTION" shall mean any Stock Option that is intended to be and is designated as an "incentive stock option" within the meaning of Section 422 of the Code. 2.10 "NON-QUALIFIED STOCK OPTION" shall mean any Stock Option that is not an Incentive Stock Option. 2.11 "PARTICIPANT" shall mean an officer, employee, director or consultant of the Company or a Subsidiary to whom an Option has been granted under the Plan. 2.12 "STOCK OPTION" or "OPTION" shall mean any option to purchase shares of Common Stock granted pursuant to Article VI of the Plan. 2.13 "SUBSIDIARY" shall mean any corporation, limited partnership, limited liability company or any other entity of which the Company owns more than 50% of the voting stock or equity or a controlling interest. 2.14 "TERMINATION OF EMPLOYMENT" shall mean, as appropriate, (a) the termination of a Participant's employment with the Company and its subsidiaries for reasons 2 3 other than a military or personal leave of absence granted by the Company, (b) termination of a Participant's consulting relationship with the Company or (c) termination of a Participant's service as a member of the Board. ARTICLE III ADMINISTRATION 3.1 THE ADMINISTRATOR. The Plan shall be administered and interpreted by the Board; provided, however, that the Board may delegate this responsibility to a committee and/or a subcommittee comprised of two or more members of the Board. 3.2 AWARDS. The Administrator shall have full authority to grant, pursuant to the terms of the Plan, Stock Options to persons eligible under Article V. In particular, the Administrator shall have the authority: (a) to select the officers, employees, directors and consultants to whom Stock Options may from time to time be granted; (b) to determine whether and to what extent Stock Options are to be granted to one or more officers, employees, directors and consultants eligible to receive Options under Article V; (c) to determine the number of shares of Common Stock to be covered by each Option granted pursuant to Article VI; and (d) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option granted under Article VI (including, but not limited to, the option price, the option term, installment exercise or waiting period provisions and provisions relating to the waiver or acceleration thereof). 3.3 GUIDELINES. Subject to Article VII hereof, the Administrator shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Option granted under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Administrator may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Option in the manner and to the extent it shall deem necessary to carry the Plan into effect. Notwithstanding the foregoing, no action of the Administrator under this Section 3.3 shall impair the rights of any Participant without the Participant's consent, unless otherwise required by law. 3 4 3.4 DECISIONS FINAL. Any decision, interpretation or other action made or taken in good faith by the Administrator arising out of or in connection with the Plan shall be final, binding and conclusive on the Company, all Participants, officers, employees, directors and consultants, and their respective heirs, executors, administrators, successors and assigns. ARTICLE IV SHARE LIMITATION 4.1 SHARES. The maximum aggregate number of shares of Common Stock that may be issued under the Plan in each calendar year is Two Million Five Hundred Thousand (2,500,000) (subject to increase or decrease pursuant to Section 4.2), which may be either authorized and unissued shares of Common Stock or issued Common Stock which have been reacquired by the Company. If any Option granted under the Plan shall expire, terminate or be cancelled for any reason without having been exercised in full, the number of shares with respect to which the Option has not been exercised shall again be available for the purposes of the Plan. 4.2 CHANGES. In the event of any merger, reorganization, consolidation, recapitalization, dividend (other than a regular cash dividend), stock split, or other change in corporate structure affecting the Common Stock, such substitution or adjustment shall be made in the maximum aggregate number of shares which may be issued under the Plan, the maximum number of shares with respect to which Options may be granted to any individual during any year, and the number and option price of shares subject to outstanding Options, as may be determined to be appropriate by the Board, in its sole discretion, provided that the number of shares subject to any Option shall always be a whole number. ARTICLE V ELIGIBILITY 5.1 EMPLOYEES. Officers and other employees of the Company or any of its Subsidiaries are eligible to be granted both Incentive Stock Options and Non-Qualified Stock Options under the Plan. 5.2 DIRECTORS AND CONSULTANTS. Directors and consultants of the Company or any of its Subsidiaries are eligible to be granted Non-Qualified Stock Options, but may not receive Incentive Stock Options unless they are employees of the Company or a Subsidiary corporation within the meaning of Section 424 of the Code. 4 5 ARTICLE VI GRANT OF STOCK OPTIONS 6.1 GRANTS. The Administrator shall have the authority to grant to any person, to the extent eligible under Article V, one or more Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options. To the extent that any Stock Option does not qualify as an Incentive Stock Option (whether because of its provisions or the time or manner of its exercise or otherwise), such Stock Option or the portion thereof which does not qualify as an Incentive Stock Option shall constitute a separate Non-Qualified Stock Option. 6.2 INCENTIVE STOCK OPTIONS. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the Participants affected, to disqualify any Incentive Stock Option under such Section 422. 6.3 TERMS OF OPTIONS. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable: (a) STOCK OPTION CERTIFICATE. Each Stock Option shall be evidenced by, and subject to the terms of, a Stock Option Certificate executed by the Company. The Stock Option Certificate shall specify whether the Option is an Incentive Stock Option or a Non-Qualified Stock Option, the number of shares of Common Stock subject to the Stock Option, the option price, the option term, and the other terms and conditions applicable to the Stock Option. (b) OPTION PRICE. The option price per share of Common Stock to be delivered upon exercise of a Stock Option shall be determined by the Administrator at the time of grant, but shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted. (c) OPTION TERM. The term of each Stock Option shall be fixed by the Administrator at the time of grant, but no Stock Option shall be exercisable more than ten years after the date it is granted. (d) EXERCISABILITY. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Administrator at the time of grant; provided, however, that the Administrator may waive any installment 5 6 exercise or waiting period provisions, in whole or in part, at any time after the date of grant, based on such factors as the Administrator shall deem appropriate in its sole discretion. (e) METHOD OF EXERCISE. Subject to such installment exercise and waiting period provisions as may be imposed by the Administrator, Stock Options may be exercised in whole or in part at any time during the option term by delivering to the Company written notice of exercise specifying the number of shares of Common Stock to be purchased and the aggregate option price therefor. The notice of exercise shall be accompanied by payment in full of the option price and, if requested by the Company, by the representation described in Section 9.2. Payment of the option price may be made (i) in cash or by check payable to the Company, (ii) unless otherwise provided by the Administrator on the date of grant, in shares of Common Stock duly owned by the Participant (and for which the Participant has good title, free and clear of any liens and encumbrances) or (iii) unless otherwise provided by the Administrator on the date of grant, by reduction in the number of shares of Common Stock issuable upon such exercise, based, in each case, on the Fair Market Value of the Common Stock on the date of exercise. Upon payment in full of the option price and satisfaction of the other conditions provided herein, a stock certificate representing the number of shares of Common Stock to which the Participant is entitled shall be issued and delivered to the Participant. (f) DEATH. Unless otherwise determined by the Administrator on or after the date of grant, in the event of a Participant's Termination of Employment by reason of death, any Stock Option held by such Participant which was exercisable on the date of death may thereafter be exercised by the legal representative of the Participant's estate until the earlier of one year after the date of death or the expiration of the stated term of such Stock Option, and any Stock Option not exercisable on the date of death shall be forfeited. (g) DISABILITY. Unless otherwise determined by the Administrator on or after the date of grant, in the event of a Participant's Termination of Employment by reason of Disability, any Stock Option held by such Participant that was exercisable on the date of such Termination of Employment may thereafter be exercised by the Participant until the earlier of one year after such date or the expiration of the stated term of such Stock Option, and any Stock Option not exercisable on the date of Termination of Employment shall be forfeited. If the Participant dies during such one-year period, any unexercised Stock Options held by the Participant at the time of death may thereafter be exercised by the legal representative of the Participant's estate until the earlier of one year after the date of the Participant's death or the expiration of the stated term of such Stock Option. If an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) TERMINATION OF EMPLOYMENT. Unless otherwise determined by the Administrator on or after the date of grant, in the event of a Participant's Termination of 6 7 Employment by reason of retirement or for any reason other than death or Disability, any Stock Option held by such Participant which was exercisable on the date of such Termination of Employment may thereafter be exercised by the Participant until the earlier of three months after such date or the expiration of the stated term of such Stock Option, and any Stock Option not exercisable on the date of Termination of Employment shall be forfeited. (i) CHANGE OF CONTROL. In the event of a Change of Control, all outstanding Stock Options shall immediately become fully exercisable, and upon payment by the Participant of the option price (and, if requested, delivery of the representation described in Section 9.2), a stock certificate representing the Common Stock covered thereby shall be issued and delivered to the Participant; provided, however, that the exercisability of the Stock Options shall not be accelerated if, in the opinion of the Board, such acceleration would prevent pooling of interests accounting for the change of control transaction and such accounting treatment is desired by the parties to such transaction. (j) NON-TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the Administrator on or after the date of grant, Stock Options shall not be transferrable by the Participant otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the Participant's lifetime, only by the Participant. (k) INCENTIVE STOCK OPTION LIMITATIONS. To the extent that the aggregate Fair Market Value (determined as of the date of grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year under the Plan and/or any other stock option plan of the Company or any Subsidiary or parent corporation (within the meaning of Section 424 of the Code) exceeds $100,000, such Options shall be treated as Options which are not Incentive Stock Options. Should any of the foregoing provisions not be necessary in order for the Stock Options to qualify as Incentive Stock Options, or should any additional provisions be required, the Board may amend the Plan accordingly, without the necessity of obtaining the approval of the shareholders of the Company. (l) TEN-PERCENT SHAREHOLDER RULE. Notwithstanding any other provision of the Plan to the contrary, no Incentive Stock Option shall be granted to any person who, immediately prior to the grant, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation (within the meaning of Section 424 of the Code), unless the option price is at least 110% of the Fair Market Value of the Common Stock on the date of grant and the Option, by its terms, expires no later than five years after the date of grant. 6.4 RIGHTS AS SHAREHOLDER. A Participant shall not be deemed to be the holder of Common Stock, or to have any of the rights of a holder of Common Stock, with 7 8 respect to shares subject to an Option, unless and until the Option is exercised and a stock certificate representing such shares of Common Stock is issued to the Participant. ARTICLE VII TERMINATION OR AMENDMENT 7.1 TERMINATION OR AMENDMENT OF PLAN. The Board may at any time amend, discontinue or terminate the Plan or any part thereof (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in Article IX) or amend any Option previously granted, prospectively or retroactively (subject to Article IV); provided, however, that, in either case unless otherwise required by law, the rights of a Participant with respect to Options granted prior to such amendment, discontinuance or termination may not be impaired without the consent of such Participant and, provided further, that the Company will seek the approval of the Company's shareholders for any amendment if such approval is necessary to comply with the Code, Federal or state securities laws or any other applicable rules or regulations. ARTICLE VIII UNFUNDED PLAN 8.1 UNFUNDED STATUS. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payment not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. ARTICLE IX GENERAL PROVISIONS 9.1 NONASSIGNMENT. Except as otherwise provided in the Plan, any Option granted hereunder and the rights and privileges conferred thereby may not be sold, transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of an Option, right or privilege contrary to the provisions hereof, or upon the levy of any attachment or similar process thereon, such Option and the rights and privileges conferred thereby shall immediately terminate and the Option shall immediately be forfeited to the Company. 8 9 9.2 LEGEND. The Company may require each person acquiring shares upon exercise of an Option to represent to the Company in writing that the Participant is acquiring the shares for the Participant's own account and without a view to the distribution thereof. The stock certificates representing such shares may include any legend which the Company deems appropriate to reflect any restrictions on transfer. All certificates representing shares of Common Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Company may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange or stock market upon which the Common Stock is then listed or traded, any applicable Federal or state securities law, and any applicable corporate law, and the Company may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 9.3 OTHER PLANS. Nothing contained in the Plan shall prevent the Company from adopting other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. 9.4 NO RIGHT TO EMPLOYMENT. Neither the Plan nor the grant of any Option shall give any Participant or other officer, employee, consultant or director any right with respect to continuance of office, employment, consulting relationship or directorship, as the case may be, with the Company or any Subsidiary, nor shall the Plan impose any limitation on the right of the Company or any Subsidiary by which a Participant is employed to terminate a Participant's office, employment or consulting relationship at any time. Neither the Plan nor the grant of any Option shall give any director the right to continue as a member of the Board or obligate the Company to nominate any director for reelection by the Company's shareholders. 9.5 WITHHOLDING OF TAXES. The Company shall have the right to reduce the number of shares of Common Stock otherwise deliverable upon exercise of an Option by an amount that would have a Fair Market Value equal to the amount of all Federal, state and local taxes required to be withheld, or to deduct the amount of such taxes from any cash payment otherwise to be made to the Participant, pursuant to the Plan or otherwise. In connection with such withholding, the Company may make such arrangements as are consistent with the Plan as it may deem appropriate. 9.6 LISTING AND OTHER CONDITIONS. (a) If the Common Stock is listed on a national securities exchange or Nasdaq, the issuance of any shares of Common Stock upon exercise of an Option shall be conditioned upon such shares being listed on such exchange or Nasdaq. The Company shall have no obligation to issue any shares of Common Stock unless and until such shares are so 9 10 listed, and the right to exercise any Option shall be suspended until such listing has been effected. (b) If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock upon exercise of an Option is or may in the circumstances be unlawful or result in the imposition of excise taxes under the statutes, rules or regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or registration under the Securities Act of 1933, as amended, or otherwise with respect to shares of Common Stock or Options, and the right to exercise any Option shall be suspended until, in the opinion of such counsel, such sale or delivery shall be lawful or shall not result in the imposition of excise taxes. (c) Upon termination of any period of suspension under this Section 9.6, any Option affected by such suspension which shall not then have expired or terminated shall be reinstated as to all shares available before such suspension and as to shares which would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Option. 9.7 GOVERNING LAW. The Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to the conflict of law principles thereof. 9.8 CONSTRUCTION. Wherever any words are used in the Plan in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. 9.9 LIABILITY OF THE BOARD. No member of the Board nor any employee of the Company or any of its Subsidiaries shall be liable for any act or action hereunder, whether of omission or commission, by any other member of the Board or officer or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or, except in circumstances involving bad faith, gross negligence or fraud, for anything done or omitted to be done by himself or herself. 9.10 COSTS. The Company shall bear all expenses incurred in administering the Plan, including expenses related to the issuance of Common Stock upon exercise of Options. 9.11 SEVERABILITY. If any part of the Plan shall be determined to be invalid or void in any respect, such determination shall not affect, impair, invalidate or nullify the remaining provisions of the Plan which shall continue in full force and effect. 10 11 9.12 SUCCESSORS. The Plan shall be binding upon and inure to the benefit of any successor or successors of the Company. 9.13 HEADINGS. Article and section headings contained in the Plan are included for convenience only and are not to be used in construing or interpreting the Plan. ARTICLE X TERM OF PLAN 10.1 EFFECTIVE DATE. The Plan shall be effective as of the Effective Date, but the grant of any Option hereunder is subject to the express condition that the Plan be approved by the shareholders of the Company within 12 months after the Effective Date. 10.2 TERMINATION DATE. Unless sooner terminated, the Plan shall terminate ten years after the Effective Date and no Options may be granted thereafter. Termination of the Plan shall not affect Options granted before such date. 11 EX-10.18 9 LICENSE AGREEMENT 1 Exhibit 10.17 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. LICENSE AGREEMENT THIS LICENSE AGREEMENT is entered into effective as of April 14, 1999, (the "Effective Date") between ALKERMES CONTROLLED THERAPEUTICS, INC. a Pennsylvania corporation ("Alkermes"), located at 64 Sidney Street, Cambridge, Massachusetts 02139 and GENENTECH, INC., a Delaware corporation ("Genentech"), located at 1 DNA Way, South San Francisco, California 94080. Alkermes and Genentech entered into a License Agreement, effective November 13, 1996, and as amended June 16, 1997, December 29, 1998, and March 31, 1999 (the "1996 License Agreement"), under which they have been collaborating for the development of a 1st generation formulation of recombinant human growth hormone for use in human beings using Alkermes' technology, currently known as the ProLease(R) delivery system, consisting of patents and knowhow, that permits PLGA encapsulation of particular molecules leading to sustained release of such molecules when injected under the skin. Alkermes and Genentech wish to continue their collaboration to complete the development of the 1st generation formulation and to incorporate Alkermes' ProLease technology into a 2nd generation formulation of recombinant human growth hormone for use in human beings under the terms and conditions of this Agreement. Genentech wishes to provide Alkermes with funding to support the collaborative development of the 1st and 2nd generation formulations of Licensed Product as specifically set forth in this Agreement. In order to provide Alkermes with such funding, Genentech and Alkermes, Inc. a Pennsylvania corporation and the parent corporation of Alkermes ("Alkermes Parent"), have entered into that certain Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement") pursuant to which Genentech agrees to buy and Alkermes Parent agrees to sell shares of its Preferred Stock. Therefore, Alkermes and Genentech agree as follows: 1. DEFINITIONS 1.1 "AFFILIATE" shall mean an entity that, directly or indirectly, through one or more intermediaries, is controlled by Alkermes or Genentech. As used herein, the term "control" will mean the direct or indirect ownership of fifty percent (50%) or more of the stock having the right to vote for directors thereof or the ability to otherwise control the management of the corporation or other business entity. 2 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1.2 "ALKERMES KNOWHOW" shall mean any and all proprietary information, data, test results, safety and efficacy data, knowledge, discoveries, inventions, materials, specifications, designs, regulatory filings, methods, processes and techniques which on or after November 13, 1996 were, or are now or hereafter owned by or in the possession or control of Alkermes and which Alkermes has the right to transfer or sublicense and which are related to the encapsulation of proteins in microspheres utilizing the ProLease(R) delivery system and any improvements thereto. Alkermes Knowhow does not include any of the foregoing which is generally ascertainable from publicly available information or which was known to Genentech prior to disclosure to Genentech by Alkermes, as evidenced by prior competent proof or which Genentech obtained independently or in collaboration with another partner and not in violation of any obligation of confidentiality. 1.3 "ALKERMES PATENTS" shall mean the patents and patent applications listed on Exhibit A hereto and their foreign counterparts and all patents (including inventor's certificates) and patent applications containing claims to the encapsulation of proteins in microspheres and substitutions, extensions, reissues, renewals, divisions, continuations or continuation-in-parts of any of the foregoing, which Alkermes presently or hereafter owns or controls, either solely or jointly with Genentech or a third party, and which Alkermes now has or hereafter shall have the right to grant sublicenses to. Alkermes shall use its best efforts to amend Exhibit A by December 31 of each year to include any Alkermes Patents that have arisen in the period since the Effective Date or since the last amendment to Exhibit A; provided, however, that if Alkermes does not so amend Exhibit A by December 31 of any year, Alkermes shall so amend Exhibit A within thirty (30) days after receipt of a written request from Genentech to do so. 1.4 "ALKERMES TECHNOLOGY" shall mean the Alkermes Patents and the Alkermes Knowhow. 1.5 "BONUS MILESTONE PAYMENT" shall mean the sum of XXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. 1.6 "CLOSING PRICE" shall mean with respect to any securities on any day the closing sales price on such day or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, in each case on the Nasdaq National Market or New York Stock Exchange, as applicable, or, if such security is not listed or admitted to trading on such National Market or Exchange, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any 2 3 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors of Alkermes, Inc. for that purpose, or a price determined in good faith by such Board of Directors, whose determination shall be conclusive and described in a Board resolution. 1.7 "COMMERCIAL INTRODUCTION" shall mean the date of first commercial sale of a Licensed Product by Genentech. 1.8 "COMMON STOCK" shall mean the class of capital stock of Alkermes Parent designated as Common Stock, par value $.01 per share, at the date hereof. 1.9 "DEVELOPMENT FUNDS" shall mean (i) the proceeds from the sale of the Preferred Stock to Genentech to be spent by Alkermes in accordance with the 1999/2000 Development Budget, plus (ii) any development expenses incurred by Alkermes in the years 1999 or 2000 that are included in the 1999/2000 Development Budget and that exceed such proceeds. 1.10 "DEVELOPMENT PLANS" shall mean the development plans for preclinical research, clinical development, manufacturing scale-up and supply of clinical and commercial Licensed Products as set forth in Exhibits B and C attached hereto. 1.11 "FULLY BURDENED MANUFACTURING COST" shall mean the sum of: (i) the cost of goods produced, determined in accordance with generally accepted accounting principles in the United States as consistently applied by a Party, including but not limited to direct labor, material and product testing costs of the Licensed Product, as well as allocable overhead, (ii) any intellectual property acquisition and licensing costs directly allocable to the manufacture, use or sale of Licensed Products by a Party, as determined in accordance with generally accepted accounting principles in the United States as consistently applied by a Party, and (iii) any other costs borne by a Party for the transport, customs clearance, and storage of the Licensed Product (e.g., freight, duties, insurance and warehousing). 1.12 "FIELD OF USE" shall mean the prevention, treatment, and diagnosis of any human disease or condition using any Licensed Product. 1.13 "GENENTECH KNOWHOW" shall mean any and all proprietary information, data, test results, safety and efficacy data, knowledge, discoveries, inventions, materials, specifications, and designs and other information owned or controlled by or in 3 4 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. the possession of Genentech and which Genentech has the right to transfer or sublicense which is specifically and only directed at the manufacture of a Licensed Product (including all research, preclinical, clinical data specific for or a Licensed Product), but only to the extent derived by Genentech pursuant to or in the course of research conducted pursuant to the 1996 License Agreement and this Agreement. Genentech Knowhow does not include any of the foregoing, which are generally ascertainable from publicly available information. 1.14 "GENENTECH PATENTS" shall mean any patents (including inventor's certificates) and patent applications containing claims to the composition or use of Licensed Products, as well as substitutions, extensions, reissues, renewals, divisions, continuations, or continuations-in-part of any of the foregoing, which Genentech own or control, either solely or jointly with Alkermes, and as to which Genentech now has or hereafter shall have the right to grant sublicenses. 1.15 "GENENTECH TECHNOLOGY" shall mean the Genentech Patents and the Genentech Knowhow. 1.16 "GHD" shall mean growth hormone deficiency. 1.17 "INTEREST INCOME" shall mean for each period ending February 28, May 31, August 31 and November 30 of each year that the Preferred Stock is outstanding, the amount equal to the product of (i) the LIBOR Rate for the period ending on such date and (ii) the balance of the unexpended net proceeds from the issuance of the Preferred Stock at the end of such period. 1.18 "LIBOR RATE" shall mean, for a particular quarter, the three-month London Interbank Offer Rate (LIBOR) published in the eastern edition of The Wall Street Journal on January 25, April 25, July 25 or October 25 (or the next succeeding business day) in such quarter. 1.19 "LICENSED PRODUCT(S)" shall mean any pharmaceutical formulation for use in or for humans which contains human growth hormone or analogues thereof or contains nucleic acids meant to be incorporated into cells, causing production of human growth hormone or analogues thereof, and (i) which, but for the license granted herein, cannot be manufactured, used or sold without infringing a Valid Claim which is contained in an Alkermes Patent, or (ii) which utilizes or was made utilizing, contains, is based upon, is derived from, or could not have been made but for, the Alkermes Technology. "Licensed Product(s)" includes, but is not limited to, the 1st Generation Formulation and the 2nd Generation Formulation. 4 5 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1.20 "MAJOR MARKET COUNTRY" shall include each of the following: Germany, France, Italy, Japan, the United Kingdom or Spain. 1.21 "NDA" shall mean a New Drug Application as that term is used in Title 21 of the Code of Federal Regulations. 1.22 "NET DIVIDEND EXPENSE" shall mean the dollar amount equal to the difference of (i) the total cumulative dividend accrued (whether or not paid) on the Preferred Stock held by Genentech on the date prior to the payment of the Bonus Milestone Payment less (ii) the total cumulative amount of Interest Income. 1.23 "NET SALES" shall mean the gross invoiced sales price charged for all Licensed Products sold or commercially disposed of for value by Genentech or by Sumitomo Pharmaceuticals ("Sumitomo"), Schwarz Pharma AG ("Schwarz") or any other entities which may replace Sumitomo or Schwarz and perform substantially similar services directly for Genentech (collectively, "Genentech's Distributors"), in arm's length sales to independent third parties after deduction of the following items, to the extent such items are incurred, provided that such items are included in the gross price charged and do not exceed reasonable and customary amounts for each such item in the market in which such sale occurred: (a) trade, cash and quantity discounts or rebates actually allowed and taken; (b) credits or allowances given or made for rejection or return of, and for uncollectible amounts on, a previously sold Licensed Product or for retroactive price reductions; (c) any tax or government charge (including any tax such as a value added or similar tax or government charge other than an income tax) levied on the sale, transportation or delivery of a Licensed Product and borne by the seller thereof; and (d) any charges allowed or prepaid for freight or insurance billed to the final customer. In the event Alkermes is receiving royalties under this Agreement from any Licensed Product sold in a form containing in addition to simple Licensed Product, at least one other ingredient which is Therapeutically Active but excluding diluents, vehicles or specific adjuvants, Net Sales for such combination Licensed Product will be calculated by multiplying actual Net Sales of such combination Licensed Product by the fraction A/(A+B) where A is the invoice price of the Licensed Product if sold separately, 5 6 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. and B is the total invoice price of any other ingredient which is Therapeutically Active in the combination, if sold separately. If, on a country-by-country basis, the other ingredient which is Therapeutically Active in the combination is not sold separately in said country, Net Sales for the purpose of determining royalties of the combination Licensed Product shall be calculated by multiplying actual Net Sales of such combination Licensed Product by the fraction A/C where A is the invoice price of the Licensed Product, if sold separately, and C is the invoice price of the combination Licensed Product. If, on a country-by-country basis, neither the Licensed Product nor the other ingredient which is Therapeutically Active of the combination Licensed Product is sold separately in said country, Net Sales for the purpose of determining royalties of the combination Product shall be determined by the Parties in good faith. For purposes of this Section 1.23, "Therapeutically Active" shall mean biologically active but shall not include diluents, vehicles or specific adjuvants or any other ingredient (other than a Licensed Product) which does not have any, or only incidental, therapeutic properties when present alone. In general, the Parties agree to negotiate in good faith for an equitable determination of Net Sales of Licensed Product, on a country-by-country basis, in the event that Genentech or its distributors sell Licensed Product in such a manner that gross sales of the same are not readily identifiable. 1.24 "NUTROPIN DEPOT" shall mean the ProLease sustained release formulation of Genentech's somatropin recombinant human growth hormone, the manufacture and clinical investigation of which has been conducted under Investigational New Drug (IND) number 49,177 held by Alkermes. 1.25 "PARTY" shall mean Genentech or Alkermes and , when used in the plural, shall mean Genentech and Alkermes. 1.26 "PREFERRED STOCK" shall mean the 1999 Redeemable Convertible Exchangeable Preferred Stock, par value $0.01 per share, of Alkermes Parent purchased by Genentech under the Stock Purchase Agreement. 1.27 "REGULATORY APPROVAL" means any approvals (including pricing and reimbursement approvals), licenses, registrations or authorizations of any federal, state or local regulatory agency, department, bureau or other governmental entity, necessary for the manufacture and sale of a Licensed Product in a regulatory jurisdiction. 1.28 "TERRITORY" shall mean all of the countries in the world except the United States. 6 7 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1.29 "TRADING DAY" shall mean (i) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national security exchange, a day on which the New York Stock exchange or another national security exchange is open for business or (ii) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made thereon or (iii) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. 1.30 "VALID CLAIM" shall mean a subsisting claim of an issued and unexpired Alkermes Patent (i) that has not been declared invalid, unpatentable or unenforceable by a decision of a governmental body or court of competent jurisdiction, (ii) that is unappealable or unappealed within the time allowed for appeal, (iii) that has not been rendered unenforceable through disclaimer or otherwise, and (iv) that is not subject to an interference claim. 1.31 "1ST GENERATION FORMULATION" shall mean Nutropin Depot. 1.32 "2ND GENERATION FORMULATION" shall mean a reformulation of Nutropin Depot meeting the specifications described in Exhibit B, or as agreed upon in writing by the Parties. 1.33 "1999/2000 DEVELOPMENT BUDGET" shall mean any budget for the years 1999 and 2000 agreed upon in writing by the Parties for the development expenses to be incurred by Alkermes or on its behalf, and to be paid for by Genentech through the purchase of Preferred Stock, and the payment for the Bonus Milestone Payment, if any, for the collaborative development of the 1st and 2nd Generation Formulations of Licensed Product. The 1999/2000 Development Budget is attached hereto as Exhibit D. 1.34 "2001/2002 DEVELOPMENT BUDGET" shall mean any budget for the years 2001 and 2002 agreed upon in writing by the Parties for the development expenses to be incurred by Alkermes or on its behalf, for the collaborative development of any Licensed Product. The proposed 2001/2002 Development Budget is attached hereto as Exhibit E. 1A. 1996 License Agreement Amended and Restated. This Agreement amends and restates in full the provisions of the 1996 License Agreement. 7 8 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2. LICENSES AND OPTIONS TO GENENTECH AND ALKERMES 2.1 GRANT OF LICENSE RIGHT TO GENENTECH. Alkermes hereby grants to Genentech (i) a coexclusive right and license along with Alkermes within the United States and within the Field of Use through December 14, 2000, (ii) an exclusive right and license (even as to Alkermes) within the United States and within the Field of Use after December 14, 2000 and (iii) an exclusive right and license (even as to Alkermes) within the Territory and within the Field of Use, all under the Alkermes Patents and the Alkermes Knowhow to perform research and development on, to manufacture and have manufactured, use, import, offer for sale and sell any Licensed Product containing human growth hormone. Genentech may not sublicense any of the rights granted in this Section 2.1. Alkermes hereby agrees not to grant any further licenses to the rights it retains through December 14, 2000 pursuant to this Section 2.1. 2.2 GRANT OF LICENSE RIGHT TO ALKERMES. Genentech hereby grants to Alkermes a coexclusive royalty-free right and license along with Genentech within the United States, under the Genentech Technology and, after December 14, 2000, under the Alkermes Patents and Knowhow, to perform research and development on and to manufacture any Licensed Product pursuant to Section 5 hereof. 3. PAYMENTS TO ALKERMES 3.1 MILESTONE PAYMENTS (a) Genentech shall pay Alkermes the amounts specified below upon the first occurrence of each event set forth below with respect to the 1st Generation Formulation of Licensed Product: EVENTS MILESTONE PAYMENT - ------ ----------------- XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX $XXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXX $XXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (b) In addition to the amounts specified above, Genentech will make the Bonus Milestone Payment to Alkermes upon the achievement of the later to occur of (x) and (y): 8 9 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. (x) XXXXXXXXXXXXXXXX: 1. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 2. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 3. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. XXXXXXXXXXXXXXXXXX (c) Subject to prior notification to Alkermes, Genentech shall pay the Bonus Milestone Amount (i) in cash, (ii) by surrendering some or all of the Preferred Stock (including accrued dividends) held by Genentech pursuant to the following terms and conditions, or (iii) some combination of (i) and (ii): 1. Any surrender by Genentech of some or all of the Preferred Stock to Alkermes to pay the Bonus Milestone Amount in whole or in part shall be a redemption in accordance with Alkermes Parent's Second Amended and Restated Articles of Incorporation, as amended, and, in the event of such a surrender, Alkermes shall credit against the Bonus Milestone Amount an amount equal to the redemption price of the shares of Preferred Stock surrendered by Genentech; provided that any such surrender and redemption is subject to the legal availability of funds therefor under Section 1551 of the Pennsylvania Business Corporation Law, as amended; and 2. In the event that the Closing Price of the Common Stock is at or above XXXXXXXXXXXXXXXXXX per share for the twenty (20) consecutive Trading Days immediately preceding the date of payment of the Bonus Milestone Amount, Alkermes can, at its option, instruct Genentech, when paying the Bonus Milestone Amount, to surrender no more than XXXXXXXXXXXXXXXXX of the Preferred Stock originally issued to Genentech under the Stock Purchase Agreement in lieu of cash and to make a cash payment for the remaining Bonus Milestone Amount; and 3. In the event Genentech surrenders some or all of the Preferred Stock to Alkermes to pay the Bonus Milestone Amount in whole or in part, Genentech shall deliver to Alkermes at the time of such surrender a certificate 9 10 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. representing the shares of Preferred Stock surrendered and any other documents or certificates reasonably requested by Alkermes. 3.2 ROYALTIES (a) ROYALTIES PAYABLE BY GENENTECH. Genentech shall pay royalties to Alkermes of XXXXXXXXXXXXXXXXX of Net Sales of Licensed Products sold by Genentech or by Genentech's Distributors, in each country in the United States and the Territory. (b) OFFSETS FOR THIRD PARTY ROYALTIES. The royalties otherwise payable by Genentech hereunder shall be reduced by XXXXXXXXXXXXXXXXXXXX of the amounts that Genentech must pay to any third party due to manufacture, use, or sale of Licensed Products and caused by the fact that the Licensed Product incorporates the Alkermes Technology, on a country-by-country basis; provided, however, that in no event shall the royalties payable hereunder be reduced by more than XXXXXXXXXXXXXXXXXXX. (c) MILESTONE CREDITS. XXXXXXXXXXXXXXXXXXX of the milestone payments marked with an asterisk made with respect to the events described in Section 3.1 shall be creditable by Genentech against future royalties to be paid to Alkermes pursuant to this Section 3.2. (d) ROYALTY REDUCTION. Until December 14, 2000, the royalties otherwise payable by Genentech hereunder shall be reduced to XXXXXXXXXXXXXXX of Net Sales of Licensed Products sold by Genentech or by Genentech's Distributors, effective automatically if (and when) Alkermes commences development and commercialization, outside of the scope of the collaboration with Genentech pursuant to this Agreement, of any pharmaceutical formulation of human growth hormone using any Alkermes Technology and any human growth hormone or analogues thereof (or nucleic acids meant to be incorporated into cells, causing production of human growth hormone or analogues thereof) not within the Genentech Technology. Any such pharmaceutical formulation is referred to herein as a "Competing Product". Such development and commercialization shall be deemed to include commencement of any human clinical trial of any Competing Product, and Alkermes shall be required to notify Genentech of the commencement of any such trial not later than the date of enrollment of the first subject in such trial. However, the automatic royalty reduction herein shall apply even if Alkermes fails to provide such notice, and if Genentech continues to pay royalties at the higher rate under Section 3.2(a) for any time period during which it later learns that Alkermes had commenced development and commercialization of a Competing Product, Genentech shall be entitled to offset against any future payments owed under 10 11 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. this Agreement the full amount of any excess royalties paid to Alkermes during such time period that the reduced royalty rate herein should have applied (plus interest thereon at a rate equal to XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. 3.3 MODE OF PAYMENT OF ROYALTIES. For purposes of determining when a sale of a Licensed Product occurs, the sale shall be deemed to occur on the earlier of: (i) the date the Licensed Product is shipped, or (ii) the date of the invoice to the purchaser of the Licensed Product. All royalty payments shall be made within ninety (90) days of the end of each calendar quarter in which the sale was made. Such royalty payments shall be accompanied by a detailed statement that shall include for each country in which sales of Licensed Products occurred: the gross sales (if available) and Net Sales in each country's currency or in the Euro, if applicable; the applicable royalty rate; the royalties payable in each country's currency or the Euro, if applicable, including an accounting of all deductions taken in the calculation of Net Sales and a separate accounting for all Combination Products sold and the formulas used in the calculation of royalties owed thereon; the applicable exchange rate to convert from each country's currency or the Euro, if applicable, to United States Dollars; and the royalties payable in United States Dollars. Royalty payments shall first be calculated in the currency in which sales took place or in the Euro, if applicable, and then converted to United States Dollars based on the spot rate as reported by Reuters at the end of each calendar quarter in which the sale was made. All royalty payments hereunder shall be made to Alkermes in United States Dollars by bank wire transfer in immediately available funds to such account designated by Alkermes. Genentech shall provide notice at least five (5) days prior to the wire transfer date of the amount of payment, the nature of the payment (with reference to the applicable section of this Agreement) and the date of receipt of good funds. Such notice should be given to the Treasurer of Alkermes at the address set forth in the Notices and Deliveries Section of this Agreement or such other address directed by Alkermes. All payments hereunder shall be made net of any withholding taxes, duties, levies, fees or charges required to be withheld under the law, on behalf of the other party. Genentech shall make any withholding payments due on behalf of Alkermes and shall promptly provide Alkermes with written documentation of any such payment sufficient to satisfy any requirements of the United States Internal Revenue Service related to an application by Alkermes for a foreign tax credit for such payment. Genentech agrees to take reasonable and lawful steps as Alkermes may request to minimize the amount of tax to which payments to Alkermes are subject, if such steps are not detrimental to Genentech. 3.4 RESTRICTIONS ON PAYMENT. If by law, regulations or fiscal policy of a particular country, remittance of royalties in United States Dollars is restricted or 11 12 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. forbidden, notice thereof will be promptly given to Alkermes, and payment of the royalty shall be made by the deposit thereof in local currency to the credit of Alkermes in a recognized banking institution designated by Alkermes. When in any country the law or regulations prohibit both the transmittal and deposit of royalties on sales in such a country, royalty payments shall be suspended for as long as such prohibition is in effect and as soon as such prohibition ceases to be in effect, all royalties that Genentech would have been under obligation to transmit or deposit but for the prohibition, shall forthwith be deposited or transmitted promptly to the extent allowable. Genentech will first obtain written agreement from Alkermes before selling a Licensed Product in a country known to Genentech to restrict or forbid remittance of royalties in United States Dollars. 3.5 RECORDS RETENTION. Genentech agrees to keep for at least three (3) years, records of all sales of Licensed Products in sufficient detail to permit Alkermes to confirm the accuracy of Genentech's royalty calculations. At the request of, upon at least five (5) days' prior written notice, and at the expense of Alkermes, Genentech shall permit a nationally recognized, independent, certified public accountant appointed by Alkermes and reasonably acceptable to Genentech to examine these records solely to the extent necessary to verify such calculations, provided that such accountant has entered into a confidentiality agreement with Genentech substantially similar to the confidentiality provisions of this Agreement, limiting the use and disclosure of such information to purposes germane to this Section 3.5. Results of any such examination shall be made available to Alkermes and to Genentech. If such examination reveals an underpayment of royalties by ten percent (10%) or more, Genentech shall pay all costs of such examination. In the event such accountant concludes that additional royalties are owed, the additional royalties shall be paid within thirty (30) days of the date Alkermes delivers to Genentech the accountant's written report reflecting such conclusion. This Section 3.5 shall survive any termination of this Agreement for three (3) years. 3.6 MILESTONE PAYMENTS FOR CLINICAL DEVELOPMENT AND PROCESS SCALE-UP. Genentech shall pay Alkermes the amounts specified below if the listed events are completed on or before the listed dates and Alkermes performs the clinical development and process scale-up work necessary for the completion of the particular event. EVENT DATE PAYMENT ------------------------ --------------------- ------- 1. XXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXX XXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXX 12 13 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 4. DEVELOPMENT PLAN The Parties have established a Joint Development Committee ("JDC") to provide oversight on all aspects of product development and to review the progress of preclinical development, clinical development and regulatory filings. The JDC will have three representatives appointed by each of Genentech and Alkermes. Such representatives will have expertise in any of the areas of clinical development, process sciences, manufacturing, marketing or regulatory affairs; however, the JDC members will not be personally responsible for implementing the Development Plans. Either Party may replace any or all of its representatives at any time upon written notice to the other Party. The JDC will meet at least once each calendar quarter or at such other times as directed by Genentech. While the Alkermes representatives may comment on any development and regulatory filing plans, Genentech shall have the final say and shall direct the process, except that Alkermes shall make the final determination if there is a disagreement on a matter that would lead to a substantial increase in the total manpower committed by Alkermes or the scheduling of Alkermes critical facilities when the scheduling is less than one year in advance. 4.1 CLINICAL DEVELOPMENT OF 1ST GENERATION LICENSED PRODUCT BY ALKERMES. Alkermes shall assemble all data and documentation and Genentech shall file for Regulatory Approval with the FDA in the United States for the 1st Generation Formulation of Licensed Product. The Parties agree that obtaining Regulatory Approval in the United States for the 1st Generation Formulation is the highest priority activity for both Parties under this Agreement. Exhibit C sets forth the activities to be completed with respect to the NDA filing. Changes in the project scope, timelines or costs shall be brought to the attention of the JDC for review and the JDC shall make recommendations regarding appropriate changes or additions to Exhibit C. Genentech shall make all final decisions on any changes or additions to Exhibit C. 4.2 PRECLINICAL DEVELOPMENT OF 2ND GENERATION LICENSED PRODUCT. Alkermes shall perform Preclinical Research for the 2nd Generation Formulation of the Licensed Product as set forth in Exhibit B attached hereto. Changes in the project scope, timelines or costs shall be brought to the attention of the JDC for review and the JDC shall make recommendations regarding appropriate changes or additions to Exhibit B. Genentech shall make all final decisions on any changes or additions to Exhibit B. Genentech shall file and hold the IND for the 2nd Generation Formulation of Licensed Product as described in Exhibit B. 4.3 CLINICAL DEVELOPMENT OF 2ND GENERATION LICENSED PRODUCT 13 14 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. (a) Alkermes shall sponsor clinical trials for the 2nd Generation Formulation as provided in Exhibit B (the "Clinical Trials"). Alkermes shall be solely responsible for and shall use its commercially reasonable efforts to perform the Clinical Trials as described in Exhibit B. For the purposes of this Agreement, "commercially reasonable" efforts shall mean those efforts expended by Alkermes on its own high priority projects. Alkermes shall prepare in collaboration with Genentech all documentation necessary for associated filings with regulatory agencies and Genentech shall make all such filings as described in Exhibit B. However, Genentech may, in its sole discretion, determine to have Alkermes make filings for Regulatory Approval. The JDC will oversee clinical development and regulatory filings and carry out plans for clinical development and regulatory filings communicated to it by Genentech. Exhibit B sets forth the Clinical Trials to be conducted, along with the anticipated timeline, requirements and estimated costs for the Clinical Trials and associated regulatory filings. If there are changes in project scope, timelines or costs, the JDC shall be informed and shall review and suggest necessary changes or additions. Genentech shall make all final decisions on any changes or additions to Exhibit B. (b) At any time, if, in Genentech's sole discretion, Genentech believes that Alkermes is not using its commercially reasonable efforts to complete or is not capable of completing any of the clinical development tasks for which Alkermes is given responsibility, Genentech may so notify Alkermes and complete such task itself. 4.4 SUPPLY OF CLINICAL MATERIAL BY ALKERMES. Alkermes shall be responsible for, and shall use its commercially reasonable efforts to, supply all clinical needs and requirements of the 1st and 2nd Generation Formulations of Licensed Product. Such Licensed Product shall be produced under GMP and all other applicable laws and regulations. Exhibit B attached hereto sets forth Alkermes' estimated timeline, requirements, and costs for supplying the 2nd Generation Formulation of the Licensed Product for the Clinical Trials. Alkermes will provide, and the Parties will agree upon, additions to Exhibit B for other clinical trials of Licensed Products. Exhibit C attached hereto sets forth Alkermes' estimated timeline, requirements, and costs for supplying the 1st Generation Formulation of Licensed Products for ongoing clinical studies and qualification lots for NDA submission. 4.5 SCALE-UP OF THE MANUFACTURING PROCESS BY ALKERMES. Alkermes shall be responsible for, and shall use its commercially reasonable efforts to, scale up the process for producing the 1st and 2nd Generation Formulations of Licensed Product for both clinical and (unless Genentech manufactures commercial Licensed Product pursuant to Section 5) commercial requirements, provided that Genentech supplies sufficient quantities of human growth hormone (at Genentech's expense) to enable 14 15 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Alkermes to do so. Exhibit B attached hereto sets forth the anticipated timeline, requirements and costs for scaling-up the manufacturing process for making the 2nd Generation Formulation of Licensed Product for clinical and commercial use. Genentech shall not be responsible for any of Alkermes' capital cost of its facilities except as otherwise set forth in Exhibit B or approved by the JDC for the facility in which commercial Licensed Product(s) are to be manufactured. The Parties will prepare and agree upon a separate document setting forth the anticipated timeline, requirements and costs for scaling-up the manufacturing process for other applications of the Licensed Product. 4.6 FUNDING FOR PRECLINICAL DEVELOPMENT, CLINICAL DEVELOPMENT, SUPPLY AND SCALE-UP OF LICENSED PRODUCTS. (a) In connection with the development of the Licensed Products, the 1999/2000 Budget is attached hereto as Exhibit D and the proposed 2001/2002 Development Budget is attached hereto as Exhibit E. The 2001/2002 Development Budget shall be reviewed by the JDC prior to the fourth calendar quarter of the year 2000 and the JDC shall approve such budget or make recommendations for changes or additions. Genentech shall make the final decision regarding any changes or additions to the 2001/2002 Development Budget. (b) Genentech shall fund XXXXXXXXXXXXXXXXXXXXXXXXXXXXX towards activities related to the filing for Regulatory Approval with the FDA of the 1st Generation Formulation of the Licensed Product and for the development of the 2nd Generation Formulation of the Licensed Product in accordance with the agreed upon Development Plans and 1999/2000 Development Budget. This amount shall be funded to Alkermes through the purchase of Preferred Stock under the Stock Purchase Agreement and the payment of the Bonus Milestone Payment, if any. The 1999/2000 Budget shall be reviewed by the Parties on a quarterly basis to update the budget forecast and to assess the need for additional funding. Any increase in the amount of funding shall require the agreement of both Parties and such funding shall be through the purchase of additional Preferred Stock. Alkermes shall submit a detailed monthly report to Genentech within four (4) weeks after the end of each month during which it expends Development Funds in 1999 and 2000. Such report shall set forth the activities completed, including development and scale-up efforts and supply of 1st and 2nd Generation Formulations for clinical use, the Full Time Equivalent (FTE) utilization rate broken down by functional area and the costs for such activities, which shall be reasonably in accordance with amounts previously agreed upon in the 1999/2000 Development Budget by the JDC for such activities. In the event of a change of control as described in Section 9.9 herein, exercise of the rights described in the Discontinuation Agreement prior to December 31, 2000 shall result in the funding of the 15 16 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Development Plans pursuant to paragraph (c) below rather than through this paragraph (b). (c) Genentech shall reimburse the costs incurred by Alkermes in accordance with the Development Plans and the 2001/2002 Development Budget, and for 1st and 2nd Generation Formulations of Licensed Product supplied for clinical use in 2001 and 2002, at Alkermes' actual cost, as determined by Alkermes in accordance with the FTE rate agreed upon for such years by the JDC at the beginning of each Alkermes fiscal year, to be consistently applied throughout such years, plus the external costs of performing any clinical trials agreed upon by the JDC. In 2001 and 2002, Alkermes shall submit a detailed monthly report to Genentech as described in Section 4.6 (b) above, together with an invoice for the total amount to be reimbursed by Genentech, which shall be reasonably in accordance with the amounts agreed upon by the JDC for the 2001/2002 Development Budget. Genentech shall reimburse Alkermes' costs within thirty (30) days of receiving each invoice. With regard to supply of Licensed Product for clinical use by Genentech, Alkermes will only ship to an invoice Genentech for Licensed Product ordered by Genentech pursuant to binding purchase orders. (d) Alkermes will keep reasonably detailed records of its costs of performing the obligations set forth in this Agreement, as determined by Alkermes consistent with the FTE rate methods used by Alkermes in connection with the prior research and development activities conducted in collaboration with Genentech plus other external costs as agreed upon by the JDC. 4.7 DEVELOPMENT DUE DILIGENCE. Alkermes shall use its commercially reasonable efforts to meet the timelines set forth in the Development Plans. 5. MANUFACTURE OF LICENSED PRODUCT 5.1 MANUFACTURE BY ALKERMES. Alkermes shall be responsible for, and shall use its commercially reasonable efforts to, supply all clinical and commercial requirements of Licensed Product in either final vial form or bulk form as agreed upon by the Parties. The provisions governing production of material for clinical trials are set forth in Section 4.4. The provisions governing the production of commercial material shall be set forth in a Supply Agreement to be entered into by the Parties on or before June 30, 1999. The price of supply of commercial material in the Supply Agreement will be a purchase price per vial (or similar quantity) of XX of the gross invoiced sales price per vial (or similar quantity) used in the calculation of Net Sales less the deductions used in the calculation of Net Sales. Prior to Commercial Introduction, the purchase price will be based on the expected gross invoiced sales price and expected deductions 16 17 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. upon Commercial Introduction. If Alkermes supplies only bulk product in this situation, Genentech shall be entitled to deduct its Fully Burdened Manufacturing Cost of filling and finishing Licensed Product from the amount otherwise payable to Alkermes. Genentech will supply the necessary amount of growth hormone free-of-charge to enable Alkermes to fulfill its supply obligations. Alkermes will permit Genentech representatives to review periodically Alkermes' quality control procedures and records, and to visit Alkermes' facilities, upon prior written notice to Alkermes and at reasonable times for quality assurance purposes. 5.2 MANUFACTURE BY GENENTECH. If in Genentech's reasonable opinion, Alkermes is unable to manufacture all clinical and commercial quantities of any Licensed Product, Alkermes shall transfer to and fully enable Genentech with the then most current version of all materials, regulatory filings, knowhow, reagents and expertise necessary for Genentech to undertake the manufacture of Licensed Products. All transfers of materials and information to Genentech shall be free of charge to Genentech if the transfer occurs due to a breach of this Agreement by Alkermes. If the transfer occurs due to any other inability to perform of Alkermes, Genentech shall reimburse Alkermes for all reasonable costs of transfer of materials and information. Alkermes shall continue to manufacture Licensed Product until, in Genentech's reasonable opinion, Genentech is fully enabled to manufacture. Manufacture of Licensed Product may be done partially by Alkermes and partially by Genentech in this situation. If that is the case, and the situation is caused by a breach of this Agreement by Alkermes, the price otherwise payable by Genentech to Alkermes under the provisions of Section 5.1 shall be reduced to XXXX of the gross invoiced sales price per vial (or similar quantity) used in the calculation of Net Sales less the deductions used in the calculation of Net Sales. Otherwise, the price otherwise payable will be prorated based on the percentage of the total manufacture of Licensed Product being done by each Party. 6. COMMERCIALIZATION. Genentech agrees to pursue a diligent sales and marketing effort for a Licensed Product to be sold by Genentech relative to other products of similar commercial potential that are being sold and marketed by Genentech. A default by Genentech with respect to pursuing a diligent sales and marketing effort for a Licensed Product in one country shall not constitute a default by Genentech with respect to any other country. 7. REPRESENTATIONS AND WARRANTIES 7.1 REPRESENTATIONS AND WARRANTIES OF ALKERMES. Alkermes hereby represents and warrants that: 17 18 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. (a) the execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly authorized by all appropriate Alkermes corporate action; (b) this Agreement is a legal and valid obligation binding upon Alkermes and enforceable in accordance with its terms. The execution, delivery and performance of the Agreement by Alkermes does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it is bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it; (c) Alkermes has the right to grant the licenses granted in Section 2.1, and has no knowledge of any rights of any third parties that would interfere with the practice of the Alkermes Technology by Genentech as contemplated under this License Agreement; and (d) to the best of its knowledge, Alkermes is not obligated under any agreement as of the date hereof to pay any third party royalties with respect to the Alkermes Technology; 7.2 REPRESENTATIONS AND WARRANTIES OF GENENTECH. Genentech represents and warrants that: (a) the execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly authorized by all appropriate Genentech corporate action; (b) this Agreement is a legal and valid obligation binding upon Genentech and enforceable in accordance with its terms. The execution, delivery and performance of the Agreement by Genentech does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it is bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it; and (c) Genentech has the right to grant the license granted herein. 8. CONFIDENTIALITY 8.1 DISCLOSED CONFIDENTIAL INFORMATION. In the course of performance of this Agreement, one Party may disclose to the other or receive written information from the other relating to the subject matter of this Agreement which information, if so 18 19 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. identified in writing either pursuant to this Section 8.1 or otherwise upon disclosure, shall be considered the disclosing Party's "Disclosed Confidential Information." Each Party agrees that it will take the same steps to protect the confidentiality of the other Party's Disclosed Confidential Information as it takes to protect its own proprietary and confidential information. Each Party shall protect and keep confidential and shall not use, publish or otherwise disclose to any third party, except as contemplated by this Agreement or with the other Party's written consent, the other Party's Disclosed Confidential Information for a period of five (5) years from the date of termination of this Agreement. 8.2 SHARED CONFIDENTIAL INFORMATION. In the course of performance of this Agreement, the Parties may jointly develop, invent or discover information, substances or processes, which shall be considered the "Shared Confidential Information" except as otherwise set forth in Section 9.6. Each Party agrees that it will take the same steps to protect the confidentiality of the Shared Confidential Information as it takes to protect its own proprietary and confidential information. Each Party shall protect and keep confidential and shall not publish or otherwise disclose to any third party, except as contemplated by this Agreement or with the other Party's written consent, the Shared Confidential Information for a period of five (5) years from the date of termination of this Agreement. Each Party may, however, use any Shared Confidential Information for any purpose; provided that such use shall not be deemed a license or a grant of any additional right or license other than or in addition to the right and license granted in Section 2 of this Agreement. 8.3 PERMITTED DISCLOSURE. In addition, each Party shall be entitled to disclose, under a binder of confidentiality containing provisions as protective as this Section 8, "Confidential Information," which shall include Disclosed Confidential Information and Shared Confidential Information, to consultants and other third parties for any purpose provided for in this Agreement. The Parties shall consult prior to the submission of any manuscript for publication if the publication will contain any Confidential Information of the other Party unless the laws and regulations applicable to the third party submitting such manuscript prohibit such consultation. Such consultation shall include providing a copy of the proposed manuscript to the other Party at least sixty (60) days prior to the proposed date of submission to a publisher, incorporating appropriate changes proposed by the other Party into the manuscript submission and deletion of all Confidential Information of which such Party does not agree to the publication. The foregoing notwithstanding, Confidential Information may be disclosed as a part of a patent application filed on inventions made under this Agreement and during any official proceeding before a court or governmental agency if reasonably related and necessary to that proceeding. For the purpose of this Agreement, Confidential Information shall not include such information that: 19 20 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. (i) was known to the receiving Party at the time of disclosure; or (ii) was generally available to the public or was otherwise part of the public domain at the time of disclosure or became generally available to the public or otherwise part of the public domain after disclosure other than through any act or omission of the receiving Party in breach of this Agreement; or (iii) became known to the receiving Party after disclosure from a source that had a lawful right to disclose such information to others; or (iv) was independently developed by the receiving Party where such independent development can be established by written documentation. 8.4 INTEGRATION. This Section 8 supersedes any confidential disclosure agreement between the Parties as to the subject matter hereof. Any confidential information under any such agreement shall be treated as Confidential Information hereunder. 9. TERM; TERMINATION 9.1 TERM; TERMINATION AT FULL TERM. This Agreement shall commence as of the Effective Date and, except as provided in the next sentence or unless sooner terminated as provided hereunder, shall terminate on a country-by-country basis on the later of (i) 10 years after Commercial Introduction in that country, or (ii) the expiration of the last Valid Claim of an Alkermes Patent in that country. Notwithstanding any termination at the full term of this Agreement, which shall occur upon termination as described in the preceding sentence in the United States and each country in the Territory, or termination as otherwise provided in this Section 9, the provisions of Sections 8, 10, 11 and 12 will not terminate on said date but will continue in full effect. Upon termination of the royalty obligations in any country, Genentech shall thereafter have in perpetuity a fully paid up, royalty-free exclusive license in that country under the Alkermes Technology to import, make, have made, use, offer for sale and sell Licensed Products in the Field of Use without any accounting to Alkermes. 9.2 UNILATERAL TERMINATION. Genentech shall have the right following ninety (90) days written notice to Alkermes to terminate this Agreement at any time for any reason except for material breach by Alkermes, which shall be governed by Section 9.3 hereof. In the event that a Licensed Product has received Regulatory Approval and Alkermes is manufacturing such Licensed Product for commercial sale, Genentech may so terminate this Agreement only after providing six (6) months written notice. In any 20 21 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. event, Alkermes shall be allowed to spend Development Funds or, if all Development Funds have been expended, receive reimbursement from Genentech, for any non-cancelable obligations it has incurred for which Genentech would otherwise be obligated to support under the Development Budget(s) if this Agreement had not been terminated. If manufacturing technology has been transferred to Genentech by Alkermes other than by reason of a material breach by Alkermes, then Genentech shall transfer all such technology back to Alkermes, at Alkermes' expense. If Genentech terminates this Agreement pursuant to this Section 9.2, all rights granted hereunder by Alkermes to Genentech shall immediately revert to Alkermes and neither Party shall have any further obligation to the other hereunder except to the extent otherwise accrued or provided for under this Agreement. In the event Genentech terminates this Agreement pursuant to this Section 9.2 prior to payment of the Bonus Milestone Payment, Genentech shall make the Bonus Milestone Payment on the termination date. 9.3 BREACH. Failure by either Party to comply with any of the material obligations contained in this Agreement shall entitle the other Party (the "Non-Defaulting Party") to give to the Party (the "Defaulting Party") in default written notice specifying the nature of the default and requiring it to make good such default. If such default is not cured within ninety (90) days after the receipt of such notice, the Non-Defaulting Party shall be entitled, without prejudice to any of its other rights conferred on it by this Agreement, in addition to any other remedies available to it by law or in equity, immediately to terminate this Agreement by giving written notice to the Defaulting Party. With respect to either party, a default with respect to its obligations in one country shall not constitute a default with respect to its obligations in any other country. The termination of this Agreement by Alkermes as a result of Genentech's breach under this Section 9.3 shall terminate all rights granted to it hereunder, except that Genentech shall pay the Bonus Milestone Payment. The right of a Party to terminate this Agreement, as hereinafter provided, shall not be affected in any way by its waiver or failure to take action with respect to any previous default. Upon any termination by Genentech under this Section 9.3, the Parties shall have the rights and obligations set forth in Section 9.7. 9.4 INSOLVENCY OR BANKRUPTCY. Either Party may, in addition to any other remedies available to it by law or in equity, terminate this Agreement, by written notice to the other Party in the event the other Party shall have become insolvent or bankrupt, or shall have made an assignment for the benefit of its creditors, or there shall have been appointed a trustee or receiver of the other Party or for all or a substantial part of its property, or any case or proceeding shall have been commenced or other action taken by or against the other Party in bankruptcy or seeking reorganization, liquidation, dissolution, winding-up, arrangement, composition or readjustment of its debts or any 21 22 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. other relief under any bankruptcy, insolvency, reorganization or other similar act or law of any jurisdiction now or hereafter in effect, or there shall have been issued a warrant of attachment, execution, distraint or similar process against any substantial part of the property of the other Party, and any such event shall have continued for sixty (60) days undismissed, unbonded and undischarged. 9.5 ACCRUED RIGHTS. Termination, relinquishment or expiration of this Agreement for any reason shall be without prejudice to any rights, which shall have accrued to the benefit of either Party prior to such termination or expiration. Such termination, relinquishment or expiration shall not relieve either Party from obligations, which are expressly indicated to survive termination or expiration of this Agreement. 9.6 OWNERSHIP OF CLINICAL DATA. All data produced as a result of clinical trials conducted under this Agreement shall be owned by Genentech, except to the extent in conflict with the requirements of any regulatory agency from which the Parties have received, will apply to receive or have applied to receive Regulatory Approval, and such ownership shall survive any expiration or termination of this Agreement. Genentech shall be named as the applicant in any regulatory submission to be made hereunder and shall be the holder of all Regulatory Approvals. Alkermes may use such data for any purpose contemplated by this Agreement. Such data shall be considered Disclosed Confidential Information. 9.7 RIGHTS AND OBLIGATIONS UPON TERMINATION. In the event of termination by Genentech for a material breach by Alkermes or upon expiration of this Agreement, if Alkermes was previously manufacturing Licensed Product for Genentech, Alkermes shall remain responsible for its supply obligations hereunder until Alkermes has fully transferred and enabled Genentech or its designee to perform all of Alkermes' supply obligations. Such transfer shall include making its personnel and other resources reasonably available to Genentech as necessary to effect an orderly transition of manufacture of Licensed Product, with the costs of providing such personnel and resources to be borne by Genentech, in the event of expiration, and by Alkermes, in the event of termination by Genentech for material breach. Such transfer will take place, at Genentech's option, at any time after expiration in any of the Major Market Countries or the United States until expiration in the last country, in the event of transfer due to expiration. In addition, Genentech shall thereafter have an exclusive license in all countries after termination by Genentech for a material breach by Alkermes for which it shall pay a XXXXXXXXXXXXXXXX royalty on Net Sales if Alkermes had previously completed a Phase I or Phase I/II clinical trial with respect to such Licensed Product. In the event of a termination by Genentech for a material breach by Alkermes or upon expiration of this Agreement, Genentech shall reimburse Alkermes for Development Funds expended through the date of termination, so long as such funds were spent in 22 23 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. accordance with the 1999/2000 Development Budget or 2001/2002 Development Budget, as applicable. 9.8 OPTION TO COMMERCIALIZE. If Genentech terminates this Agreement pursuant to Section 9.2 or if Genentech does not make the Bonus Milestone Payment by December 31, 2001, Alkermes will have the option to continue the development and commercialization of the 1st and 2nd Generation Formulations of the Licensed Products pursuant to a license and cost plus supply agreement to be negotiated in good faith by the parties and with commercially reasonable terms. 9.9 CHANGE OF CONTROL. In the event of a change of control of Alkermes Parent, Alkermes Parent, its third party acquiror or its successor will have the rights described in the Discontinuation Agreement between Genentech and Alkermes Parent dated the date hereof (the "Discontinuation Agreement"). It is acknowledged that any exercise by Alkermes Parent of its rights under the Discontinuation agreement shall not in and of itself trigger a termination of this Agreement. 10. PATENT RIGHTS 10.1 SOLE INVENTIONS. The Parties recognize that either Party may independently and separately make inventions during the course of this Agreement relating to human growth hormone, delivery systems for human growth hormone, PLGA encapsulation of proteins or otherwise related to the scope of this Agreement but not as a result of activities performed pursuant to this Agreement. Each Party shall retain title to inventions and knowhow, whether or not patentable, made or owned solely by it or on its behalf which do not arise out of the activities performed by it or on its behalf under this Agreement ("Sole Knowhow"). In such event, the Party making the invention shall be the sole owner of that invention and of any patent applications and patents thereon (including inventor's certificates) and shall be solely responsible for the filing, prosecution and maintenance of all such patent application and patents. Except as provided in this Agreement, neither Party shall have any right to use or license knowhow to which the other Party has sole title. 10.2 JOINT PATENTS. All inventions conceived or first reduced to practice as a result of activities performed pursuant to this Agreement shall be jointly owned by Genentech and Alkermes. In addition, the event that it is determined, in accordance with applicable law, that both: (i) employees or agents of Genentech or any other persons obliged to assign such invention to Genentech, and (ii) employees or agents of Alkermes or any other persons obliged to assign such invention to Alkermes, are joint inventors of an invention, the Parties shall jointly own patents, inventor's certificates and applications therefor covering such invention. With respect to any sole or joint 23 24 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. inventions arising as a result of activities performed under this Agreement, Alkermes and Genentech shall require the Alkermes and/or Genentech inventors to assign all such inventions to Genentech and Alkermes as joint owners; provided however, that within thirty (30) days of the termination of the Agreement for any of the reasons provided in Section 9 hereof, Alkermes and Genentech shall assign all issued and pending United States and foreign patents and applications covering inventions arising hereunder according to the following: (i) patent applications or patents naming only Alkermes inventors shall be assigned to Alkermes, (ii) patent applications or patents naming only Genentech inventors shall be assigned to Genentech and (iii) patent applications and patents naming both Alkermes and Genentech inventors shall remain jointly assigned to Alkermes and Genentech. With respect to any joint invention or jointly owned invention, Genentech shall prosecute all such patents relating to Genentech Technology and Alkermes shall prosecute all such patents relating to the Alkermes Technology. The party having such obligation to prosecute will be referred to herein as the "Controlling Party". The Controlling Party shall have the right (but not the obligation) to undertake such filings, prosecutions and maintenance at its sole expense, provided that: (a) the Controlling Party notifies the non-Controlling Party within one (1) month after the filing of any patent application by the Controlling Party and (b) the Controlling Party provides the non-Controlling Party, a reasonable time prior to taking or failing to take any action that would substantially affect the scope or validity of rights under any patent applications or patents (including but not limited to substantially narrowing or canceling any claim without reserving the right to file a continuing or divisional application (which shall not be unreasonably delayed), abandoning any patent or not filing or perfecting the filing of any patent application), with notice of such proposed action or inaction so that the non-Controlling Party has a reasonable opportunity to review and assume the prosecution or maintenance thereof. In the event that the Controlling Party fails to undertake the filing of a patent application (or continuing or divisional application) within ninety (90) days of being designated as the Controlling Party with respect to such patent application, the non-Controlling Party may undertake such filing, prosecution and maintenance at its sole expense. Notwithstanding the foregoing, the Parties shall assist each other to the maximum extent reasonable in securing intellectual property rights resulting from activities conducted hereunder. As to enforcement of jointly owned patents, including actions against an infringer, the Parties shall consult with each other in good faith as to the best manner in which to proceed. The Parties agree as a basic principle that in the case of such actions against infringers, the expenses incurred and damages awarded shall be for the account of the Party or Parties which take such actions to the extent of their financial participation therein. 10.3 INFRINGEMENT CLAIMS RELATING TO GENENTECH TECHNOLOGY. Genentech shall defend, at its sole cost and expense, any legal proceedings brought against it or 24 25 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Alkermes claiming that Alkermes' manufacture of any Licensed Product under this Agreement constitutes an infringement of third party patent rights arising out of the use of Genentech Knowhow or the practice of Genentech Patents, except to the extent that any such proceedings shall arise from the gross negligence or willful misconduct of Alkermes and shall indemnify and hold Alkermes harmless from any damages or expenses incurred or awarded as the result of any settlement related thereto agreed to by Genentech or judgment against Alkermes, provided that Alkermes gives Genentech written notice of any such claim or the institution of any suit or suits against it within thirty (30) days after Alkermes has knowledge of any such claim or suit or suits, that Alkermes assist Genentech, at Genentech's expense, in the investigation of, preparation for and defense of any such claim or suit or suits, and that Alkermes not compromise or settle any such claim or suit or suits without Genentech's written consent. Alkermes' failure to notify Genentech of such claim or suit or suits within thirty (30) days shall not obviate its right to receive indemnification hereunder so long as such failure does not materially prejudice the defense of such claim or suit or suits. Genentech shall promptly notify Alkermes in writing of the institution of any suit by a third party against Genentech for patent infringement involving the manufacture, use, sale, distribution or marketing of Licensed Product arising out of the activities carried out pursuant to this Agreement. 10.4 INFRINGEMENT CLAIMS RELATING TO THE ALKERMES TECHNOLOGY. Alkermes shall defend, at its sole cost and expense, any legal proceedings brought against it or Genentech claiming that Alkermes' manufacture of any Licensed Product or Genentech's manufacture, use, sale, distribution or marketing of Licensed Product hereunder constitutes an infringement of third party patent rights arising out of the use of Alkermes Knowhow or the practice of Alkermes Patents, except to the extent that any such proceedings shall arise from the gross negligence or willful misconduct of Genentech, and shall indemnify and hold Genentech harmless from any damages or expenses incurred or awarded as the result of any settlement related thereto agreed to by Alkermes or judgment against Genentech, provided that Genentech gives Alkermes written notice of any such claim or the institution of any suit or suits against it within thirty (30) days after Genentech has knowledge of any such claim or suit or suits, that Genentech assist Alkermes, at Alkermes' expense, in the investigation of, preparation for and defense of any such claim or suit or suits, and that Genentech not compromise or settle any such claim or suit or suits without Alkermes' written consent. Genentech's failure to notify Alkermes of such claim or suit or suits within thirty (30) days shall not obviate its right to receive indemnification hereunder so long as such failure does not materially prejudice the defense of such claim or suit or suits. Alkermes shall promptly notify Genentech in writing of the institution of any suit by a third party against Alkermes for patent infringement involving the manufacture, use, sale, distribution or marketing of Licensed Product arising out of the activities carried out pursuant to this Agreement. 25 26 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 10.5 SURVIVAL. This Section 10 shall survive the termination or expiration of this Agreement. 11. INDEMNIFICATION (a) Genentech hereby agrees to save, defend and hold Alkermes and its agents and employees harmless from and against any and all suits, claims, actions, demands, liabilities, expenses and/or loss, including reasonable legal expense and attorneys' fees ("Losses") except for patent claims handled under Section 10, resulting directly from the marketing, packaging, testing, labeling, manufacture, use, or sale of Licensed Products in the United States and the Territory by Genentech, except to the extent such Losses result from the negligence or willful misconduct of Alkermes. (b) Alkermes hereby agrees to save, defend and hold Genentech and its agents and employees harmless from and against any and all Losses except for patent claims handled under Section 10, resulting directly from the manufacture of Licensed Products by Alkermes, except to the extent such Losses result from the negligence or willful misconduct of Genentech. (c) In the event that one Party is seeking indemnification under this Section 11 (the "Indemnified Party"), it shall inform the other Party (the "Indemnifying Party") of a claim as soon as reasonably practicable after the Indemnified Party receives notice of the claim, shall permit the Indemnifying Party to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall cooperate as requested (at the expense of the Indemnifying Party) in the defense of the claim. (d) This Section 11 shall survive termination or expiration of this Agreement. 12. MISCELLANEOUS PROVISIONS 12.1 NO PARTNERSHIP. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, distributorship, employer-employee or joint venture relationship between the Parties. No Party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein. 12.2 ASSIGNMENTS. Neither Party shall assign any of its rights or obligations hereunder except: (i) as incident to the merger, consolidation, reorganization or acquisition of stock or assets affecting substantially all of the assets or voting control of 26 27 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. the assigning Party; (ii) to any wholly-owned subsidiary if the assigning Party remains liable and responsible for the performance and observance of all of the subsidiary's duties and obligations hereunder; or (iii) with the consent of the other Party. This Agreement shall be binding upon the successors and permitted assigns of the Parties, and the name of a Party appearing herein shall be deemed to include the names of such Party's successor's and permitted assigns to the extent necessary to carry out the intent of this Agreement. Any assignment not in accordance with this Section 12.2 shall be void. 12.3 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 12.4 NO TRADEMARK RIGHTS. Except as otherwise provided herein, no right, express or implied, is granted by this Agreement to use in any manner the names "Alkermes" or "Genentech" or any other trade name or trademark of Alkermes or Genentech in connection with the performance of this Agreement. 12.5 PUBLIC ANNOUNCEMENTS. Except as may otherwise be required by law or regulation, neither Party shall make any public announcement concerning this Agreement or the subject matter hereof without the prior consent of the other Party unless the nature of the information has been previously approved for disclosure. If the nature of the information has been approved, this Section 12.5 will no longer apply to that information. 12.6 ADVERSE EVENT REPORTS. In order to comply with adverse event reporting regulations of the FDA (as provided in Title 21 of the Code of Federal Regulations) and other international regulatory agencies, each of Genentech and Alkermes acknowledge that once the Parties hereunder are selling and/or clinically testing in humans any Licensed Product they must report promptly to each other the occurrence of adverse events regarding such products for timely reporting to the FDA and other reporting agencies. The specific terms of the adverse event data exchange between the appropriate parties shall be set forth in a separate agreement and identify the departments responsible for safety surveillance at each entity. 12.7 ENTIRE AGREEMENT OF THE PARTIES; AMENDMENTS. This Agreement constitutes and contains the entire understanding and agreement of the Parties and cancels and supersedes any and all prior negotiations, correspondence, understandings and agreements, whether verbal or written, between the Parties respecting the subject matter hereof, including the 1996 License Agreement. No waiver, modification or amendment of any provision of this Agreement shall be valid or 27 28 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. effective unless made in writing and signed by a duly authorized officer of each of the Parties. 12.8 SEVERABILITY. In the event any one or more of the provisions of this Agreement should for any reason be held by any court or authority having jurisdiction over this Agreement or either of the parties to be invalid, illegal or unenforceable, such provision or provisions shall be validly reformed to as nearly as possible approximate the intent of the Parties and, if unreformable, shall be divisible and deleted in such jurisdiction; elsewhere, this Agreement shall not be affected so long as the Parties are still able to realize the principal benefits bargained for in this Agreement. 12.9 CAPTIONS. The captions to this Agreement are for convenience only, and are to be of no force or effect in construing or interpreting any of the provisions of this Agreement. 12.10 APPLICABLE LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California applicable to contracts entered into and to be performed entirely within the State of California. 12.11 NOTICES AND DELIVERIES. Any notice, requests, delivery, approval or consent required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered in person, transmitted by fax with a confirming copy sent by overnight courier, overnight courier, or registered mail to the Party to whom it is directed at its address shown below or such other address as such party shall have last given by notice to the other Party. Any such notice, requests, delivery, approval or consent shall be deemed received on the date of fax or hand delivery, one (1) business day after deposit with an overnight courier, or three (3) days after deposit of the registered mail with the U.S. postal service. IF TO ALKERMES, ADDRESSED TO: Alkermes Controlled Therapeutics, Inc. 64 Sidney Street Cambridge, MA 02139 Attention: President Telephone: 617-494-0171 Fax: 617-494-9255 28 29 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. IF TO GENENTECH, INC., ADDRESSED TO: Genentech, Inc. 1 DNA Way South San Francisco, California 94080 Attention: Corporate Secretary Telephone: 650-225-1000 Fax: 650-952-9881 12.12 PREVAILING PARTY. In the event of any dispute which results in a suit or other legal proceeding to construe or enforce any provision of this Agreement or because of an alleged breach, default or misrepresentation in connection with any of the provisions of this Agreement, the parties agree that the prevailing party or parties (in addition to all other amounts and relief to which such party or parties may be entitled) shall be entitled to recover reasonable attorneys' fees and other costs incurred in any action or proceeding. 12.13 COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.14 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by a Party and shall be able to be relied fully on by the Parties. 29 30 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. IN WITNESS WHEREOF, the Parties have caused this License Agreement to be executed by their respective duly authorized officers as of the day and year first above written, each copy of which shall for all purposes be deemed to be an original. ALKERMES CONTROLLED THERAPEUTICS, INC. GENENTECH, INC. BY: /S/ JAMES M. FRATES BY: /S/ WILLIAM D. YOUNG ----------------------------- ---------------------------------- WILLIAM D. YOUNG TITLE: VICE PRESIDENT TITLE: CHIEF OPERATING OFFICER ----------------------------- ---------------------------------- 30 31 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Exhibit B 2nd General Formulation Pre-Clinical, Manufacturing and Clinical Plan XXXXXXXXXXXXXX 32 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Exhibit C Nutropin Depot Development Plan XXXXXXXXXXXXXXXXXXXX 33 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Exhibit D 2nd Generation Formulation Development Plan and Budget for 1999-2000
External Total # Patients Total Costs Costs Activity Start-Finish (all Naive) Comments FTEs (MM) ($000) XXX XXX XXX XXX XXX XXX XXX
34 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Exhibit D Nutropin Depot Budget for 1999-2000
External Total # Patients Total Costs Costs Activity Start-Finish (all Naive) Comments FTEs (MM) ($000) XXX XXX XXX XXX XXX XXX XXX
35 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Exhibit E 2nd Generation Formulation Development Plan and Budget for 2001-2002
External Total # Patients Total Costs Costs Activity Start-Finish (all Naive) Comments FTEs (MM) ($000) XXX XXX XXX XXX XXX XXX XXX
EX-10.19 10 DISCONTINUATION AGREEMENT 1 Exhibit 10.18 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. DISCONTINUATION AGREEMENT THIS DISCONTINUATION AGREEMENT (the "Agreement") is entered into effective as of April 4, 1999 (the "Effective Date") between ALKERMES, INC., a Pennsylvania corporation ("Alkermes Parent"), located at 64 Sidney Street, Cambridge, Massachusetts 02139 and GENENTECH, INC., a Delaware corporation ("Genentech"), located at 1 DNA Way, South San Francisco, California 94080. Alkermes Controlled Therapeutics, Inc., a Pennsylvania corporation and a wholly owned subsidiary of Alkermes Parent ("Alkermes"), and Genentech have entered into, on the date hereof, a License Agreement (the "License Agreement") under which they will further collaborate on the development of formulations of recombinant human growth hormone for use in human beings using Alkermes' technology currently known as the ProLease(R) delivery system, consisting of patents and know-how, that permits PLGA encapsulation of particular molecules leading to sustained release of such molecules when injected under the skin. Genentech and Alkermes Parent have entered into, on the date hereof, a Stock Purchase Agreement, pursuant to which Genentech agreed to buy and Alkermes Parent agreed to sell shares of Alkermes Parent's 1999 Redeemable Convertible Exchangeable Preferred Stock (the "Preferred Stock") to fund their further collaborative efforts under the License Agreement through the year 2000. Genentech and Alkermes Parent desire to enter into this Agreement in order to provide for the option by Alkermes Parent or its successor in interest to discontinue the Preferred Stock funding mechanism described above in the event of a change in control of Alkermes Parent. Therefore, Alkermes Parent and Genentech, intending to be legally bound hereby, agree as follows: 1. Any capitalized term used herein and not defined shall have the meaning set forth in the License Agreement. 2. So long as the Bonus Milestone Payment has not been paid pursuant to Section 3.1 of the License Agreement, in the event that a third party, who is not an affiliate of Alkermes Parent, acquires greater than 49% of the voting stock of Alkermes Parent, such acquiring third party, Alkermes Parent or its successor may, in its sole discretion, elect to discontinue the Preferred Stock funding mechanism. In such case, 2 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. (a) Alkermes Parent or its successor shall redeem for cash that amount of the Preferred Stock held by Genentech equal to (i) the difference between the proceeds from the sale of the Preferred Stock to Genentech and (ii) the Development Funds expended by Alkermes to the date of such redemption in accordance with the 1999/2000 Development Budget; (b) There will not be a termination of the License Agreement by virtue of the discontinuation of the funding mechanism and the termination provisions in Section 9 of the License Agreement shall control; (c) The Bonus Milestone Payment shall be adjusted to equal the sum of XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXX multiplied by a fraction, the numerator of which is the Development Funds expended by Alkermes as of the payment date and the denominator of which is the proceeds from the sale of the Preferred Stock to Genentech; and (d) Alkermes Parent shall redeem the remaining Preferred Stock (or Debentures, if issued in exchange for the Preferred Stock) according to its terms, if not earlier converted into Common Stock or Non-Voting Common Stock. 3. This Agreement, along with the License Agreement and the terms of the Preferred Stock and the Non-Voting Common Stock in the Second Amended and Restated Articles of Incorporation of Alkermes, Inc., as amended, constitute and contain the entire understanding and agreement of the parties and cancel and supersede any and all prior negotiations, correspondence, understandings and agreements, whether verbal or written, between the parties respecting the subject matter hereof. No waiver, modification or amendment of any provision of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each of the parties. 2 3 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. IN WITNESS WHEREOF, the parties have caused this Discontinuation Agreement to be executed by their respective duly authorized officers as of the day and year first above written, each copy of which shall for all purposes be deemed to be an original. ALKERMES, INC. GENENTECH, INC. By: /s/ James M. Frates By: /s/ William D. Young ----------------------------------- ------------------------------ Name: James M. Frates Name: William D. Young Title: Vice President, Chief Financial Title: Chief Operating Officer 3 EX-10.25 11 PATENT LICENSE AGREEMENT 1 Exhibit 10.24 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. MASSACHUSETTS INSTITUTE OF TECHNOLOGY AND ADVANCED INHALATION RESEARCH, INC. PATENT LICENSE AGREEMENT THIS OFFER WILL EXPIRE ON AUGUST 15, 1997 (EXCLUSIVE) 2 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. TABLE OF CONTENTS WITNESSETH.................................................................. 1 1 - DEFINITIONS............................................................. 3 2 - GRANT................................................................... 9 3 - DILIGENCE............................................................... 11 4 - ROYALTIES............................................................... 14 5 - REPORTS AND RECORDS..................................................... 21 6 - PATENT PROSECUTION...................................................... 25 7 - INFRINGEMENT............................................................ 26 8 - PRODUCT LIABILITY....................................................... 29 9 - EXPORT CONTROLS......................................................... 31 10 - NON-USE OF NAMES...................................................... 31 11 - ASSIGNMENT............................................................. 32 12 - DISPUTE RESOLUTION.................................................... 32 13 - TERMINATION........................................................... 33 14 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS............................. 35 15 - REPRESENTATION......................................................... 35 16 - MISCELLANEOUS PROVISIONS............................................... 36 APPENDIX A.................................................................. 38 APPENDIX B.................................................................. 39 APPENDIX C.................................................................. 40 APPENDIX D.................................................................. 42 3 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. APPENDIX E.................................................................. 43 APPENDIX F.................................................................. 44 4 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. MASSACHUSETTS INSTITUTE OF TECHNOLOGY and ADVANCED INHALATION RESEARCH, INC. PATENT LICENSE AGREEMENT This Agreement is made and entered into this 11th day of August, 1997, (the "EFFECTIVE DATE") by and between the MASSACHUSETTS INSTITUTE OF TECHNOLOGY, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts and having its principal office at 77 Massachusetts Avenue, Cambridge, Massachusetts 02139, U.S.A. (hereinafter referred to as "M.I.T."), and ADVANCED INHALATION RESEARCH, INC. a corporation duly organized under the laws of Delaware and having its principal office at c/o David Edwards, 109 Hartswick Avenue, State College, Pennsylvania 16803 (hereinafter referred to as "LICENSEE"). WITNESSETH WHEREAS, M.I.T. is the owner of certain PATENT RIGHTS (as later defined herein) relating to M.I.T. Case No. 7203, "Porous Advanced Particles For Pulmonary Drug Delivery," by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr. and Noah Lotan and has the right to grant licenses under said PATENT RIGHTS; WHEREAS, M.I.T. and the Pennsylvania State Research Foundation (hereinafter PSRF) are joint owners of certain PATENT RIGHTS relating to M.I.T. Case 7465, "Aerodynamically Light 5 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Particles For Pulmonary Drug Delivery", by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr., Noah Lotan and Abdelaziz Ben-Jebria, and PSRF has appointed M.I.T. as its sole and exclusive agent for the licensing of its patent rights in M.I.T. Case 7465, so that M.I.T. has the right to grant an exclusive license under said PATENT RIGHTS, subject only to a royalty-free, nonexclusive license heretofore granted to the United States Government; and WHEREAS, M.I.T. and PSRF are joint owners of certain PATENT RIGHTS relating to M.I.T. Case 7513, "Optimized Aerosols With Lung Surfactant", by David A. Edwards, Carmen Evora, Justin Hanes, and Robert S. Langer, Jr., and PSRF has appointed M.I.T. as its sole and exclusive agent for the licensing of its patent rights in M.I.T. Case 7513, so that M.I.T. has the right to grant an exclusive license under said PATENT RIGHTS, subject only to royalty free, nonexclusive license heretofore granted to the United States Government; and WHEREAS, M.I.T. desires to have the PATENT RIGHTS developed and commercialized to benefit the public and is willing to grant a license thereunder; WHEREAS, Robert S. Langer, a current employee of M.I.T., and also an M.I.T. inventor of the PATENT RIGHTS now holds or shall shortly acquire an equity position in LICENSEE, the Conflict Avoidance Statement of Robert S. Langer, is attached hereto as Appendix C, and his Waiver of participation in M.I.T.'s institutional equity share is attached as Appendix D; WHEREAS, David A. Edwards, an M.I.T. inventor of M.I.T. Case No. 7203, one of the inventions in the PATENT RIGHTS, now holds or shall shortly acquire an equity position in 2 6 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. LICENSEE,his Waiver of participation in M.I.T.'s institutional equity share is attached as Appendix E; WHEREAS, M.I.T. is accepting equity in partial lieu of royalties, M.I.T.'s Vice President for Research has granted approval; WHEREAS, LICENSEE has represented to M.I.T., to induce M.I.T. to enter into this Agreement, that it shall commit itself to a thorough, vigorous and diligent program of exploiting the PATENT RIGHTS so that public utilization shall result therefrom; and WHEREAS, LICENSEE desires to obtain a license under the PATENT RIGHTS upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows: 1 - DEFINITIONS For the purposes of this Agreement, the following words and phrases shall have the following meanings: 1.1 "LICENSEE" shall mean Advanced Inhalation Research, Inc. and its AFFILIATES. 1.2 "AFFILIATE" shall mean any legal entity (such as a corporation, partnership, or limited liability company) that is controlled by LICENSEE. For the purposes of this definition, the term "control" means (i) beneficial ownership of at least fifty percent (50%) of the voting securities of a corporation or other business organization with voting securities or (ii) a fifty percent (50%) or 3 7 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. greater interest in the net assets or profits of a partnership or other business organization without voting securities. 1.3 "PATENT RIGHTS" shall mean all of the following intellectual property: a. the United States patents listed in Appendix A; b. the United States patent applications listed in Appendix A, and divisionals, continuations and claims of continuation-in-part applications which shall be directed to subject matter specifically described in such patent applications, and the resulting patents; c. any patents resulting from reissues or reexaminations of the United States patents described in a. and b. above; d. the Foreign patents listed in Appendix A; e. the Foreign patent applications listed in Appendix A, and divisionals, continuations and claims of continuation-in-part applications which shall be directed to subject matter specifically described in such Foreign patent applications, and the resulting patents; f. Foreign patent applications filed after the EFFECTIVE DATE in the countries listed in Appendix B and divisionals, continuations and claims of continuation-in-part applications which shall be directed to subject matter specifically described in such patent applications, and the resulting patents; and 4 8 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. g. any Foreign patents, resulting from equivalent Foreign procedures to United States reissues and reexaminations, of the Foreign patents described in d., e. and f. above. 1.4 A "LICENSED PRODUCT" shall mean any product or part thereof which: a. is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the PATENT RIGHTS in the country in which any such product or part thereof is made, used or sold or imported; or b. is manufactured by using a process or is employed to practice a process which is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the PATENT RIGHTS in the country in which any LICENSED PROCESS is used or in which such product or part thereof is used or sold or imported. 1.5 A "LICENSED PROCESS" shall mean any process which is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the PATENT RIGHTS. 1.6 A "PARTICLE" shall mean a LICENSED PRODUCT which is a porous particle and which does not incorporate a therapeutic agent and which does not include a method for administering it to the respiratory tract of a patient. 1.7 A "THERAPEUTIC PARTICLE" shall mean a LICENSED PRODUCT which is a porous particle and which does incorporate a therapeutic agent but which does not include a method for administering it to the respiratory tract of a patient. 5 9 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1.8 An "ADMINISTRATION SYSTEM" shall mean a LICENSED PRODUCT the use of which practices any claim of substantially the same form as claims: 14-15 of U.S.S.N. 08/655,570, 17-28 of U.S.S.N. 08/739,308, 17-33 of U.S.S.N. 08/784,421. 1.9 "NET SALES" shall mean LICENSEE's and its sublicensees' billings for LICENSED PRODUCTS and LICENSED PROCESSES less the sum of the following: a. discounts allowed in amounts customary in the trade for quantity purchases, cash payments, prompt payments, wholesalers and distributors; b. sales, tariff duties and/or use taxes directly imposed and with reference to particular sales; c. outbound transportation prepaid or allowed; and d. amounts allowed or credited on returns. No deductions shall be made for commissions paid to individuals whether they be with independent sales agencies or regularly employed by LICENSEE and on its payroll, or for cost of collections. NET SALES shall occur when a LICENSED PRODUCT or LICENSED PROCESS shall be invoiced; provided, however that with respect to sales by LICENSEE to its AFFILIATES, a NET SALE shall be deemed to have occurred upon resale of such LICENSED PRODUCT or LICENSED PROCESS by such AFFILIATE to a third party. If a LICENSED PRODUCT or LICENSED PROCESS shall be distributed or invoiced for a discounted price substantially lower than customary in the trade or distributed at no cost, NET SALES shall be based on the customary amount billed for such LICENSED PRODUCTS or LICENSED PROCESSES. 6 10 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1.10 Notwithstanding paragraph 1.9 above: a. NET SALES of THERAPEUTIC PARTICLES into which have been incorporated a HIGH COST THERAPEUTIC AGENT shall be the difference between XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXX. b. NET SALES of ADMINISTRATION SYSTEMS in which are THERAPEUTIC PARTICLES into which have been incorporated a HIGH COST THERAPEUTIC AGENT shall be the difference between XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. 1.11 "TECHNICAL AREA" shall mean any of the following: a) Delivery of Therapeutic Agents Directed to the Human Pulmonary System via the Human Pulmonary System; and b) Delivery of Therapeutic Agents Directed to Other Human Organs Outside the Human Pulmonary 7 11 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. System via the Human Pulmonary System; and c) Delivery of Diagnostic Agents via the Human Pulmonary System; and d) All other applications including veterinary. 1.12 "FIELD OF USE" of the EFFECTIVE DATE shall mean all the TECHNICAL AREAS listed above, and is subject to modification according to the provisions of paragraphs 2.3 (b) and 2.3(c). 1.13 "CORPORATE PARTNER" shall mean: a) any entity which agrees to compensate (either in cash or non-cash) LICENSEE for any one or more of the rights to market, distribute, sell, use, and/or transfer LICENSED PRODUCTS and/or LICENSED PROCESSES, or b) any entity which agrees to compensate (either in cash or non-cash) LICENSEE for the right to incorporate LICENSED PRODUCTS in its own drug delivery system(s) and for any one or more of the rights to market, distribute, sell, use, and/or transfer the resulting combination, or c) any entity which agrees to compensate (either in cash or non-cash) LICENSEE for the right to attach its own biologically active agent(s) to LICENSED PRODUCTS and for any one or more of the rights to market, distribute, sell, use, and/or transfer the resulting combination. Any CORPORATE PARTNER that receives a sublicense of the PATENT RIGHTS shall also be a sublicensee. 1.14 "MILESTONE PAYMENT" shall mean a payment to LICENSEE from a CORPORATE PARTNER due upon achievement of agreed upon regulatory or business milestones. Illustrative examples of these milestones include, but are not limited to: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. 8 12 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1.15 "MAJOR COUNTRY" shall mean the United States of America, Japan, German, France or Great Britain. 1.16 "RUNNING ROYALTIES" shall mean a royalty paid on NET SALES of LICENSED PRODUCTS or LICENSED PROCESSES. 1.17 "HIGH COST THERAPEUTIC AGENT" shall mean a therapeutic agent, a single dose of which cost more than XXXXXXXXXXXXXX as much to manufacture than a single dose of PARTICLES into which the same therapeutic agent is incorporated. 1.18 "DILUTIVE ISSUANCE" shall mean an event following the EFFECTIVE DATE in which LICENSEE issues Common Stock or securities convertible into or exercisable for shares of Common Stock of LICENSEE in exchange for cash, property, services or other valuable consideration; provided, however, that the following issuances of Common Stock or securities convertible into or exercisable for shares of Common Stock of LICENSEE are explicitly excluded from this definition: (a) the issuance of XXXXXXX shares of Series A Convertible Preferred Stock and warrants exercisable for up to XXXXXXX shares of Series AA Convertible Preferred Stock to XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX and its affiliates pursuant to a certain Series A Convertible Preferred Stock and Warrant Purchase Agreement; (b) issuances of shares of Common Stock upon the conversion of then outstanding shares of LICENSEE's preferred stock unless, and to the extent that, each share of preferred stock can be exchanged for more than one share of Common Stock (including, for the purposes of such calculation, fractional shares), (c) issuances of shares of Common Stock pursuant to Section 4.1 b. of this Agreement, (d) issuances to officers, 9 13 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. directors or employees of, or consultants to LICENSEE for compensation purposes, and (e) issuances in connection with a sale of LICENSEE's capital stock through the public markets. 1.19 "DILUTIVE ISSUANCE THRESHOLD" shall mean the point in time when LICENSEE has issued capital stock in connection with DILUTIVE ISSUANCE(S) in exchange for aggregate cash consideration totaling at least XXXXXXXXXXXXXXXXXXXXXXX. 1.20 "M.I.T. HOLDERS" shall mean the institutions and persons named in Appendix F of this Agreement to whom LICENSEE has agreed to issue an aggregate of XXXXXX shares of its Common Stock pursuant to this Agreement. 2 - GRANT 2.1 M.I.T. hereby grants to LICENSEE the exclusive right and license for the FIELD OF USE to practice under the PATENT RIGHTS and, to the extent not prohibited by other patents, to make, have made, use, lease, sell and import LICENSED PRODUCTS and to practice the LICENSED PROCESSES, until the expiration of the last to expire of the PATENT RIGHTS, unless this Agreement shall be sooner terminated according to the terms hereof. 2.2 LICENSEE agrees to comply with 35 U.S.C. 204. 2.3 (a) In order to establish a period of exclusivity for LICENSEE, M.I.T. hereby agrees that it shall not grant any other license to make, have made, use, lease, sell and import LICENSED PRODUCTS or to utilize LICENSED PROCESSES, subject to the royalty-free, nonexclusive license rights to the United States Government per FAR 52.227-11 for the PATENT 10 14 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. RIGHTS related to cases 7465 and 7513, for the FIELD OF USE during the period of time commencing with the EFFECTIVE DATE and terminating with the end of the term or terms for which any PATENT RIGHTS have been or shall be granted, unless sooner terminated as hereinafter provided. (b) XXXXXXXXXXXXXXXXXXX, if M.I.T. receives a written request from a capable third party for a license to the PATENT RIGHTS in a TECHNICAL AREA not presently being commercialized by LICENSEE as demonstrated by LICENSEE having spent a minimum of XXXXXXXX toward the commercialization of a LICENSED PRODUCT in that TECHNICAL AREA, and to which LICENSEE has not previous granted a sublicense pursuant to its rights set forth in paragraph 2.6, then, M.I.T. may, at its sole discretion, with written notice to LICENSEE, grant one exclusive license or non-exclusive license per TECHNICAL AREA per year, thereby revoking entirely or partially LICENSEE's rights in that TECHNICAL AREA. (c) XXXXXXXXXXXXXXXXXX, if M.I.T. receives a written request from a capable third party for a license to the PATENT RIGHTS in a TECHNICAL AREA not presently being commercialized by LICENSEE as demonstrated by LICENSEE having spent a minium of XXXXXXXXXX toward the commercialization of a LICENSED PRODUCT in that TECHNICAL AREA, and to which LICENSEE has not previous granted a sublicense pursuant to its rights set forth in paragraph 2.6, then, M.I.T. may, at its sole discretion, with written notice to LICENSEE, grant one exclusive license or non-exclusive license per TECHNICAL AREA per year, thereby revoking entirely or partially LICENSEE's rights in that TECHNICAL AREA. 11 15 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2.4 M.I.T. and PSRF reserve the right to practice under the PATENT RIGHTS for noncommercial research purposes. 2.5 After LICENSEE has fulfilled the diligence requirements set forth in paragraphs 3.2(a) and 3.2(b) and 3.2(e), LICENSEE shall have the right to enter into sublicensing agreements for the PATENT RIGHTS in the FIELD OF USE. Upon any termination of this Agreement, sublicensees rights shall also terminate, subject to Paragraph 13.6 hereof. 2.6 LICENSEE agrees to incorporate terms and conditions substantively similar to Articles 2, 5.1, 7.1, 7.2, 7.3, 7.5, 7.6, 8, 9, 10, 12 and 15 of this Agreement into its sublicense agreements, that are sufficient to enable LICENSEE to comply with this Agreement. 2.7 LICENSEE agrees to forward to M.I.T. a copy of any and all sublicense agreements promptly upon execution by the parties. 2.8 Nothing in this Agreement shall be construed to confer any rights upon LICENSEE by implication, estoppel or otherwise as to any technology or patent rights of M.I.T. or any other entity other than the PATENT RIGHTS, regardless of whether such patent rights shall be dominant or subordinate to any PATENT RIGHTS. 3 - DILIGENCE 3.1 LICENSEE shall use its best efforts to bring one or more LICENSED PRODUCTS or LICENSED PROCESSES to market through a thorough, vigorous and diligent program for 12 16 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. exploitation of the PATENT RIGHTS and to continue active, diligent marketing efforts for one or more LICENSED PRODUCTS or LICENSED PROCESSES throughout the life of this Agreement. 3.2 In addition, LICENSEE shall adhere to the following milestones: a. LICENSEE shall: (i) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXX (ii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXX. b. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX. c. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. d. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 13 17 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXX. e. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXX. f. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXX. g. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXX. h. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXX: XXXX XXXXXXX XXXX XXXXXXX XXXX XXXXXXX XXXXXXXXXXXXXX XXXXXXX 14 18 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 3.3 LICENSEE's failure to perform in accordance with either Paragraph 3.1 or 3.2 above shall be grounds for M.I.T. to terminate this Agreement pursuant to Paragraph 13.3 hereof. 4 - ROYALTIES 4.1 For the rights, privileges and license granted hereunder, LICENSEE shall pay royalties to M.I.T. in the manner hereinafter provided to the end of the term of the PATENT RIGHTS or until this Agreement shall be terminated: a. License Issue Fee of XXXXXXXXXXXXXXXXXXXXXXX, which said License Issue Fee shall be deemed earned and due immediately upon the EFFECTIVE DATE. b. (i) In consideration of the Licenses and other rights granted by M.I.T. to LICENSEE pursuant to this Agreement, LICENSEE agrees to issue to each of the M.I.T. HOLDERS listed in Appendix F a number of shares of LICENSEE's Common Stock set forth opposite M.I.T. HOLDER'S name as provided in Appendix F, which Appendix M.I.T. and LICENSEE agree to hold confidential. (ii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 15 19 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (iii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. 16 20 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. (iv) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXX. (v) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXX. (vi) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 17 21 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXX. c. (i) License Maintenance Fee of XXXXXXXXXXXXXXXXXXX payable on XXXXXXXXXXXXXX provided, however, that this License Maintenance Fee may be credited to Running Royalties subsequently due on NET SALES for XXXXXXXXXXXXX, if any. A License Maintenance Fee paid in excess of Running Royalties shall not be creditable to Running Royalties for future XXXXX. (ii) License Maintenance Fee of XXXXXXXXXXXXXXXXXXXX payable on XXXXXXXXXXXXXXX, and on XXXXXXXXXXXXXXX provided, however, that these License Maintenance Fees may be credited to Running Royalties subsequently due on NET SALES for XXXXXXXXXXXXX XXXXX, and XXXX, respectively, if any. License Maintenance Fees paid in excess of Running Royalties shall not be creditable to Running Royalties for future XXXXX. (iii) License Maintenance Fee of XXXXXXXXXXXXXXXXXXX payable on XXXXXXXXXXXXXXX, provided, however, that this License 18 22 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Maintenance Fee may be credited to Running Royalties subsequently due on NET SALES for XXXXXXXXXXXXXXXXXX, if any. A License Maintenance Fee paid in excess of Running Royalties shall not be creditable to Running Royalties for future XXXXX. (iv) License Maintenance Fee of XXXXXXXXXXXXXXXXXXX payable on XXXXXXXXXXXXX provided, however, that this License Maintenance Fee may be credited to Running Royalties subsequently due on NET SALES for XXXXXXXXXXXXXXXXXX, if any. A License Maintenance Fee paid in excess of Running Royalties shall not be credited to Running Royalties for future XXXXX. (v) License Maintenance Fee of XXXXXXXXXXXXXXXXXXX payable on XXXXXXXXXXXXXXX, and on XXXXXXXXXXXXXXXXX XXXXXXXXXX, provided, however, that these License Maintenance Fees may be credited to Running Royalties subsequently due on NET SALES for XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXX, if any. A License Maintenance Fee paid in excess of Running Royalties shall not be creditable to Running Royalties for future XXXXX. d. Running Royalties in an amount equal to XXXXXXXXXXX of NET SALES of the PARTICLES used, leased or sold by and/or for LICENSEE and/or its sublicensees and/or its CORPORATE PARTNERS. 19 23 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. e. Running Royalties in an amount equal to XXXXXXXXXX of NET SALES of THERAPEUTIC PARTICLES used, leased or sold by and/or for LICENSEE and/or its sublicensees and/or its CORPORATE PARTNERS. f. Running Royalties in an amount equal to XXXXXXXXXXX of NET SALES of ADMINISTRATION SYSTEMS used, leased, or sold by and/or for LICENSEE and/or its sublicensees and/or its CORPORATE PARTNERS. g. In addition to Running Royalties, XXXXXXXXXXXXXXXXXXXXXX due upon the execution of a first contract with a particular CORPORATE PARTNER. h. Royalties in an amount equal to XXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXX. i. Royalties in an amount equal to XXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXX. j. Royalties in an amount equal to XXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXX. k. In addition to Running Royalties, LICENSEE shall pay to M.I.T. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 20 24 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. 4.2 All payments due hereunder shall be paid in full, without deduction of taxes or other fees which may be imposed by any government, except as otherwise provided in Paragraph 1.5(b). 4.3 No multiple royalties shall be payable because any PARTICLE, its manufacture, use, lease or sale are or shall be covered by more than one PATENT RIGHTS patent application or PATENT RIGHTS patent licensed under this Agreement. 4.4 No multiple royalties shall be payable because any THERAPEUTIC PARTICLE, its manufacture, use, lease or sale are or shall be covered by more than one PATENT RIGHTS patent application or PATENT RIGHTS patent licensed under this Agreement. 4.5 No multiple royalties shall be payable because any ADMINISTRATIVE SYSTEM, its manufacture, use, lease or sale are or shall be covered by more than one PATENT RIGHTS patent application or PATENT RIGHTS patent licensed under this Agreement. 4.6 It is understood that the same physical object, such as a PARTICLE, or THERAPEUTIC PARTICLE, may be sold multiple times. For example, a PARTICLE could be sold 21 25 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. to a sublicensee who makes a THERAPEUTIC PARTICLE out of it, then sells the THERAPEUTIC PARTICLE to another sublicensee, who incorporates it into an ADMINISTRATION SYSTEM, and sells that. M.I.T. and LICENSEE agree that royalties will be payable each time an invoice is generated as a result of the sale of a LICENSED PRODUCT, event if the same physical object, albeit in altered form, is sold more than once. 4.7 Royalty payments shall be paid in United States dollars in Cambridge, Massachusetts, or at such other place as M.I.T. may reasonably designate consistent with the laws and regulations controlling in any foreign country. If any currency conversion shall be required in connection with the payment of royalties hereunder, such conversion shall be made by using the exchange rate prevailing at the Chase Manhattan Bank (N.A.) on the last business day of the calendar quarterly reporting period to which such royalty payments relate. 5 - REPORTS AND RECORDS 5.1 LICENSEE shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to M.I.T. hereunder. Said books of account shall be kept at LICENSEE's principal place of business or the principal place of business of the appropriate division of LICENSEE to which this Agreement relates. Said books and the supporting data shall be open at all reasonable times for five (5) years following the end of the calendar year to which they pertain, to the inspection of M.I.T. or its agents for the purpose of verifying LICENSEE's royalty statement or compliance in other respects with this 22 26 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Agreement. Should such inspection lead to the discovery of a greater than XXXXXXXXX discrepancy in reporting to M.I.T.'s detriment, LICENSEE agrees to pay the full cost of such inspection. 5.2 LICENSEE shall deliver to M.I.T. true and accurate reports, giving such particulars of the business conducted by LICENSEE and its sublicensees under this Agreement as shall be pertinent to diligence under Article 3 and royalty accounting hereunder. a. before the first commercial sale of a LICENSED PRODUCT or LICENSED PROCESS, annually, on January 31 of each year, and b. after the first commercial sale of a LICENSED PRODUCT or LICENSED PROCESS, quarterly, within sixty (60) days after March 31, June 30, September 30 and December 31, of each year. These reports shall include at least the following: a. number of LICENSED PRODUCTS manufactured, leased and sold by and/or for LICENSEE, its CORPORATE PARTNERS and any other sublicensees, including a separate accounting for PARTICLES, THERAPEUTIC PARTICLES, and ADMINISTRATION SYSTEMS; b. accounting for any and all HIGH COST THERAPEUTIC AGENTS, including: (i) the identity of the HIGH COST THERAPEUTIC AGENT; 23 27 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. (ii) The cost to manufacture a single dose of the PARTICLES into which the HIGH COST THERAPEUTIC AGENT is to be incorporated; (iii) the cost to manufacture a single dose of the HIGH COST THERAPEUTIC AGENT; and (iv) a calculation confirming that by the criterion of paragraph 1.17 the therapeutic agent is a HIGH COST THERAPEUTIC AGENT. c. accounting related to the special provisions of paragraph 1.10(a),including explicitly; (i) the identity of the HIGH COST THERAPEUTIC AGENT; (ii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXX; (iii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX; and (iv) XXXXXXXXXXXXXXXXXXXXX. 24 28 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. d. accounting related to the special provisions of paragraph 1.10(b), including explicitly: (i) the identity of the HIGH COST THERAPEUTIC AGENT; (ii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXX; (iii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX; and (iv) XXXXXXXXXXXXXXXXXXXXXXX. e. accounting for all LICENSED PROCESSES used or sold by and/or for LICENSEE, its CORPORATE PARTNERS and any other sublicensees; f. description of the TECHNICAL AREAS in which LICENSEE is presently funding effort toward the commercialization of the PATENT RIGHTS, and the level of funding in each TECHNICAL AREA; g. contracts executed with CORPORATE PARTNERS, and payments due under 4.1 (g); h. accounting for NET SALES, noting the deductions applicable as provided in Paragraph 1.9, and any special circumstances per paragraph 1.10; 25 29 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. i. regulatory and business milestones which trigger MILESTONE PAYMENTS to M.I.T., and the amounts of those MILESTONE PAYMENTS; j. running Royalties due under Paragraph 4.1(d), (e), and (f); k. royalties due on MILESTONE PAYMENTS from CORPORATE PARTNERS under Paragraph 4.1(h), (i), and (j); l. royalties due on payments from other sublicensees under paragraph 4.1(k); m. total royalties due; and n. names and address of all CORPORATE PARTNERS, and any other sublicensees of LICENSEE. M.I.T. agrees to keep any information reported by LICENSEE under this paragraph in confidence and not to disclose it to third parties not bound by a similar obligation of confidentiality, except as may be required by law. M.I.T. agrees to protect the confidential nature of the information using measures as strong as those it uses to protect its own confidential information. LICENSEE agrees that M.I.T. may share any information provided to M.I.T. under this article 5.2 with PSRF and also with agents hired by M.I.T. under paragraph 5.1 pursuant to our right to audit LICENSEE's royalty reports, provided that PSRF and any such agent shall have first agreed tin writing to be bound by an obligation of confidentiality at least as restrictive as that undertaken by M.I.T. under this section 5.2. 5.3 With each such report submitted, LICENSEE shall pay to M.I.T. the royalties due and payable under this Agreement. If no royalties shall be due, LICENSEE shall so report. 26 30 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 5.4 On or before the ninetieth (90th) day following the close of LICENSEE's fiscal year, LICENSEE shall provide M.I.T. with LICENSEE's certified financial statements for the preceding fiscal year including, at a minimum, a balance sheet and an income statement. 5.5 The amounts due under Articles 4 and 6 shall, if overdue, bear interest until payment at a per annum rate XXXXXXXXXXXXXXXXXXXXXXXXXXXX in effect at the Chase Manhattan Bank (N.A.) on the due date. The payment of such interest shall not foreclose M.I.T. from exercising any other rights it may have as a consequence of the lateness of any payment. 6 - PATENT PROSECUTION 6.1 M.I.T. shall apply for, seek prompt issuance of, and maintain the PATENT RIGHTS during the term of this Agreement. Appendix B is a list of the foreign countries in which patent applications corresponding to the United States Patent applications listed in Appendix A shall be filed. Appendix B may be amended by mutual agreement of both parties. The filing, prosecution and maintenance of all PATENT RIGHTS applications and patents shall be the primary responsibility of M.I.T.; provided, however, LICENSEE shall have reasonable opportunities to advise M.I.T. and shall cooperate with M.I.T. in such filing, prosecution and maintenance. M.I.T. shall instruct Patrea Pabst, or another attorney mutually acceptable to M.I.T., PSRF, and LICENSEE, to copy LICENSEE on all patent prosecution documents, and shall instruct Patrea Pabst or such other attorney not to proceed with a substantive action without receiving LICENSEE's 27 31 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. written approval, except, that not hearing from LICENSEE within ten days after requesting LICENSEE's approval shall be deemed to constitute such approval. 6.2 Payment of all fees and costs relating to the filing, prosecution and maintenance of the PATENT RIGHTS shall be the responsibility of LICENSEE, whether such fees and costs were incurred before or after the EFFECTIVE DATE, provided however, LICENSEE shall not be responsible for payment of any fees incurred following the termination of this Agreement. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. LICENSEE shall pay such fees and costs to M.I.T. within thirty (30) days of invoicing; late payments shall accrue interest and shall be subject to Paragraph 5.5. 7 - INFRINGEMENT 7.1 LICENSEE shall inform M.I.T. promptly in writing of any alleged infringement of the PATENT RIGHTS by a third party and of any available evidence thereof. 7.2 In the FIELD OF USE, LICENSEE shall have the right, but shall not be obligated, to prosecute at its own expense all infringements of the PATENT RIGHTS and, in furtherance of such right, M.I.T. hereby agrees that LICENSEE may include M.I.T. as party plaintiff in any such suit, without expense to M.I.T. The total cost of any such infringement action commenced or defended solely by LICENSEE shall be borne by LICENSEE, and LICENSEE shall keep any recovery or damages for past infringement derived therefrom. No settlement, consent judgment or 28 32 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. other voluntary final disposition of the suit may be entered into without the consent of M.I.T., which consent shall not unreasonably be withheld. LICENSEE shall indemnify M.I.T. against any order for costs that may be made against M.I.T. in such proceedings. 7.3 If within six (6) months after having been notified of an alleged infringement, LICENSEE shall have been unsuccessful in persuading the alleged infringer to desist and shall not have brought and shall not be diligently prosecuting an infringement action, or if LICENSEE shall notify M.I.T. at any time prior thereto of its intention not to bring suit against any alleged infringer for the FIELD OF USE, then, and in those events only, M.I.T. shall have the right, but shall not be obligated, to prosecute at its own expense any infringement of the PATENT RIGHTS in the FIELD OF USE, and M.I.T. may, for such purposes, use the name of LICENSEE as party plaintiff. The total cost of any such infringement action commenced or defended solely by M.I.T. shall be borne by M.I.T. and M.I.T. shall keep any recovery or damages for past infringement derived therefrom. 7.4 In the event that LICENSEE shall undertake litigation for the enforcement of the PATENT RIGHTS, or the defense of the PATENT RIGHTS under this Article 7, LICENSEE may withhold up to XXXXXXXXXXXXX of the payments otherwise thereafter due M.I.T. under Article 4 hereunder and apply the same toward reimbursement of up to half or LICENSEE's expenses, including reasonable attorneys' fees, in connection therewith. Any recovery of damages by LICENSEE for each such suit shall be applied first in satisfaction of any unreimbursed expenses and legal fees of LICENSEE relating to such suit, and next toward reimbursement of M.I.T. for any payments under Article 4 past due or withheld and applied pursuant to this Article 7. If any M.I.T. 29 33 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. royalties have been withheld pursuant to this clause, the balance remaining from any such recovery due to M.I.T. shall be calculated by creating a fraction, the numerator of which is the amount of royalties withheld, and the denominator of which is the cost of litigation paid by LICENSEE, and multiplying said fraction by the balance remaining, but in no event shall such sum be less than XXXXXXXXXXXXXXX of the balance remaining. 7.5 In the event that (a) LICENSEE undertakes the enforcement and/or defense of the PATENT RIGHTS by litigation, and (b) LICENSEE demonstrates by competent proof that an infringer's activity is substantially affecting LICENSEE's sales, and that LICENSEE's sales of LICENSED PRODUCTS and LICENSED PROCESSES have declined by at least XXXXX XXXXXXXXXXXXXXX during the period of infringement, then, for a period not to exceed two years, LICENSEE may withhold up to XXXXXXXXXXXXXXX of the payments otherwise due M.I.T. under Article 4 hereunder and apply the same toward reimbursement of LICENSEE's expenses, including reasonable attorney's fees in connection therewith. Any recovery of damages by LICENSEE for each such suit shall be applied first in satisfaction of any unreimbursed expenses and legal fees of LICENSEE relating to such suit, and next toward reimbursement of M.I.T. for payments under article 4 past due or withheld and applied pursuant to this Article 7. If any M.IT. royalties have been withheld pursuant to this clause, the balance remaining from any such recovery due to M.I.T. shall be calculated by creating a fraction, the numerator of which is the amount of royalties withheld, and the denominator of which is the cost of litigation paid by LICENSEE, and 30 34 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. multiplying said fraction by the balance remaining, but in no event shall such sum be less than XXX XXXXXXXXXXXX of the balance remaining. 7.6 In the event that a declaratory judgment action alleging invalidity or noninfringement of any of the PATENT RIGHTS shall be brought against LICENSEE, LICENSEE shall within ten (10) days after the commencement of such action notify M.I.T. as to whether or not LICENSEE intends to defend such action. In the event LICENSEE notifies M.I.T. that LICENSEE intends to defend such action, LICENSEE shall take over the sole defense of the action at its own expense. In the event LICENSEE notifies M.I.T. that it intends not to defend such action, or that it intends to discontinue the defense of such action, M.I.T. at its sole option, shall have the right, within thirty (30) days of such notice, to intervene and take over the sole defense of the action at its own expenses subject to Paragraph 7.4. 7.7 In any infringement suit as either party may institute to enforce the PATENT RIGHTS pursuant to this Agreement, the other party hereto shall, at the request and expense of the party initiating such suit, cooperate in all respects and to the extent possible, have its employees testify when requested and make available relevant records, papers, information, samples, specimens, and the like. 7.8 LICENSEE shall have the sole right in accordance with the terms and conditions herein to sublicense any alleged infringer in the FIELD OF USE for future use of the PATENT RIGHTS. Any fees as part of such a sublicense shall be treated per Article 4. 31 35 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 8 - PRODUCT LIABILITY 8.1 LICENSEE shall at all times during the term of this Agreement and thereafter, indemnify, defend and hold M.I.T., its trustees, directors, officers, employees and affiliates, and PSRF and its trustees, directors, officers, employees and affiliates, harmless against all claims, proceedings, demands and liabilities of any kind whatsoever, including legal expenses and reasonable attorneys' fees, arising out of the death of or injury to any person or persons of out of any damage to property, resulting from the production, manufacture, sale, use, lease, consumption or advertisement of the LICENSED PRODUCT(S) and/or LICENSED PROCESS(es) or arising from any obligation of LICENSEE hereunder. 8.2 Before the first clinical use of a LICENSED PRODUCT or LICENSED PROCESSES, LICENSEE shall obtain and carry in full force and effect commercial, general liability insurance, including product liability and errors and omissions insurance, which shall protect LICENSEE and M.I.T. and PSRF with respect to events covered by Paragraph 8.1 above. Such insurance shall be written by a reputable insurance company authorized to do business in the Commonwealth of Massachusetts, shall list M.I.T. and PSRF as additional named insured parties thereunder, shall be endorsed to include product liability coverage and shall require thirty (30) days written notice to be given to M.I.T. and PSRF prior to any cancellation of material change thereof. The limits of such insurance shall not be less than One Million Dollars ($1,000,000) per occurrence with an aggregate of Three Million Dollars ($3,000,000) for personal injury including death; One Million Dollars ($1,000,000) per occurrence with an aggregate of Three Million Dollars 32 36 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ($3,000,000) for property damage; and One Million Dollars ($1,000,000) per occurrence with an aggregate of Three Million Dollars ($3,000,000) for errors and omissions. LICENSEE shall provide M.IT. and PSRF with Certificates of Insurance evidencing the same. 8.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, M.I.T., ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES, AND AFFILIATES, AND PSRF AND ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES, AND AFFILIATES, MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR PENDING, AND THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE OR WARRANTY GIVEN BY M.I.T. OR PSRF THAT THE PRACTICE BY LICENSEE OF T14E LICENSE GRANTED HEREUNDER SHALL NOT INFRINGE THE PATENT RIGHT'S OF ANY THIRD PARTY. 8.4 IN NO EVENT SHALL M.I.T., ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES AND AFFILIATES, OR PSRF, ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES AND AFFILIATES, BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS, REGARDLESS OF WHETHER M.I.T. OR PSRF SHALL BE ADVISED, 33 37 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. SHALL HAVE OTHER REASON TO KNOW, OR IN FACT SHALL KNOW OF THE POSSIBILITY OF THE FOREGOING. 9 - EXPORT CONTROLS LICENSEE acknowledges that it is subject to United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes and other commodities (including the Arms Export Control Act, as amended and the United States Department of Commerce Export Administration Regulations). The transfer of such items may require a license from the cognizant agency of the United States Government and/or written assurances by LICENSEE that LICENSEE shall not export data or commodities to certain foreign countries without prior approval of such agency. M.I.T. neither represents that a license shall not be required nor that, if required, it shall be issued. 10 - NON-USE OF NAMES LICENSEE shall not use the names or trademarks of the Massachusetts Institute of Technology or Lincoln Laboratory, or the Pennsylvania State Research Foundation, nor any adaptation thereof, nor the names of any of their employees, in any advertising, promotional or sales literature without prior written consent obtained from M.IT., or the Pennsylvania State Research Foundation, or said employee, except that LICENSEE may state that it is licensed by M.I.T. and/or 34 38 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. PSRF under one or more of the patents and/or applications comprising the PATENT RIGHTS and may identify the inventors of such patents and or applications. 11 - ASSIGNMENT This Agreement is not assignable and any attempt to do so shall be void; provided, however, LICENSEE may assign this Agreement in connection with the sale or transfer of all or substantially all of LICENSEE's equity and assets related to LICENSED PRODUCTS by merger, consolidation or otherwise, so long as the assignee shall agree in writing to be bound by all the terms and conditions hereof prior to such assignment. Failure of such assignee to so agree shall be grounds for termination by M.I.T. under paragraph 13.3. 12 - DISPUTE RESOLUTION 12.1 Except for the right of either party to 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, any and all claims, disputes or controversies arising under, out of, or in connection with the Agreement, including any dispute relating to patent validity or infringement, which the parties shall be unable to resolve within sixty (60) days shall be mediated in good faith. The party raising such dispute shall promptly advise the other party of such claim, dispute or controversy in a writing which describes in reasonable detail the nature of such dispute. By not later than five (5) business days after the recipient has received such notice of dispute, each 35 39 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. party shall have selected for itself a representative who shall have the authority to bind such party, and shall additionally have advised the other party in writing of the name and title of such representative. By not later than ten (10) business days after the date of such notice of dispute, the party against whom the dispute shall be raised shall select a mediation firm in the Boston area and such representatives shall schedule a date with such firm for a mediation hearing. The parties shall enter into good faith mediation and shall share the costs equally. If the representatives of the parties have not been able to resolve the dispute within fifteen (15) business days after such mediation hearing, then any and all claims, disputes or controversies arising under, out of, or in connection with this Agreement, including any dispute relating to patent validity or infringement, shall be resolved by final and binding arbitration in Boston, Massachusetts under the rules of the American Arbitration Association, or the Patent Arbitration Rules if applicable, then obtaining. The arbitrators shall have no power to add to, subtract from or modify any of the terms or conditions of this Agreement, nor to award punitive damages. Any award rendered in such arbitration may be enforced by either party in either the courts of the Commonwealth of Massachusetts or in the United States District Court for the District of Massachusetts, to whose jurisdiction for such purposes M.I.T. and LICENSEE each hereby irrevocably consents and submits. 12.2 Notwithstanding the foregoing, nothing in this Article shall be construed to waive any rights or timely performance of any obligations existing under this Agreement. 36 40 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 13 - TERMINATION 13.1 If LICENSEE shall cease to carry on its business, this Agreement shall terminate upon notice by M.I.T. 13.2 Should LICENSEE fail to make any payment whatsoever due and payable to M.I.T. hereunder, M.I.T. shall have the right to terminate this Agreement effective on thirty (30) days' notice, unless LICENSEE shall make all such payments to M.I.T. within said thirty (30) day period. Upon the expiration of the thirty (30) day period, if LICENSEE shall not have made all such payments to M.I.T., the rights, privileges and license granted hereunder shall automatically terminate. 13.3 Upon any material breach or default of this Agreement by LICENSEE (including, but not limited to, breach or default under Paragraph 3.3), other than those occurrences set out in Paragraphs 13.1 and 13.2 hereinabove, which shall always take precedence in that order over any material breach or default referred to in this Paragraph 13.3, M.I.T. shall have the right to terminate this Agreement and the rights, privileges and license granted hereunder effective on ninety (90) days' notice to LICENSEE. Such termination shall become automatically effective unless LICENSEE shall have cured any such material breach or default prior to the expiration of the ninety (90) day period. 13.4 LICENSEE shall have the right to terminate this Agreement at any time on six (6) months' notice to M.I.T., and upon payment of all amounts due M.I.T. through the effective date of the termination. 37 41 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 13.5 Upon termination of this Agreement for any reason, nothing herein shall be construed to release either party from any obligation that matured prior to the effective date of such termination; and Articles 1.4.1 b., 8, 9, 10, 12, 13.5, 13.6. and 15 shall survive any such termination. LICENSEE and any sublicensee thereof may, however, after the effective date of such termination, sell all LICENSED PRODUCTS, and complete LICENSED PRODUCTS in the process of manufacture at the time of such termination and sell the same, provided that LICENSEE shall make the payments to M.I.T. as required by Article 4 of this Agreement and shall submit the reports required by Article 5 hereof. 13.6 Upon termination of this Agreement for any reason, any sublicensee not then in default shall have the right to seek a license from M.I.T. M.I.T. agrees to negotiate such licenses in good faith under reasonable terms and conditions. 14 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS Any payments, notice or other communication pursuant to this Agreement shall be sufficiently made or given on the date of mailing if sent to such party by certified first class mail, return receipt requested, postage prepaid, addressed to it at its address below or as it shall designate by written notice given to the other party: In the case of M.I.T.: Director Technology Licensing Office Massachusetts Institute of Technology 38 42 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 77 Massachusetts Avenue, Room NE25-230 Cambridge, Massachusetts 02139 In the case of LICENSEE: c/o David A. Edwards, President Advanced Inhalation Research, Inc. 109 Hartswick Avenue State College, Pennsylvania 16803 15 - REPRESENTATION M.I.T. represents to the best of its knowledge and belief that it has the authority to enter into this agreement, and that there are no outstanding claims, licenses or other encumbrances on the PATENT RIGHTS which would prevent M.I.T. from granting the rights granted herein, provided, however, that M.I.T.'s liability under this provision shall be limited to the total sum paid by LICENSEE to M.I.T. under the terms of this Agreement. 16 - MISCELLANEOUS PROVISIONS 16.1 ALL disputes arising out of or related to this Agreement, or the performance, enforcement, breach or termination hereof, and any remedies relating thereto, shall be construed, governed, interpreted and applied in accordance with the laws of the Commonwealth of Massachusetts, U.S.A., except that questions affecting the construction and effect of any patent shall be determined by the law of the country in which the patent shall have been granted. 39 43 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 16.2 The parties hereto acknowledge that this Agreement sets forth the entire Agreement and understanding of the parties hereto as to the subject matter hereof, and shall not be subject to any change or modification except by the execution of a written instrument signed by the parties. 16.3 The provisions of this Agreement are severable, and in the event that any provisions of this Agreement shall be determined to be invalid or unenforceable under any controlling body of the law, such invalidity or unenforceability shall not in any way affect the validity or enforceability of the remaining provisions hereof. 16.4 LICENSEE agrees to mark the LICENSED PRODUCTS sold in the United States with all applicable United States patent numbers. All LICENSED PRODUCTS shipped to or sold in other countries shall be marked in such a manner as to conform with the patent laws and practice of the country of manufacture or sale. 16.5 The failure of either party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term of condition by the other party. 40 44 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. IN WITNESS WHEREOF, the parties have duly executed this Agreement the day and year set forth below. MASSACHUSETTS INSTITUTE OF ADVANCED INHALATION RESEARCH, TECHNOLOGY INC. By /s/ J. David Litster By /s/ David Edwards ------------------------------ -------------------------------- Name J. David Litster Name David Edwards ---------------------------- ------------------------------- Title Vice President for Research Title President --------------------------- ----------------------------- Date August 11, 1997 Date 8/4/97 ---------------------------- ------------------------------ 41 45 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. APPENDIX A PATENT RIGHTS on the EFFECTIVE DATE UNITED STATES PATENT RIGHTS M.I.T. Case No. 7203 "Porous Advanced Particles For Pulmonary Drug Delivery" U.S.S.N. 08/655,570, Filed May 24,1996 by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr. and Noah Lotan M.I.T. Case No. 7465 "Aerodynamically Light Particles For Pulmonary Drug Delivery" U.S.S.N. 08/739,308, Filed October 29, 1996 by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr., Noah Lotan and Abdelaziz Ben-Jebria M.I.T. Case No. 7513 "Optimized Aerosols With Lung Surfactant" U.S.S.N. 08/784,421, Filed January 16, 1997 by David A. Edwards, Carmen Evora, Justin Hanes, and Robert S. Langer, Jr. FOREIGN PATENT RIGHTS M.I.T. Case No. 7203 PCT/US97/08895, Filed May 23,1997 "Porous Advanced Particles For Pulmonary Drug Delivery" by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr. and Noah Lotan M.I.T. Case No. 7465 PCT/US97/08895, Filed May 23, 1997 "Aerodynamically Light Particles For Pulmonary Drug Delivery" by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr., Noah Lotan and Abdelaziz Ben-Jebria 42 46 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. FIRST AMENDMENT This First amendment pertains to the License Agreement (hereinafter the "License Agreement") effective August 11, 1997 by and between the MASSACHUSETTS INSTITUTE OF TECHNOLOGY (hereinafter M.I.T.) and ADVANCED INHALATION RESEARCH, INC. (hereinafter AIR), and to a Joint Invention Agreement by and between M.I.T. and the PENNSYLVANIA STATE RESEARCH FOUNDATION (hereinafter PSRF). WHEREAS, M.I.T. and PSRF are joint owners of certain PATENT RIGHTS relating to M.I.T. Case No. 7804, "Drug Insolubilisation For Sustained Pulmonary Drug Delivery", by Rita Vanbever, Jeffrey Mintzes, Jue Wang, Donghao Chen, Robert S. Langer, Jr., and David Edwards; and WHEREAS, PSRF, in the First Amendment to the Joint Invention Agreement, effective September 19, 1997, and attached hereto as Attachment A, appointed M.I.T. as its sole and exclusive agent for the licensing of its patent rights in M.I.T. Case 7804, so that M.I.T. has the right to grant an exclusive license under said PATENT RIGHTS, subject only to a royalty-free, nonexclusive license heretofore granted to the United States Government. The parties hereby agree as follows: 1. M.I.T. agrees to add, in consideration for the sum of XXXXXXXXXX, M.I.T. case 7804, U.S.S.N. 60/059,004, to the PATENT RIGHTS. 2. LICENSEE agrees to pay all costs associated with the U.S. and foreign prosecution, filing and maintenance of M.I.T. case 7804, U.S.S.N. 60/059,004. This offer extends to December 31, 1997. MASSACHUSETTS INSTITUTE OF ADVANCED INHALATION RESEARCH, TECHNOLOGY INC. By /s/ Lori Pressman By /s/ David Edwards -------------------------------- ----------------------------------- Name Lori Pressman Name David Edwards ------------------------------ --------------------------------- Title Assistant Director Technology Title President ----------------------------- -------------------------------- Licensing Office ----------------------------- Date December 16, 1997 Date 12/18/97 ------------------------------ ---------------------------------- 43 47 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ATTACHMENT A FIRST AMENDMENT TO JOINT INVENTION AGREEMENT This Amendment pertains to a Joint Invention Agreement, effective 5/9/97 by and between the MASSACHUSETTS INSTITUTE OF TECHNOLOGY ("M.I.T.") and THE PENN STATE RESEARCH FOUNDATION ("PSRF"). WHEREAS: M.I.T. and PSRF are joint owners of an invention entitled "Drug Insolubilisation for Sustained Pulmonary Drug Delivery", PSU Invention Disclosure No. 97-1797, M.I.T. Case Number 7804, by Rita Vanbever, Robert S. Langer and David A. Edwards, on which, as of this date of this amendment no patent application has yet been filed; and M.I.T. and PSRF are joint owners of an invention entitled "Drug Insolubilisation for Sustained Pulmonary Drug Delivery", PSU Invention Disclosure Number 97-1797, M.I.T. Case Number 7804, by Rita Vanbever, Robert S. Langer and David A. Edwards, on which, as of the date of this amendment, no patent application has yet been filed; and M.I.T. and PSRF have previously executed a Joint Invention Agreement, referenced above, which also relates to jointly owned technology for drug delivery using inhaled biodegradable particles; NOW THEREFORE, the parties hereby agree to add the following paragraphs to that Joint Invention Agreement. 2c. M.I.T. and PSRF are joint owners of an invention disclosure entitled: "Drug Insolubilisation for Sustained Pulmonary Drug Delivery", PSU Invention Disclosure No. 97-1797, M.I.T. Case Number 7804, by Rita Vanbever, Robert S. Langer and David A. Edwards, on which the parties intend to file a patent application. 2d. M.I.T. and PSRF are joint owners of an invention disclosure entitled: XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX", PSU Invention disclosure Number XXXXXXX, M.I.T. Case Number XXXX, XXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX, on which the parties intend to file a patent application. 44 48 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 4c. PSRF hereby appoints M.I.T. as its sole and exclusive agent for the licensing of its intellectual property rights in PSU Invention Disclosure No. 97-1797, M.I.T. Case 7804 and authorizes M.I.T. to grant licenses to the intellectual property rights, subject to third parties sponsors, if any, and subject to the rights of PSRF to practice the invention in its own research. It is understood and agreed that consideration for license rights in the form of equity shares shall require the prior approval of PSRF. 4d. PSRF hereby appoints M.I.T. as its sole and exclusive agent for the licensing of its Intellectual property rights in PSU Invention Disclosure No. XXXXXXX, M.I.T. case XXXX and authorizes M.I.T. to grant licenses to the intellectual property rights, subject to third parties sponsors, if any, and subject to the rights of PSRF to practice the invention in its own research. It is understood and agreed that consideration for license rights in the form of equity shares shall require the prior approval of PSRF. Agreed for by: MASSACHUSETTS INSTITUTE OF THE PENN STATE RESEARCH TECHNOLOGY FOUNDATION By /s/ Lori Pressman By /s/ David E. Branigan --------------------------------- ---------------------------------- Name Lori Pressman Name David E. Branigan ------------------------------ ------------------------------- Title Assistant Director Technology Title Treasurer ----------------------------- ------------------------------- Licensing Office ----------------------------- Date September 3, 1997 Date September 19, 1997 ------------------------------- ------------------------------- 45 49 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. APPENDIX A PATENT RIGHTS on the EFFECTIVE DATE UNITED STATES PATENT RIGHTS M.I.T. Case No. 7203 "Porous Advanced Particles For Pulmonary Drug Delivery" U.S.S.N. 08/655,570, Filed May 24,1996 by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr. and Noah Lotan M.I.T. Case No. 7465 "Aerodynamically Light Particles For Pulmonary Drug Delivery" U.S.S.N. 08/739,308, Filed October 29, 1996 by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr., and Noah Lotan M.I.T. Case No. 7513 "Optimized Aerosols With Lung Surfactant" U.S.S.N. 08/784,421, Filed January 16, 1997 by David A. Edwards, Carmen Evora, Justin Hanes, and Robert S. Langer, Jr. M.I.T. Case No. 7804 (by Amendment) "Drug Insolubilisation For Sustained Pulmonary Drug Delivery" U.S.S.N. 60/059,004, Filed September 15, 1997 by Rita Vanbever, Jeffrey Mintzes, Jue Wang, Donghao Chen, Robert S. Langer, Jr., and David Edwards FOREIGN PATENT RIGHTS M.I.T. Case No. 7203 "Porous Advanced Particles For Pulmonary Drug Delivery" PCT/US97/08895, Filed May 23,1997 by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr. and Noah Lotan M.I.T. Case No. 7465 46 50 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. "Aerodynamically Light Particles For Pulmonary Drug Delivery" PCT/US97/08895, Filed May 23, 1997 by Giovanni Caponetti, David A. Edwards, Justin Hanes, Jeffrey S. Hrkach, Robert S. Langer, Jr., and Noah Lotan 47 51 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. SECOND AMENDMENT This Second Amendment pertains to the License Agreement (hereinafter the "License Agreement") effective August 11, 1997, by and between the MASSACHUSETTS INSTITUTE OF TECHNOLOGY (hereinafter M.I.T.) and ADVANCED INHALATION RESEARCH, INC. (hereinafter AIR). WHEREAS, AIR intends to enter into an agreement with a CORPORATE PARTNER (as defined in the License Agreement) according to which AIR will be receiving MILESTONE PAYMENTS (as defined in the License Agreement); and WHEREAS, in the License Agreement the MILESTONE PAYMENTS are subject to royalties according to paragraphs 4.1(h), (i), and (j); WHEREAS, in the agreement with the CORPORATE PARTNER, the MILESTONE PAYMENTS are fully creditable against earned royalties on NET SALES which the CORPORATE PARTNER will be paying AIR when product is on the market, such credits scheduled so that the payments normally due to AIR on NET SALES can be reduced by up to XXXXXXXXX in a given year until the full credit is used up; and WHEREAS, the CORPORATE PARTNER wishes assurance that should the License agreement terminate M.I.T. will grant to the CORPORATE PARTNER rights to practice under the PATENT RIGHTS under reasonable terms; NOW THEREFORE, the parties hereby agree to modify the License Agreement by: A) adding the following sentence to the end of paragraph 4.1(h): To the extent such MILESTONE PAYMENTS are creditable against royalties on NET SALES normally due LICENSEE from a CORPORATE PARTNER, M.I.T. agrees that the royalties on MILESTONE PAYMENTS normally due M.I.T. under this paragraph 4.1(h) are also creditable against RUNNING ROYALTIES due M.I.T. on NET SALES according to paragraph 4.1(d), provided, however, that the royalties due M.I.T. under paragraph 4.1(d) are reduced by no more than XXXXXXXXXXXXXXXX. B) adding the following sentence to the end of paragraph 4.1(i): To the extent such MILESTONE PAYMENTS are creditable against royalties on NET SALES normally due LICENSEE from a CORPORATE PARTNER, M.I.T. agrees that the 48 52 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. royalties on MILESTONE PAYMENTS normally due M.I.T. under this paragraph 4.1(i) are also creditable against RUNNING ROYALTIES due M.I.T. on NET SALES according to paragraphs 4.1(e), provided, however, that the royalties due M.I.T. under paragraph 4.1(e) are reduced by no more than XXXXXXXXXXXXXXX. C) adding the following sentence to the end of paragraph 4.1(j): To the extent that MILESTONE PAYMENTS are creditable against royalties on NET SALES normally due LICENSEE from a CORPORATE PARTNER, M.I.T. agrees that the royalties on MILESTONE PAYMENTS normally due M.I.T. under this paragraph 4.1(j) are also creditable against RUNNING ROYALTIES due M.I.T. on NET SALES according to paragraphs 4.1(f), provided, however, that the royalties due M.I.T. under paragraph 4.1(f) are reduced by no more than XXXXXXXXXXXXXXXX. MASSACHUSETTS INSTITUTE OF ADVANCED INHALATION RESEARCH, TECHNOLOGY INC. By /s/ Lori Pressman By /s/ David Edwards -------------------------------- -------------------------------- Name Lori Pressman Name David Edwards ----------------------------- ------------------------------ Title Assistant Director Technology Title President ----------------------------- ----------------------------- Licensing Office ----------------------------- Date July 17, 1998 Date 7/29/98 ------------------------------ ------------------------------ 49 53 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THIRD AMENDMENT This Third Amendment pertains to the License Agreement (hereinafter the "License Agreement") effective August 11, 1997 by and between the MASSACHUSETTS INSTITUTE OF TECHNOLOGY (hereinafter M.I.T.) and ADVANCED INHALATION RESEARCH, INC. (hereinafter AIR) and to a Joint Invention Agreement by and between M.I.T. and the PENNSYLVANIA STATE RESEARCH FOUNDATION (hereinafter PSRF). WHEREAS, AIR has clarified their business strategy and developed certain prototype products, and has determined that THERAPEUTIC PARTICLES will be their principal product, and that most pharmaceuticals incorporated into such THERAPEUTIC PARTICLES will be HIGH COST THERAPEUTIC AGENTS; and WHEREAS, there are COMPARABLE THERAPEUTIC AGENTS (as later defined herein) on the market against which it is possible to determine the relative value of LICENSED PRODUCTS; and NOW, THEREFORE, the parties hereby agree to modify the License Agreement as follows: Delete paragraph 1.17 in its entirety and replace it with: 1.17 "COMPARABLE THERAPEUTIC AGENT" shall mean a proprietary agent, explicitly not delivered via a PARTICLE, currently being prescribed according to standard clinical practice to treat, manage, or diagnose a medical condition, which condition can now be treated, managed or diagnosed using THERAPEUTIC PARTICLES, and approved by M.I.T. according to the procedure in paragraph 5.6. Delete paragraphs 1.10(a) and (b) in their entirety and replace with: 1.10(a) NET SALES of THERAPEUTIC PARTICLES shall be the difference betweenXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXX. An example of the computation of the royalty owed by LICENSEE on NET SALES of THERAPEUTIC PARTICLES under paragraph 4.1(e) is attached as Exhibit A. 50 54 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1.10(b) NET SALES of ADMINISTRATION SYSTEMS which deliver THERAPEUTIC PARTICLES shall be the difference between XXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. Add the following sentences to the end of paragraphs 2.3(b) and 2.3(c). M.I.T. will provide such notice prior to the grant. LICENSEE understands that such notice will not be triggered by written request. Delete paragraph 4.1(c) (v) and replace it with: License Maintenance Fee of XXXXXXXXXXXXXXXXXXXX payable on XXXXXXXXXXX, XXXXXXXXXXXX, XXXXXXXXXXX, XXXXXXXXXXXX, and XXXXXXXXXXXX, provided, however, that these License Maintenance Fees may be credited to Running Royalties due on NET SALES for the corresponding XXXXXXXXXXXXX, if any. A License Maintenance Fee paid in excess of Running Royalties shall not be creditable to Running Royalties for future XXXXX. Add paragraph 4.1(c) (vi): License Maintenance Fee of XXXXXXXXXXXXXXXXXXXXXX payable on XXXXXXXXXXXX, and on XXXXXXXXXXXXXXXXXXXXX, provided, however, that these License Maintenance Fees may be credited to Running Royalties subsequently due on NET SALES for XXXXXXXXXXXXXXXXXX XXXXXXXXXXXX, if any. A License Maintenance Fee paid in excess of Running Royalties shall not be creditable to Running Royalties for future XXXXX. Delete paragraph 4.6 in its entirety. Delete paragraphs 5.2(b), (c) and (d) in their entirety and replace them with: 5.2(b) accounting related to the special provisions of paragraph 1.10(a), including 51 55 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. (i) identity of COMPARABLE THERAPEUTIC AGENTS, and their vendors. (ii) a brief explanation of why such agent is a COMPARABLE THERAPEUTIC AGENT, XXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. (iii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. (iv) calculation of royalties due based on the difference between XXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXX. 5.2(c) accounting related to the special provisions of paragraph 1.10(b), including (i) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX. (ii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX. (iii) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXX. 52 56 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. (iv) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXX Add paragraphs 5.6. 5.6 Within thirty (30) days of receipt of all the information pertinent to a royalty accounting described in paragraph 5.2, including, but not limited to paragraph 5.2(b) and 5.2(c) above, and also payment due per paragraph 5.3, M.I.T. shall notify LICENSEE in writing, of whether or not M.I.T. approves of the basis of the royalty calculation and resulting payment, such approval not to be unseasonably withheld. Failure of M.I.T. to so notify LICENSEE within thirty (30) days of receipt of both the payment due per paragraph 5.3, and the information described in paragraph 5.2, shall be deemed to constitute such approval. If M.I.T. does not approve of the basis of the royalty calculation, then M.I.T. shall so notify LICENSEE in writing, and the parties shall meet in good faith to resolve the matter, and either party may invoke the dispute resolution mechanisms of paragraph 12. Modify the fourth sentence of paragraph 6.1 by adding "David Brook," after "Patrea Pabst." Modify paragraph 14 so that the address for legal notice of AIR is: c/o David A. Edwards, President Advanced Inhalation Research, Inc. 840 Memorial Drive Cambridge, MA 02142 Agreed to for M.I.T. by Agreed to for A.I.R. by MASSACHUSETTS INSTITUTE OF ADVANCED INHALATION RESEARCH, TECHNOLOGY INC. By /s/ Lori Pressman By /s/ David Edwards -------------------------------- --------------------------------- Name Lori Pressman Name David Edwards ------------------------------- -------------------------------- Title Assistant Director Technology Title President ------------------------------ ------------------------------- Licensing Office ------------------------------ Date January 27, 1999 Date January 27, 1999 ------------------------------- -------------------------------- 53 57 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT A AIR/MIT LICENSE AGREEMENT THERAPEUTIC PARTICLE ROYALTY COMPUTATION*
XXXXXXXXXX XXXXXXXXXXX XXXXXXXXXX XXXXXXXX XXX XXXXXXX XX(1) XXXXXXXXX(2) XXXXXXX XXXXXXXXX - - XX $XXX $XXX $XXX $XXX - - XXXXX $XXX $XXX $XXX $XXX - - XXXXX $XXX $XXX $XXX $XXX - - XXXXX $XXX $XXX $XXX $XXX - - XXXXX $XXX $XXX $XXX $XXX - - XXXXX) $XXX $XXX $XXX $XXX - - XXXXX $XXX $XXX $XXX $XXX - - XXXXX $XXXX $XXXX $XXXX $XXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX - -------- (1) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXX. (2) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. 54 58 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. FOURTH AMENDMENT This Fourth Amendment pertains to the License Agreement (hereinafter the "License Agreement') effective August 11, 1997 by and between the MASSACHUSETTS INSTITUTE OF TECHNOLOGY (hereinafter M.I.T.) and ADVANCED INHALATION RESEARCH, INC. (hereinafter AIR), and to a Joint Invention Agreement by and between M.I.T. and the PENNSYLVANIA STATE RESEARCH FOUNDATION (hereinafter PSRF). WHEREAS, per Paragraph 6.1, Appendix B, attached hereto as a convenience, may be amended by mutual agreement of both parties. NOW, THEREFORE, the parties hereby agree to modify the License Agreement as follows: Appendix B shall now state: Foreign countries in which PATENT RIGHTS shall be filed, prosecuted and maintained in accordance with Article 6: For M.I.T. Case Nos. 7203/7465 "Aerodynamically Light Particles for Pulmonary Drug Delivery" PCT/US97/08895, Filed May 23, 1997 Designated States: Canada (CA), Japan (JP), European Patent Office (EPO)* For M.I.T. Case Nos. 7513/7804 "Preparation of Particles for Inhalation" PCT/US97/20930, Filed November 17, 1997 Designated States: Canada (CA), Japan (JP), European Patent Office (EPO)* *European Patent Office (EPO) Austria (AT), Belgium (BE), Switzerland (CH), Germany (DE), Denmark (DK), Spain (ES), Finland (FI), France (FR), United Kingdom (GB), Greece (GR), Ireland (IE), Italy (IT), Luxembourg (LU), Monaco (MC), Netherlands (NL), Portugal (PT) and Sweden (SE) MASSACHUSETTS INSTITUTE OF ADVANCED INHALATION RESEARCH, TECHNOLOGY INC. By /s/ Lori Pressman By /s/ David Edwards -------------------------------- ------------------------------ 55 59 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Name Lori Pressman Name David Edwards ------------------------------ ----------------------------- Title Assistant Director Technology Title President ------------------------------ ---------------------------- Licensing Office ------------------------------ Date January 28, 1999 Date January 27, 1999 ------------------------------- ---------------------------- 56 60 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "X" AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. APPENDIX B DESIGNATED FOREIGN COUNTRIES Foreign countries in which PATENT RIGHTS shall be filed, prosecuted and maintained in accordance with Article 6: For M.I.T. Case Nos. 7203/7465 "Aerodynamically Light Particles for Pulmonary Drug Delivery" PCT/US97/08895, Filed May 23, 1997 Designated States: Canada (CA), Japan (JP), European Patent Office (EPO)* For M.I.T. Case Nos. 7513/7804 "Preparation of Particles for Inhalation" PCT/US97/20930, Filed November 17, 1997 Designated States: Canada (CA), Japan (JP), European Patent Office (EPO)* *European Patent Office (EPO) Austria (AT), Belgium (BE), Switzerland (CH), Germany (DE), Denmark (DK), Spain (ES), Finland (FI), France (FR), United Kingdom (GB), Greece (GR), Ireland (IE), Italy (IT), Luxembourg (LU), Monaco (MC), Netherlands (NL), Portugal (PT), and Sweden (SE) 57 EX-10.42 12 INCENTIVE LOAN PROGRAM 1 Exhibit 10.42 SUMMARY OF INCENTIVE LOAN PROGRAM In recognition of ongoing contributions and service to the Company, the Compensation Committee of the Board of Directors of Alkermes has established an Incentive Loan Program for certain of its employees. Alkermes will offer to lend these employees a fixed amount (the "Loan") which offer will expire, if not accepted by the employee, within thirty days of the offer. Any employee accepting the offer (an "employee participant") will be required to sign an Incentive Loan Note in the form presented by the Company. The general terms of the Loan are summarized as follows: 1. TERM. The term will be two years. 2. INTEREST RATE. The interest rate will be equal to the prime rate on the commencement date of the Loan. 3. FORGIVENESS. a. If, on the first anniversary of the Loan, the employee participant remains an employee of Alkermes, then 50% of the outstanding principal balance of the Loan plus accrued interest on such 50% of the principal will be forgiven on the date of such anniversary. b. If, on the second anniversary of the Loan, the employee participant remains an employee of Alkermes, then the remaining principal balance plus all accrued interest will be forgiven on the date of such anniversary. c. In the event of the death or long-term disability (as defined in the long-term disability policy of the Company) of the employee participant or a change in control of Alkermes, the remaining principal balance plus all accrued interest will be forgiven, regardless of the timing of such event. 4. PAYMENT. If the employee participant ceases to be employed by Alkermes prior to the second anniversary of the Loan, then the employee participant must pay all of the outstanding principal balance (less any amount forgiven) plus all accrued interest thereon within 45 days of the employee participant's last day of employment at Alkermes. The amount of the principal and interest forgiven on the Loan will be considered ordinary income by the Internal Revenue Service and will be reflected as such by Alkermes at the time of the forgiveness (i.e., on the first and second anniversaries of the Loan). Each employee who is considering participating in this Loan Incentive Program is advised to consult independent tax advisors with respect to the tax treatment of this Loan. EX-21 13 SUBSIDIARIES 1 Exhibit 21 SUBSIDIARIES OF ALKERMES, INC.
State or Percentage Country of Registrant Ownership Incorporation - ---------- --------- ------------- Alkermes Controlled Therapeutics, Inc. 100 Pennsylvania Alkermes Controlled Therapeutics Inc. II 100 Pennsylvania Alkermes Development Corporation II 100 Delaware Advanced Inhalation Research, Inc. 100 Delaware Alkermes Europe, Ltd. 100 United Kingdom Alkermes Investments, Inc. 100 Delaware
EX-23 14 DELOITTE & TOUCHE CONSENT 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-75645, 333-75649, 333-50157, 333-19955 and 33-90736 of Alkermes, Inc. on Form S-3 and Registration Statement Nos. 333-71011, 333-50357, 333-13283, 33-97468, 33-58330 and 33-44752 of Alkermes, Inc. on Form S-8 of our report dated May 21, 1999, appearing in the Annual Report on Form 10-K of Alkermes, Inc. for the year ended March 31, 1999. /s/ Deloitte & Touche LLP Boston, Massachusetts June 29, 1999 EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-K FOR THE YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1999 APR-01-1998 MAR-31-1999 9,115 154,303 0 0 0 169,164 47,657 (14,292) 213,452 28,500 28,417 0 23 250 155,933 213,452 0 43,716 0 48,457 0 0 2,298 (41,056) 0 (41,056) 0 0 0 (41,056) (1.98) (1.98)
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