-----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, WqY5F1DSUXkXLy56lWAqMy81HwY9QAqEkhfH90YoSM0QN56W+rUMN+ZekBJNyjog cEe6N/nFHxvF1UyDJcp4PQ== 0000950109-96-004201.txt : 19960702 0000950109-96-004201.hdr.sgml : 19960702 ACCESSION NUMBER: 0000950109-96-004201 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960701 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19267 FILM NUMBER: 96589648 BUSINESS ADDRESS: STREET 1: 64 SIDNEY ST CITY: CAMBRIDGE STATE: MA ZIP: 02139-4136 BUSINESS PHONE: 6174940171 10-K 1 FORM 10-K 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 [FEE REQUIRED] For the fiscal year ended March 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 Class A 1992 Warrants to purchase shares of Common Stock Class A 1995 Warrants to purchase shares of Common Stock Class B 1992 Warrant to purchase shares of Common Stock Class B 1995 Warrant to purchase shares of Common Stock Incentive Warrant to purchase shares of Common Stock Affiliate Warrant to purchase shares of Common 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 ((S) 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. [_] Based upon the last sale price of the Registrant's Common Stock on June 7, 1996, the aggregate market value of the 16,533,492 outstanding shares of voting stock held by non-affiliates of the Registrant was $150,868,115. As of June 7, 1996, 18,348,306 shares of the Registrant's Common Stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in this Report on Form 10-K: 1) Proxy Statement dated June 28, 1996 for the Registrant's Annual Shareholders' Meeting to be held on July 25, 1996 (Part III). PART I ITEM 1. BUSINESS - ----------------- GENERAL Alkermes, Inc. (together with its subsidiaries, "Alkermes" or the "Registrant") is a leading drug delivery company in the development of sophisticated drug delivery systems. Alkermes' core technologies are RMP-7/TM/, a proprietary drug designed to facilitate drug delivery to the central nervous system, and product candidates based on the Registrant's two injectable sustained release drug delivery technologies: ProLease(R), for complex biopharmaceutical products; and Medisorb(R), for more traditional small molecule pharmaceutical products. RMP-7 is currently being tested in combination with the chemotherapeutic agent carboplatin in four multi-center Phase II clinical trials in patients with recurrent malignant glioma, a form of primary brain tumor, and in one multi-center Phase I/II clinical trial in patients with metastatic brain tumor. ProLease product candidates are being developed in collaboration with some of the world's leading biotechnology and pharmaceutical companies. A Phase I clinical trial commenced in February 1996 for a ProLease formulation of Genentech, Inc.'s ("Genentech") human growth hormone ("hGH"). A Medisorb product candidate is being developed for Janssen Pharmaceutica International ("Janssen") under a license agreement. Janssen initiated a Phase I clinical trial in May 1996 for a Medisorb formulation of a Janssen proprietary product. 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 advanced 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 advanced tablets and capsules have been developed and successfully applied to a range of pharmaceutical products. 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 Biopharmaceuticals present drug delivery challenges because they are often large molecules which degrade rapidly in the bloodstream, have limited ability to cross cell membranes and 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 to provide a therapeutic benefit. 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. New opportunities in drug delivery require new technological approaches. Traditional drug delivery systems developed to improve the oral or transdermal delivery of traditional pharmaceutical products will find limited applicability, if any, in these applications. BUSINESS STRATEGY There are five key elements to the Registrant's strategy: DEVELOP BROADLY APPLICABLE DRUG DELIVERY SYSTEMS AND APPLY THEM TO MULTIPLE PHARMACEUTICAL PRODUCTS. The Registrant's strategy is to develop sophisticated drug delivery systems to address significant new drug delivery opportunities arising in the pharmaceutical industry. The Registrant has identified drug delivery systems with the potential to be applied to multiple new product opportunities through combination with different pharmaceutical and biopharmaceutical compounds. By identifying and developing drug delivery systems targeted to substantial markets and applicable to multiple products, Alkermes has the potential for multiple, independent commercial opportunities. COLLABORATE TO DEVELOP AND FINANCE PRODUCT CANDIDATES. In addition to conducting product development activities on its own, the Registrant has entered into collaborations with pharmaceutical and biotechnology companies and others to develop product candidates incorporating the Registrant's technologies, provide capital for product development independent of capital markets and share development risk. APPLY DRUG DELIVERY SYSTEMS INITIALLY TO APPROVED DRUGS. Alkermes is initially applying RMP-7, ProLease and Medisorb to novel applications and formulations of pharmaceutical and biopharmaceutical products that have already been approved by the Food and Drug Administration ("FDA") or other regulatory authorities. By doing so, the Registrant and its partners can develop a novel dosage form or application with the benefit of 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. 3 ESTABLISH INDEPENDENT PRODUCT DEVELOPMENT CAPABILITIES FOR PROPRIETARY PRODUCTS AND TO FACILITATE COLLABORATIONS. Alkermes has assembled its own product development organization to enable the Registrant to proceed independently for an extended period of time in the development of its product candidates and to optimize the timing and structure of collaborations for RMP-7, ProLease and Medisorb. DEVELOP AND EXPAND SCIENTIFIC AND INTELLECTUAL PROPERTY LEADERSHIP POSITION. Alkermes believes that it has a leadership position in the development of technologies for improved drug delivery to the central nervous system and for stabilizing and providing advanced drug delivery for complex biomolecules, as well as traditional pharmaceuticals. The Registrant believes that these areas are of increasing importance and value in the pharmaceutical industry, and the Registrant intends to capitalize on its leadership position by seeking broad patent protection for its inventions. RMP-7 RMP-7, 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. RMP-7 is a proprietary, synthetic analog of bradykinin developed by Alkermes to increase transiently the permeability of the blood-brain barrier. Following injection, RMP-7 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 RMP-7. Preclinical and clinical data also suggest that RMP-7 can be administered at doses that selectively increase permeability in the region of brain tumor and other pathology while not significantly affecting permeability in healthy brain tissue. In contrast to traditional drug delivery systems, RMP-7 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. The Registrant is developing RMP-7 to be manufactured, packaged and dispensed as a standalone product. In the clinical setting, RMP-7 is administered separately from the therapeutic or diagnostic agent. Timing of RMP-7 administration 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. RMP-7 is intended to be marketed as an independent agent to increase the utility of other therapeutic and diagnostic compounds given with it. The Registrant believes RMP-7 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. PRODUCT DEVELOPMENT STRATEGY. The Registrant's strategy to date has been to advance RMP-7 through clinical trials independently while establishing its safety and permeability effects in humans. To support the clinical development of RMP-7, Alkermes formed, and transferred substantially all of its rights to the RMP/TM/ technology to, Alkermes Clinical Partners, L.P. (the "Partnership"), which completed a $46 million unit offering in April 1992. Alkermes has the option to purchase all of the 4 limited partnership interests in the Partnership. See "Collaborative Arrangements -- Alkermes Clinical Partners." RMP-7 has the potential to be used in combination with a variety of agents in various disease settings. The Registrant's goal is to expand the applications of RMP-7 through collaborations with pharmaceutical companies. First, Alkermes may collaborate with companies having drugs whose uses could be expanded to include central nervous system indications. In such cases, Alkermes and its partner could collaborate in the clinical development of the combination without any exchange of product rights. Second, Alkermes may collaborate with development and marketing partners for RMP-7 in various business areas and geographic territories. In such cases, Alkermes could license rights to RMP-7 to its partner, subject to the rights of the Partnership. See "Collaborative Arrangements -- Alkermes Clinical Partners." TARGET INDICATIONS. RMP-7 is being tested initially for the treatment of recurrent malignant glioma, an aggressive form of brain tumor. Alkermes believes that RMP-7 may have applicability to the treatment and diagnosis of other types of brain tumors and other diseases of the central nervous system. In that regard, the Registrant initiated, in February 1996, a Phase I/II clinical trial of RMP-7 in patients with metastatic brain tumor. BRAIN TUMOR. Brain tumors can be classified into two major groups: Primary brain tumors, which originate and recur in the brain, and metastatic brain tumors, which are tumors that have spread to the brain from other parts of the body. Each year in the United States and Europe a total of 40,000 patients are diagnosed with primary brain tumors and 150,000 patients are diagnosed with metastatic brain tumors. Current treatment for primary brain tumors is limited and inadequate. Standard treatment typically involves surgery to remove cancerous tissue, followed by radiation therapy. Some primary brain tumor patients receive chemotherapy, but its effectiveness is limited. Following surgery and radiation, patients typically experience a period of time without evidence of disease progression. With few exceptions, primary brain tumors recur after initial treatment, at which time treatment options are limited. Upon recurrence of the tumor, patients usually die within months. Alkermes is first testing the efficacy of RMP-7 and the chemotherapeutic agent carboplatin in the treatment of recurrent malignant brain tumor. Alkermes is pursuing two alternative treatment strategies for RMP-7 and carboplatin in patients with recurrent malignant glioma: intravenous and intra-arterial administration. By pursuing both treatment methods, the Registrant believes it strengthens the scientific foundation of the clinical trials program and increases the likelihood of observing a treatment effect in patients. If the results of the Registrant's current Phase II clinical trials are favorable, the Registrant intends to test the combination of RMP-7 and carboplatin or other chemotherapeutic agents earlier in the treatment of primary malignant brain tumor, prior to recurrence. In addition, the Registrant initiated a Phase I/II clinical trial of RMP-7 and carboplatin in patients with metastatic brain tumor. 5 OTHER APPLICATIONS. Alkermes continues to evaluate the potential for use of RMP-7 in other applications, principally infectious diseases of the central nervous system in combination with anti-infective drugs and diagnostic imaging of the central nervous system in combination with contrast agents. CLINICAL TRIALS EXPERIENCE. The Registrant's clinical strategy for RMP-7 has been to establish a foundation of safety and pharmacologic effect of increasing blood-brain barrier permeability prior to entering Phase II efficacy studies of RMP-7 administered in combination with therapeutic drugs. To date, over 450 human subjects have received RMP-7 in a series of clinical trials. The clinical trials of RMP-7 can be summarized as follows: PHASE I. Phase I clinical trials of intravenous RMP-7 commenced in December 1991. During Phase I, 11 clinical trials were conducted in a total of 215 human subjects. These studies tested RMP-7 as a single agent in healthy volunteers and in patients with brain tumor and patients with AIDS who have increased risk of central nervous system infections. The Phase I program was designed to provide information regarding RMP-7's safety, to determine the maximum tolerated dose and dose limiting toxicity of RMP-7 and to provide a limited amount of information regarding RMP-7's vasoactivity and ability to affect central nervous system permeability. Through the Phase I clinical trials, RMP-7 was shown to have a good safety profile in volunteers and patients. Transient flushing and nausea were the most consistent adverse events noted and nausea was determined to be the dose limiting toxicity. To evaluate RMP-7's permeability effects, brain imaging techniques such as computed tomography, magnetic resonance imaging and single photon emission computed tomography were employed in four of the Phase I clinical trials in patients with brain tumors. Data from all four studies was limited due to the difficulty of the methods used for obtaining quantitative permeability data from human subjects, but provided evidence supporting RMP-7's effect on selectively increasing permeability in the region of brain tumors. PHASE I/II. Phase I/II clinical trials of intravenous RMP-7 were conducted in a total of 80 patients in two patient populations: patients with brain tumors and patients with cryptococcal meningitis, a fungal infection of the central nervous system associated with immunocompromised patients, such as those with AIDS. The Phase I/II studies were designed to test the safety of the combination of various doses of RMP-7 and various doses of a therapeutic drug. In two Phase I/II studies involving 24 patients with brain tumor, RMP-7 was tested in combination with the chemotherapeutic agent, carboplatin. One study was conducted at University of California San Francisco, the other at Addenbrooke's Hospital in Cambridge, England. The results of the studies showed no evidence of increased toxicity associated with the combination of RMP-7 and carboplatin, and no evidence of change in pharmacokinetics of carboplatin. The drug combination was well tolerated by patients. Brain imaging techniques employing ultra-fast computed tomography were used in a limited number of patients in the Phase I/II clinical trial in England and provided preliminary data supportive of RMP-7's ability to selectively affect permeability in the region of brain tumors. 6 In addition to the two Phase I/II clinical trials of intravenous RMP-7 and carboplatin, a third study, involving 12 patients with brain tumor, investigating intra-arterial administration of the drug combination was conducted at the University of California, Los Angeles. The results of the study showed no evidence of increased toxicity associated with the combination of RMP-7 and carboplatin. The drug combination was well-tolerated by patients. In patients with cryptococcal meningitis, RMP-7 was tested in combination with amphotericin B, an anti-fungal compound. The study involved 20 patients and was conducted at nine sites in the United States. Due to a decrease in the incidence of the disease resulting from novel and effective prophylaxis, the clinical trial was closed prior to reaching full enrollment and the Registrant decided in early 1995 not to proceed further in this indication. The results of the truncated study showed no evidence of increased toxicity associated with the combination of RMP-7 and amphotericin B and provided data supporting RMP-7's effect on increasing amphotericin B concentrations in cerebrospinal fluid. PHASE II. Based on the successful completion of Phase I and Phase I/II clinical trials, Alkermes initiated Phase II clinical trials in Europe of intravenous RMP-7 and carboplatin in patients with primary brain tumor in February 1995. Three concurrent Phase II clinical trials are being conducted in this indication in the United States and Europe, with a planned enrollment of 180 patients. In the United States, the Phase II clinical trial commenced in March 1995 and is being conducted at ten centers. The study is designed as a double blind, placebo controlled study in approximately 90 patients, comparing treatment with intravenous RMP-7 and carboplatin to treatment with carboplatin alone in patients with recurrent malignant glioma. In Europe, two separate studies commenced in early 1995. These studies are multi-center, open label studies testing the efficacy of intravenous RMP-7 and carboplatin in approximately 90 patients with recurrent malignant glioma. Alkermes initiated an open label multi-center Phase II clinical trial in the United States of intra-arterial RMP-7 and carboplatin in March 1996. The study is expected to involve approximately 45 patients and to be conducted at nine centers. Alkermes initiated a multi-center Phase I/II clinical trial in Europe of intravenous RMP-7 and carboplatin in patients with metastatic brain tumor in February 1996. The study is open label, will be conducted at two centers, and is expected to involve approximately 14 patients. PROLEASE ProLease is a proprietary method of encapsulating fragile, protein-based biopharmaceuticals in microspheres made of common medical polymers. The Registrant's proprietary expertise in this field lies in its ability to encapsulate drugs, to stabilize fragile molecules within polymers, to preserve their biological activity 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 biopharmaceutical products by replacing frequent injections with controlled, sustained release over time. The Registrant believes ProLease formulations have the potential to improve patient compliance by reducing the need for frequent self-injection, to lower 7 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 products that require frequent injections and for drugs 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 cold temperatures is critical to protecting fragile molecules from degradation during the manufacturing process and is a key element of the ProLease technology. The microspheres then are suspended in a small volume of liquid and administered to a patient by injection under the skin or into a muscle. Drug release from ProLease can be controlled to last from days to months. Drug release from the microsphere is controlled by diffusion of the bioactive molecule 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 ProLease manufacturing process is tailored to preserve the biological activity of fragile biopharmaceutical compounds. A complete aseptic process using a closed system with steam-in-place vessels and scaleable unit operations has been completed and is in the process of being validated. Scale-up to large quantity production for clinical studies is currently underway. PRODUCT DEVELOPMENT STRATEGY. The Registrant's strategy is to generate multiple product opportunities by applying ProLease technology to the development of superior formulations of several significant biotechnology products. The Registrant believes these formulations have the potential to expand the utilization of these products and improve the competitive advantage of its partners in major markets. The Registrant's goal is to develop ProLease formulations in collaboration with partners having expertise, established marketing strength and patent protection relating to important biopharmaceutical products. The Registrant's first commercial applications of ProLease are intended to be advanced formulations of major biotechnology products which have already received regulatory approvals and have been marketed by the Registrant's partners for several years. Since January 1995, Alkermes has entered into or expanded several collaborative agreements with pharmaceutical companies, including Genentech and Schering-Plough Corporation ("Schering-Plough"). See "Collaborative Arrangements." The product development plan for individual ProLease formulations is expected to proceed in several stages. First, the Registrant, either on its own or pursuant to a collaboration, conducts initial feasibility work to test various ProLease 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 ProLease formulation would be conducted in collaboration with a partner. 8 The first phase of clinical trials will be designed primarily to test the safety and drug release profile of the ProLease formulation. The Registrant and its partner may elect to conduct several early clinical trials of various ProLease formulations of the same drug in order to select a lead formulation to advance into later stage clinical trials. Alkermes may conduct such early stage clinical trials of certain ProLease product candidates or they may be conducted by its partners. If targeted drug release levels are achieved over the desired duration and if the safety and tolerability of the ProLease product is adequate, the Registrant expects that it and its partner would elect to proceed into expanded clinical trials of the ProLease formulation in order to support regulatory approvals. Late stage clinical trials are expected to be conducted by the Registrant's partners. PROLEASE PRODUCTS IN DEVELOPMENT PROLEASE HUMAN GROWTH HORMONE. Alkermes is developing a ProLease formulation of Genentech's hGH in collaboration with Genentech. Genentech is the leading supplier of hGH in the United States. hGH is approved for use in the treatment of children with growth hormone deficiency and other indications and is being tested in additional indications in adults. hGH is currently administered frequently, often daily, by subcutaneous injection. In 1995, Genentech reported sales of $219 million for its hGH products Protropin(R) and Nutropin(R). PROLEASE ALPHA INTERFERON. Alkermes is developing a ProLease formulation of Schering-Plough's Intron(R) A (interferon alpha 2b) product in collaboration with Schering-Plough. Schering-Plough is the leading supplier of alpha interferon in the world. Intron A is approved for use in several infectious disease and oncology indications including hepatitis, hairy cell leukemia and Kaposi's sarcoma. Intron A is currently administered by frequent injection. In 1995, Schering-Plough reported sales of $433 million for Intron A. PROLEASE EXPERIENCE. The Registrant's experience with the application of ProLease to a wide range of biopharmaceuticals has shown that high incorporation efficiencies and high protein loads can be achieved. Through formulation and manufacturing at the research scale, biopharmaceuticals incorporated into ProLease microspheres have shown excellent integrity (low levels of aggregates or other degradation products) and stability and biological activity for up to 30 days in in vitro experiments. The results of animal studies with several different ProLease formulations have shown that ProLease can release targeted levels of drugs over extended periods of time and that the pharmacodynamic response with ProLease formulations can match that of continuous drug infusion. Suitable in vivo delivery patterns in rodents and primates have been achieved with different therapeutic proteins. MEDISORB The Medisorb technology is a proprietary method of encapsulating traditional pharmaceuticals in microspheres made of common medical polymers. Medisorb is designed to enable novel formulations of traditional pharmaceuticals by replacing frequent injections with controlled, sustained 9 release over time. The Registrant believes that Medisorb formulations also have the potential to improve patient compliance 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, Medisorb may provide access to important new markets currently inaccessible to products that require frequent injections and for drugs administered orally. The Medisorb formulation process has been designed to assure stability of pharmaceuticals during manufacture, storage and throughout the release phase in the body. 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 then administered to a patient by injection under the skin or into a muscle. Drug release from Medisorb can be controlled to last from days to weeks. 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. PRODUCT DEVELOPMENT STRATEGY. The Registrant's strategy is to generate multiple product opportunities by applying Medisorb technology to the development of superior formulations of traditional pharmaceutical products. The Registrant believes these formulations have the potential to expand the utilization of these products and improve the competitive advantage of its partners in major markets. The Registrant's goal is to develop Medisorb formulations in collaboration with partners having expertise, established marketing strength and patent protection relating to important pharmaceutical products. The Registrant's first commercial applications of Medisorb are intended to be advanced formulations of major pharmaceutical products which have already received regulatory approvals and have been marketed by the Registrant's partners for several years. Alkermes has licensed the technology necessary to formulate a Medisorb product candidate to Janssen, a subsidiary of Johnson & Johnson. See "Collaborative Arrangements." The product development plan for individual Medisorb formulations is expected to proceed in several stages. First, the Registrant, either on its own or pursuant to a collaboration, conducts 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. The first phase of clinical trials will be designed primarily to test the safety and drug release profile of the Medisorb formulation. The Registrant and its partner may elect to conduct several early clinical trials of various Medisorb formulations of the same drug in order to select a lead formulation to advance into later stage clinical trials. Alkermes may conduct such early stage clinical trials of certain Medisorb product candidates or they may be conducted by its partner. If targeted drug release 10 levels are achieved over the desired duration and if the safety and tolerability of the Medisorb product is adequate, the Registrant expects that it and its partner would elect to proceed into expanded clinical trials of the Medisorb formulation in order to support regulatory approvals. Late stage clinical trials are expected to be conducted by the Registrant's partner. MEDISORB PRODUCTS IN DEVELOPMENT MEDISORB PRODUCT CANDIDATE. Alkermes is developing and manufacturing a Medisorb product candidate for Janssen under a license agreement. Janssen initiated a Phase I clinical trial in May 1996 for this Medisorb product candidate. COLLABORATIVE ARRANGEMENTS The Registrant's business strategy includes forming collaborations with other pharmaceutical companies to provide technological, financial, marketing, manufacturing and other resources. The Registrant has entered into the following corporate collaborations: Schering-Plough Under an amended Development and License Agreement with Schering-Plough, the Registrant has agreed to develop an injectable delivery system which incorporates Intron A as an active ingredient utilizing the Registrant's ProLease delivery system and has granted to Schering-Plough an exclusive worldwide license to manufacture, use and sell any such system that may be developed pursuant to the amended agreement. Under the amended agreement, Schering-Plough will also be responsible for conducting clinical trials and securing regulatory approvals. The amended agreement provides for development funding to the Registrant and provides for certain payments to be made by Schering-Plough to the Registrant for its achievement of certain milestones. The Registrant and Schering-Plough entered into a Prepaid Royalty Agreement pursuant to which Schering-Plough has prepaid certain royalties. In total, payments to the Registrant are expected to approximate $7.0 million by September 30, 1996, and future milestone payments could exceed an additional $5.0 million. Schering-Plough has the right to terminate the amended agreement upon 60 days' written notice upon the occurrence of certain events, including if the Registrant fails to meet product specifications or an agreed upon delivery schedule, the results of a safety and pharmacokinetics study provide Schering- Plough with reasonable justification not to proceed to a Phase II clinical trial, the use of the product results in adverse effects that justify termination of clinical trials, Schering-Plough is unable to manufacture the product on a commercial scale, or upon completion or permanent discontinuation of the clinical study. Either party may terminate the amended agreement upon the insolvency or bankruptcy of the other party or upon a breach by the other party which has not been cured after 60 days' notice. Schering-Plough also has the right to terminate the amended agreement upon 90 days' written notice or continue the development project on its own in the event Alkermes fails by an agreed upon date to deliver batches of a ProLease formulation of Intron A that meet agreed upon specifications. In the event Schering-Plough elects to continue the development project, it will remain obligated to pay Alkermes milestone payments and royalties upon commercial sale. In the 11 event Schering-Plough terminates the amended agreement for any reason, Alkermes must repay the prepaid royalties received from Schering-Plough with interest. Such repayment obligation would be evidenced by an interest-bearing note and would be payable in full on the third anniversary of the date of the note. Alkermes will have the right, subject to the satisfaction of certain conditions, to satisfy its repayment obligation through the issuance of shares of its Common Stock. The number of shares that may be issued would be based upon the average closing price of Alkermes Common Stock on the Nasdaq National Market for the 30 business days immediately preceding the date on which the shares are delivered. Any Common Stock issued to Schering-Plough must be freely resaleable. Genentech In January 1995, Alkermes entered into a collaborative agreement with Genentech, pursuant to which the Registrant agreed to develop sustained release formulations of up to two Genentech proteins utilizing the Registrant's ProLease microencapsulation technology. One of these proteins is hGH and the other protein has not been publicly disclosed. In the initial phase of the collaboration, the Registrant will develop a sustained release formulation of hGH, which is approved for marketing in the United States for the treatment of children with growth hormone deficiencies and growth failure due to renal insufficiency. The Registrant commenced a Phase I clinical trial for hGH in February 1996. The initial phase of the Genentech collaboration is expected to be completed within two years. During the initial phase, the parties have agreed to work exclusively with each other regarding the use of the Registrant's ProLease technology for the encapsulation of hGH. At any time prior to the date that is six months after the conclusion of the Phase I clinical trial for the ProLease formulation of hGH, Genentech has the option to obtain a worldwide exclusive license to make, use and sell products incorporating hGH and/or the other Genentech protein and the Registrant's ProLease encapsulation technology. In the event Genentech exercises such option, the parties have agreed to negotiate in good faith regarding the terms of the definitive license agreement, which shall include royalties, milestone payments and other terms which have already been agreed upon by the parties. If Genentech elects to exercise its option to develop ProLease formulations of both proteins, and assuming the successful development and regulatory approval of the ProLease formulations of both proteins, total milestone payments to Alkermes could reach $16.5 million. To fund the Registrant's activities during the initial phase of the collaboration, Genentech has loaned the Registrant 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. The outstanding principal amount of the Note and accrued but unpaid interest thereon becomes due and payable on January 31, 2000. Under the terms of the Note, Alkermes has the option to convert, at any time, all outstanding principal and accrued but unpaid interest thereon (as such amount may exist from time to time, the "Conversion Amount") into shares of Common Stock. The number of shares into which the Note will be converted shall be determined by dividing the Conversion Amount by the average closing price of the Common Stock on the Nasdaq National Market for the 20 trading days immediately preceding the 12 conversion date (the "Conversion Price"). In addition, Genentech shall have the right to convert the Conversion Amount into shares of Common Stock at the Conversion Price if at any time the total cash, cash equivalents and marketable debt instruments of the Registrant shall be less than the sum of (i) all indebtedness which ranks senior to the indebtedness evidenced by the Note, and (ii) the Conversion Amount. Genentech also has the right to demand that the Common Stock be registered under certain circumstances. Pursuant to the collaboration agreement, both Alkermes and Genentech have the right to terminate the agreement upon the other's material breach which is not cured within 30 days' written notice or upon the other's insolvency or bankruptcy. Genentech also has the right to terminate the agreement at any time upon 30 days' written notice to Alkermes. Janssen Pursuant to a Development Agreement, the Registrant is collaborating exclusively with Janssen in the development of sustained release formulations of a Medisorb product candidate. Under the Development Agreement, the Registrant is responsible for production of the Medisorb product candidate for clinical trials. Janssen is responsible for conducting clinical trials of the Medisorb product candidate and securing all necessary regulatory approvals. Janssen initiated a Phase I clinical trial in May 1996 for this Medisorb product candidate. Under related license agreements (the "License Agreements"), Janssen and an affiliate have exclusive world-wide licenses from the Registrant to manufacture and have manufactured, to use and to have used, and to sell and have sold, the Medisorb product candidate. If Janssen decides to employ third-party suppliers of the Medisorb product candidate, the Registrant has a right of first refusal for the manufacture and supply to Janssen of all Medisorb product candidate, and component bio-absorbable polymers thereof, developed under the Development Agreement. Under the License Agreements, Janssen is required to pay Alkermes certain royalties with respect to all Medisorb product candidate sold to customers. Janssen can terminate the Development Agreement or the License Agreements upon 30 days' prior written notice to Alkermes. Alkermes Clinical Partners In April 1992, Units consisting of limited partnership interests in the Partnership and warrants to purchase the Registrant's Common Stock were sold to investors in a private placement (the "Private Placement"). See "Corporate Matters -- Private Placement and Warrant Exchange." The net proceeds of the $46 million Private Placement are being used to fund the further development and clinical testing of RMPs for human pharmaceutical use in the United States and Canada. Pursuant to a Product Development Agreement, dated March 6, 1992, Alkermes transferred substantially all of its rights to the RMP technology to the Partnership. Alkermes has an option to purchase all of the limited partnership interests in the Partnership and thereby reacquire the transferred technology. 13 Research and development of RMPs is being conducted by Alkermes for the Partnership pursuant to the Product Development Agreement. Alkermes has been reimbursed by the Partnership for its actual costs incurred in conducting such research and development, and has received a management fee of 10% of such costs. During the fiscal year ended March 31, 1996, Alkermes recorded revenue of approximately $11.2 million from the Partnership. The revenues recorded by Alkermes from the Partnership during the fiscal year ended March 31, 1996 constituted approximately 70% of the Registrant's net revenues during such period. The Partnership's funding obligations will end in the quarter ending June 30, 1996 and Alkermes intends thereafter to fund the development of RMPs, but may be forced to seek alternative sources of funding. The Partnership may terminate the research program for any or all products if the directors of the general partner of the Partnership, Alkermes Development Corporation II ("ADC II"), a wholly owned subsidiary of Alkermes, determine, by an affirmative vote of 75% of such directors, 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 Alkermes has 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 Alkermes 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 FDA, Alkermes is obligated to make a payment to the Partnership equal to 20% of the aggregate capital contributions of all limited partners. Additionally, Alkermes will pay royalty payments equal to 12% of United States and Canadian revenues and, in certain circumstances, 10% of European revenues from any sales of RMPs by Alkermes. The interim license will terminate if Alkermes does not exercise its option to acquire all of the limited partners' interests in the Partnership. 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 Alkermes. 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 unless certain events occur. OTHER RESEARCH ACTIVITIES Alkermes is evaluating other drug delivery technologies principally through research collaborations with academic institutions. These research projects are focused typically on novel drug delivery systems that fit the Registrant's strategic focus on sophisticated technologies potentially applicable to multiple product candidates. COMPETITION The biotechnology and pharmaceutical industries are subject to rapid and substantial technological change. Alkermes faces, and will continue to face, intense competition in the 14 development, manufacturing, marketing and commercialization of its product candidates from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies. There can be no assurance that developments by others will not render the Registrant's product candidates or technologies obsolete or noncompetitive. At the present time, Alkermes has no sales force or marketing experience and limited commercial manufacturing capability. In addition, many of the Registrant's competitors and potential competitors have substantially greater capital resources, manufacturing and marketing experience, research and development resources, and production facilities than does Alkermes. Many of these competitors also have significantly greater experience than Alkermes in undertaking preclinical testing and clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals. With respect to RMP-7, there are currently no products approved by the FDA for increasing the permeability of the blood-brain barrier. Guilford Pharmaceuticals, Inc., however, has filed for approval of a surgically implantable polymer wafer containing BCNU, a chemotherapeutic agent, for the treatment of brain tumor. The Registrant is aware of certain programs under development by competitors that are focused on the delivery of biopharmaceuticals utilizing a sustained release vehicle. However, the Registrant is not aware of any company that has initiated clinical trials involving the Registrant's partners' products or products which would compete with the Registrant's programs. Many of these competitors have greater resources than the Registrant. There can be no assurance that the Registrant will be able to compete successfully with such companies. The existence of products developed by the Registrant's competitors, or other products or treatments of which the Registrant is not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed by the Registrant. PATENTS AND PROPRIETARY RIGHTS The Registrant's success will be dependent, in part, on its ability to obtain patent protection for its and the Partnership's products, to maintain trade secret protection and to operate without infringing upon the proprietary rights of others. The Registrant has a proprietary portfolio of patent rights and exclusive licenses to patents and patent applications. The Registrant has filed numerous U.S. 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, of which one U.S. patent was issued in each of May 1992, December 1993 and April 1996; carriers for enabling passage into the brain of therapeutic compounds, of which one U.S. patent was issued in each of October 1992, January 1993 and June 1996; therapeutic applications of cationized antibodies; the ProLease microencapsulation process, of which one U.S. patent was issued in December 1993; the formulation of ProLease product candidates of which one U.S. patent was issued in May 1995; the Medisorb microencapsulation process of which one U.S. patent was issued in June 1983; two additional U.S. patents related to processes of preparation of which one was issued in each of June 1993 and February 1994; and the formulation of product candidates, of which nine U.S. patents were issued between July 1985 and June 1995. In the future, the Registrant plans to file further U.S. and foreign patent applications directed to new or improved products and processes. The U.S. patents 15 issued to the Registrant will expire between 2000 and 2013. Alkermes intends to file additional patent applications when appropriate and intends to defend its patent position aggressively. Alkermes has exclusive rights through licensing agreements with several institutions to nine issued U.S. patents, a number of U.S. patent applications and to corresponding foreign patents and patent applications in many countries, subject in certain instances to the rights of the U.S. government to use the technology covered by such patents and patent applications. The Registrant has an exclusive option for exclusive rights to one U.S. patent application and a related international patent application for gene therapy. The U.S. patents that have been licensed to the Registrant will expire between the years 2003 and 2013. Under certain licensing agreements, the Registrant currently pays license maintenance fees and/or minimum annual royalties. During the fiscal year ended March 31, 1996, such fees were approximately $127,000. In addition, under all licensing agreements, Alkermes is obligated to pay royalties on future sales of products, if any, covered by the licensed patents. Two applications for patents were filed by a third party in the United States and in Europe that contain claims covering certain analogs and uses thereof of the same naturally occurring molecule on which RMP-7 is based. One U.S. patent has issued from these applications. Based on an opinion of the Registrant's patent counsel, Alkermes believes that the claims of the issued U.S. patent are not infringed by the Partnership's or the Registrant's proposed manufacture, use or sale of RMP-7. However, there can be no assurance that the claims of the issued U.S. patent are not infringed and the claims of future patents issuing from these applications, if any, will not be infringed by the Partnership's or the Registrant's proposed manufacture, use or sale of RMP-7. There can be no assurance that Alkermes or the Partnership would prevail in any legal action seeking damages or injunctive relief for infringement of any patent that might issue under such applications or that any license required under any such patent would be made available or, if available, would be available on acceptable terms. Failure to obtain a required license could result in the inability to proceed with RMP-based products. The patent positions of pharmaceutical, biopharmaceutical and biotechnology firms, including Alkermes, are generally uncertain and involve complex legal and factual questions. In addition, there can be no assurance that the Registrant's or its licensors' current patent applications will be allowed or that the claims of any patents issued to Alkermes or its licensors (in connection with either or both the Registrant's product candidates or the Partnership's product candidate) will be sufficiently broad to protect the Registrant's or the Partnership's technology or to provide Alkermes or the Partnership with any competitive advantages. Moreover, no assurance can be given that patents issued to Alkermes (in connection with either or both the Registrant's product candidates or the Partnership's product candidate), or its respective licensors, if any, will not be contested, invalidated or circumvented. In addition, if Alkermes or the Partnership is required to defend against a charge of patent infringement or to protect its own proprietary rights against third parties, substantial costs could be incurred. In the future, Alkermes may be required to obtain additional licenses to patents or other proprietary rights of third parties. There can be no assurance that any such licenses will be available on acceptable terms, if at all, and failure to obtain such licenses could result in delays in marketing the Registrant's products or the inability to proceed with the development, manufacture or sale of product candidates requiring such licenses. 16 The Registrant also relies upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain its competitive position which it seeks to protect, in part, by confidentiality agreements with its corporate partners, collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that the Registrant would have adequate remedies for any breach, or that the Registrant's trade secrets will not otherwise become known or be independently discovered by competitors. The Registrant's practice is to require its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Registrant. The agreements provide that all confidential information developed or made known to an individual during the course of the employment or consulting relationship shall be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual while employed by the Registrant shall be the exclusive property of the Registrant. There can be no assurance, however, that these agreements will provide meaningful protection for the Registrant's trade secrets in the event of unauthorized use or disclosure of such information. MANUFACTURING RMP-7 is a small peptide manufactured using standard synthetic techniques. Alkermes relies on an independent European pharmaceutical company for the manufacture and supply of RMP-7. Alkermes believes that, if necessary, there are other companies which could manufacture and supply its requirements for RMP-7. Nevertheless, there can be no assurance that any manufacturer of RMP-7 will meet the Registrant's demands for quality, quantity, cost and timeliness. The Medisorb manufacturing process is significantly different from the ProLease process and is based on a method of encapsulating small molecule drugs, provided by the Registrant's collaborator, in polymers using a large scale emulsification. Alkermes is manufacturing, in accordance with Good Manufacturing Practices ("GMP"), a product candidate incorporating its Medisorb sustained release delivery system, for use in clinical trials, at its recently acquired facility in Wilmington, Ohio. It does not manufacture such product candidates on a commercial scale. ProLease manufacturing involves microencapsulation of drug substances provided to Alkermes by its collaborators. Alkermes has completed construction of an in-house pilot production facility which is in the process of being validated. This facility will be used to manufacture, in accordance with GMP, product candidates incorporating its ProLease sustained release delivery system for use in clinical trials. Pursuant to agreements with certain of its partners, Alkermes may obtain the right to manufacture ProLease products for commercial sale. The manufacture of either Medisorb or ProLease products on a commercial scale would require significant start-up expenses and expansion of facilities and personnel, and no assurance can be given that Alkermes can develop such manufacturing capability successfully. If Alkermes is not able to develop manufacturing capacity and experience or to continue to contract for manufacturing capabilities on acceptable terms, its ability to conduct preclinical testing 17 and clinical trials will be compromised, and delays in obtaining regulatory approvals might result. Such delays could materially adversely affect the Registrant's competitive position and its business, financial condition and results of operations. MARKETING Alkermes plans to market and sell RMP-7, if successfully developed and approved, either directly or through co-promotion or other licensing arrangements with third parties. Such arrangements may be exclusive or nonexclusive and may provide for marketing rights worldwide or in a specific market. Alkermes intends to market any ProLease and Medisorb products through its corporate partners. Alkermes has entered into development agreements, including sales and marketing, for ProLease product candidates with Genentech and Schering-Plough, and for a Medisorb product candidate with Janssen. See "Collaborative Arrangements." Alkermes has no marketing experience and there can be no assurance that it will successfully develop such experience or that it will be able to enter into marketing agreements with others on acceptable terms. To the extent the Registrant enters into co-promotion arrangements, any revenues received by the Registrant will be dependent on the efforts of third parties, and there can be no assurance that such efforts will be successful. 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. 18 Prior to marketing, any product developed by Alkermes 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 the Registrant's 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. An Establishment License Application ("ELA") must be submitted for approval by the FDA with information about manufacturing facilities. Before approval of the ELA, 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 control to ensure full technical compliance. After the establishment is licensed, it is subject to periodic inspections by the FDA. The requirements which the Registrant 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. The Registrant is also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Registrant's research. Compliance with laws and regulations relating to the protection of the environment has not had a material effect on capital expenditures, earnings or the competitive position of the Registrant. However, the extent of government regulation which might result from any legislative or administrative action cannot be accurately predicted. EMPLOYEES As of June 24, 1996, the Registrant had 159 full-time employees, of whom 25 held M.D. degrees or Ph.D. degrees in the fields of analytical chemistry, pharmaceutics, chemical engineering, organic polymer chemistry, biochemistry, cell biochemistry, microbiology, molecular biology, oncology, pharmacology, pharmacy and polymer science and engineering. A significant number of the Registrant's management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. Alkermes believes that it has been highly successful in attracting skilled and experienced scientific personnel; however, competition for such personnel is intense. None of the Registrant's employees is covered by a collective bargaining agreement. 19 CORPORATE MATTERS Alkermes, a Pennsylvania corporation, was organized in 1987. Medisorb Transaction In March 1996, a wholly owned subsidiary of the Registrant, Alkermes Controlled Therapeutics Inc. II ("ACT II") acquired certain Medisorb technology and assets owned or used by Medisorb Technologies International L.P., a privately owned limited partnership. Included in the acquisition was a 14,000 square foot pharmaceutical production facility located in Wilmington, Ohio. The purchase was made with cash. Enzytech Merger In February 1993, Enzytech, Inc. ("Enzytech"), an unrelated entity, was merged with and into Alkermes Controlled Therapeutics, Inc., a wholly owned subsidiary of the Registrant (the "Merger"). The Merger was consummated by converting the shares of all classes of Enzytech capital stock then outstanding into shares of the Registrant's Common Stock. The Registrant also granted to certain of Enzytech's employees and consultants options to purchase shares of the Registrant's Common Stock. The business acquired in the Merger is focused on the development of products incorporating proprietary drug delivery systems based on microencapsulation technologies which may enable injectable sustained release or oral formulations to be made of biopharmaceutical products such as proteins and peptides. Private Placement and Warrant Exchange On April 10, 1992, Alkermes and the Partnership sold in the Private Placement (i) 920 Class A units, each unit consisting of one Class A limited partnership interest in the Partnership, a 1992 warrant to purchase 2,800 shares of the Registrant's Common Stock, par value $.01 per share ("Common Stock"), and a 1995 warrant to purchase 300 shares of Common Stock, and (ii) one Class B unit consisting of one Class B limited partnership interest in the Partnership, a 1992 warrant to purchase 5,600 shares of Common Stock and a 1995 warrant to purchase 600 shares of Common Stock. The purchase price was $50,000 for each Class A Unit (subject to certain reductions for certain investors) and $100,000 for the Class B Unit. The purchase price for the Class A and Class B Units was payable in installments due on an annual basis which commenced in 1992 and ended in 1995. The Class A 1992 Warrants, the Class A 1995 Warrants, the Class B 1992 Warrant and the Class B 1995 Warrant were issued by the Registrant in consideration of the grant by each limited partner to the Registrant of an option to purchase, under certain circumstances, the limited partnership interest held by such limited partner. The Class A 1992 Warrants and the Class B 1992 Warrant may be exercised during the period which began on August 1994 and ends on July 31, 1999, and upon the payment of a warrant exercise price per share of $20.03. The Class A 1995 Warrants and the Class B 1995 Warrant may 20 be exercised during the period which began on April 15, 1995 and ends on April 14, 2000, and upon the payment of a warrant exercise price per share of $3.54. PaineWebber Development Corporation, the sales agent for the Units (the "Sales Agent"), purchased the Class B Unit in the Private Placement. An affiliate of the Sales Agent (the "Fund Affiliate") purchased 133 Class A units in the Private Placement. In consideration of such purchase, the Registrant issued to the Sales Agent Affiliate a warrant to purchase 13,300 shares of Common Stock (the "Fund Warrant"). The Fund Warrant had the same exercise period and exercise price ($20.03) as the Class A 1992 Warrants. As part of the Private Placement, the Registrant also issued to an affiliate of the Sales Agent (the "Incentive Affiliate") a warrant to purchase 77,100 shares of Common Stock (the "Incentive Warrant"). The Incentive Warrant had an exercise period which began on August 1, 1994 and ends on July 31, 1997 and had a warrant exercise price per share of $20.83. The Registrant completed an exchange offer on January 27, 1995 with respect to the foregoing warrants. Pursuant to the exchange offer, Class A limited partners had the option to exchange both the Class A 1992 Warrants and the Class A 1995 Warrants for a new 1994 Class A Warrant to purchase, at $5.00 per share, 1,700 shares of the Registrant'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 Sales Agent had the option to exchange both the Class B 1992 Warrant and the Class B 1995 Warrant for a new 1994 Class B Warrant to purchase 3,400 shares of the Registrant's Common Stock at $5.00 per share. The Fund Affiliate had the option to exchange the Fund Warrant for a new 1994 Fund Warrant to purchase 7,293 shares of Common Stock at $5.00 per share. The Incentive Affiliate had the option to exchange the Incentive Warrant for a new 1994 Incentive Warrant to purchase 42,280 shares of Common Stock at $5.25 per share. The 1994 Class A Warrants, 1994 Class B Warrant, and 1994 Fund Warrant are exercisable during the period which began on April 1, 1995 and ends on March 31, 2000. The 1994 Incentive Warrant is exercisable during the period which began on April 1, 1995 and ends on March 31, 1998. Holders of approximately 92% of the Class A 1992 Warrants and the Class A 1995 Warrants originally issued exchanged such warrants in response to the exchange offer. The Sales Agent, the Fund Affiliate and the Incentive Affiliate also exchanged the warrants they acquired in the Private Placement for new 1994 warrants. In February and April 1996, the Registrant purchased an aggregate of 74 Class A Units that were owned by investors who defaulted on their payment obligations. The aggregate purchase price for such Units was the aggregate amount of the unpaid installments, approximately $2,052,000. ITEM 2. PROPERTIES ---------- The Registrant leases and occupies approximately 90,000 square feet of laboratory and office space in Cambridge, Massachusetts under five leases expiring in the years 1998 to 2002. The leases contain provisions permitting the Registrant to extend the term of such leases for up to ten years. The Registrant has completed construction of a GMP pilot suite at its Massachusetts facility which is in the process of being validated. Such suite is for the manufacture of product candidates incorporating the ProLease delivery system for preclinical and clinical trials. The Registrant believes 21 that its Massachusetts facility is adequate for its preclinical and clinical operations. The Registrant does not manufacture and does not expect to manufacture RMPs for clinical trials. The Registrant has engaged a third party to manufacture preclinical, clinical and commercial supplies of RMPs. Alkermes Europe, Ltd., a wholly owned subsidiary of the Registrant, leases and occupies approximately 1,500 square feet of office space in Cambridge, England under a lease expiring in the year 1997. The Registrant believes that such office space is adequate for the operations of Alkermes Europe, Ltd. The Registrant owns and occupies approximately 14,000 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. The Registrant believes that its Wilmington facility is adequate for its preclinical and clinical operations. The Registrant also leases and occupies approximately 25,000 square feet of laboratory and office space in Blue Ash, Ohio under a lease expiring in 1997. The lease contains a provision permitting the Registrant to extend the term of such lease for one year. The Registrant believes that the Blue Ash facility is adequate for its operations. ITEM 3. LEGAL PROCEEDINGS ----------------- Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- Not applicable. 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED ------------------------------------------------ STOCKHOLDER MATTERS ------------------- The Registrant's common stock is traded on the Nasdaq National Market under the symbol ALKS. Set forth below for the indicated periods are the high and low sale prices for Alkermes' common stock.
Fiscal 1996 Fiscal 1995 ------------------- --------------- High Low High Low ----------- ------ ------ ------- 1st Quarter $ 4 1/2 $2 5/8 $7 3/8 $3 3/4 2nd Quarter 9 1/4 3 5/8 4 5/8 2 7/8 3rd Quarter 8 5/8 5 3/4 3 3/4 1 7/8 4th Quarter 11 1/4 7 1/8 3 3/8 1 15/16
The number of shareholders of record on June 7, 1996 was 658. No dividends have been paid on the common stock to date, and the Registrant does not expect to pay cash dividends in the foreseeable future. 23 ITEM 6. SELECTED FINANCIAL DATA ----------------------- ALKERMES, INC. AND SUBSIDIARIES (In thousands, except per share data)
YEAR ENDED MARCH 31, -------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues............ $ 15,919 $ 13,903 $ 9,460 $ 11,806 $ 1,656 Research and development expenses................. 21,586 18,955 20,480 16,709 7,005 Total expenses............ 29,666 25,807 26,736 51,953 9,708 Net loss.................. $(13,747) $(11,904) $(17,275) $(40,147)(1) $(8,052) Net loss per weighted average number of common shares................... $ (0.93) $ (0.88) $ (1.29) $ (3.77)(1) $ (0.98) Weighted average number of common shares outstanding.............. 14,775 13,535 13,362 10,653 8,193 MARCH 31, -------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents and short-term investments.............. $ 32,374 $ 21,351 $ 27,948 $ 32,859 $45,679 Total assets.............. 45,752 36,708 46,322 54,025 55,706 Long-term obligations..... 9,876 8,376 6,598 2,149 244 Shareholder's equity...... 23,513 21,163 31,874 47,731 54,187
- -------- (1) Includes a one time non-cash charge of $31.3 million for the purchase of in-process research and development as a result of the Company's acquisition of Enzytech, Inc. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- INTRODUCTION Alkermes is developing sophisticated products based on innovative drug delivery technologies. 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 sales of products. The Company has been unprofitable since inception and expects to incur substantial additional operating losses over the next several years. At March 31, 1996, the Company had an accumulated deficit of $101 million. 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 intends to develop 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 makes such statements based on assumptions which it believes to be reasonable, the Company's business is subject to significant risks and there can be no assurance that actual results will not differ materially from the Company's expectations. Accordingly, the Company hereby identifies the following important factors, among others, which could cause its results to differ from any results which might be projected, forecasted or estimated by the Company in any such forward-looking statements: (i) the Company and its collaborators could not be permitted by regulatory authorities to undertake additional clinical trials for RMP-7(TM) or ProLease(R) or to commence clinical trials for Medisorb(R); (ii) product candidates could be ineffective or unsafe during clinical trials; (iii) difficulties or set-backs in obtaining the substantial additional funding required to continue research and development programs and clinical trials; (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 or be precluded from commercialization by proprietary rights of third parties; (v) technological change in the biotechnology or pharmaceutical industries could render the Company's product candidates obsolete or noncompetitive;(vi) disputes with collaborators, termination of collaborations or failure to negotiate acceptable new collaborative arrangements for ProLease and Medisorb technologies, which are not independently commercializable; (vii) disputes with Clinical Partners over rights to the RMP(TM) technology and RMP-7, or the Company could fail to purchase this technology from Clinical Partners, or, if the Company did purchase RMP technology from Clinical Partners (a) in shares of the Company's common stock, the Company's shareholders would be substantially diluted or (b) in cash, the Company's capital resources would be substantially depleted; and (viii) difficulties or set-backs in obtaining and enforcing Alkermes' patents and with the patent rights of others. RESULTS OF OPERATIONS The Company's research and development revenue under collaborative arrangement with related party was $11,182,741, $9,277,371 and $7,449,700 for the fiscal years ended in 1996, 1995 and 1994, respectively. This revenue was received from Clinical Partners under a product development agreement entered into in March 1992. The increase in such revenue for fiscal 1996 as compared to fiscal 1995 and for fiscal 1995 as compared to fiscal 1994 was a result of increased reimbursable costs incurred by the Company pursuant to such product development agreement. The Company's research and development revenue under collaborative arrangements was $2,848,510, $3,049,106 and $361,920 for the fiscal years ended in 1996, 1995 and 1994, respectively. The decrease in such revenue for fiscal 1996 as compared to fiscal 1995 was primarily a result of the completion of the feasibility phase of a collaborative agreement with Boehringer Mannheim GmbH, partially offset by an 25 expanded collaboration with Schering-Plough Corporation. The increase in such revenue for fiscal 1995 as compared to fiscal 1994 was primarily a result of research and development performed under such agreement with Boehringer Mannheim GmbH. Interest income was $1,887,275, $1,576,794 and $1,648,833 for the fiscal years ended in 1996, 1995 and 1994, respectively. The increase in such revenue for fiscal 1996 as compared to fiscal 1995 was primarily a result of the investment of the net proceeds of approximately $14,800,000 received upon the consummation of the public offering of the Company's common stock in September and October 1995, as well as funds received from other financing arrangements completed during fiscal 1996. The decrease in fiscal 1995 as compared to fiscal 1994 was mainly a result of decreased cash, cash equivalents and investments due to negative cash flow resulting from continued research and development and other expenditures. Such decrease was partially offset by an increase in interest rates during fiscal 1995. The Company's total operating expenses were $29,665,610 for the fiscal year ended in 1996 as compared to $25,807,424 and $26,735,558 for the fiscal years ended in 1995 and 1994, respectively. The Company recorded a $750,000 nonrecurring charge in March 1996 for Medisorb technology purchased but not yet commercially viable. The Company's research and development expenses were $21,586,316 for the fiscal year ended in 1996 compared to $18,955,347 and $20,479,682 for the fiscal years ended in 1995 and 1994, respectively. The increase for fiscal 1996 as compared to fiscal 1995 was mainly the result of an increase in the purchase of lab supplies and preclinical and clinical expenses related primarily to the Company's RMP-7 and ProLease programs. The decrease for fiscal 1995 as compared to fiscal 1994 was mainly the result of the Company's decision in September 1994 to focus on its two principal technologies, RMP-7 and ProLease, as well as the completion of certain preclinical and clinical studies and a bulk product purchase of RMP-7 during fiscal year 1994. Included in fiscal 1994 is a payment of $550,000 related to the Company's now terminated collaboration with Cortex Pharmaceuticals, Inc. General and administrative expenses were $6,285,700, $5,104,062 and $5,921,572 for the fiscal years ended in 1996, 1995 and 1994, respectively. The increase for fiscal 1996 as compared to fiscal 1995 was primarily the result of non-cash charges related to the write-down of the Company's investments in Clinical Partners and an increase in patent legal costs and other legal costs associated with financing and other transactions. The decrease for fiscal 1995 as compared to fiscal 1994 was primarily the result of a reduction of non-cash compensation charges relating to the grant of certain stock options and awards made, which was partially offset by now accounting for the Company's investment in Clinical Partners under the equity method of accounting. The Company does not believe that inflation and changing prices has had a material impact on its consolidated results of operations. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996, the Company had current assets totaling $34,331,841, primarily consisting of $445,150 in cash and cash equivalents and $31,929,214 in U.S. Treasury Notes and other Government obligations having a maturity of less than one year; and current liabilities of $6,447,934. The Company's short-term investment objectives are, first, to assure conservation of principal, and second, to obtain investment income. As a result, the Company invests primarily in high grade government or government-backed securities. In May 1996, the Company completed a direct public offering of 2,300,000 shares of its common stock at $10 per share. Net proceeds to the Company were approximately $22,930,000. The Company's research and development costs to date have been financed primarily by sales of equity securities and research and development collaborative arrangements. The Company expects to incur significant research and development and other costs, including costs related to preclinical studies, clinical trials and facilities expansion. The research and development revenue from Clinical Partners will end during the quarter ending June 30, 1996. Such funding will not be sufficient to complete clinical trials and seek regulatory approval 26 of RMP-7. As a result, Alkermes intends to use its own resources to develop RMP-7, but may be forced to seek alternative sources of funding, including additional collaborators. Therefore, the Company expects that such costs will exceed revenues significantly for the next several years, which will result in continuing losses from operations. 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. 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 believes its current cash, cash equivalents and short-term investments, combined with anticipated interest income, research and development revenues under collaborative arrangements from Clinical Partners and the proceeds of the direct public offering discussed above, will be sufficient to meet its anticipated capital requirements through March 31, 1998. 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 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 will 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 adoption of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and SFAS No. 123, "Accounting for Stock-Based Compensation" in fiscal 1997 is not expected to have a material effect on the Company's consolidated financial position, results of operations and cash flows. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 AND 1995 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED MARCH 31, 1996 AND INDEPENDENT AUDITORS' REPORT 28 INDEPENDENT AUDITORS' REPORT Board of Directors Alkermes, Inc. Cambridge, Massachusetts We have audited the accompanying consolidated balance sheets of Alkermes, Inc. and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Alkermes, Inc. and subsidiaries as of March 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Boston, Massachusetts May 24, 1996 29 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1996 AND 1995 - ------------------------------------------------------------------------------
ASSETS 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 445,150 $ 1,086,627 Short-term investments 31,929,214 20,264,141 Prepaid expenses and other current assets 1,957,477 777,549 Note receivable from related party - 4,735,000 ----------- ----------- Total current assets 34,331,841 26,863,317 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: Land 225,000 - Building 1,275,000 - Furniture, fixtures and equipment 9,864,501 6,406,046 Leasehold improvements 2,008,193 1,492,440 Construction in progress 147,326 - ----------- ----------- 13,520,020 7,898,486 Less accumulated depreciation and amortization (5,097,882) (3,447,239) ----------- ----------- 8,422,138 4,451,247 ----------- ----------- INVESTMENTS 1,372,789 4,367,226 ----------- ----------- OTHER ASSETS 747,377 662,845 ----------- ----------- OTHER INVESTMENTS 877,928 363,707 ----------- ----------- $45,752,073 $36,708,342 =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 CURRENT LIABILITIES: Accounts payable and accrued expenses $ 3,522,178 $ 2,553,628 Deferred revenue from Alkermes Clinical Partners, L.P. - 1,585,000 Long-term obligations - current portion 2,925,756 2,655,929 ------------- ------------ Total current liabilities 6,447,934 6,794,557 ------------- ------------ LONG-TERM OBLIGATIONS 9,876,347 8,376,201 ------------- ------------ OTHER LONG-TERM LIABILITIES 915,241 374,835 ------------- ------------ DEFERRED REVENUE 5,000,000 - ------------- ------------ COMMITMENTS SHAREHOLDERS' EQUITY: Capital stock, par value $.01 per share: authorized, 5,000,000 shares; none issued Common stock, par value $.01 per share: authorized, 40,000,000 shares; issued, 15,966,942 shares in 1996 and 13,571,838 shares in 1995 159,669 135,718 Additional paid-in capital 124,239,023 109,149,171 Receivable for warrants and deferred compensation (317,682) (812,318) Cumulative foreign currency translation adjustments (24,354) (10,301) Unrealized gain on marketable securities 502,500 - Accumulated deficit (101,046,605) (87,299,521) ------------- ------------ Total shareholders' equity 23,512,551 21,162,749 ------------- ------------ $ 45,752,073 $ 36,708,342 ============= ============
See notes to consolidated financial statements. 30 ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------ 1996 1995 1994 REVENUES: Research and development revenue under collaborative arrangements $ 2,848,510 $ 3,049,106 $ 361,920 Research and development revenue under collaborative arrangement with related party 11,182,741 9,277,371 7,449,700 Interest income 1,887,275 1,576,794 1,648,833 ------------ ------------ ------------ 15,918,526 13,903,271 9,460,453 ------------ ------------ ------------ EXPENSES: Research and development 21,586,316 18,955,347 20,479,682 General and administrative 6,285,700 5,104,062 5,921,572 Interest expense 1,043,594 608,015 334,304 Purchase of in-process research and development 750,000 - - Write-down of other investment - 1,140,000 - ------------ ------------ ------------ 29,665,610 25,807,424 26,735,558 ------------ ------------ ------------ NET LOSS $(13,747,084) $(11,904,153) $(17,275,105) ============ ============ ============ NET LOSS PER WEIGHTED AVERAGE NUMBER OF COMMON SHARES $ (0.93) $ (0.88) $ (1.29) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,774,584 13,535,339 13,361,618 ============ ============ ============
See notes to consolidated financial statements. - 31 - ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1996, 1995 AND 1994
- ----------------------------------------------------------------------------------------------------- RECEIVABLE CUMULATIVE FOR FOREIGN UNREALIZED ADDITIONAL WARRANTS AND CURRENCY GAIN (LOSS) ON COMMON STOCK PAID-IN DEFERRED TRANSLATION MARKETABLE ACCUMULATED SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENTS SECURITIES DEFICIT TOTAL BALANCE, APRIL 1, 1993 13,164,526 $131,645 $109,188,902 $(3,469,045) $ - $ - $(58,120,263) $47,731,239 Issuance of common stock April 1993 through March 1994 355,565 3,556 258,231 - - - - 261,787 Amortization of receivable for warrants - - - 450,300 - - - 450,300 Compensation relating to grant of stock options and awards made - - 51,517 (51,517) - - - - Amortization of compen- sation relating to grant of stock options and awards made - - - 1 ,050,487 - - - 1,050,487 Unrealized loss on marketable securities - - - - - (330,000) - (330,000) Cumulative foreign currency translation adjustments - - - - (14,451) - - (14,451) Net loss for year - - - - - - (17,275,105) (17,275,105) ---------- -------- ------------ ----------- ---------- -------- ------------ ----------- BALANCE, MARCH 31, 1994 13,520,091 135,201 109,498,650 (2,019,775) (14,451) (330,000) (75,395,368) 31,874,257 Issuance of common stock April 1994 through March 1995 51,747 517 39,228 - - - - 39,745 Warrant exchange and amortization of receivable for warrants - - (354,090) 841,719 - - - 487,629 Compensation relating to grant of stock options and awards made - - 103,320 (103,320) - - - - Amortization of compen- sation relating to grant of stock options and awards made - - (137,937) 469,058 - - - 331,121 Carrying value adjustments - - - - - 330,000 - 330,000 Cumulative foreign currency translation adjustments - - - - 4,150 - - 4,150 Net loss for year - - - - - - (11,904,153) (11,904,153) ---------- -------- ------------ ----------- ---------- -------- ------------ ----------- BALANCE, MARCH 31, 1995 13,571,838 135,718 109,149,171 (812,318) (10,301) - (87,299,521) (21,162,749)
(Continued) - 32 - ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1996, 1995 AND 1994 - -----------------------------------------
Receivable Cumulative for Foreign Unrealized Additional Warrants and Currency Gain (Loss) on Common Stock Paid-in Deferred Translation Marketable Accumulated Shares Amount Capital Compensation Adjustments Securities Deficit Total BALANCE, MARCH 31,1995 (CARRIED FORWARD) 13,571,838 135,718 109,149,171 (812,318) (10,301) - (87,299,521) 21,162,749 Issuance of common stock, April 1995 through March 1996, net of issuance costs of $1,281,445 2,395,104 23,951 15,002,862 - - - - 15,026,813 Amortization of receivable for warrants - - - 402,259 - - - 402,259 Amortization of compensation relating to grant of stock options and awards made - - 86,990 92,377 - - - 179,367 Unrealized gain on marketable securities - - - - - 502,500 - 502,500 Cumulative foreign currency translation adjustments - - - - (14,053) - - (14,053) Net loss for year - - - - - - (13,747,084) (13,747,084) ---------- -------- ------------ --------- -------- -------- ------------- ----------- BALANCE, MARCH 31, 1996 15,966,942 $159,669 $124,239,023 $(317,682) $(24,354) $502,500 $(101,046,605) $23,512,551 ========== ======== ============ ========= ======== ======== ============= =========== (Concluded)
See notes to consolidated financial statements. - 33 - ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1996, 1995 AND 1994 - ---------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(13,747,084) $(11,904,153) $(17,275,105) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 1,770,242 1,426,068 1,256,862 Amortization of amounts receivable for warrants and compensation relating to grant of stock options and awards made 581,626 818,750 1,500,787 Adjustments to other investments 101,742 1,474,934 - Changes in assets and liabilities: Prepaid expenses and other current assets 830,500 26,049 162,367 Accounts payable and accrued expenses 960,670 256,067 (792,519) Deferred revenue from Alkermes Clinical Partners, L.P. (1,585,000) (1,215,000) 2,800,000 Other long-term liabilities 540,406 61,611 61,611 Deferred revenue 5,000,000 - - ------------ ------------ ------------ Net cash used by operating activities (5,546,898) (9,055,674) (12,285,997) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment, net (5,606,737) (629,935) (1,935,063) (Purchases) sales of short-term investments, net (11,665,073) 5,031,130 7,269,462 Sales of investments, net 2,994,437 1,133,969 3,145,264 Investment in Alkermes Clinical Partners, L.P. (2,122,463) (126,959) (113,543) Other assets (209,500) 20,500 (53,568) Repayment of loan to Alkermes Clinical Partners, L.P. 4,735,000 - - ------------ ------------ ------------ Net cash (used by) provided by investing activities (11,874,336) 5,428,705 8,312,552 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net 15,026,813 39,745 261,787 Proceeds from issuance of long-term debt 4,500,000 4,500,000 7,094,086 Payment of long-term obligations (2,733,061) (2,479,359) (1,009,743) ------------ ------------ ------------ Net cash provided by financing activities 16,793,752 2,060,386 6,346,130 ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (13,995) 619 (14,451) ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (641,477) (1,565,964) 2,358,234 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,086,627 2,652,591 294,357 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 445,150 $ 1,086,627 $ 2,652,591 ============ ============ ============ SUPPLEMENTARY INFORMATION - Interest paid $ 492,731 $ 568,198 $ 238,536 ============ ============ ============
See notes to consolidated financial statements. -34- ALKERMES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------- 1. FORMATION OF COMPANY Alkermes, Inc. (the Company) was incorporated in July 1987 and is an emerging pharmaceutical company that is focused on the development and commercialization of therapeutic products based on sophisticated drug delivery technologies. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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) (see Note 3), Alkermes Investments, Inc., Alkermes Development Corporation II (ADC II) and Alkermes Europe, Ltd. 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 7). All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES - The preparation of the Company's 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 aggregate fair value. The carrying amounts of the Company's debt instruments approximate fair value. NET LOSS PER WEIGHTED AVERAGE NUMBER OF COMMON SHARES - Net loss per share is computed using the weighted average number of common shares outstanding during the period. RESEARCH AND DEVELOPMENT REVENUES - Research and development revenues are recorded as services are performed. RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses are charged to operations as incurred. 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 6). -35- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS - Cash equivalents, with original maturities of three months or less, consist of money market accounts. INVESTMENTS - The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", effective April 1, 1994. Prior years financial statements have not been restated, and the effects of the adoption were immaterial. Under SFAS No. 115, 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". Short-term investments and investments consist of U.S. Treasury and other government securities which are classified as "held-to-maturity" and reported at amortized cost. Short-term investments and investments have maturity dates within one year of the balance sheet date. Investments classified as long-term includes securities held as collateral. The carrying value of all investments approximated market value at March 31, 1996 and 1995. Included in other investments is an investment in Cortex Pharmaceutical Inc.'s common stock, which is classified as "available-for-sale" and reported at fair value. During the year ended March 31, 1995, the Company recorded a charge to operations of $1,140,000 due to other than temporary reductions in the market value of such investment. Other investments also include ADC II's investment in Clinical Partners, which is accounted for under the equity method of accounting. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets (3 to 25 years) or, in the case of leasehold improvements and capital leases, over the lease terms (3 to 10 years). DEFERRED REVENUE - LONG-TERM - During fiscal 1996, the Company received a $5,000,000 prepayment of royalties under a collaborative agreement. This amount has been recorded as deferred revenue at March 31, 1996 and accrues interest at a rate (6.1375% at March 31, 1996) equal to .20% above the LIBOR rate. LICENSE AGREEMENTS AND PURCHASED PATENTS - License agreements and purchased patents, included in other assets, are amortized on a straight-line basis over a period of five years. RECEIVABLE FOR WARRANTS AND DEFERRED COMPENSATION - Receivable for warrants is comprised of amounts receivable related to warrants issued in connection with the capitalization of Clinical Partners and is amortized as revenues are earned from Clinical Partners. Deferred compensation is related to both the Company's 1991 Restricted Common Stock Award Plan and compensatory stock options and is amortized over vesting periods ranging from one to five years. NEW ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. SFAS No. 121 is effective for the Company's 1997 fiscal year. The Company is evaluating the impact of the new standard on its consolidated financial position, results of operations and cash flows, and expects the effect to be immaterial. -36- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) - In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". The Company intends to continue to account for its stock-based transactions with employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and will include the pro forma disclosures required by SFAS No. 123 in fiscal 1997. 3. ACQUISITION OF CERTAIN ASSETS AND TECHNOLOGY On March 8, 1996, ACT II acquired certain assets and technology owned or used by Medisorb Technologies International L.P., a leader in the development of injectable controlled release drug delivery technologies for the pharmaceutical industry. The assets acquired included a large scale pharmaceutical production facility and equipment. The Company paid $4,000,000 in cash for the assets and technology. A nonrecurring charge totaling $750,000 for technology purchased but not yet commercially viable was recorded by the Company at the acquisition date. This charge represents that portion of the purchase price of the acquired technology that was allocated to research and development in-process. 4. SHAREHOLDERS' EQUITY In September and October 1995, the Company completed an underwritten public offering of 2,300,000 shares of its common stock at $7.00 per share. Net proceeds to the Company were approximately $14,800,000. 5. LONG-TERM OBLIGATIONS Long-term obligations at March 31 consist of:
1996 1995 Notes payable - banks $ 9,246,427 $ 7,414,282 Note payable - other 3,500,000 3,500,000 Capital lease obligations - 34,212 Other 55,676 83,636 ----------- ----------- 12,802,103 11,032,130 Less current portion 2,925,756 2,655,929 ----------- ----------- $ 9,876,347 $ 8,376,201 =========== ===========
-37- 5. LONG-TERM OBLIGATIONS (CONTINUED) In December 1995, the Company increased the principal amount of its equipment loan with a bank by $1,500,000 to $3,594,640 ($3,246,427 outstanding at March 31, 1996). The loan is secured by cash collateral (included in long-term investments at March 31, 1996) having a minimum market value of the lesser of $1,000,000 or the outstanding principal amount of the loan. This additional principal amount of the loan is payable in equal monthly installments of $25,000, which commenced January 2, 1996 and bears interest at the fixed rate of 8% per annum. The original principal amount of the loan is payable in equal monthly installments of $91,071, which commenced January 3, 1995, together with interest at the rate of 8.46% per annum. 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 permitted investments to indebtedness. Certain equipment is also pledged as collateral under this loan. In December 1993, the Company borrowed $6,000,000 from a second bank. The principal amount of the loan is payable in equal quarterly installments of $375,000, which commenced April 1, 1994, together with interest at the rate of 6.35% per annum. In December 1995, the Company increased the outstanding principal amount of this loan by $3,000,000 to $6,000,000 ($6,000,000 outstanding at March 31, 1996). This additional principal balance of the loan is payable in equal quarterly installments of $375,000, commencing April 1, 1998. The additional $3,000,000 bears interest at a rate (7.125% at March 31, 1996) equal to 1 1/2% above the LIBOR rate. The loan agreement 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. In January 1995, the Company borrowed $3,500,000 from a corporate partner. The principal amount of the loan, together with interest accrued at the prime rate of interest (8.25% at March 31, 1996), is payable in the Company's common stock or cash, at the Company's option, in five years. Included in property, plant and equipment at March 31, 1995 are costs of approximately $569,000 and net book values of approximately $200,000 in equipment and leasehold improvements acquired under capital leases. At March 31, 1996, the maturities of the long-term obligations are as follows:
Notes Payable and Other 1997 $ 2,925,756 1998 2,547,618 1999 1,803,729 2000 5,300,000 2001 225,000 ----------- $12,802,103 ===========
-38- 6. INCOME TAXES The Company has approximately $39,419,000 of net operating loss (NOL) carryforwards for federal income tax purposes and approximately $2,790,000 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 2011. The components of the net deferred income tax asset at March 31 are as follows:
1996 1995 Acquired technology $ 884,000 $ 884,000 Capitalized research and development expenses, net of amortization 12,146,000 11,664,000 NOL carryforwards 15,557,000 12,331,000 Tax credit carryforwards 3,491,000 3,261,000 Alkermes Europe NOL carryforward 1,373,000 779,000 Other 709,000 - Less valuation allowance (34,160,000) (28,919,000) ------------ ------------ $ - $ - ============ ============
The valuation allowance has been provided because of the uncertainty of realizing the future benefits of the net deferred income tax assets. In fiscal 1995, the valuation allowance increased by $3,986,000. The ACTI NOL carryforwards and ACTI research and development credit carryforwards of approximately $4,780,000 and $790,000, respectively, acquired from Enzytech, Inc. are only available to offset future taxable income of ACTI. 7. 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 1992 Warrant) to purchase 2,800 shares of the Company's common stock and a 1995 warrant (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 unpaid portions of which were evidenced by investor notes which were payable in annual installments through April 15, 1995. In connection with the offering, the Company also issued, to an affiliate of the sales agent for the Class A Units, warrants (the Incentive Warrants) to purchase 77,100 shares of the Company's common stock and issued, to another affiliate of the sales agent, a warrant (the Affiliate Warrant) to purchase 13,300 shares of the Company's common stock. -39- 7. RELATED-PARTY TRANSACTIONS (CONTINUED) The net proceeds of the offering are being used and will be used primarily to fund the further development and clinical testing of a family of molecules designated by the Company as Receptor-Mediated Permeabilizers (RMPs) for human pharmaceutical use in the United States and Canada. Proprietary RMP 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 is being reimbursed by Clinical Partners for its actual costs incurred in conducting such research and development and is also receiving a management fee of 10% of such costs. Such funding will end during the quarter ending June 30, 1996. Such funding will not be sufficient to complete clinical trials and obtain regulatory approval of RMP-7. As a result, Alkermes intends to use its own resources to develop RMP-7, but may be forced to seek alternative sources of funding, including additional collaborators. 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 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 its purchase option to acquire all of the limited partners' interests in Clinical Partners, as discussed below. 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, under certain circumstances, the limited partnership interest 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. -40- 7. 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. The 1992 Warrants and the Class B 1992 Warrant may be exercised during the period beginning on August 1, 1994 and ending on July 31, 1999, and upon the payment of a warrant exercise price per share of $20.03. The 1995 Warrants and the Class B 1995 Warrant may be exercised during the period beginning on April 15, 1995 and ending on April 14, 2000, and upon the payment of a warrant exercise price of $3.54. The exercise periods of all warrants may be accelerated upon the occurrence of certain reorganization events of the Company. 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. Of the Class A 1992 Warrants and Class A 1995 Warrants originally issued, approximately 92% were exchanged in response to the exchange offer. The Class B 1992 Warrant and the Class B 1995 Warrant, the Affiliate Warrant and the Incentive Warrants were also exchanged in the exchange offer for new warrants entitling the holders thereof to purchase an aggregate of 3,400, 7,293 and 42,280 shares of common stock, respectively. The exchange offer resulted in a decrease of 1,225,927 shares of common stock which are issuable upon exercise of the Company's outstanding warrants. In order to fund organizational and offering costs, the Company loaned Clinical Partners, at the closing of the private placement, $4,735,000. The loan was secured by a pledge of the investor notes, bore interest at 7.5% per annum, payable annually in arrears, and was paid in April 1995. In February and April 1996, the Company purchased from Clinical Partners an aggregate of 74 Class A Units that were owned by investors who defaulted on their payment obligations. The total purchase price for such Units was the aggregate amount of unpaid installments, approximately $2,052,000. -41- 8. RESEARCH AND DEVELOPMENT ARRANGEMENTS The Company has entered into several collaborative agreements with corporate partners (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. In addition to research and development funding, during fiscal 1996 the Company received $300,000 for two milestone payments under these agreements. Additionally, the Company may obtain the right to manufacture and supply products developed under certain of these agreements. 9. COMMITMENTS LEASE COMMITMENTS - The Company leases certain offices and research laboratories under operating leases with initial terms of one to ten years expiring between 1997 and 2002. The leases contain provisions for extensions for up to ten years. Total annual future minimum lease payments are as follows:
1997 $2,516,000 1998 1,884,000 1999 1,874,000 2000 1,874,000 2001 1,235,000 Thereafter 912,000
Rent expense charged to operations was approximately $2,439,000, $2,589,000 and $2,341,000 for the years ended March 31, 1996, 1995 and 1994, respectively. Additionally, a U.S. Treasury Bill with a total principal amount of $257,000 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, 1996. LICENSE AND ROYALTY COMMITMENTS - The Company has entered into license agreements with certain corporations and universities which require the Company to pay 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, $117,000 and $180,000 for the years ended March 31, 1996, 1995 and 1994, respectively. -42- 10. STOCK OPTIONS AND AWARDS During fiscal 1996, the Board of Directors approved, subject to shareholder approval, the Stock Option Plan for Non-Employee Directors (the Director Plan), which provides for the granting of stock options to non-employee directors of the Company. The Company's Amended and Restated 1989 Non- Qualified Stock Option Plan (the 1989 Plan), Amended and Restated 1990 Omnibus Stock Option Plan (the 1990 Plan) and 1992 Non-Qualified Stock Option Plan (the 1992 Plan) provide for the granting of stock options to employees, officers and directors of, and consultants to, 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 1,500,000 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 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 and the Director Plan will terminate on March 18, 2006. The Compensation Committee of the Board of Directors administers the 1989 Plan, the 1990 Plan and the 1992 Plan and determines who is to receive options and the exercise price and terms of such options. The Board of Directors administers the Director Plan. The option exercise price of stock options granted under the 1989 Plan, the 1990 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, 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. Through March 31, 1996, LSARs have been granted under the 1990 Plan with respect to options to purchase 425,750 shares. During fiscal 1992, the Company 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. Through March 31, 1996, 1995 and 1994, an aggregate of 77,000, 77,000 and 49,000 shares of common stock, respectively, have been awarded under the Award Plan, of which 13,200, 7,900 and 5,200 shares vested and were issued during the years ended March 31, 1996, 1995 and 1994, respectively. In addition, 5,000, 6,900 and 1,200 shares were canceled during the years ended March 31, 1996, 1995 and 1994, respectively. The Award Plan will terminate on November 15, 2001, unless sooner terminated by the Board of Directors. The Company has reserved a total of 2,271,827 shares of common stock for issuance under the five plans. -43- 10. STOCK OPTIONS AND AWARDS (CONTINUED) A summary of option activity under the 1989, 1990, 1992 and Director Plans is as follows:
Exercise Number Price of Per Shares Share Balance, April 1, 1993 1,576,328 $.04 - $21.00 Granted 346,000 .56 - 8.50 Exercised (350,865) .04 - 1.00 Canceled (242,962) .56 - 21.00 ----------- Balance, March 31, 1994 1,328,501 .56 - 21.00 Granted 1,210,765 2.01 - 7.00 Exercised (43,847) .56 - 1.00 Canceled (1,038,126) .60 - 21.00 ----------- Balance, March 31, 1995 1,457,293 .56 - 14.875 Granted 445,450 2.81 - 10.31 Exercised (60,199) .56 - 3.69 Canceled (106,540) 1.00 - 9.13 ----------- Balance, March 31, 1996 1,736,004 $.56 - $14.875 ===========
During fiscal 1995, a significant number of outstanding options were canceled in exchange for the grant of fewer options with an exercise price equal to the fair market value of the common stock on the date of grant of $3.69 per share. These options vest over three years. Other options granted generally vest over four years, except options granted under the Director Plan which vest after six months. At March 31, 1996, options to purchase 611,926 shares were exercisable under the above-mentioned plans. For certain stock options granted and awards made, the Company recognizes, as compensation expense, the excess of the deemed value for accounting purposes of the common stock issuable upon exercise of such stock options over the aggregate exercise price thereof and in connection with stock awards the fair market value of the Company's common stock on the date of the award. This compensation expense is amortized ratably over the vesting period of each stock option and stock award. For the years ended March 31, 1996, 1995 and 1994, compensation expense of $179,367, $331,121 and $1,050,487, respectively, was recorded and will aggregate a maximum of $282,995 over the remaining terms of such stock options granted and stock awards made. 11. SUBSEQUENT EVENT 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 $22,930,000. * * * * * * -44- 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, 12 and 18-20 of the Registrant's Proxy Statement dated June 28, 1996 for the Registrant's annual shareholders' meeting to be held on July 25, 1996 (the "1996 Proxy Statement"). (b) Executive Officers. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Registrant, who are elected to serve at the pleasure of the Board of Directors, are as follows:
Name Age Position - ---- --- -------- Richard F. Pops 34 Chief Executive Officer and Director Robert A. Breyer 52 President, Chief Operating Officer and Director Raymond Bartus 49 Senior Vice President, Neurobiolgy Michael J. Landine 42 Senior Vice President, Chief Financial Officer and Treasurer Don G. Burstyn 41 Vice President, Regulatory Affairs J. Duncan Higgons 41 Vice President, Business Development Scott D. Putney 42 Vice President, Molecular Biology James L. Wright 48 Vice President, Pharmaceutical Development
Mr. Pops has been Chief Executive Officer and a Director of the Registrant since February 1991. From February 1991 to June 1994, Mr. Pops was also President of the Registrant. Mr. Pops currently serves on the Board of Directors of the Biotechnology Industry Organization (BIO) and The Brain Tumor Society (a non-profit organization). 45 Mr. Breyer has been President and Chief Operating Officer and a Director of the Registrant 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. From September 1987 to August 1991, he was Senior Vice President, Marketing and Sales of IVAC Corporation, a medical device company and a subsidiary of Eli Lilly & Co. Dr. Bartus has served as Senior Vice President, Neurobiology of the Registrant since November 1992. From June 1988 to November 1992, Dr. Bartus held various positions with Cortex Pharmaceuticals, Inc., most recently as Executive Vice President and Chief Operating Officer. He holds an M.S. in Experimental Psychology and a Ph.D. in Physiological Psychology from North Carolina State University. Mr. Landine has been the Chief Financial Officer of the Registrant since March 1988. From March 1988 to December 1994, he also served as a Vice President, and since December 1994 as a Senior Vice President. He has also been Treasurer of the Registrant since April 1991. He is currently an advisor to Walker Magnetics Group, an international manufacturer of industrial equipment. Mr. Landine is a certified public accountant. Dr. Burstyn became Vice President, Regulatory Affairs in October 1993. From 1987 to 1993, Dr. Burstyn was employed in various capacities at Biogen, Inc., most recently as Director, Development Operations. Dr. Burstyn received his B.S., M.S. and Ph.D. from the University of Maryland. Mr. Higgons became Vice President, Business Development in December 1994. From 1986 to 1994, he was employed in various capacities at IVAC Corporation, most recently as Senior Director of Sales, Western Area. Dr. Putney has been Vice President, Molecular Biology since October 1991. From 1985 to October 1991, Dr. Putney served as Director of Molecular Biology at Repligen Corporation, a biotechnology company, and from 1988 to October 1991, Dr. Putney was also a Vice President at Repligen Corporation. Dr. Putney received a B.S. in Biology and a B.A. in Chemistry from the University of California, Irvine and a Ph.D. in Chemistry from the Massachusetts Institute of Technology. Dr. Wright became Vice President, Pharmaceutical Development in December 1994. From 1989 to 1994, he was employed at Boehringer Ingelheim Pharmaceuticals, Inc., most recently as a Director. Dr. Wright received a B.A. in Chemistry and Biology from the University of California, Santa Barbara, and an M.S. in Pharmacy and a Ph.D. in Pharmacy from the University of Wisconsin. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The information required under this item is incorporated herein by reference to pages 6 through 17 of the 1996 Proxy Statement. 46 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT ---------- The information required by this item is incorporated herein by reference to pages 18 through 20 of the 1996 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information required by this item is incorporated herein by reference to page 20 of the 1996 Proxy Statement. 47 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, 1996 and 1995. Consolidated Statements of Operations for the Years Ended March 31, 1996, 1995 and 1994. Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and 1994. 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 48 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). 3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of July 1, 1994. (Incorporated by reference to Exhibit 4.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1994). 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 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). 4.3 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). 4.4 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). 4.5 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). 4.6 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). 4.7 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). 4.8 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). 49 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 10.3 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1995).+ 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. 33-44752)).+ 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.+ 10.6 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). 10.6(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)). 10.7 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)). 10.8 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). 10.9 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). 10.10 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). 50 10.10(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)). 10.10(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)). 10.11 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). 10.12 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)).* 10.13 Development and License Agreement, dated February 4, 1992, between Enzytech, Inc. and Schering Corporation. (Incorporated by reference to Exhibit 10.38 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932)).* 10.13(a) Amendment to Development and License Agreement, dated July 26, 1995, between Alkermes Controlled Therapeutics, Inc. and Schering Corporation (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1995).** 10.14 Prepaid Royalty Agreement, dated July 26, 1995, between Alkermes Controlled Therapeutics, Inc. and Schering Corporation. (Incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1995).** 10.15 Collaborative Development Agreement, dated as of January 9, 1995, by and between Genentech, Inc. and Alkermes Controlled Therapeutics, Inc. (Incorporated by reference to Exhibit 10.27 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994).**** 10.16 Note Purchase Agreement, dated as of January 9, 1995, by the 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). 51 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 Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International.++ 10.18(a) First Amendment to Development Agreement, dated as of December 23, 1993, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International.++ 10.19 License Agreement, dated as of February 13, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (United States).++ 10.20 License Agreement, dated as of February 21, 1996, between Medisorb Technologies International L.P. and Janssen Pharmaceutica International (worldwide except United States).++ 10.21 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). 10.21(a) Amendment No. 1 to Loan Agreement, dated as of December 31, 1994, among the Registrant, Alkermes Investments, Inc. and The Daiwa Bank, Limited. 10.21(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). 10.22 Amended and Restated Note, dated December 29, 1995, by Registrant and Alkermes Investments, Inc. to 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, 1995). 10.23 Loan Agreement, dated November 19, 1992, between Fleet Bank of Massachusetts, N.A. and the Registrant. (Incorporated by reference to Exhibit 10.33 to the Registrant's Registration Statement on Form S-4, as amended (File No. 33-54932)). 10.23(a) Loan Modification Agreement, dated as of November 24, 1993, between Fleet Bank of Massachusetts, N.A. and the Registrant. (Incorporated by reference to Exhibit 10.27(a) to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1993). 52 10.23(b) Second Loan Modification Agreement, dated as of December 23, 1994, between Fleet Bank of Massachusetts, N.A. and the Registrant. (Incorporated by reference to Exhibit 10.19(b) to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1994). 10.23(c) Third Loan Modification Agreement, dated as of February __, 1995, between the Registrant and Fleet Bank of Massachusetts, N.A. 10.23(d) Letter Agreement, dated August 18, 1995, between the Registrant and Fleet Bank of Massachusetts, N.A.++ 10.23(e) Modification Agreement, dated as of December 19, 1995, by and between Registrant and Fleet Bank of Massachusetts, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended December 31, 1995). 10.24 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). 10.25 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). 10.26 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)).+ 10.27 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).+ 11 Statement re: computation of per share earnings. 21 Subsidiaries of the Registrant. 22 Proxy Statement dated June 28, 1996. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule. 53 * 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. ** Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted September 19, 1995. Such provisions have been filed separately with the Commission. *** Confidential status has been granted for certain portions thereof pursuant to a Commission Order granted March 24, 1995. Such provisions have been filed separately with the Commission. ++ Confidential status has been requested for certain portions thereof. 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, 1996, the Registrant filed a report on Form 8-K, dated March 11, 1996, reporting under Item 5, the completion of an acquisition of certain technology and assets owned or used by Medisorb Technologies International L.P. on March 8, 1996. 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 and 33-97468. 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. 54 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 28, 1996 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 28, 1996 - ----------------------- Board Michael A. Wall /s/ Richard F. Pops Director and Chief Executive Officer June 28, 1996 - ----------------------- (Principal Executive Officer) Richard F. Pops /s/ Michael J. Landine Senior Vice President, Chief June 28, 1996 - ----------------------- Financial Officer and Michael J. Landine Treasurer (Principal Financial and Accounting Officer) /s/ Floyd Bloom Director June 28, 1996 - ---------------------- Floyd Bloom /s/ Robert A. Breyer President and Chief Operating June 28, 1996 - ----------------------- Officer and Director Robert A. Breyer 55 /s/ John K. Clarke Director June 28, 1996 - ----------------------- John K. Clarke /s/ Robert S. Langer Director June 28, 1996 - ----------------------- Robert S. Langer /s/ Alexander Rich Director June 28, 1996 - ----------------------- Alexander Rich /s/ Paul Schimmel Director June 28, 1996 - ----------------------- Paul Schimmel 56 EX-10.5 2 STOCK OPTION PLAN [Approved by the Board of Directors on March 18, 1996, subject to shareholder approval at annual meeting on July 25, 1996] Exhibit 10.5 ALKERMES, INC. STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS ARTICLE I PURPOSE The purpose of the Stock Option Plan for Non-Employee Directors (the "Plan") is to enable Alkermes, Inc. (the "Company") to attract and retain independent directors and to strengthen the mutuality of interests between such directors and the Company's shareholders. ARTICLE II DEFINITIONS For purposes of the Plan, the following terms shall have the following meanings: 2.1 "BOARD" shall mean the Board of Directors of the Company. 2.2 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 2.3 "COMMON STOCK" shall mean the Common Stock, par value $.01 per share, of the Company. 2.4 "DISABILITY" shall mean a disability that results in a director's inability to carry out his or her duties as a director, as determined in the reasonable judgment of the Board. 2.5 "EFFECTIVE DATE" shall mean the date on which the Plan is approved by the Board. 2.6 "ELIGIBLE DIRECTOR" shall mean any member of the Board who, on the date on which Options are to be granted, is not an officer or employee of the Company or any of the Company's subsidiaries. 2.7 "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, the Nasdaq National 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. 2.8 "OPTIONEE" shall mean an individual to whom a Stock Option has been granted under the Plan. 2.9 "STOCK OPTION" or "OPTION" shall mean any option to purchase shares of Common Stock granted pursuant to Article VI. ARTICLE III ADMINISTRATION 3.1 GUIDELINES. The Plan shall be administered by the Board. Subject to the express provisions of the Plan, the Board 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 administer the Plan. The Board 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 Board under this Section 3.1 shall impair the rights of any Optionee without such person's consent, unless otherwise required by law. 3.2 DECISIONS FINAL. Any decision, interpretation or other action made or taken in good faith by the Board arising out of or in connection with the Plan shall be final, binding and conclusive on the Company, all members of the Board and their respective heirs, executors, administrators, successors and assigns. 2 ARTICLE IV SHARE LIMITATION 4.1 SHARES. The maximum aggregate number of shares of Common Stock that may be issued under the Plan shall be 150,000 shares of Common Stock (subject to any increase or decrease pursuant to Section 4.2), which may be either authorized and unissued shares of Common Stock or issued Common Stock that has 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 unpurchased shares 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 that may be issued under the Plan, the number of shares for which Stock Options are to be granted to Eligible Directors pursuant to Section 6.2 and the number of shares subject to, and the option price of, 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 ELIGIBLE DIRECTORS. Only Eligible Directors shall be granted Options under the Plan. ARTICLE VI STOCK OPTIONS 6.1 OPTIONS. All Stock Options granted under the Plan shall be non- qualified stock options (i.e., options that do not qualify as incentive stock options under Section 422 of the Code). 6.2 GRANTS. On the Effective Date, each Eligible Director who is not then a consultant to the Company shall automatically receive a one-time grant of Stock Options to purchase 10,000 shares of Common Stock. Thereafter, for as long as the Plan 3 remains in effect, each Eligible Director shall automatically be granted, on the date of the annual meeting of shareholders of the Company, Stock Options to purchase 2,500 shares of Common Stock; provided, however, that an individual who ceases to be a member of the Board on such date shall not be granted any Stock Options. 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 Board 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 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 purchasable upon exercise of a Stock Option shall be equal to 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 ten years from the date of grant. (d) EXERCISABILITY. Stock Options shall become exercisable in full six months after the date of grant. (e) METHOD OF EXERCISE. Stock Options may be exercised in whole or in part at any time during the option term by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased and the option price therefor. The notice of exercise shall be accompanied by payment in full of the option price and, if requested, by the representation described in Section 9.2. The option price may be paid in cash or by check payable to the Company or in such other form as the Board deems acceptable. Unless otherwise determined by the Board in its sole discretion at or after grant, payment in full or in part may be made in the form of Common Stock duly owned by the Optionee (and for which the Optionee has good title free and clear of any liens and encumbrances) or by reduction in the number of shares issuable upon such exercise, based, in either case, on the Fair Market Value of the Common Stock on the last trading date preceding payment. Upon payment in full of the option price, as provided herein, a stock certificate representing the number of shares of Common Stock to which the Optionee is entitled shall be issued and delivered to the Optionee. An Optionee shall not be deemed to be the holder of Common Stock, or to have the rights of a 4 holder of Common Stock, with respect to shares subject to the Option, unless and until a stock certificate representing such shares of Common Stock is issued to such Optionee. (f) DEATH. If an Optionee ceases to be a member of the Board by reason of death, any Stock Option that was exercisable on the date of such Optionee's death may thereafter be exercised by the legal representative of the Optionee's estate for a period of one year after the date of death or until the expiration of the stated term of the Stock Option, whichever period is shorter, and any Stock Option not exercisable on the date of death shall be forfeited. (g) DISABILITY. If an Optionee ceases to be a member of the Board by reason of Disability, any Stock Option that was exercisable on the date on which the Optionee ceased to be a member of the Board may thereafter be exercised by the Optionee for a period of one year after such date or until the expiration of the stated term of the Stock Option, whichever period is shorter, and any Stock Option not exercisable on the date on which the Optionee ceased to be a member of the Board shall be forfeited; provided, however, that if the Optionee dies during such one-year period, any unexercised Stock Options may be exercised by the legal representative of the Optionee's estate for a period of one year after the date of the Optionee's death or until the expiration of the stated term of the Stock Option, whichever period is shorter. (h) OTHER TERMINATION. If an Optionee ceases to be a member of the Board by reason of retirement or for any reason other than death or Disability, any Stock Option that was exercisable on the date on which the Optionee ceased to be a member of the Board may be exercised by the Optionee for a period of three months after such date or until the expiration of the stated term of such Stock Option, whichever period is shorter, and any Stock Option not exercisable on the date on which the Optionee ceases to be a member of the Board shall be forfeited. (i) NON-TRANSFERABILITY OF OPTION. No Stock Option shall be transferable by an Optionee otherwise than by will or by the laws of descent and distribution, to the extent consistent with the terms of the Plan and the Option, and all Stock Options shall be exercisable, during an Optionee's lifetime, only by the Optionee. 5 ARTICLE VII TERMINATION OR AMENDMENT 7.1 TERMINATION OR AMENDMENT OF THE 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); provided, however, that, unless otherwise required by law, the rights of an Optionee with respect to Options granted prior to such amendment, discontinuance or termination, may not be impaired without the consent of such Optionee and, provided further, without the approval of the Company's shareholders, no amendment may be made that would (i) materially increase the aggregate number of shares of Common Stock that may be issued under the Plan (except by operation of Section 4.2); (ii) materially modify the requirements as to eligibility for participation in the Plan; or (iii) materially increase the benefits accruing to participants under the Plan. Notwithstanding the foregoing, the provisions of Articles V and VI may not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. 7.2 AMENDMENT OF OPTIONS. The Board may amend the terms of any Stock Options theretofore granted, prospectively or retroactively, but, subject to Article IV, no such amendment or other action by the Board shall impair the rights of any Optionee without the Optionee's consent. ARTICLE VIII UNFUNDED PLAN 8.1 UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payment not yet made to an Optionee by the Company, nothing contained herein shall give any such individual any rights that are greater than those of a general creditor of the Company. 6 ARTICLE IX GENERAL PROVISIONS 9.1 NONASSIGNMENT. Except as otherwise provided in the Plan, Options granted hereunder and the rights and privileges conferred thereby shall 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 such 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. 9.2 LEGEND. The Board may require each person purchasing shares upon exercise of an Option to represent to the Company in writing that the Optionee is acquiring the shares without a view to distribution thereof. The stock certificates representing such shares may include any legend which the Board deems appropriate to reflect any restrictions on transfer. All certificates representing shares of Common Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Board may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed or traded or Nasdaq, any applicable Federal or state securities law, and any applicable corporate law, and the Board 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 Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 9.4 NO RIGHT TO CONTINUE RELATIONSHIP. Neither the Plan nor the grant of any Option under the Plan shall confer upon any person any right to continue as a director of the Company or obligate the Company to nominate any director for reelection by the Company's shareholders. 7 9.5 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 with Nasdaq. The Company shall have no obligation to issue such shares unless and until such shares are so 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, 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 9.5, 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. 9.6 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. 9.7 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. 9.8 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 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. 8 9.9 COSTS. The Company shall bear all expenses incurred in administering the Plan, including expenses of issuing Common Stock upon the exercise of Options. 9.10 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. 9.11 SUCCESSORS. The Plan shall be binding upon and inure to the benefit of any successor or successors of the Company. 9.12 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 affirmative vote of the holders of a majority of the outstanding shares of Common Stock present, or represented, and entitled to vote at a duly held meeting of the shareholders of the Company. 10.2 TERMINATION. Unless sooner terminated, the Plan shall terminate ten years after the Effective Date and no Options shall be granted thereafter. Termination of the Plan shall not affect Options granted before such date, which shall continue to be exercisable, in accordance with their terms, after the Plan terminates. 9 ALKERMES, INC. STOCK OPTION CERTIFICATE This certifies that, pursuant to the Alkermes, Inc. Stock Option Plan for Non-Employee Directors, an option to purchase shares of Common Stock of Alkermes, Inc. has been granted as follows: Name and Address of Optionee: Position of Optionee: Non-Employee Director Date of Grant: Type of Option: Non-Qualified Number of shares subject to Option: Exercise Price: Vesting Date: Expiration Date: The option is subject to all the terms and conditions of the aforementioned Plan, a copy of which is attached to this certificate. Date: ALKERMES, INC. ------------------------------ By: Title: EX-10.18 3 DEVELOPMENT AGREEMENT DEVELOPMENT AGREEMENT MEDISORB TECHNOLOGIES INTERNATIONAL L.P. ("Medisorb"), a Delaware limited partnership, doing business at 6954 Cornell Road, Cincinnati, Ohio 45242, and JANSSEN PHARMACEUTICA INTERNATIONAL, a division of Cilag International AG, ("Janssen"), a Swiss business corporation, doing business at Kollerstrasse 38, CH-6300 Zug 6, Switzerland, agree this 23 rd day of December, 1993 to jointly -- -------- develop the products described herein under the following terms and conditions: 1. Background ---------- Janssen desires to develop a depot formulation of [ ]. Medisorb possesses technology and expertise relating to bioabsorbable polymer technologies and drug delivery systems for biologically active compounds based on such polymers. In light of these facts, Medisorb and Janssen's Affiliate entered into a preliminary Development Agreement (dated 9 June 1992) in order to collaborate in determining the feasibility of developing a depot formulation of [ ]. Janssen has executed the option as specified in the said preliminary Development Agreement and both parties agree to continue the development of Product under the terms and conditions specified hereinafter. 2. Definitions ----------- A) Affiliate: shall mean any company controlling, controlled by, or under common control with a party by ownership, directly or indirectly, of fifty percent (50%) or more of the total ownership or by the power to control the policies and actions of such company. B) Field: shall mean human [ ] products comprising polymers of lactic and glycolic acids. In this regard [ .] C) International Registration Dossier ("IRF"): shall mean the Product registration file compiled by Janssen Pharmaceutica N.V., Beerse, Belgium on behalf of Janssen, the contents and format being such that it can be submitted as such to national health authorities or be used as a basis for a national application for marketing authorization for the Products in the specific format required by such national health authorities. D) Patents: shall mean (i) any and all existing issued patents and patent applications or parts thereof which describe and claim a depot formulation of [ ], or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids and the production and use thereof; (ii) any other patents and patent applications filed by or on behalf of Medisorb, or under which Medisorb has the rights to grant licenses, which are needed to practice the inventions; and (iii) any reissues, extensions, substitutions, confirmations, registrations, revalidations, additions, continuations, continuations-in-part, or divisions of or to any of the foregoing which are granted hereafter or any additional protection certificate granted with respect thereto. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN- MEDISORB PAGE 2 DEVELOPMENT AGREEMENT E) Products: shall mean any and all depot formulations of [ ], or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids which are designed to deliver [ ], or any of its chemical analogues, over an extended period. 3. Development Program ------------------- A) "Development Program" shall mean the development activities conducted by the parties as contemplated hereunder. The Development Program is to be mutually agreed upon from time to time as the parties find necessary. Medisorb shall (i) carry out its development activities in the Development Program to the currently accepted standards of Good Laboratory Practice, and (ii) manufacture human clinical supplies to cGMP standards. The Development Program is attached hereto as Exhibit A and incorporated herein. B) Janssen will fund Medisorb's activities under the Development Program at a cost not to exceed the following projected development costs without prior written authorization from Janssen: [ ] [ ] [ ] Medisorb will invoice Janssen monthly according to Medisorb's standard rates and practices for the actual costs of work performed during the immediately preceding month. Payment will be due 30 days from the end of the month in which the invoice is received; a late fee of 1.5% per month will be added to any outstanding balance not paid when due. C) Medisorb will provide Janssen monthly brief written descriptions of the work performed during the preceding month. Upon Janssen's request Medisorb will promptly provide Janssen with detailed reports of the work already undertaken, in order for Janssen and its Affiliates to prepare the health registration applications and the IRF. Medisorb will provide to Janssen a final detailed written report on the work performed under the Development Program within 30 days of completion of the Development Program. D) Janssen will disclose to Medisorb as soon as reasonably practicable during the term of this Agreement the following test results from experiments employing materials supplied to Janssen by Medisorb: (i) bioavailability and bioactivity assays from in vivo tests and (ii) any results which reasonably suggest potential adverse consequences in humans associated with such materials. 4. Term and Termination -------------------- A) The initial term of this Agreement shall commence upon the date first above written and continue thereafter until the earlier of (i) the completion of the Development Program at the moment of finalization of the IRF, which is expected during the [ ], or (ii) [ ], unless earlier terminated pursuant to the provisions of this Section 4 or according to the terms of Section 16 below. However, in the event that the IRF has not been completed by [ ], if Janssen can show due diligence, this Agreement shall not terminate and will be extended for such period as Janssen requires to finalize the IRF, provided that during such extension Janssen continues to show due diligence. Due diligence, amongst other factors, shall mean the timely filing of required regulatory applications, THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 3 including, without limitation, a CTX (clinical trial exemption certificate) and/or IND, and continuing to fund the Development Program in a commercially reasonable manner. B) Janssen may terminate this Agreement upon 30 days written notice, provided that Janssen must fulfill all obligations to Medisorb actually incurred prior to the notice of termination. C) Medisorb may only terminate this Agreement upon 30 days written notice for cause, which shall include: 1. Any material breach of this Agreement by Janssen which has not been cured within 30 days of written notice of the breach; and 2. The failure of Janssen to provide within 60 days of a request by Medisorb reasonably sufficient quantities of [ ] as will be required by Medisorb to fulfill its obligations hereunder. D) Articles 8, 9, 10, 11, 12 and 17 shall survive termination of this Agreement. 5. Exclusivity and Right of First Refusal -------------------------------------- A) This Agreement shall be exclusive with respect to both parties obligations in the Field. B) With respect to Products in the Field intended to treat [ ] the development of which is not being currently pursued and/or funded by Janssen shall be subject to the following right of first refusal. With respect to products in the Field which are subject to this right of first refusal, Medisorb shall provide written notice to Janssen of Medisorb's intent to enter into substantive negotiations with a third party for the development of such a product. Medisorb's notice shall, to the fullest permissible extent, disclose to Janssen the details of the proposed product and its application(s). Medisorb shall not be required to disclose the identity of the third party. Janssen shall have 60 days following the notice required above from Medisorb to inform Medisorb of its intent to enter into substantive negotiations with Medisorb for the development of a product in the same application(s). In the event that Janssen does not elect to enter into such negotiations with Medisorb within the 60 day period, Medisorb shall thereafter be free to enter into development, licensing and/or supply contracts with third parties respecting the product which was the subject of Medisorb's original notice to Janssen. In the event that Janssen elects to enter into substantive negotiations with Medisorb and the parties are unable, despite their mutual good faith efforts, to negotiate and enter into the subject agreements within 120 days from Medisorb's original notice to Janssen, Medisorb shall thereafter be free to enter into development, licensing and/or supply contracts with third parties respecting the product which was the subject of Medisorb's original notice to Janssen. Medisorb agrees that whenever it would not have been possible to execute such an agreement with such third party within a period of twelve months, the right of first refusal granted to Janssen will be restored. 6. Option ------ A) Medisorb hereby grants to Janssen an option, exercisable at any time during the period beginning with the finalization of the IRF and 30 days thereafter (except as modified by Section 6(B) below), to enter into the License Agreements (i.e., the first a worldwide license, THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 4 DEVELOPMENT AGREEMENT excluding the United States, and the second a license encompassing only the United States) attached hereto as Exhibits B & C, respectively. B) The option granted to Janssen under Section 6(A) above shall be immediately exercisable upon the termination of this Agreement by Janssen due to material breach by Medisorb. 7. Future Supply ------------- A) In the event that Janssen and Medisorb enter into the License Agreements referred to in Section 6 above, the parties agree that it is likely that either Janssen or Medisorb will manufacture Product(s) for commercial sale. Therefore the parties are negotiating the definitive terms of two Product Manufacturing Agreements (i.e., the first a worldwide agreement, excluding the United States, and the second encompassing only the United States) which shall be appended hereto as Exhibits D & E respectively, and which will be executed at the moment of executing the License Agreements, unless Janssen elects to manufacture the Product itself as specified hereafter. The parties each covenant to use their best efforts to expeditiously negotiate the definitive Manufacturing Agreements referred to in this Section 7(A). It is understood and agreed upon that Janssen and its Affiliates shall retain sole discretion at the time of entering in to the License Agreements under Section 6 to choose to manufacture or have manufactured Product(s). In the event that Janssen determines to manufacture Product(s) itself or have Product(s) manufactured by a third party, the terms of the License Agreements (Appendices B and C to this Agreement) shall control the transfer of the required technology from Medisorb to Janssen. B) With respect to third party suppliers, except as limited by the Product Manufacturing Agreements, Medisorb will have a right of first refusal as to the manufacture and supply to Janssen of all Product(s), and component bioabsorbable polymers thereof, developed under this Agreement. Medisorb will have a period of thirty days following written notice from Janssen of terms it is offering to, or prepared to accept from, third parties to notify Janssen of its intention to exercise its right of first refusal to supply Product or component bioabsorbable polymers thereof to Janssen, its Affiliates and Licensees on terms no less favorable to Janssen than those offered by such third party supplier. 8. Proprietary Rights ------------------ A) Medisorb will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to absorbable polymers, controlled release of active agents, and/or manufacturing methods or processes relating to such polymers and the controlled delivery systems for active agents based on such polymers previously owned by Medisorb or developed by Medisorb as a result of the Development Program or otherwise. Medisorb will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Janssen agrees to provide Medisorb with any necessary utility information. Medisorb shall inform Janssen of any patent application it wishes to file to protect proprietary rights defined in Article 8, resulting from either the Development Program or the preliminary THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 5 DEVELOPMENT AGREEMENT Development Program and shall forward a copy of any such patent application to Janssen at least one month prior to filing. Medisorb shall consider any suggestions made by Janssen for amplifying such application and shall accordingly amend the application where in Medisorb's opinion it is appropriate. Nine months after the first filing, Medisorb shall propose a list of countries in which it intends to file foreign equivalents. Janssen shall be given the opportunity to propose further countries to be added to the list. In case the adding of some or all of these further countries is unacceptable to Medisorb, Janssen shall have the right to file patent applications in those countries, in Medisorb's name and at Janssen expense. Medisorb shall assist in the transfer of rights for the latter patent applications and shall provide all information necessary to file and prosecute such patent applications. Medisorb shall not abandon part or whole of any of the patents or patent applications without having first consulted Janssen, which shall have the right to further pursue any patents or patent applications which Medisorb wishes to abandon, or parts thereof, in its own name and at its own expense. B) Janssen and/or its Affiliate will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to [ ] or any chemical analogues of [ ] with similar physiological activity previously owned by Janssen and/or its Affiliate or developed by Janssen as a result of this Agreement or otherwise. Janssen and/or its Affiliate will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Medisorb agrees to provide Janssen with any necessary utility information. C) Any inventions, other than those falling under either section 8(A) or 8(B) hereof, having an inventorship jointly between at least one employee of Janssen or an Affiliate of Janssen and one employee of Medisorb or an Affiliate of Medisorb shall be jointly-owned by Janssen and Medisorb. Each party will cooperate fully in the filing and prosecution of such patent applications. Janssen and Medisorb shall agree on which of both shall be responsible for the filing, prosecution and maintenance of any such joint patent applications and patents (hereinafter referred to as the "Responsible Party"). In principle, the party having contributed the most to the invention to be protected shall be the responsible party, unless agreed upon differently. Upon mutual consent, the responsible party may select an agent for drafting, filing and prosecuting a joint application. However, both parties shall agree who shall be the agent and to what extent this agent shall be used. The Responsible Party shall consult the other party when drafting any new jointly owned patent application. The final draft shall be forwarded to the other party at least one month prior to filing to give the opportunity to make final comments. The Responsible Party shall propose a list of countries in which it intends to file such patent applications. The other party shall be given the opportunity to propose further countries to be added to the list. In case the adding of some or all of these further countries is unacceptable to the Responsible Party, the other party shall have the right to file patent applications in those countries, in its own name and at its own expense. The Responsible Party shall assist in the THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 6 DEVELOPMENT AGREEMENT transfer of rights for the latter patent applications and shall provide all information necessary to file and prosecute such patent applications. The Responsible Party shall not abandon part or whole of any of the patents or patent applications without having first consulted the other party, which shall have the right to further pursue any patents or patent applications which the responsible party wishes to abandon, or parts thereof, in its own name and at its own expense. All out-of-pocket costs made in relation to joint patent applications and patents shall be shared equally by Janssen and Medisorb. A statement of costs shall be made up on a quarterly basis and invoiced to the other party. Medisorb shall grant to Janssen an exclusive fully-paid up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of [ ] or any chemical analogues of [ ] with similar physiological activity. However, nothing contained in this paragraph shall obviate Janssen's obligation to pay royalties under Section 6 hereof with respect to any Products developed hereunder. Janssen shall grant to Medisorb an exclusive fully paid-up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of bioabsorbable polymers in the field of human and/or veterinary medicine. D) In addition, each party will retain exclusive title to its respective Confidential Information (as defined in Section 11 below) 9. Patent Infringement ------------------- A) In the event that either party becomes aware that any third party is infringing any patents included within the Patents in any country or countries, the party becoming aware of such infringement shall promptly give notice of such infringement to the other party. Any possible action against such alleged infringement of the Patents will be carried out by either or both of the parties in accordance with the provisions specified hereinafter in paragraphs B), C), D) and E). B) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Medisorb retains full title and ownership pursuant to Article 8 A), Medisorb shall use all reasonable efforts to take action against such infringement in its own name, at its own expense and on its own behalf. If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph A) above or after having become aware of such infringement, Janssen shall be entitled at its own discretion and at its own expense, to take THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 7 DEVELOPMENT AGREEMENT immediate action against such infringement in its own name, at its own expense and on its own behalf. If Janssen commences or assumes such action, Janssen may credit [ ] of any royalty otherwise due to Medisorb for sales in such country or countries against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen.The amount of expenses so deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen as a result of such action. Except for such repayment of royalties deducted, Janssen shall be entitled to retain all recoveries therefrom. In no event shall Medisorb settle with such infringing third party in the Field without the prior written consent of Janssen. C) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen retains full title and ownership pursuant to Article 8 B), Janssen shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen fails to take action against such infringement, or if Janssen does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph A) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement. Medisorb shall be entitled to retain all recoveries, if any, therefrom. D) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen and Medisorb jointly retain full title and ownership pursuant to Article 8 C), and whenever in such case the infringing product would be a drug product falling within the definition of the Field, Janssen shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen fails to take action against such infringement, or if Janssen does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph A) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Janssen will have a continuing right to take over any such action at its own expense and shall pay to Medisorb from any recoveries Janssen receives (i) Medisorb's expenses and (ii) from any sums remaining after deduction of Medisorb's and Janssen's expenses, an amount proportionate to Medisorb's expenses in relation to Janssen's expenses. Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen and Medisorb jointly retain full title and ownership pursuant to Article 8C), and whenever in such case the infringing product would be a drug product falling outside the definition of the Field, Medisorb shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf.If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph A) above or after having become aware of such infringement, Janssen shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Medisorb will have a continuing right to take over any such action at its own expense. If Janssen commences or assumes such action, Janssen may credit [ ] of any royalty otherwise payable to Medisorb payable hereunder against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen. The amount of expenses so THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 8 DEVELOPMENT AGREEMENT deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen as a result of such action. Except for such repayment of royalties deducted, Janssen shall be entitled to retain all recoveries therefrom. E) Each party agrees to cooperate reasonably with the other party in such litigation, including making available to the other party records, information, and evidence relevant to the infringement of the Patent. 10. Third Party Intellectual Property Rights ---------------------------------------- A) Medisorb warrants that to the best of its current knowledge and belief the Products to be developed hereunder will not infringe the patent rights of any third party. B) In the event that the manufacture, use or sale of the Product would constitute an infringement of the rights of a third party in a country because of the use of the Patents or Medisorb's know how, each party shall, as soon as it becomes aware of the same, notify the other thereof in writing, giving in the same notice full details known to it of the rights of such third party and the extent of any alleged infringement. The parties shall after receipt of such notice meet to discuss the situation, and, to the extent necessary attempt to agree on a course of action in order to permit Janssen to practice the license granted hereunder. Such course of action may include: (a) modifying the Product or its manufacture so as to be noninfringing; (b) obtaining an appropriate license from such third party; or (c) fight the claimor suit. In the event that within a short period of time, the parties fail to agree on an appropriate course of action Janssen may decide upon the course of action in the interest of the further development, manufacturing or commercialization of the Product. C) In the event that the parties cannot agree on modifying the Product or in the case that such modification would not be economically viable or regulatorily feasible, Janssen, whenever it relates to know how, whether patented or not, owned by Janssen in accordance with the provisions of Article 8 B) and C), or Medisorb, whenever it relates to know how, whether patented or not, owned by Medisorb in accordance with the provisions of Article 8 A), will have the right to negotiate with such third party for such license. Both parties hereto will in any event in good faith consult with each other with respect to such negotiations and the party negotiating such license as indicated above, will make every effort to minimize the amount of license fees and royalties payable thereunder. In no event shall either party as a result of such settlement, grant a sublicense or cross license to the third party to settle the suit, without the prior written approval of the other party. In the event that such negotiations result in a consummated agreement, any license fee and/or royalties to be paid thereunder shall be paid by the party responsible for the negotiations as indicated above, [ ] of any license fees or royalties paid by Janssen under such license will be creditable against royalties due to Medisorb with respect to such country or countries. D) In the event that either or both parties would further to such notification under Paragraph 10 B) decide to defend such suit or claim in which a third party alleges that the manufacture, use or selling of the Product infringes said third party's patent in a country, Janssen shall have the right to apply [ ] of the royalties due to Medisorb on the sales of the allegedly infringing Product against its litigation expenses. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 9 DEVELOPMENT AGREEMENT 11. Confidentiality and Disclosure ------------------------------ A) Each party agrees to keep confidential and to not use for any purpose other than as set forth herein all technical information and materials supplied by the other hereunder and any information a party may acquire about the other or its activities as a result of entering into this Agreement, provided that such obligation shall not apply to technical information or material which: (i) was in the receiving party's possession without restriction prior to receipt from the other party or its Affiliates; (ii) was in the public domain at the time of receipt; (iii) becomes part of the public domain through no fault of the receiving party; (iv) shall be lawfully received from a third party with a right of further disclosure; (v) shall be required to be disclosed by law, by regulation or by the rules of any securities exchange. B) Except as may be otherwise provided herein, the confidentiality obligations as set out in this Section shall continue so long as this Agreement remains in force and for 10 years thereafter. C) Licensee shall cause its Affiliates and Sublicensees to enter into similar obligations of confidentiality with respect to unpublished information within the Patents and Technical Information. 12. Disclaimer of Warranty ---------------------- Medisorb makes no representations or warranties, express or implied, other than those specified in section 13 below, with respect to any services, technology, products or materials supplied to Janssen hereunder, including without limitation any warranties of merchantability or fitness for a particular purpose. 13. Liability --------- A) Janssen agrees to indemnify, defend and hold harmless Medisorb from and against any liability, loss, damages and expenses (including reasonable attorney fees) Medisorb may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Medisorb by reason of personal injury or damage to property arising out or caused by Janssen's clinical testing of the Product, except where such liabilities claims, demands, costs or judgments are caused by any sole negligence on behalf of Medisorb in manufacturing the clinical trial samples, its failure to supply such samples in accordance with the mutually agreed written specifications or its failure to provide Janssen with any information as specified in Article 13(B). Medisorb will notify Janssen as soon as it becomes aware of any such claim or action and agrees to give reasonable assistance in the investigation and defense of such claim or action it being understood that it shall allow Janssen to control the disposition of the same. B) Medisorb agrees to indemnify, defend and hold harmless Janssen from and against any liability, loss, damages and expenses (including reasonable attorney fees) Janssen may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Janssen by reason of personal injury or damage to property arising out or caused by Medisorb's sole negligence in manufacturing the clinical trial samples or its failure to supply such samples in accordance with the mutually agreed written specifications. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 10 DEVELOPMENT AGREEMENT C) In no event shall either party be liable for loss of profits, loss of goodwill or any consequential or incidental damages of any kind of the other party. D) This indemnification shall not apply with respect to any Product which would be commercialized under the terms of the License Agreement or manufactured under the terms of the Product Manufacture Agreement with respect to which the indemnification clause of such Agreements will apply. 14. Product Information and Adverse Drug Events ------------------------------------------- A) As Janssen has superior knowledge of the end-use applications to which Products developed hereunder will be put, Janssen is responsible for providing third parties with adequate information as to the medical profile of the Product. Janssen will provide Medisorb with copies of the IPID (International Product Information Document) and the IPPI (International Patient Package Insert), which are all part of the IRF for the Product. For the purpose of this Agreement IPID refers to the document that summarizes all medically relevant features of the Product, including the instructions for use meant to inform the medical profession, whereas the IPPI is a patient-oriented document, based upon the IPID that summarizes all relevant information on the Product in lay language. Janssen will keep Medisorb informed of any revisions or amendments in the IPID and IPPI of the Product. B) Medisorb will provide to Janssen promptly after its discovery by Medisorb, any information in its possession which indicates adverse effects in humans associated with the Products developed hereunder. For the purpose of this Agreement "adverse event" shall mean an experience which is noxious and unintended and which occurs at doses normally used in man for the prophylaxis, diagnosis or therapy of a disease or for the modification or physiological functioning and any report of an overdose. 15. Government Approvals -------------------- A) Janssen shall be responsible for conducting all necessary testing as well as determining what, if any, government approvals are required for the use and sale of Products developed hereunder and shall comply with all such requirements prior to and following the sale or distribution of such Products. Medisorb shall cooperate fully with Janssen in obtaining regulatory approvals for Products developed hereunder and shall, at Janssen's request, provide appropriate regulatory authorities with any and all information concerning Medisorb's technology, Medisorb polymers and manufacturing methods for such Products. In this respect Medisorb undertakes that it has submitted or will as soon as possible submit a type IV Drug Master File to the FDA identifying Medisorb's method of manufacture, release specifications and testing methods used in the manufacture of its bioabsorbable polymers and a type I Drug Master File of Medisorb's manufacturing facilities where Product may be manufactured. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 11 DEVELOPMENT AGREEMENT 16. Warranties and Covenants ------------------------ A) Each party hereto covenants with the other to use its best efforts, consistent with reasonable business practice, to perform its obligations hereunder in a timely fashion. In the event that Janssen determines not to pursue the commercialization of Products, it will promptly inform Medisorb of such decision and this Agreement will automatically terminate. B) Medisorb warrants to the best of its knowledge that Medisorb bioabsorbable polymers are suitable for chronic human use in parenteral drug delivery systems similar to Products to be developed hereunder. C) Medisorb warrants that to the best of its knowledge the use of Medisorb's bioabsorbable polymers in Products will not infringe the patent rights of any third parties. 17. Force Majeure ------------- Neither party shall be liable for its failure to perform any of its obligations hereunder if such failure is occasioned by a contingency beyond its reasonable control including, but not limited to, occurrences such as strikes or other labor disturbances, lock out, riot, war, default by a common carrier, fire, flood, storm, earthquake, other acts of God, inability to obtain raw materials, failure of plant facilities or government regulation, act or failure to act. Each party shall notify the other immediately upon occurrence or cessation of any such contingencies. If such contingency continues unabated for at least 180 consecutive days, either party shall have the right to terminate this Agreement without further obligation beyond those actually incurred prior to such termination. 18. Dispute Resolution ------------------ Should any dispute arise under this Agreement, the parties shall first meet in an attempt to amicably resolve the situation. In the event that the parties are unable to resolve any contested issues, then both parties hereby agree to submit said disputes to the jurisdiction of the competent Courts of Zurich, Switzerland, and agree that any litigation in any way related to this Agreement shall be submitted to such Courts and that same shall be subject to Swiss law. 19. Assignment ---------- This Agreement shall not be assigned by either party without the prior written consent of the other party; provided, however, that assignment shall be permitted without such consent to any party, not less than 50% of the total interest of which owns, is owned by, or is under common control with the assigning party. In the event of any such permitted assignment the assignee shall be subject to and shall agree in writing to be bound by the terms and conditions of this Agreement. 20. Severability ------------ In the event that 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 any of the parties hereto to be invalid, illegal or unenforceable such provision or provisions shall be validly reformed to as nearly approximate THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 12 DEVELOPMENT AGREEMENT the intent of the parties as possible and, if unreformable; shall be divisible and deleted in such jurisdiction, elsewhere this Agreement shall not be affected, except to the extent such applicability would substantially burden only one of the parties to this Agreement. 21. Separate Entities ----------------- Nothing contained herein shall be construed to constitute the parties hereto as partners or joint venturers, or as agents or representatives of the other. 22. Captions -------- The captions of this Agreement are for convenience only, and shall not be deemed of any force or effect whatsoever in construing this Agreement. 23. Waiver ------ Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any further breach of the same or other provisions of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. 24. Press Communications -------------------- Neither Party shall originate any publicity, news release or public announcement, written or oral relating to this Agreement, including its existence, without the prior written approval of the other party. 25. Notices ------- Any legal notice required or permitted hereunder shall be considered properly given if in writing and sent by first class mail, certified mail or by telefacsimile to the party being notified at the respective address of such party as follows: If to Medisorb: Medisorb Technologies International L.P. 6954 Cornell Road Cincinnati, OH 45242 USA Facsimile: 513-489-2348 If to Janssen: Janssen Pharmaceutica Kollerstrasse 38 6300 Zug 6 Switzerland Facsimile: 00-41-42449565 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. JANSSEN-MEDISORB PAGE 13 DEVELOPMENT AGREEMENT Such notice shall be effective upon receipt or upon refusal to accept such notice. In any case, notice shall be presumed effective no later than five (5) days after such notice is sent. Neither party shall originate any publicity, news release or public announcement, written or oral, relating to this Agreement, including its existence, without the written approval of the other party. 26. Entire Understanding -------------------- This Agreement may be executed by the parties hereto in counterparts, each of which when so executed and delivered shall be considered to be an original, but all such counterparts shall together constitute but one and the same instrument. This Agreement constitutes the entire understanding between the parties with respect to the subject matter hereof and supersedes all previous agreements related thereto, provided, however, that no variation or modification of this Agreement or any of the terms hereof shall be valid unless in writing and signed by the parties hereto. WITNESS the signature of both parties by their duly authorized officers: JANSSEN PHARMACEUTICA INTERNATIONAL A division of Cilag International AG By: /s/ Erik Rombouts ----------------------------- Name: Erik Rombouts ----------------------- Title: Business Manager ----------------------- Date: January 4, 1994 ------------------------- {Second Janssen Signatory} - -------------------------- By: /s/ Heinz Schmid ---------------------------- Name: Heinz Schmid ------------------------ Title: General Manager ------------------------- Date: January 4, 1994 ------------------------------ MEDISORB TECHNOLOGIES INTERNATIONAL L.P. by: Medisorb Technologies International, Inc., its General Partner By: /s/ David R. Lohr ---------------------------------- Name: David R. Lohr ------------------------------- Title: President ----------------------------------- Date: December 6, 1993 --------------------------------- 11299302 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT A --------- DEVELOPMENT PROGRAM [ ] THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. DEVELOPMENT PROGRAM Page 2 [ ] THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT B To Development Agreement dated December 23, 1993 between Janssen Pharmaceutica International and Medisorb Technologies International L.P. License Agreement, ex. United States of America Following 16 Pages [Note: This exhibit supercedes the previous Exhibit B, document number 07069402.doc.] /s/ Erik Rombouts 12/12/95 - -------------------------------- -------- For JANSSEN Date /s/ David R. Lohr December 6, 1995 - ------------------------------- ---------------- For MEDISORB Date 1205902.doc THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. LICENSE AGREEMENT This Agreement is made as of the __ day ______ of 19___, between MEDISORB TECHNOLOGIES INTERNATIONAL L.P., a Delaware limited partnership (hereinafter "Medisorb") and JANSSEN PHARMACEUTICA INTERNATIONAL, a division of Cilag International AG, a Swiss business corporation ("Janssen"). WHEREAS, the parties have entered into a certain Development Agreement, dated December 23, 1993 (the "Development Agreement"), for the development of a Product (as described below); and WHEREAS, Janssen has an option under the Development Agreement to enter into this License Agreement for the Medisorb technology required to make, use and sell the Product, which option Janssen has elected to exercise; and WHEREAS, the parties believe that it is in their mutual best interest for Medisorb to license to Janssen on an exclusive basis in the Territory, Medisorb Patents and Technical Information within the Field, upon the terms and conditions set forth herein; NOW, IT IS HEREBY AGREED AS FOLLOWS: (1) Definitions: The following terms shall have the meanings ascribed ----------- to them herein, unless the context otherwise requires: (a) "Affiliate" shall mean any company controlling, controlled by, or under common control with a party by ownership, directly or indirectly, of fifty percent (50%) or more of the total ownership or by the power to control the policies and actions of such company. (b) "Development Program" shall mean the development activities conducted by the parties pursuant to the Development Agreement. (c) "Field" shall mean the treatment of [ ]. (d) "Improvements" shall mean any improvements or developments to or of the Patents and Technical Information in the Field which Medisorb may acquire, discover, invent, originate, make, conceive or have a right to, in whole or in part, during the term of this Agreement, whether or not such improvement or development is patentable. (e) "International Registration Dossier" ("IRF") shall mean the Product registration file compiled by Janssen Pharmaceutica N.V., Beerse, Belgium on behalf of Janssen, the contents and format being such that it can be submitted as such to national health authorities or be used as a basis for a national application for marketing authorization for the Products in the specific format required by such national health authorities. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 2 License Agreement (f) "Medisorb Polymers" shall mean bioresorbable aliphatic polyesters based on glycolide, lactide, caprolactone and combinations of such polymers, which are manufactured by Medisorb and utilized in Product(s) licensed under this Agreement. (g) "Net Sales" shall mean the gross amounts received from sales of Products during a calendar quarter to third parties by Janssen, its Sublicensees or any Affiliate of either, less any: (i) applicable sales taxes; (ii) cash trade or quantity discounts; (iii) amounts repaid or credited by reason of rejections or return of goods; or (iv) freight, postage and duties paid for. No deduction from the gross sales price shall be made for any item of cost incurred by the seller in its own operations incident to the manufacture, sale or shipment of the product sold. For purposes hereof, Net Sales shall not include sales of a Product from Janssen or an Affiliate of Janssen to any Affiliate or Sublicensee of either; it being intended that Net Sales shall only include sales to unrelated third-parties. (h) "Patents" shall mean (i) any and all existing issued patents and patent applications or parts thereof which describe and claim a depot formulation of [ ], or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids and the production and use thereof; (ii) any other patents and patent applications filed by or on behalf of Medisorb, or under which Medisorb has the rights to grant licenses, which are needed to practice the inventions; and (iii) any reissues, extensions, substitutions, confirmations, registrations, revalidations, additions, continuations, continuations-in-part, or divisions of or to any of the foregoing which are granted hereafter or any additional protection certificate granted with respect thereto. (i) "Product(s)" shall mean any and all depot formulations of [ ], or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids which are designed to deliver [ ], or any of its chemical analogues, over an extended period. (j) "Sublicensees" shall mean any company or companies, other than Janssen's Affiliates, sublicensed by Janssen. (k) "Technical Information" shall mean all unpatented information, know-how, practical experience, procedures, methodology, specifications, formulae and data whether or not the same shall be patentable which have been heretofore developed or acquired by Medisorb prior to the date of this Agreement and which are necessary in order to use, manufacture or sell Products in the Field. (l) "Territory" shall mean worldwide with the exception of the United States, its Territories, Protectorates, Commonwealths, and all other political subdivisions of the United States. (2) License Grant ------------- THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 3 License Agreement (a) Medisorb hereby grants to Janssen in the Territory an exclusive license under the Patents and Technical Information existing prior to the effective date of this Agreement, with the right to grant sublicenses thereunder, for all purposes within the Field to practice and use the Patents and Technical Information, including the rights to manufacture and have manufactured, to use and have used, and to sell and have sold Products. Medisorb exclusively retains all rights under the Patents and Technical Information outside the Field and for use other than in Products. The right to grant sublicenses granted hereunder is exclusive to Janssen and shall not extend to Janssen Affiliates or Sublicensees. (b) Medisorb shall offer to Janssen for incorporation into this License Agreement on reasonable terms and conditions, Medisorb Improvements in the Field which, if incorporated into Janssen's then current commercial Product(s), would: (i) result in significant changes in either the specifications for such Product(s) or the processes for producing such Product(s), and (ii) would reasonably be expected to result in enhanced market value and/or profitability of such Product(s). Examples of such Improvements would include: (i) the development by Medisorb of a non-aqueous injection vehicle which offers significant advantages with respect to ease of administration and (ii) the development by Medisorb of technology enabling[ ]. It is the parties' understanding that the effect of any such license amendment would, in general, be either an extension of the term of this Agreement for a mutually agreed period or a marginal increase in the then current royalty rate . All other Medisorb Improvements shall be made available to Janssen for its use without further agreement. Proprietary rights to Improvements jointly developed by Medisorb and Janssen shall be governed by the terms of Section 5(c) of this Agreement. (c) In the event that at any time during the term of this Agreement Medisorb is unable for any reason whatsoever to supply the Medisorb Polymers required by Janssen for use in Products, then the license granted under paragraph 2(a) above shall be expanded to include the Medisorb Technology required to make and use the Medisorb Polymers. (3) Royalties: ---------- (a) Janssen shall pay or cause to be paid to Medisorb a running royalty with respect to all Products sold to customers by Janssen, its Affiliates and Sublicensees, payable quarter-annually in arrears within sixty (60) days following the end of each three (3) month period ending on March 31, June 30, September 30 or December 31 in any year during the term hereof, as follows: (i) [ ]% of the Net Sales of each unit of Product sold during the preceding calendar quarter during the term hereof, if such unit of Product was manufactured by Medisorb pursuant to a written contract for the supply of Product; or (ii) [ ]% of the Net Sales of each unit of Product sold during the preceding calendar quarter during the term hereof, if such unit of Product was not manufactured by Medisorb pursuant to a written contract for the supply of Product. Any withholding or other tax that Janssen or any of its Affiliates are required by statute to withhold and pay on behalf of Medisorb with respect to the royalties payable to Medisorb under this Agreement shall be deducted from said royalties and paid contemporaneously with the remittance to Medisorb; provided, however, that in regard to any tax so deducted Janssen shall furnish Medisorb with proper evidence of the taxes paid on its behalf. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 4 License Agreement (b) In the event that, in a country where Product is not claimed in a valid Patent, a similar product obtains a market share greater than [ ]% of the total market revenues for Products and similar products in such country, the parties agree to meet and negotiate in good faith an appropriate reduction in the royalty rate then in effect. In no event shall a reduction in royalty rates pursuant to this section result in royalty rates [ ] of the rates specified under Section 3(a)(i) and 3(a)(ii) of this Agreement. For the purposes of this section, "similar product" shall mean a generic version of the Product(s) where: (i) the active agent is [ ], or a chemical analogue thereof and (ii) the excipient is comprised of lactic and/or glycolic acids. In the event that patent protection for Product(s) becomes available subsequent to a royalty reduction pursuant to this section, the parties agree to (i) reinstitute the royalty otherwise applicable, and (ii) in the event that any recovery is obtained for prior infringement of the subsequently issued patent, the parties will first apply such recoveries to reimbursing Medisorb for royalties it would otherwise have received. (c) Janssen shall keep complete and adequate records with respect to the proceeds of Products on which it has to pay royalties payable hereunder for at least two (2) years after expiry of the year they concern. Medisorb shall have the right to have such records of Janssen inspected and examined, at Medisorb's expense, for the purpose of determining the correctness of royalty payments made hereunder. Such inspection shall be made by an independent, certified public accountant to whom Janssen shall have no reasonable objection. Such accountant shall not disclose to Medisorb any information other than that necessary to verify the accuracy of the reports and payments made pursuant to this Agreement. It is understood that such examination with respect to any quarterly accounting period shall take place not later than two (2) years following the expiration of said period. Not more than one examination per year shall take place. Based upon the verification of such reports and whenever there is reasonable doubt about the accuracy of the sales of Product realized by an Affiliate or sublicensee, Medisorb may reasonably request Janssen to audit the books of such Affiliate or such sublicensee in accordance with any applicable contractual provision, in order to confirm the accuracy of such reports. (4) Production of Product/Technology Transfer: ----------------------------------------- (a) Janssen shall use its reasonable efforts to commercialize and market Product, or to have the same commercialized and marketed. (b) In the event that Janssen determines to manufacture Product itself or have Product manufactured by a third party, Medisorb shall transfer to Janssen all relevant Technical Information, and provide such technical assistance, upon mutually agreed terms and conditions, as is required by Janssen in order to enable the manufacture of Product by Janssen or its designated third party manufacturer. However, with respect to such third party manufacturers, except as limited by a written Product manufacturing agreement between Janssen and Medisorb, Medisorb will have a right of first refusal as to the manufacture and supply to Janssen of all Product(s), and component bioabsorbable polymers utilized in such Product(s). Medisorb will have a period of thirty (30) days THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 5 License Agreement following written notice from Janssen of terms it is offering to, or prepared to accept from, a third party manufacturer to notify Janssen of its intention to exercise its right of first refusal to supply Product and/or component bioabsorbable polymers thereof to Janssen, its Affiliates and Licensees on terms no less favorable to Janssen than those offered by such third party manufacturer. Such third party manufacturer cannot be an in-kind competitor to Medisorb and must be reasonably acceptable to Medisorb with respect to confidential protection of Medisorb's Technical Information. In the event that at any time during the term of this Agreement Medisorb is unable for any reason whatsoever to supply the Medisorb Polymers required by Janssen for use in Products, then the right of first refusal under this paragraph respecting the supply of the component bioabsorbable polymers shall be eliminated. For the purposes of this section, an "in-kind" competitor shall mean any organization which regularly engages in the contract development and/or contract manufacture of injectable controlled release drug delivery systems comprising a polymeric excipient based on lactic and/or glycolic acids and/or other closely related monomers. This Section 4(b) specifically supercedes Section 7(B) of the Development Agreement, which Section 7(B) shall be of no further force or effect. (c) The right of first refusal granted to Medisorb pursuant to Section 4(b) above shall be contingent upon: (i) Medisorb and Janssen reaching an agreement concerning the financing, scheduling and construction in Europe of a Medisorb manufacturing facility within twelve (12) months of the date first above written or the initiation of Phase III human clinical trials, whichever is later, and (ii) prior to the qualification of Medisorb's European manufacturing facility, Medisorb using reasonable efforts to supply from its United States manufacturing facilities all of Janssen's commercial requirements for Product pursuant to the Product Supply Agreement anticipated by Section 7(A) of the Development Agreement. (5) Proprietary Rights ------------------ (a) Medisorb will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to absorbable polymers, controlled release of active agents, and/or manufacturing methods or processes relating to such polymers and the controlled delivery systems for active agents based on such polymers previously owned by Medisorb or developed by Medisorb as a result of the Development Program or otherwise. Medisorb will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Janssen agrees to provide Medisorb with any necessary utility information. Medisorb shall inform Janssen of any patent application it wishes to file to protect proprietary rights defined in Article 5, resulting from either the Development Program or the preliminary Development Program and shall forward a copy of any such patent application to Janssen at least one month prior to filing. Medisorb shall consider any suggestions made by Janssen for amplifying such application and shall accordingly amend the application where in Medisorb's opinion it is appropriate. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 6 License Agreement Nine months after the first filing, Medisorb shall propose a list of countries in which it intends to file foreign equivalents. Janssen shall be given the opportunity to propose further countries to be added to the list. In case the adding of some or all of these further countries is unacceptable to Medisorb, Janssen shall have the right to file patent applications in those countries, in Medisorb's name and at Janssen expense. Medisorb shall assist in the transfer of rights for the latter patent applications and shall provide all information necessary to file and prosecute such patent applications. Medisorb shall not abandon part or whole of any of the patents or patent applications without having first consulted Janssen, which shall have the right to further pursue any patents or patent applications which Medisorb wishes to abandon, or parts thereof, in its own name and at its own expense. (b) Janssen and/or its Affiliate will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to [ ] or any chemical analogues of [ ] with similar physiological activity previously owned by Janssen and/or its Affiliate or developed by Janssen as a result of this Agreement or otherwise. Janssen and/or its Affiliate will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Medisorb agrees to provide Janssen with any necessary utility information. (c) Any inventions, other than those falling under either section 5(a) or 5(b) hereof, having an inventorship jointly between at least one employee of Janssen or an Affiliate of Janssen and one employee of Medisorb or an Affiliate of Medisorb shall be jointly-owned by Janssen and Medisorb. Each party will cooperate fully in the filing and prosecution of such patent applications. Janssen and Medisorb shall agree on which of both shall be responsible for the filing, prosecution and maintenance of any such joint patent applications and patents (hereinafter referred to as the "Responsible Party"). In principle, the party having contributed the most to the invention to be protected shall be the responsible party, unless agreed upon differently. Upon mutual consent, the responsible party may select an agent for drafting, filing and prosecuting a joint application. However, both parties shall agree who shall be the agent and to what extent this agent shall be used. The Responsible Party shall consult the other party when drafting any new jointly owned patent application. The final draft shall be forwarded to the other party at least one month prior to filing to give the opportunity to make final comments. The Responsible Party shall propose a list of countries in which it intends to file such patent applications. The other party shall be given the opportunity to propose further countries to be added to the list. In case the adding of some or all of these further countries is unacceptable to the Responsible Party, the other party shall have the right to file patent applications in those countries, in its own name and at its own expense. The Responsible Party shall assist in the transfer of rights for the latter patent applications and shall provide all information necessary to file and prosecute such patent applications. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 7 License Agreement The Responsible Party shall not abandon part or whole of any of the patents or patent applications without having first consulted the other party, which shall have the right to further pursue any patents or patent applications which the responsible party wishes to abandon, or parts thereof, in its own name and at its own expense. All out-of-pocket costs made in relation to joint patent applications and patents shall be shared equally by Janssen and Medisorb. A statement of costs shall be made up on a quarterly basis and invoiced to the other party. Medisorb shall grant to Janssen an exclusive fully-paid up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of [ ] or any chemical analogues of [ ] with similar physiological activity. However, nothing contained in this paragraph shall obviate Janssen's obligation to pay royalties under Section 3 hereof with respect to any Products developed hereunder. Janssen shall grant to Medisorb an exclusive fully paid-up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of bioabsorbable polymers in the field of human and/or veterinary medicine. (d) In addition, each party will retain exclusive title to its respective confidential information in accordance with the provisions of Article 9 below. (6) Patent Infringement ------------------- (a) In the event that either party becomes aware that any third party is infringing any patents included within the Patents in any country or countries, the party becoming aware of such infringement shall promptly give notice of such infringement to the other party. Any possible action against such alleged infringement of the Patents will be carried out by either or both of the parties in accordance with the provisions specified hereinafter in paragraphs (b), (c), (d) and (e). (b) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Medisorb retains full title and ownership pursuant to Article 5 a), Medisorb shall use all reasonable efforts to take action against such infringement in its own name, at its own expense and on its own behalf. If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Janssen shall be entitled at its own discretion and at its own expense, to take immediate action against THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 8 License Agreement such infringement in its own name, at its own expense and on its own behalf. If Janssen commences or assumes such action, Janssen may credit [ ] of any royalty otherwise due to Medisorb for sales in such country or countries against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen. The amount of expenses so deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen as a result of such action. Except for such repayment of royalties deducted, Janssen shall be entitled to retain all recoveries therefrom. In no event shall Medisorb settle with such infringing third party in the Field without the prior written consent of Janssen. (c) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen retains full title and ownership pursuant to Article 5 B), Janssen shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen fails to take action against such infringement, or if Janssen does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement. Medisorb shall be entitled to retain all recoveries, if any, therefrom. (d) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen and Medisorb jointly retain full title and ownership pursuant to Article 5 (c), and whenever in such case the infringing product would be a drug product falling within the definition of the Field, Janssen shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen fails to take action against such infringement, or if Janssen does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Janssen will have a continuing right to take over any such action at its own expense and shall pay to Medisorb from any recoveries Janssen receives (i) Medisorb's expenses and (ii) from any sums remaining after deduction of Medisorb's and Janssen's expenses, an amount proportionate to Medisorb's expenses in relation to Janssen's expenses. Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen and Medisorb jointly retain full title and ownership pursuant to Article 5 (c), and whenever in such case the infringing product would be a drug product falling outside the definition of the Field, Medisorb shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Janssen shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Medisorb will have a continuing right to take over any such action at its own THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 9 License Agreement expense. If Janssen commences or assumes such action, Janssen may credit [ ] of any royalty otherwise payable to Medisorb payable hereunder against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen. The amount of expenses so deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen as a result of such action. Except for such repayment of royalties deducted, Janssen shall be entitled to retain all recoveries therefrom. (e) Each party agrees to cooperate reasonably with the other party in such litigation, including making available to the other party records, information, and evidence relevant to the infringement of the Patent. (7) Third Party Intellectual Property Rights ---------------------------------------- (a) Medisorb warrants that to the best of its current knowledge and belief the Products to be developed hereunder will not infringe the patent rights of any third party. (b) In the event that the manufacture, use or sale of the Product would constitute an infringement of the rights of a third party in a country because of the use of the Patents or Medisorb's know how, each party shall, as soon as it becomes aware of the same, notify the other thereof in writing, giving in the same notice full details known to it of the rights of such third party and the extent of any alleged infringement. The parties shall after receipt of such notice meet to discuss the situation, and, to the extent necessary attempt to agree on a course of action in order to permit Janssen to practice the license granted hereunder. Such course of action may include: (a) modifying the Product or its manufacture so as to be noninfringing; (b) obtaining an appropriate license from such third party; or (c) fight the claimor suit. In the event that within a short period of time, the parties fail to agree on an appropriate course of action Janssen may decide upon the course of action in the interest of the further development, manufacturing or commercialization of the Product. (c) In the event that the parties cannot agree on modifying the Product or in the case that such modification would not be economically viable or regulatorily feasible, Janssen, whenever it relates to know how, whether patented or not, owned by Janssen in accordance with the provisions of Article 5 (b) and (c), or Medisorb, whenever it relates to know how, whether patented or not, owned by Medisorb in accordance with the provisions of Article 5 (a), will have the right to negotiate with such third party for such license. Both parties hereto will in any event in good faith consult with each other with respect to such negotiations and the party negotiating such license as indicated above, will make every effort to minimize the amount of license fees and royalties payable thereunder. In no event shall either party as a result of such settlement, grant a sublicense or cross license to the third party to settle the suit, without the prior written approval of the other party. In the event that such negotiations result in a consummated agreement, any license fee and/or royalties to be paid thereunder shall be paid by the party responsible for the negotiations as indicated above, [ ] of any license fees or royalties paid by Janssen under such license will be creditable against royalties due to Medisorb with respect to such country or countries. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 10 License Agreement (d) In the event that either or both parties would further to such notification under Paragraph 7 (b) decide to defend such suit or claim in which a third party alleges that the manufacture, use or selling of the Product infringes said third party's patent in a country, Janssen shall have the right to apply [ ] of the royalties due to Medisorb on the sales of the allegedly infringing Product against its litigation expenses. (8) Term: ---- (a) Except as otherwise provided herein, this Agreement and the term of the license granted to Janssen hereunder shall commence on the date first written above and shall expire (i) upon expiration of the last to expire Patent in such country or (ii) fifteen (15) years after the date of the first commercial sale of Product in such country, whichever is later; provided, that in no event shall the license granted hereunder expire later than the twentieth anniversary of the first commercial sale of Product in any country with the exception of the following countries where the fifteen (15) year minimum shall pertain regardless: Canada, France, Germany, Italy, Japan, Spain and the United Kingdom. After expiration of the license granted to Janssen hereunder, Janssen shall retain a fully paid-up non-exclusive license to manufacture, use and sell Products in the Field in the Territory. (b) Medisorb may convert the exclusive license granted under this Agreement to non-exclusive if Janssen does not maintain the following minimum annual royalty payments to Medisorb: (i) With respect to the entire Territory, excluding Japan, the minimum royalty obligation will first apply to the twelve month period following the anniversary of the end of the ;month in which the Product was launched in the third major country. For the purpose of this Article only, major country shall mean France, Germany, United Kingdom or Italy. During the first twelve month period that such minimum royalty obligation is applicable, the minimum royalty amount to be paid by Janssen will be calculated by multiplying the applicable royalty rate by [ ] percent of the actual aggregate net sales of other [ ] products during such twelve month period in the three major countries referred to above. As from the subsequent twelve month period the minimum annual royalty amount to be paid by Janssen will be calculated by multiplying the applicable royalty rate by [ ]% of the aggregate net sales of other [ ] products during such period in all countries where Product has been launched and marketed for a period of minimally twelve months prior to the actual reference twelve month period; and (ii) In Japan the minimum royalty obligation will be first applied to the twelve month period following the anniversary of the end of the month in which the Product was launched. The minimum annual royalty amount to be paid by Janssen will be calculated by multiplying the applicable royalty rate by an amount representing [ ]% of the aggregate net sales of other [ ] products in Japan during such period. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 11 License Agreement Janssen shall have the right to make up any shortfall in minimum royalty payments from Product sales, both in Japan and in the rest of the Territory provided, such make-up payment is made at the same time and in the same manner as required for the underlying minimum royalty obligation. Janssen may elect to have its exclusive rights converted into non-exclusive rights on a country by country basis. As a consequence thereof, such country's other [ ] products sales will no longer be taken into account for calculating the above minimum royalty obligation. (c) In the event that either party shall enter or be put into voluntary or compulsory liquidation or have a receiver appointed or default in the observance or performance of its obligations under this Agreement and shall fail to remedy such default within ninety (90) days after the delivery of written notice from the other party, the other party shall be entitled upon giving written notice to terminate this Agreement. (d) Janssen may terminate this Agreement without cause upon 30 days prior written notice. Thereafter, Janssen shall have no further rights or privileges with respect to the use of Medisorb Technology in Products and Medisorb shall be under no further obligation of non-competition or exclusive dealing. (e) Any early termination of the Agreement shall be without prejudice to the rights of either party against the other accrued under this Agreement prior to termination. (f) Upon any termination of this Agreement, any remaining inventory of Product may be sold, provided all royalties otherwise due hereunder are paid with respect to such sales. (9) Confidentiality: --------------- (a) Each party agrees to keep confidential and to not use for any purpose other than as set forth herein all technical information and materials supplied by the other hereunder and any information a party may acquire about the other or its activities as a result of entering into this Agreement, provided that such obligation shall not apply to technical information or material which: (i) was in the receiving party's possession without restriction prior to receipt from the other party or its Affiliates; (ii) was in the public domain at the time of receipt; (iii) becomes part of the public domain through no fault of the receiving party; (iv) shall be lawfully received from a third party with a right of further disclosure; (v) shall be required to be disclosed by law, by regulation or by the rules of any securities exchange. (b) Except as may be otherwise provided herein, the confidentiality obligations as set out in this Section shall continue so long as this Agreement remains in force and thereafter for a period of seven (7) years. (c) Janssen shall cause its Affiliates and Sublicensees to abide by the obligations of confidentiality with respect to unpublished information within the Patents and Technical Information. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 12 License Agreement (d) Any confidential information relating to the subject matter of this Agreement imparted to the other party prior to the execution of this Agreement shall be considered to fall under the terms of this Agreement. (10) Disclaimer of Warranty: Medisorb makes no representations or ---------------------- warranties, express or implied, with respect to the Medisorb Patents and Technical Information licensed to Janssen hereunder, including without limitation any warranties of merchantability or fitness for a particular purpose. (11) Liability --------- (a) Janssen agrees to indemnify, defend and hold harmless Medisorb from and against any liability, loss, damages and expenses (including reasonable attorney fees) Medisorb may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Medisorb by reason of personal injury or damage to property arising out or caused by Janssen's promotion, use and sale of the Product, except where such liabilities claims, demands, costs or judgments are caused by Medisorb's failure to provide Janssen with any information as specified in Section 12 (c) and Article 13. Medisorb will notify Janssen as soon as it becomes aware of any such claim or action and agrees to give reasonable assistance in the investigation and defense of such claim or action it being understood that it shall allow Janssen to control the disposition of the same. (b) Medisorb agrees to indemnify, defend and hold harmless Janssen from and against any liability, loss, damages and expenses (including reasonable attorney fees) Janssen may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Janssen by reason of personal injury or damage to property arising out or caused by Medisorb's failure to provide Janssen with any information as specified in Section 12 (c) and Article 13. (c) In no event shall either party be liable for loss of profits, loss of goodwill or any consequential or incidental damages of any kind of the other party. (12) Product Information and Adverse Drug Events ------------------------------------------- (a) As Janssen has superior knowledge of the end-use applications to which Products licensed hereunder will be put, Janssen is responsible for providing third parties with adequate information as to the medical profile of such Products. Janssen will provide Medisorb with copies of the IPID (International Product Information Document) and the IPPI (International Patient Package Insert), which are all part of the IRF for the Product. For the purpose of this Agreement IPID refers to the document that summarizes all medically relevant features of the Product, including the instructions for use meant to inform the medical profession, whereas the IPPI is a patient-oriented document, based upon the IPID that summarizes all relevant information on the Product in lay language. Janssen will keep Medisorb informed of any revisions or amendments in the IPID and IPPI of the Product. (b) Medisorb does not claim the expertise to judge whether Product(s) will perform acceptably in Janssen's application(s). Janssen is the sole judge as to whether Product(s) will THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 13 License Agreement perform acceptably in Janssen's application(s). Janssen represents and warrants on an on-going basis during the term of this agreement that it has the capability to assess the suitability of Product(s) in Janssen's application(s) and agrees to conduct adequate testing to confirm the safety and efficacy of Products prior to commercialization. (c) Medisorb will provide to Janssen promptly after its discovery by Medisorb, any information in its possession which indicates adverse effects in humans associated with the Products, including the bioabsorbable polymeric components thereof, licensed hereunder. For the purpose of this Agreement "adverse event" shall mean an experience which is noxious and unintended and which occurs at doses normally used in man for the prophylaxis, diagnosis or therapy of a disease or for the modification of a physiological function and any report of an overdose. (13) Government Approvals -------------------- Janssen shall be responsible for conducting all necessary testing as well as determining what, if any, government approvals are required for the use and sale of Product licensed hereunder and shall comply with all such requirements prior to and following the sale or distribution of such Products. Medisorb shall cooperate fully with Janssen in obtaining regulatory approvals for Product licensed hereunder and shall, at Janssen's request, provide appropriate regulatory authorities with any and all information concerning Medisorb's technology, Medisorb polymers and Medisorb's manufacturing process for such Product. In this respect Medisorb undertakes that it has submitted or will as soon as possible submit a type IV Drug Master File to the FDA identifying Medisorb's method of manufacture, release specifications and testing methods used in the manufacture of its bioabsorbable polymers and a type I Drug Master File of Medisorb's manufacturing facilities where Product may be manufactured. Medisorb will authorize Janssen at its request to cross-reference any Medisorb Drug Master Files relating to the Medisorb Polymers. (14) Force Majeure: Neither party shall be liable for its failure to ------------- perform any of its obligations hereunder if such failure is occasioned by a contingency beyond its reasonable control including, but not limited to, occurrences such as strikes or other labor disturbances, lock out, riot, war, default by a common carrier, fire, flood, storm, earthquake, other acts of God, inability to obtain raw materials, failure of plant facilities or government regulation, act or failure to act. Each party shall notify the other immediately upon occurrence or cessation of any such contingencies. If such contingency continues unabated for at least 180 consecutive days, either party shall have the right to terminate this Agreement without further obligation beyond those actually incurred prior to such termination. (15) Press Communications: Neither party shall originate any -------------------- publicity, news release or public announcement, written or oral relating to this Agreement, including its existence, without the prior written approval of the other party. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 14 License Agreement (16) Notices: Any legal notice required or permitted hereunder shall ------- be considered properly given if in writing and sent by first class mail, certified mail or by telefacsimile to the party being notified at the respective address of such party as follows: If to Medisorb: Medisorb Technologies International L.P. 6954 Cornell Road Cincinnati, OH 45242 USA Facsimile: 513-489-2348 If to Janssen: Janssen Pharmaceutica Kollerstrasse 38 6300 Zug 6 Switzerland Facsimile: 00-41-42449565 Such notice shall be effective upon receipt or upon refusal to accept such notice. In any case, notice shall be presumed effective no later than five (5) days after such notice is sent. Neither party shall originate any publicity, news release or public announcement, written or oral, relating to this Agreement, including its existence, without the written approval of the other party. (17) Assignment: This Agreement shall not be assigned by either party ---------- without the prior written consent of the other party; provided, however, that assignment shall be permitted without such consent to any party, not less than 50% of the total interest of which owns, is owned by, or is under common control with the assigning party. In the event of any such permitted assignment the assignee shall be subject to and shall agree in writing to be bound by the terms and conditions of this Agreement. (18) Dispute Resolution: The parties shall amicably discuss and ------------------ negotiate any matters which arise under this Agreement and are not specifically set forth hereunder. If any disputes arise under this Agreement, the parties shall use their best efforts to meet and resolve such disputes. In the event that the parties are unable to resolve any such disputes, then both parties hereby agree to submit said disputes to the jurisdiction of the competent Courts of Zurich, Switzerland, and agree that any litigation in any way related to this Agreement shall be submitted to such Courts and that same shall be subject to Swiss law. (19) 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 any of the parties hereto to be invalid, illegal or unenforceable such provision or THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 15 License Agreement provisions shall be validly reformed to as nearly approximate the intent of the parties as possible and, if unreformable; shall be divisible and deleted in such jurisdiction, elsewhere this Agreement shall not be affected. (20) Captions: The captions of this Agreement are for convenience -------- only, and shall not be deemed of any force or effect whatsoever in construing this Agreement. (21) Waiver: The failure on the party of a party to exercise or ------ enforce any right conferred upon it hereunder shall not be deemed to be a waiver of any such right, nor operate to bar the exercise or enforcement thereof at any time thereafter. (22) Survival: The following Articles of this Agreement shall survive -------- the termination or expiration of this Agreement: 5, 9, 10, 11, 15, 17, and 18. (23) Miscellaneous: This Agreement may be executed by the parties ------------- hereto in counterparts, each of which when so executed and delivered shall be considered to be an original, but all such counterparts shall together constitute but one and the same instrument. This Agreement is the complete agreement of the parties and supersedes all previous understandings and agreements relating to the subject matter hereof. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally , but only by an instrument in writing signed by the party against whom enforcement of the termination, amendment, supplement, waiver or modification is sought. IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto have executed this Agreement as of the day and year first above written. JANSSEN PHARMACEUTICA INTERNATIONAL A division of Cilag International AG By: _________________________ Name: _______________________ Title: ______________________ Date: _______________________ {Second Janssen Signatory} - -------------------------- By: _________________________ Name: _______________________ Title: ______________________ Date: _______________________ THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb Page 16 License Agreements MEDISORB TECHNOLOGIES INTERNATIONAL L.P. by: Medisorb Technologies International, Inc., its General Partner By: __________________________ Name: David R. Lohr ------------------------ Title: President ----------------------- Date: ________________________ 12059504.doc 12/05/95 4:06 PM THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT C To Development Agreement dated December 23, 1993 between Janssen Pharmaceutica International and Medisorb Technologies International L.P.: License Agreement, United States of America Following 16 Pages /s/ Paul F. Costa 12/12/95 - ----------------- -------- For JANSSEN Date /s/ David R. Lohr December 6, 1995 - ------------------ ---------------- For MEDISORB Date 12059503.doc THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. LICENSE AGREEMENT This Agreement is made as of the __ day ______ of 19___, between MEDISORB TECHNOLOGIES INTERNATIONAL L.P., a Delaware limited partnership (hereinafter "Medisorb") and JANSSEN PHARMACEUTICA INC., a New Jersey corporation ("Janssen US"). WHEREAS, Medisorb and Janssen Pharmaceutica International, an affiliate of Janssen US, have entered into a certain Development Agreement, dated December 23, 1993 (the "Development Agreement"), for the development of a Product (as described below); and WHEREAS, Janssen Pharmaceutica International has an option under the Development Agreement to enter into this License Agreement for the Medisorb technology required to make, use and sell the Product, which option Janssen Pharmaceutica International has assigned to Janssen US with the consent of Medisorb and which option Janssen US has elected to exercise; and WHEREAS, the parties believe that it is in their mutual best interest for Medisorb to license to Janssen US on an exclusive basis in the Territory, Medisorb Patents and Technical Information within the Field, upon the terms and conditions set forth herein; NOW, IT IS HEREBY AGREED AS FOLLOWS: (1) Definitions: The following terms shall have the meanings ascribed ----------- to them herein, unless the context otherwise requires: (a) "Affiliate" shall mean any company controlling, controlled by, or under common control with a party by ownership, directly or indirectly, of fifty percent (50%) or more of the total ownership or by the power to control the policies and actions of such company. (b) "Development Program" shall mean the development activities conducted by the parties pursuant to the Development Agreement. (c) "Field" shall mean the treatment of [ ]. (d) "Improvements" shall mean any improvements or developments to or of the Patents and Technical Information in the Field which Medisorb may acquire, discover, invent, originate, make, conceive or have a right to, in whole or in part, during the term of this Agreement, whether or not such improvement or development is patentable. (e) "Medisorb Polymers" shall mean bioresorbable aliphatic polyesters based on glycolide, lactide, caprolactone and combinations of such polymers, which are manufactured by Medisorb and utilized in Product(s) licensed under this Agreement. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 2 License Agreement (f) "NDA" shall mean a New Drug Application and all supplements filed pursuant to the requirements of the United States Food and Drug Administration, including all documents, data and other information concerning Product which are necessary for, or included in, FDA approval to market a Product as more fully defined in 21 C.F.R. 314.5 et seq. or any other similar application for marketing authorization filed with the appropriate regulatory authorities in other countries of the Territory (as defined hereinafter). (g) "Net Sales" shall mean the gross amounts received from sales of Products during a calendar quarter to third parties by Janssen US, its Sublicensees or any Affiliate of either, less any: (i) applicable sales taxes; (ii) cash trade or quantity discounts; (iii) amounts repaid or credited by reason of rejections or return of goods; or (iv) freight, postage and duties paid for. No deduction from the gross sales price shall be made for any item of cost incurred by the seller in its own operations incident to the manufacture, sale or shipment of the product sold. For purposes hereof, Net Sales shall not include sales of a Product from Janssen US or an Affiliate of Janssen US to any Affiliate or Sublicensee of either; it being intended that Net Sales shall only include sales to unrelated third-parties. (h) "Patents" shall mean (i) any and all existing issued patents and patent applications or parts thereof which describe and claim a depot formulation of [ ], or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids and the production and use thereof; (ii) any other patents and patent applications filed by or on behalf of Medisorb, or under which Medisorb has the rights to grant licenses, which are needed to practice the inventions; and (iii) any reissues, extensions, substitutions, confirmations, registrations, revalidations, additions, continuations, continuations-in-part, or divisions of or to any of the foregoing which are granted hereafter or any additional protection certificate granted with respect thereto. (i) "Product(s)" shall mean any and all depot formulations of [ ], or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids which are designed to deliver [ ], or any of its chemical analogues, over an extended period. (j) "Sublicensees" shall mean any company or companies, other than Janssen US's Affiliates, sublicensed by Janssen US. (k) "Technical Information" shall mean all unpatented information, know-how, practical experience, procedures, methodology, specifications, formulae and data whether or not the same shall be patentable which have been heretofore developed or acquired by Medisorb prior to the date of this Agreement and which are necessary in order to use, manufacture or sell Products in the Field. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 3 License Agreement (l) "Territory" shall mean the United States, its Territories, Protectorates, Commonwealths, and all other political subdivisions of the United States. (2) License Grant ------------- (a) Medisorb hereby grants to Janssen US in the Territory an exclusive license under the Patents and Technical Information existing prior to the effective date of this Agreement, with the right to grant sublicenses thereunder, for all purposes within the Field to practice and use the Patents and Technical Information, including the rights to manufacture and have manufactured, to use and have used, and to sell and have sold Products. Medisorb exclusively retains all rights under the Patents and Technical Information outside the Field and for use other than in Products. The right to grant sublicenses granted hereunder is exclusive to Janssen US and shall not extend to Janssen US Affiliates or Sublicensees. (b) Medisorb shall offer to Janssen US for incorporation into this License Agreement on reasonable terms and conditions, Medisorb Improvements in the Field which, if incorporated into Janssen US's then current commercial Product(s), would: (i) result in significant changes in either the specifications for such Product(s) or the processes for producing such Product(s), and (ii) would reasonably be expected to result in enhanced market value and/or profitability of such Product(s). Examples of such Improvements would include: (i) the development by Medisorb of a non-aqueous injection vehicle which offers significant advantages with respect to ease of administration and (ii) the development by Medisorb of technology enabling [ ]. It is the parties' understanding that the effect of any such license amendment would, in general, be either an extension of the term of this Agreement for a mutually agreed period or a marginal increase in the then current royalty rate . All other Medisorb Improvements shall be made available to Janssen US for its use without further agreement. Proprietary rights to Improvements jointly developed by Medisorb and Janssen US or any of its Affiliates shall be governed by the terms of Section 5(c) of this Agreement. (c) In the event that at any time during the term of this Agreement Medisorb is unable for any reason whatsoever to supply the Medisorb Polymers required by Janssen U.S. for use in Products, then the license granted under paragraph 2(a) above shall be expanded to include the Medisorb Technology required to make and use the Medisorb Polymers. (3) Royalties: ---------- (a) Janssen US shall pay or cause to be paid to Medisorb a running royalty with respect to all Products sold to customers in the Territory by Janssen THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 4 License Agreement US, its Affiliates and Sublicensees, payable quarter-annually in arrears within sixty (60) days following the end of Janssen US's regular fiscal quarters in any year during the term hereof, as follows: (i) [ ]% of the Net Sales of each unit of Product sold during the preceding calendar quarter during the term hereof, if such unit of Product was manufactured by Medisorb pursuant to a written contract for the supply of Product; or (ii) [ ] % of the Net Sales of each unit of Product sold during the preceding calendar quarter during the term hereof, if such unit of Product was not manufactured by Medisorb pursuant to a written contract for the supply of Product. Any withholding or other tax that Janssen US or any of its Affiliates or Sublicensees are required by statute to withhold and pay on behalf of Medisorb with respect to the royalties payable to Medisorb under this Agreement shall be deducted from said royalties and paid contemporaneously with the remittance to Medisorb; provided, however, that in regard to any tax so deducted Janssen US shall furnish Medisorb with proper evidence of the taxes paid on its behalf. (b) In the event that Product is not claimed in a valid Patent effective in the Territory and a similar product obtains a market share greater than [ ]% of the total market revenues for Products and similar products in such country, the parties agree to meet and negotiate in good faith an appropriate reduction in the royalty rate then in effect. In no event shall a reduction in royalty rates pursuant to this section result in royalty rates [ ] of the rates specified under Section 3(a)(i) and 3(a)(ii) of this Agreement. For the purposes of this section, "similar product" shall mean a generic version of the Product(s) where: (i) the active agent is [ ], or a chemical analogue thereof and (ii) the excipient is comprised of lactic and/or glycolic acids. In the event that patent protection in the Territory for Product(s) becomes available subsequent to a royalty reduction pursuant to this section, the parties agree to (i) reinstitute the royalty otherwise applicable, and (ii) in the event that any recovery is obtained for prior infringement of the subsequently issued patent, the parties will first apply such recoveries to reimbursing Medisorb for royalties it would otherwise have received. (c) Janssen US shall keep complete and adequate records with respect to the proceeds of Products on which it has to pay royalties payable hereunder for at least two (2) years after expiry of the year they concern. Medisorb shall have the right to have such records of Janssen US inspected and examined, at Medisorb's expense, for the purpose of determining the correctness of royalty payments made hereunder. Such inspection shall be made by an independent, certified public accountant to whom Janssen US shall have no reasonable objection. Such accountant shall not disclose to Medisorb any information other than that necessary to verify the accuracy of the reports and payments made pursuant to this Agreement. It is understood that such examination with respect to any quarterly accounting period shall take place not later than two (2) years following the expiration of said period. Not more than one examination per year shall take place. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen UA-Medisorb Page 5 License Agreement Based upon the verification of such reports and whenever there is reasonable doubt about the accuracy of the sales of Product realized by an Affiliate or sublicensee, Medisorb may reasonably request Janssen US to audit the books of such Affiliate or such sublicensee in accordance with any applicable contractual provision, in order to confirm the accuracy of such reports. (4) Production of Product/Technology Transfer: ----------------------------------------- (a) Janssen US shall use its reasonable efforts consistent with its overall business practices and strategies to commercialize and market Product, or to have the same commercialized and marketed in the Territory. (b) In the event that Janssen US determines to manufacture Product itself or through an Affiliate or have Product manufactured by a third party, Medisorb shall transfer to Janssen US and/or Affiliate all relevant Technical Information, and provide such technical assistance, upon mutually agreed terms and conditions, as is required by Janssen US in order to enable the manufacture of Product by Janssen US, its Affiliate or its designated third party manufacturer. However, with respect to such third party manufacturers, except as limited by a written Product manufacturing agreement between Janssen US and Medisorb, Medisorb will have a right of first refusal as to the manufacture and supply to Janssen US of all Product(s), and component bioabsorbable polymers utilized in such Product(s). Medisorb will have a period of thirty (30) days following written notice from Janssen US of terms it is offering to, or prepared to accept from, a third party manufacturer to notify Janssen US of its intention to exercise its right of first refusal to supply Product and/or component bioabsorbable polymers thereof to Janssen US, its Affiliates and Licensees on terms no less favorable to Janssen US than those offered by such third party manufacturer. Such third party manufacturer cannot be an in-kind competitor to Medisorb and must be reasonably acceptable to Medisorb with respect to confidential protection of Medisorb's Technical Information. In the event that at any time during the term of this Agreement Medisorb is unable for any reason whatsoever to supply the Medisorb Polymers required by Janssen U.S. for use in Products, then the right of first refusal under this paragraph respecting the supply of the component bioabsorbable polymers shall be eliminated. For the purposes of this section, an "in-kind" competitor shall mean any organization which regularly engages in the contract development and/or contract manufacture of injectable controlled release drug delivery systems comprising a polymeric excipient based on lactic and/or glycolic acids and/or other closely related monomers. This Section 4(b) specifically supersedes Section 7(B) of the Development Agreement, which Section 7(B) shall be of no further force or effect. (5) Proprietary Rights ------------------ THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 6 License Agreement (a) Medisorb will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to absorbable polymers, controlled release of active agents, and/or manufacturing methods or processes relating to such polymers and the controlled delivery systems for active agents based on such polymers previously owned by Medisorb or developed by Medisorb as a result of the Development Program or otherwise. Medisorb will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Janssen US agrees to provide Medisorb with any necessary utility information. Medisorb shall inform Janssen US of any patent application it wishes to file to protect proprietary rights defined in Article 5, resulting from either the Development Program or the preliminary Development Program and shall forward a copy of any such patent application to Janssen US at least one month prior to filing. Medisorb shall consider any suggestions made by Janssen US for amplifying such application and shall accordingly amend the application where in Medisorb's opinion it is appropriate. Medisorb shall not abandon part or whole of any of the patents or patent applications without having first consulted Janssen US, which shall have the right to further pursue any patents or patent applications which Medisorb wishes to abandon, or parts thereof, in its own name and at its own expense. (b) Janssen US and/or its Affiliate will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to [ ] or any chemical analogues of [ ] with similar physiological activity previously owned by Janssen US and/or its Affiliate or developed by Janssen US and/or affiliate as a result of this Agreement or otherwise. Janssen US and/or its Affiliate will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Medisorb agrees to provide Janssen US with any necessary utility information. (c) Any inventions, other than those falling under either section 5(a) or 5(b) hereof, having an inventorship jointly between at least one employee of Janssen US or an Affiliate of Janssen US and one employee of Medisorb or an Affiliate of Medisorb shall be jointly-owned by Janssen US or Janssen US Affiliate as the case may be and Medisorb. Each party will cooperate fully in the filing and prosecution of such patent applications. Janssen US and Medisorb shall agree on which of both shall be responsible for the filing, prosecution and maintenance of any such joint patent applications THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 7 License Agreement and patents (hereinafter referred to as the "Responsible Party") in Territory. In principle, the party having contributed the most to the invention to be protected shall be the responsible party, unless agreed upon differently. Upon mutual consent, the responsible party may select an agent for drafting, filing and prosecuting a joint application. However, both parties shall agree who shall be the agent and to what extent this agent shall be used. The Responsible Party shall consult the other party when drafting any new jointly owned patent application. The final draft shall be forwarded to the other party at least one month prior to filing to give the opportunity to make final comments. The Responsible Party shall not abandon part or whole of any of the patents or patent applications without having first consulted the other party, which shall have the right to further pursue any patents or patent applications which the responsible party wishes to abandon, or parts thereof, in its own name and at its own expense. All out-of-pocket costs made in relation to joint patent applications and patents in the Territory shall be shared equally by Janssen US and Medisorb. A statement of costs shall be made up on a quarterly basis and invoiced to the other party. Medisorb shall grant to Janssen US an exclusive fully-paid up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of [ ] or any chemical analogues of [ ] with similar physiological activity. However, nothing contained in this paragraph shall obviate Janssen US's obligation to pay royalties under Section 3 hereof with respect to any Products developed hereunder. Janssen US shall grant to Medisorb an exclusive fully paid-up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of bioabsorbable polymers in the field of human and/or veterinary medicine. (d) In addition, each party will retain exclusive title to its respective confidential information in accordance with the provisions of Article 9 below. (6) Patent Infringement ------------------- THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 8 License Agreement (a) In the event that either party becomes aware that any third party is infringing in the Territory any patents included within the Patents, the party becoming aware of such infringement shall promptly give notice of such infringement to the other party. Any possible action against such alleged infringement of the Patents will be carried out by either or both of the parties in accordance with the provisions specified hereinafter in paragraphs (b), (c), (d) and (e). (b) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Medisorb retains full title and ownership pursuant to Article 5 a), Medisorb shall use all reasonable efforts to take action against such infringement in its own name, at its own expense and on its own behalf. If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Janssen US shall be entitled at its own discretion and at its own expense, to take immediate action against such infringement in its own name, at its own expense and on its own behalf. Medisorb will give all reasonable assistance to Janssen in taking such action in accordance with Article 6(e), including giving Janssen the authority to file and prosecute such suit and, if necessary, being named a party in such action. If Janssen US commences or assumes such action, Janssen US may credit [ ] of any royalty otherwise due to Medisorb for sales in such country or countries against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen US. The amount of expenses so deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen US as a result of such action. Except for such repayment of royalties deducted, Janssen US shall be entitled to retain all recoveries therefrom. In no event shall Medisorb settle with such infringing third party in the Field without the prior written consent of Janssen US. (c) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen US or any of its Affiliates retains full title and ownership pursuant to Article 5 B), Janssen US shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen US fails to take action against such infringement, or if Janssen US does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement. Medisorb shall be entitled to retain all recoveries, if any, therefrom. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 9 License Agreement (d) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen US or any of its Affiliates and Medisorb jointly retain full title and ownership pursuant to Article 5 (c), and whenever in such case the infringing product would be a drug product falling within the definition of the Field, Janssen US shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen US fails to take action against such infringement, or if Janssen US does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Janssen US will have a continuing right to take over any such action at its own expense and shall pay to Medisorb from any recoveries Janssen US receives (i) Medisorb's expenses and (ii) from any sums remaining after deduction of Medisorb's and Janssen US's expenses, an amount proportionate to Medisorb's expenses in relation to Janssen US's expenses. Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen US or any of its Affiliates and Medisorb jointly retain full title and ownership pursuant to Article 5 (c), and whenever in such case the infringing product would be a drug product falling outside the definition of the Field, Medisorb shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Janssen US shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Medisorb will have a continuing right to take over any such action at its own expense. If Janssen US commences or assumes such action, Janssen US may credit [ ] of any royalty otherwise payable to Medisorb payable hereunder against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen US. The amount of expenses so deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen US as a result of such action. Except for such repayment of royalties deducted, Janssen US shall be entitled to retain all recoveries therefrom. (e) Each party agrees to cooperate reasonably with the other party in such litigation, including making available to the other party records, information, and evidence relevant to the infringement of the Patent. (7) Third Party Intellectual Property Rights ---------------------------------------- THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 10 License Agreement (a) Medisorb warrants that to the best of its current knowledge and belief the Products to be developed hereunder will not infringe the patent rights of any third party. (b) In the event that the manufacture, use or sale of the Product would constitute an infringement of the rights of a third party in the Territory because of the use of the Patents or Medisorb's know how, each party shall, as soon as it becomes aware of the same, notify the other thereof in writing, giving in the same notice full details known to it of the rights of such third party and the extent of any alleged infringement. The parties shall after receipt of such notice meet to discuss the situation, and, to the extent necessary attempt to agree on a course of action in order to permit Janssen US to practice the license granted hereunder. Such course of action may include: (a) modifying the Product or its manufacture so as to be noninfringing; (b) obtaining an appropriate license from such third party; or (c) fight the claim or suit. In the event that within a short period of time, the parties fail to agree on an appropriate course of action Janssen US may decide upon the course of action in the interest of the further development, manufacturing or commercialization of the Product. (c) In the event that the parties cannot agree on modifying the Product or in the case that such modification would not be economically viable or regulatory feasible, Janssen US, whenever it relates to know how, whether patented or not, owned by Janssen US in accordance with the provisions of Article 5 (b) and (c), or Medisorb, whenever it relates to know how, whether patented or not, owned by Medisorb in accordance with the provisions of Article 5 (a), will have the right to negotiate with such third party for such license. Both parties hereto will in any event in good faith consult with each other with respect to such negotiations and the party negotiating such license as indicated above, will make every effort to minimize the amount of license fees and royalties payable thereunder. In no event shall either party as a result of such settlement, grant a sublicense or cross license to the third party to settle the suit, without the prior written approval of the other party. In the event that such negotiations result in a consummated agreement, any license fee and/or royalties to be paid thereunder shall be paid by the party responsible for the negotiations as indicated above, [ ] of any license fees or royalties paid by Janssen US under such license will be creditable against royalties due to Medisorb hereunder. (d) In the event that either or both parties would further to such notification under Paragraph 7 (b) decide to defend such suit or claim in which a third party alleges that the manufacture, use or selling of the Product in the Territory infringes said third party's patent in, Janssen US shall have the right to apply [ ] of the royalties due to Medisorb on the sales of the allegedly infringing Product against its litigation expenses. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 11 License Agreement (8) Term: ---- (a) Except as otherwise provided herein, this Agreement and the term of the license granted to Janssen US hereunder shall commence on the date first written above and shall expire (i) upon expiration of the last to expire Patent or (ii) fifteen (15) years after the date of the first commercial sale of Product in the Territory, whichever is later; provided, that in no event shall the license granted hereunder expire later than the twentieth anniversary of the first commercial sale of Product. After expiration of the license granted to Janssen US hereunder, Janssen US shall retain a fully paid-up non-exclusive license to manufacture, use and sell Products in the Field in the Territory. (b) Medisorb may convert the exclusive license granted under this Agreement to non-exclusive if Janssen US does not maintain the following minimum annual royalty payments to Medisorb. With respect to the entire Territory, the minimum royalty obligation will first apply to the twelve month period following the anniversary of the end of the month in which the Product was launched. During the first twelve month period and each subsequent twelve month period that such minimum royalty obligation is applicable, the minimum royalty amount to be paid by Janssen US will be calculated by multiplying the applicable royalty rate by [ ] percent of the actual aggregate net sales of other [ ] products in the Territory during such twelve month period. Janssen US shall have the right to make up any shortfall in minimum royalty payments from Product sales in the Territory provided, such make-up payment is made at the same time and in the same manner as required for the underlying minimum royalty obligation. (c) In the event that either party shall enter or be put into voluntary or compulsory liquidation or have a receiver appointed or default in the observance or performance of its obligations under this Agreement and shall fail to remedy such default within ninety (90) days after the delivery of written notice from the other party, the other party shall be entitled upon giving written notice to terminate this Agreement. (d) Janssen US may terminate this Agreement without cause upon 30 days prior written notice. Thereafter, Janssen US shall have no further rights or privileges with respect to the use of Medisorb Technology in Products and Medisorb shall be under no further obligation of non-competition or exclusive dealing. (e) Any early termination of the Agreement shall be without prejudice to the rights of either party against the other accrued under this Agreement prior to termination. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 12 License Agreement (f) Upon any termination of this Agreement, any remaining inventory of Product may be sold, provided all royalties otherwise due hereunder are paid with respect to such sales. (g) All rights and licenses granted under or pursuant to this Agreement by Medisorb to Janssen U.S. are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11, U.S. Code (the "Bankruptcy Code"), licenses to "intellectual property" as defined under section 101(60) of the Bankruptcy Code. The parties agree that Janssen, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. (9) Confidentiality: --------------- (a) Each party agrees to keep confidential and to not use for any purpose other than as set forth herein all technical information and materials supplied by the other hereunder and any information a party may acquire about the other or its activities as a result of entering into this Agreement, provided that such obligation shall not apply to technical information or material which: (i) was in the receiving party's possession without restriction prior to receipt from the other party or its Affiliates; (ii) was in the public domain at the time of receipt; (iii) becomes part of the public domain through no fault of the receiving party; (iv) shall be lawfully received from a third party with a right of further disclosure; (v) shall be required to be disclosed by law, by regulation or by the rules of any securities exchange. (b) Except as may be otherwise provided herein, the confidentiality obligations as set out in this Section shall continue so long as this Agreement remains in force and thereafter for a period of seven (7) years. (c) Janssen US shall cause its Affiliates and Sublicensees to abide by the obligations of confidentiality with respect to unpublished information within the Patents and Technical Information. (d) Any confidential information relating to the subject matter of this Agreement imparted to the other party prior to the execution of this Agreement shall be considered to fall under the terms of this Agreement. (10) Disclaimer of Warranty: Medisorb makes no representations or ---------------------- warranties, express or implied, with respect to the Medisorb Patents and Technical Information licensed to Janssen US hereunder, including without limitation any warranties of merchantability or fitness for a particular purpose. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 13 License Agreement (11) Liability --------- (a) Janssen US agrees to indemnify, defend and hold harmless Medisorb from and against any liability, loss, damages and expenses (including reasonable attorney fees) Medisorb may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Medisorb by reason of personal injury or damage to property arising out or caused by Janssen US's promotion, use and sale of the Product, except where such liabilities claims, demands, costs or judgments are caused by Medisorb's failure to provide Janssen US with any information as specified in Section 12 (c) and Article 13. Medisorb will notify Janssen US as soon as it becomes aware of any such claim or action and agrees to give reasonable assistance in the investigation and defense of such claim or action it being understood that it shall allow Janssen US to control the disposition of the same. (b) Medisorb agrees to indemnify, defend and hold harmless Janssen US from and against any liability, loss, damages and expenses (including reasonable attorney fees) Janssen US may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Janssen US by reason of personal injury or damage to property arising out or caused by Medisorb's failure to provide Janssen US with any information as specified in Section 12 (c) and Article 13. (c) In no event shall either party be liable for loss of profits, loss of goodwill or any consequential or incidental damages of any kind of the other party. (12) Product Information and Adverse Drug Events ------------------------------------------- (a) As Janssen US has superior knowledge of the end-use applications to which Products licensed hereunder will be put, Janssen US is responsible for providing third parties with adequate information as to the medical profile of such Products. Janssen US will provide Medisorb with copies of the product information document which is part of the NDA for the Product. (b) Medisorb does not claim the expertise to judge whether Product(s) will perform acceptably in Janssen US's application(s). Janssen US is the sole judge as to whether Product(s) will perform acceptably in Janssen US's application(s). Janssen US represents and warrants on an on-going basis during the term of this agreement that it has the capability to assess the suitability of Product(s) in Janssen US's application(s) and agrees to conduct adequate testing to confirm the safety and efficacy of Products prior to commercialization. (c) Medisorb will provide to Janssen US promptly after its discovery by Medisorb, any information in its possession which indicates adverse effects in THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 14 License Agreement humans associated with the Products, including the bioabsorbable polymeric components thereof, licensed hereunder. For the purpose of this Agreement "adverse event" shall mean an experience which is noxious and unintended and which occurs at doses normally used in man for the prophylaxis, diagnosis or therapy of a disease or for the modification of a physiological function and any report of an overdose. (13) Government Approvals -------------------- Janssen US shall be responsible for conducting all necessary testing as well as determining what, if any, government approvals are required for the use and sale of Product licensed hereunder and shall comply with all such requirements prior to and following the sale or distribution of such Products. Medisorb shall cooperate fully with Janssen US in obtaining regulatory approvals for Product licensed hereunder and shall, at Janssen US's request, provide appropriate regulatory authorities with any and all information concerning Medisorb's technology, Medisorb polymers and Medisorb's manufacturing process for such Product. In this respect Medisorb undertakes that it has submitted or will as soon as possible submit a type IV Drug Master File to the FDA identifying Medisorb's method of manufacture, release specifications and testing methods used in the manufacture of Medisorb Polymers and a type I Drug Master File of Medisorb's manufacturing facilities where Product may be manufactured. Medisorb will authorize Janssen U.S. at its request to cross-reference any Drug Master Files relating to the Medisorb Polymers. (14) Force Majeure: Neither party shall be liable for its failure to ------------- perform any of its obligations hereunder if such failure is occasioned by a contingency beyond its reasonable control including, but not limited to, occurrences such as strikes or other labor disturbances, lock out, riot, war, default by a common carrier, fire, flood, storm, earthquake, other acts of God, inability to obtain raw materials, failure of plant facilities or government regulation, act or failure to act. Each party shall notify the other immediately upon occurrence or cessation of any such contingencies. If such contingency continues unabated for at least 180 consecutive days, either party shall have the right to terminate this Agreement without further obligation beyond those actually incurred prior to such termination. (15) Press Communications: Neither party shall originate any -------------------- publicity, news release or public announcement, written or oral relating to this Agreement, including its existence, without the prior written approval of the other party. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 15 License Agreement (16) Notices: Any legal notice required or permitted hereunder shall ------- be considered properly given if in writing and sent by first class mail, certified mail or by telefacsimile to the party being notified at the respective address of such party as follows: If to Medisorb: Medisorb Technologies International L.P. 6954 Cornell Road Cincinnati, OH 45242 Facsimile: 513-489-2348 If to Janssen US: Janssen U.S. 1125 Trenton-Harbourton Road P.O. Box 200 Titusville, New Jersey 08560-0200 Facsimile: 609-630-2616 with a copy to Janssen Pharmaceutica International Kollerstrasse 38 6300 Zug 6 Switzerland Facsimile: 00-41-42449565 Such notice shall be effective upon receipt or upon refusal to accept such notice. In any case, notice shall be presumed effective no later than five (5) days after such notice is sent. Neither party shall originate any publicity, news release or public announcement, written or oral, relating to this Agreement, including its existence, without the written approval of the other party. (17) Assignment: This Agreement shall not be assigned by either party ---------- without the prior written consent of the other party; provided, however, that assignment shall be permitted without such consent to any party, not less than 50% of the total interest of which owns, is owned by, or is under common control with the assigning party. In the event of any such permitted assignment the assignee shall be subject to and shall agree in writing to be bound by the terms and conditions of this Agreement. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 16 License Agreement (18) Dispute Resolution: The parties shall amicably discuss and ------------------ negotiate any matters which arise under this Agreement and are not specifically set forth hereunder. If any disputes arise under this Agreement, the parties shall use their reasonable efforts to meet and resolve such disputes. In the event that the parties are unable to resolve any such disputes, then both parties hereby agree to submit said disputes to the jurisdiction of the competent courts of the State of New Jersey and agree that any litigation in any way related to this Agreement shall be submitted to such courts and that same shall be subject to the laws of the State of New Jersey without regard to its rules respecting choice of law. (19) 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 any of the parties hereto to be invalid, illegal or unenforceable such provision or provisions shall be validly reformed to as nearly approximate the intent of the parties as possible and, if unreformable; shall be divisible and deleted in such jurisdiction, elsewhere this Agreement shall not be affected. (20) Captions: The captions of this Agreement are for convenience -------- only, and shall not be deemed of any force or effect whatsoever in construing this Agreement. (21) Waiver: The failure on the party of a party to exercise or ------ enforce any right conferred upon it hereunder shall not be deemed to be a waiver of any such right, nor operate to bar the exercise or enforcement thereof at any time thereafter. (22) Survival: The following Articles of this Agreement shall survive -------- the termination or expiration of this Agreement: 5, 9, 10, 11, 15, 17, and 18. (23) Miscellaneous: This Agreement may be executed by the parties ------------- hereto in counterparts, each of which when so executed and delivered shall be considered to be an original, but all such counterparts shall together constitute but one and the same instrument. This Agreement is the complete agreement of the parties and supersedes all previous understandings and agreements relating to the subject matter hereof. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally , but only by an instrument in writing signed by the party against whom enforcement of the termination, amendment, supplement, waiver or modification is sought. IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto have executed this Agreement as of the day and year first above written. JANSSEN PHARMACEUTICA INC. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 17 License Agreement By: _________________________ Name: _______________________ Title: ______________________ Date: _______________________ {Second Janssen Signatory} - --------------------------- By: _________________________ Name: _______________________ Title: ______________________ Date: _______________________ MEDISORB TECHNOLOGIES INTERNATIONAL L.P. by: Medisorb Technologies International, Inc., its General Partner By: __________________________ Name: David R. Lohr ------------------------ Title: President ----------------------- Date: ________________________ 12059501.doc THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.18(A) 4 FIRST AMENDMENT TO DEVELOPMENT AGREEMENT FIRST AMENDMENT TO DEVELOPMENT AGREEMENT This First Amendment to that certain Development Agreement, dated 23 December --------------------- 1993 (hereinafter "the Development Agreement"), by and between MEDISORB TECHNOLOGIES INTERNATIONAL L.P. ("Medisorb"), a Delaware limited partnership, doing business at 6954 Cornell Road, Cincinnati, Ohio 45242, and JANSSEN PHARMACEUTICA INTERNATIONAL, a division of Cilag International AG, ("Janssen"), a Swiss business corporation, doing business at Kollerstrasse 38, CH-6300 Zug 6, Switzerland, is agreed this 6th day of December, 1995. --- -------- WHEREAS, the Parties desire to amend certain terms of the Development Agreement respecting the timing of Janssen's right to exercise its option to license MTI technology and, further, respecting, certain milestone dates; NOW THEREFORE, the parties agree to amend the Development Agreement as follows: (A) Section 4(A) of the Development Agreement is hereby amended in its entirety to read as follows: The initial term of this Agreement shall commence upon the date first above written and continue thereafter until the earlier of (i) the completion of the Development Program at the moment of finalization of the IRF, which is expected during the [ ], or (ii) [ ], unless earlier terminated pursuant to the provisions of this Section 4 or according to the terms of Section 16 below. However, in the event that the IRF has not been completed by [ ], if Janssen can show due diligence, this Agreement shall not terminate and will be extended for such period as Janssen requires to finalize the IRF, provided that during such extension Janssen continues to show due diligence. Due diligence, amongst other factors, shall mean the timely filing of required regulatory applications, including, without limitation, a CTX (clinical trial exemption certificate) and/or IND, and continuing to fund the Development Program in a commercially reasonable manner. (B) Section 6(A) of the Development Agreement is hereby amended in its entirety to read as follows: Medisorb hereby grants to Janssen an option, exercisable at any time during the term of this Agreement and continuing for a period of thirty (30) days thereafter to enter into the License Agreements (i.e., the first a worldwide license, excluding the United States, and the second a license encompassing only the United States) attached hereto as Exhibits B & C, respectively. All capitalized terms used in this First Amendment shall have the same meanings as defined in the Development Agreement. Other than the foregoing, all other terms of the Development Agreement remain in full force and effect. WITNESS the signature of both parties by their duly authorized officers: JANSSEN PHARMACEUTICA INTERNATIONAL A division of Cilag International AG By: /s/ Erik Rombouts ---------------------------------------- Name: Erik Rombouts -------------------------------------- Title: Operations Director ------------------------------------- Date: 12/12/95 -------------------------------------- THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIALS IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. DEVELOPMENT AGREEMENT AMENDMENT JANSSEN-MEDISORB [Second Janssen Signatory] - ------------------------- By: /s/ Heinz Schmid ----------------------------------- Name: Heinz Schmid --------------------------------- Title: General Manager -------------------------------- Date: 12/12/95 --------------------------------- MEDISORB TECHNOLOGIES INTERNATIONAL L.P. by: Medisorb Technologies International, Inc., its General Partner By: /s/ David R. Lohr --------------------------------- Name: David R. Lohr ------------------------------- Title: President ------------------------------ Date: December 6, 1995 ------------------------------- THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.19 5 LICENSE AGREEMENT DATED 2/13/96 LICENSE AGREEMENT This Agreement is made as of the 13 day February of 1996, between MEDISORB -- -------- ---- TECHNOLOGIES INTERNATIONAL L.P., a Delaware limited partnership (hereinafter "Medisorb") and JANSSEN PHARMACEUTICA INC., a New Jersey corporation ("Janssen US"). WHEREAS, Medisorb and Janssen Pharmaceutica International, an affiliate of Janssen US, have entered into a certain Development Agreement, dated December 23, 1993 (the "Development Agreement"), for the development of a Product (as described below); and WHEREAS, Janssen Pharmaceutica International has an option under the Development Agreement to enter into this License Agreement for the Medisorb technology required to make, use and sell the Product, which option Janssen Pharmaceutica International has assigned to Janssen US with the consent of Medisorb and which option Janssen US has elected to exercise; and WHEREAS, the parties believe that it is in their mutual best interest for Medisorb to license to Janssen US on an exclusive basis in the Territory, Medisorb Patents and Technical Information within the Field, upon the terms and conditions set forth herein; NOW, IT IS HEREBY AGREED AS FOLLOWS: (1) Definitions: The following terms shall have the meanings ascribed to ----------- them herein, unless the context otherwise requires: (a) "Affiliate" shall mean any company controlling, controlled by, or under common control with a party by ownership, directly or indirectly, of fifty percent (50%) or more of the total ownership or by the power to control the policies and actions of such company. (b) "Development Program" shall mean the development activities conducted by the parties pursuant to the Development Agreement. (c) "Field" shall mean the treatment of [ ]. (d) "Improvements" shall mean any improvements or developments to or of the Patents and Technical Information in the Field which Medisorb may acquire, THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 2 License Agreement discover, invent, originate, make, conceive or have a right to, in whole or in part, during the term of this Agreement, whether or not such improvement or development is patentable. (e) "Medisorb Polymers" shall mean bioresorbable aliphatic polyesters based on glycolide, lactide, caprolactone and combinations of such polymers, which are manufactured by Medisorb and utilized in Product(s) licensed under this Agreement. (f) "NDA" shall mean a New Drug Application and all supplements filed pursuant to the requirements of the United States Food and Drug Administration, including all documents, data and other information concerning Product which are necessary for, or included in, FDA approval to market a Product as more fully defined in 21 C.F.R. 314.5 et seq. or any other similar application for marketing authorization filed with the appropriate regulatory authorities in other countries of the Territory (as defined hereinafter). (g) "Net Sales" shall mean the gross amounts received from sales of Products during a calendar quarter to third parties by Janssen US, its Sublicensees or any Affiliate of either, less any: (i) applicable sales taxes; (ii) cash trade or quantity discounts; (iii) amounts repaid or credited by reason of rejections or return of goods; or (iv) freight, postage and duties paid for. No deduction from the gross sales price shall be made for any item of cost incurred by the seller in its own operations incident to the manufacture, sale or shipment of the product sold. For purposes hereof, Net Sales shall not include sales of a Product from Janssen US or an Affiliate of Janssen US to any Affiliate or Sublicensee of either; it being intended that Net Sales shall only include sales to unrelated third-parties. (h) "Patents" shall mean (i) any and all existing issued patents and patent applications or parts thereof which describe and claim a depot formulation of [ ], or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids and the production and use thereof; (ii) any other patents and patent applications filed by or on behalf of Medisorb, or under which Medisorb has the rights to grant licenses, which are needed to practice the inventions; and (iii) any reissues, extensions, substitutions, confirmations, registrations, revalidations, additions, continuations, continuations-in-part, or divisions of or to any of the foregoing which are granted hereafter or any additional protection certificate granted with respect thereto. (i) "Product(s)" shall mean any and all depot formulations of [ ], or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids which are designed to deliver [ ], or any of its chemical analogues, over an extended period. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 3 License Agreement (j) "Sublicensees" shall mean any company or companies, other than Janssen US's Affiliates, sublicensed by Janssen US. (k) "Technical Information" shall mean all unpatented information, know-how, practical experience, procedures, methodology, specifications, formulae and data whether or not the same shall be patentable which have been heretofore developed or acquired by Medisorb prior to the date of this Agreement and which are necessary in order to use, manufacture or sell Products in the Field. (l) "Territory" shall mean the United States, its Territories, Protectorates, Commonwealths, and all other political subdivisions of the United States. (2) License Grant ------------- (a) Medisorb hereby grants to Janssen US in the Territory an exclusive license under the Patents and Technical Information existing prior to the effective date of this Agreement, with the right to grant sublicenses thereunder, for all purposes within the Field to practice and use the Patents and Technical Information, including the rights to manufacture and have manufactured, to use and have used, and to sell and have sold Products. Medisorb exclusively retains all rights under the Patents and Technical Information outside the Field and for use other than in Products. The right to grant sublicenses granted hereunder is exclusive to Janssen US and shall not extend to Janssen US Affiliates or Sublicensees. (b) Medisorb shall offer to Janssen US for incorporation into this License Agreement on reasonable terms and conditions, Medisorb Improvements in the Field which, if incorporated into Janssen US's then current commercial Product(s), would: (i) result in significant changes in either the specifications for such Product(s) or the processes for producing such Product(s), and (ii) would reasonably be expected to result in enhanced market value and/or profitability of such Product(s). Examples of such Improvements would include: (i) the development by Medisorb of a non-aqueous injection vehicle which offers significant advantages with respect to ease of administration and (ii) the development by Medisorb of technology enabling [ ]. It is the parties' understanding that the effect of any such license amendment would, in general, be either an extension of the term of this Agreement for a mutually agreed period or a marginal increase in the then current royalty rate. All other Medisorb Improvements shall be made available to Janssen US for its use without further agreement. Proprietary rights to Improvements jointly developed by Medisorb and Janssen US or any of its Affiliates shall be governed by the terms of Section 5(c) of this Agreement. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 4 License Agreement (c) In the event that at any time during the term of this Agreement Medisorb is unable for any reason whatsoever to supply the Medisorb Polymers required by Janssen U.S. for use in Products, then the license granted under paragraph 2(a) above shall be expanded to include the Medisorb Technology required to make and use the Medisorb Polymers. (3) Royalties: ---------- (a) Janssen US shall pay or cause to be paid to Medisorb a running royalty with respect to all Products sold to customers in the Territory by Janssen US, its Affiliates and Sublicensees, payable quarter-annually in arrears within sixty (60) days following the end of Janssen US's regular fiscal quarters in any year during the term hereof, as follows: (i) [ ]% of the Net Sales of each unit of Product sold during the preceding calendar quarter during the term hereof, if such unit of Product was manufactured by Medisorb pursuant to a written contract for the supply of Product; or (ii) [ ]% of the Net Sales of each unit of Product sold during the preceding calendar quarter during the term hereof, if such unit of Product was not manufactured by Medisorb pursuant to a written contract for the supply of Product. Any withholding or other tax that Janssen US or any of its Affiliates or Sublicensees are required by statute to withhold and pay on behalf of Medisorb with respect to the royalties payable to Medisorb under this Agreement shall be deducted from said royalties and paid contemporaneously with the remittance to Medisorb; provided, however, that in regard to any tax so deducted Janssen US shall furnish Medisorb with proper evidence of the taxes paid on its behalf. (b) In the event that Product is not claimed in a valid Patent effective in the Territory and a similar product obtains a market share greater than [ ]% of the total market revenues for Products and similar products in such country, the parties agree to meet and negotiate in good faith an appropriate reduction in the royalty rate then in effect. In no event shall a reduction in royalty rates pursuant to this section result in royalty rates [ ] of the rates specified under Section 3(a)(i) and 3(a)(ii) of this Agreement. For the purposes of this section, "similar product" shall mean a generic version of the Product(s) where: (i) the active agent is [ ], or a chemical analogue thereof and (ii) the excipient is comprised of lactic and/or glycolic acids. In the event that patent protection in the Territory for Product(s) becomes available subsequent to a royalty reduction pursuant to this section, the parties agree to (i) reinstitute the royalty otherwise applicable, and (ii) in the event that any recovery is obtained for prior infringement of the subsequently issued patent, the parties will first apply such recoveries to reimbursing Medisorb for royalties it would otherwise have received. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 5 License Agreement (c) Janssen US shall keep complete and adequate records with respect to the proceeds of Products on which it has to pay royalties payable hereunder for at least two (2) years after expiry of the year they concern. Medisorb shall have the right to have such records of Janssen US inspected and examined, at Medisorb's expense, for the purpose of determining the correctness of royalty payments made hereunder. Such inspection shall be made by an independent, certified public accountant to whom Janssen US shall have no reasonable objection. Such accountant shall not disclose to Medisorb any information other than that necessary to verify the accuracy of the reports and payments made pursuant to this Agreement. It is understood that such examination with respect to any quarterly accounting period shall take place not later than two (2) years following the expiration of said period. Not more than one examination per year shall take place. Based upon the verification of such reports and whenever there is reasonable doubt about the accuracy of the sales of Product realized by an Affiliate or sublicensee, Medisorb may reasonably request Janssen US to audit the books of such Affiliate or such sublicensee in accordance with any applicable contractual provision, in order to confirm the accuracy of such reports. (4) Production of Product/Technology Transfer: ----------------------------------------- (a) Janssen US shall use its reasonable efforts consistent with its overall business practices and strategies to commercialize and market Product, or to have the same commercialized and marketed in the Territory. (b) In the event that Janssen US determines to manufacture Product itself or through an Affiliate or have Product manufactured by a third party, Medisorb shall transfer to Janssen US and/or Affiliate all relevant Technical Information, and provide such technical assistance, upon mutually agreed terms and conditions, as is required by Janssen US in order to enable the manufacture of Product by Janssen US, its Affiliate or its designated third party manufacturer. However, with respect to such third party manufacturers, except as limited by a written Product manufacturing agreement between Janssen US and Medisorb, Medisorb will have a right of first refusal as to the manufacture and supply to Janssen US of all Product(s), and component bioabsorbable polymers utilized in such Product(s). Medisorb will have a period of thirty (30) days following written notice from Janssen US of terms it is offering to, or prepared to accept from, a third party manufacturer to notify Janssen US of its intention to exercise its right of first refusal to supply Product and/or component bioabsorbable polymers thereof to Janssen US, its Affiliates and Licensees on terms no less favorable to Janssen US than those offered by such THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 6 License Agreement third party manufacturer. Such third party manufacturer cannot be an in-kind competitor to Medisorb and must be reasonably acceptable to Medisorb with respect to confidential protection of Medisorb's Technical Information. In the event that at any time during the term of this Agreement Medisorb is unable for any reason whatsoever to supply the Medisorb Polymers required by Janssen U.S. for use in Products, then the right of first refusal under this paragraph respecting the supply of the component bioabsorbable polymers shall be eliminated. For the purposes of this section, an "in-kind" competitor shall mean any organization which regularly engages in the contract development and/or contract manufacture of injectable controlled release drug delivery systems comprising a polymeric excipient based on lactic and/or glycolic acids and/or other closely related monomers. This Section 4(b) specifically supersedes Section 7(B) of the Development Agreement, which Section 7(B) shall be of no further force or effect. (5) Proprietary Rights ------------------ (a) Medisorb will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to absorbable polymers, controlled release of active agents, and/or manufacturing methods or processes relating to such polymers and the controlled delivery systems for active agents based on such polymers previously owned by Medisorb or developed by Medisorb as a result of the Development Program or otherwise. Medisorb will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Janssen US agrees to provide Medisorb with any necessary utility information. Medisorb shall inform Janssen US of any patent application it wishes to file to protect proprietary rights defined in Article 5, resulting from either the Development Program or the preliminary Development Program and shall forward a copy of any such patent application to Janssen US at least one month prior to filing. Medisorb shall consider any suggestions made by Janssen US for amplifying such application and shall accordingly amend the application where in Medisorb's opinion it is appropriate. Medisorb shall not abandon part or whole of any of the patents or patent applications without having first consulted Janssen US, which shall have the right to further pursue any patents or patent applications which Medisorb wishes to abandon, or parts thereof, in its own name and at its own expense. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 7 License Agreement (b) Janssen US and/or its Affiliate will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to [ ] or any chemical analogues of [ ] with similar physiological activity previously owned by Janssen US and/or its Affiliate or developed by Janssen US and/or affiliate as a result of this Agreement or otherwise. Janssen US and/or its Affiliate will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Medisorb agrees to provide Janssen US with any necessary utility information. (c) Any inventions, other than those falling under either section 5(a) or 5(b) hereof, having an inventorship jointly between at least one employee of Janssen US or an Affiliate of Janssen US and one employee of Medisorb or an Affiliate of Medisorb shall be jointly-owned by Janssen US or Janssen US Affiliate as the case may be and Medisorb. Each party will cooperate fully in the filing and prosecution of such patent applications. Janssen US and Medisorb shall agree on which of both shall be responsible for the filing, prosecution and maintenance of any such joint patent applications and patents (hereinafter referred to as the "Responsible Party") in Territory. In principle, the party having contributed the most to the invention to be protected shall be the responsible party, unless agreed upon differently. Upon mutual consent, the responsible party may select an agent for drafting, filing and prosecuting a joint application. However, both parties shall agree who shall be the agent and to what extent this agent shall be used. The Responsible Party shall consult the other party when drafting any new jointly owned patent application. The final draft shall be forwarded to the other party at least one month prior to filing to give the opportunity to make final comments. The Responsible Party shall not abandon part or whole of any of the patents or patent applications without having first consulted the other party, which shall have the right to further pursue any patents or patent applications which the responsible party wishes to abandon, or parts thereof, in its own name and at its own expense. All out-of-pocket costs made in relation to joint patent applications and patents in the Territory shall be shared equally by Janssen US and Medisorb. A statement of costs shall be made up on a quarterly basis and invoiced to the other party. Medisorb shall grant to Janssen US an exclusive fully-paid up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 8 License Agreement divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of [ ] or any chemical analogues of [ ] with similar physiological activity. However, nothing contained in this paragraph shall obviate Janssen US's obligation to pay royalties under Section 3 hereof with respect to any Products developed hereunder. Janssen US shall grant to Medisorb an exclusive fully paid-up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of bioabsorbable polymers in the field of human and/or veterinary medicine. (d) In addition, each party will retain exclusive title to its respective confidential information in accordance with the provisions of Article 9 below. (6) Patent Infringement ------------------- (a) In the event that either party becomes aware that any third party is infringing in the Territory any patents included within the Patents, the party becoming aware of such infringement shall promptly give notice of such infringement to the other party. Any possible action against such alleged infringement of the Patents will be carried out by either or both of the parties in accordance with the provisions specified hereinafter in paragraphs (b), (c), (d) and (e). (b) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Medisorb retains full title and ownership pursuant to Article 5 a), Medisorb shall use all reasonable efforts to take action against such infringement in its own name, at its own expense and on its own behalf. If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Janssen US shall be entitled at its own discretion and at its own expense, to take immediate action against such infringement in its own name, at its own expense and on its own behalf. Medisorb will give all reasonable assistance to Janssen in taking such action in accordance with Article 6(e), including giving Janssen the authority to file and prosecute such suit and, if necessary, being named a party in such action. If Janssen US commences or assumes such action, Janssen US may credit [ ] of THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 9 License Agreement any royalty otherwise due to Medisorb for sales in such country or countries against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen US. The amount of expenses so deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen US as a result of such action. Except for such repayment of royalties deducted, Janssen US shall be entitled to retain all recoveries therefrom. In no event shall Medisorb settle with such infringing third party in the Field without the prior written consent of Janssen US. (c) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen US or any of its Affiliates retains full title and ownership pursuant to Article 5 B), Janssen US shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen US fails to take action against such infringement, or if Janssen US does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement. Medisorb shall be entitled to retain all recoveries, if any, therefrom. (d) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen US or any of its Affiliates and Medisorb jointly retain full title and ownership pursuant to Article 5 (c), and whenever in such case the infringing product would be a drug product falling within the definition of the Field, Janssen US shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen US fails to take action against such infringement, or if Janssen US does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Janssen US will have a continuing right to take over any such action at its own expense and shall pay to Medisorb from any recoveries Janssen US receives (i) Medisorb's expenses and (ii) from any sums remaining after deduction of Medisorb's and Janssen US's expenses, an amount proportionate to Medisorb's expenses in relation to Janssen US's expenses. Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen US or any of its Affiliates and Medisorb jointly retain full title and ownership pursuant to Article 5 (c), and whenever in such case the THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 10 License Agreement infringing product would be a drug product falling outside the definition of the Field, Medisorb shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Janssen US shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Medisorb will have a continuing right to take over any such action at its own expense. If Janssen US commences or assumes such action, Janssen US may credit [ ] of any royalty otherwise payable to Medisorb payable hereunder against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen US. The amount of expenses so deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen US as a result of such action. Except for such repayment of royalties deducted, Janssen US shall be entitled to retain all recoveries therefrom. (e) Each party agrees to cooperate reasonably with the other party in such litigation, including making available to the other party records, information, and evidence relevant to the infringement of the Patent. (7) Third Party Intellectual Property Rights ---------------------------------------- (a) Medisorb warrants that to the best of its current knowledge and belief the Products to be developed hereunder will not infringe the patent rights of any third party. (b) In the event that the manufacture, use or sale of the Product would constitute an infringement of the rights of a third party in the Territory because of the use of the Patents or Medisorb's know how, each party shall, as soon as it becomes aware of the same, notify the other thereof in writing, giving in the same notice full details known to it of the rights of such third party and the extent of any alleged infringement. The parties shall after receipt of such notice meet to discuss the situation, and, to the extent necessary attempt to agree on a course of action in order to permit Janssen US to practice the license granted hereunder. Such course of action may include: (a) modifying the Product or its manufacture so as to be noninfringing; (b) obtaining an appropriate license from such third party; or (c) fight the claim or suit. In the event that within a short period of time, the parties fail to agree on an appropriate course of action Janssen US may decide upon the course of action in the interest of the further development, manufacturing or commercialization of the Product. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 11 License Agreement (c) In the event that the parties cannot agree on modifying the Product or in the case that such modification would not be economically viable or regulatory feasible, Janssen US, whenever it relates to know how, whether patented or not, owned by Janssen US in accordance with the provisions of Article 5 (b) and (c), or Medisorb, whenever it relates to know how, whether patented or not, owned by Medisorb in accordance with the provisions of Article 5 (a), will have the right to negotiate with such third party for such license. Both parties hereto will in any event in good faith consult with each other with respect to such negotiations and the party negotiating such license as indicated above, will make every effort to minimize the amount of license fees and royalties payable thereunder. In no event shall either party as a result of such settlement, grant a sublicense or cross license to the third party to settle the suit, without the prior written approval of the other party. In the event that such negotiations result in a consummated agreement, any license fee and/or royalties to be paid thereunder shall be paid by the party responsible for the negotiations as indicated above, [ ] of any license fees or royalties paid by Janssen US under such license will be creditable against royalties due to Medisorb hereunder. (d) In the event that either or both parties would further to such notification under Paragraph 7 (b) decide to defend such suit or claim in which a third party alleges that the manufacture, use or selling of the Product in the Territory infringes said third party's patent in, Janssen US shall have the right to apply [ ] of the royalties due to Medisorb on the sales of the allegedly infringing Product against its litigation expenses. (8) Term: ---- (a) Except as otherwise provided herein, this Agreement and the term of the license granted to Janssen US hereunder shall commence on the date first written above and shall expire (i) upon expiration of the last to expire Patent or (ii) fifteen (15) years after the date of the first commercial sale of Product in the Territory, whichever is later; provided, that in no event shall the license granted hereunder expire later than the twentieth anniversary of the first commercial sale of Product. After expiration of the license granted to Janssen US hereunder, Janssen US shall retain a fully paid-up non-exclusive license to manufacture, use and sell Products in the Field in the Territory. (b) Medisorb may convert the exclusive license granted under this Agreement to non-exclusive if Janssen US does not maintain the following minimum annual royalty payments to Medisorb. With respect to the entire Territory, the minimum royalty obligation will first apply to the twelve month period following the anniversary of the end of the month in which the Product was launched. During the first twelve month period and each subsequent twelve month period that such minimum royalty obligation is applicable, the THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 12 License Agreement minimum royalty amount to be paid by Janssen US will be calculated by multiplying the applicable royalty rate by [ ] percent of the actual aggregate net sales of other [ ] products in the Territory during such twelve month period. Janssen US shall have the right to make up any shortfall in minimum royalty payments from Product sales in the Territory provided, such make-up payment is made at the same time and in the same manner as required for the underlying minimum royalty obligation. (c) In the event that either party shall enter or be put into voluntary or compulsory liquidation or have a receiver appointed or default in the observance or performance of its obligations under this Agreement and shall fail to remedy such default within ninety (90) days after the delivery of written notice from the other party, the other party shall be entitled upon giving written notice to terminate this Agreement. (d) Janssen US may terminate this Agreement without cause upon 30 days prior written notice. Thereafter, Janssen US shall have no further rights or privileges with respect to the use of Medisorb Technology in Products and Medisorb shall be under no further obligation of non-competition or exclusive dealing. (e) Any early termination of the Agreement shall be without prejudice to the rights of either party against the other accrued under this Agreement prior to termination. (f) Upon any termination of this Agreement, any remaining inventory of Product may be sold, provided all royalties otherwise due hereunder are paid with respect to such sales. (g) All rights and licenses granted under or pursuant to this Agreement by Medisorb to Janssen U.S. are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11, U.S. Code (the "Bankruptcy Code"), licenses to "intellectual property" as defined under section 101(60) of the Bankruptcy Code. The parties agree that Janssen, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. (9) Confidentiality: --------------- (a) Each party agrees to keep confidential and to not use for any purpose other than as set forth herein all technical information and materials supplied by the other hereunder and any information a party may acquire about the other or its activities as a result of entering into this Agreement, provided that such obligation shall not apply to THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 13 License Agreement technical information or material which: (i) was in the receiving party's possession without restriction prior to receipt from the other party or its Affiliates; (ii) was in the public domain at the time of receipt; (iii) becomes part of the public domain through no fault of the receiving party; (iv) shall be lawfully received from a third party with a right of further disclosure; (v) shall be required to be disclosed by law, by regulation or by the rules of any securities exchange. (b) Except as may be otherwise provided herein, the confidentiality obligations as set out in this Section shall continue so long as this Agreement remains in force and thereafter for a period of seven (7) years. (c) Janssen US shall cause its Affiliates and Sublicensees to abide by the obligations of confidentiality with respect to unpublished information within the Patents and Technical Information. (d) Any confidential information relating to the subject matter of this Agreement imparted to the other party prior to the execution of this Agreement shall be considered to fall under the terms of this Agreement. (10) Disclaimer of Warranty: Medisorb makes no representations or ---------------------- warranties, express or implied, with respect to the Medisorb Patents and Technical Information licensed to Janssen US hereunder, including without limitation any warranties of merchantability or fitness for a particular purpose. (11) Liability --------- (a) Janssen US agrees to indemnify, defend and hold harmless Medisorb from and against any liability, loss, damages and expenses (including reasonable attorney fees) Medisorb may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Medisorb by reason of personal injury or damage to property arising out or caused by Janssen US's promotion, use and sale of the Product, except where such liabilities claims, demands, costs or judgments are caused by Medisorb's failure to provide Janssen US with any information as specified in Section 12 (c) and Article 13. Medisorb will notify Janssen US as soon as it becomes aware of any such claim or action and agrees to give reasonable assistance in the investigation and defense of such claim or action it being understood that it shall allow Janssen US to control the disposition of the same. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 14 License Agreement (b) Medisorb agrees to indemnify, defend and hold harmless Janssen US from and against any liability, loss, damages and expenses (including reasonable attorney fees) Janssen US may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Janssen US by reason of personal injury or damage to property arising out or caused by Medisorb's failure to provide Janssen US with any information as specified in Section 12 (c) and Article 13. (c) In no event shall either party be liable for loss of profits, loss of goodwill or any consequential or incidental damages of any kind of the other party. (12) Product Information and Adverse Drug Events ------------------------------------------- (a) As Janssen US has superior knowledge of the end-use applications to which Products licensed hereunder will be put, Janssen US is responsible for providing third parties with adequate information as to the medical profile of such Products. Janssen US will provide Medisorb with copies of the product information document which is part of the NDA for the Product. (b) Medisorb does not claim the expertise to judge whether Product(s) will perform acceptably in Janssen US's application(s). Janssen US is the sole judge as to whether Product(s) will perform acceptably in Janssen US's application(s). Janssen US represents and warrants on an on-going basis during the term of this agreement that it has the capability to assess the suitability of Product(s) in Janssen US's application(s) and agrees to conduct adequate testing to confirm the safety and efficacy of Products prior to commercialization. (c) Medisorb will provide to Janssen US promptly after its discovery by Medisorb, any information in its possession which indicates adverse effects in humans associated with the Products, including the bioabsorbable polymeric components thereof, licensed hereunder. For the purpose of this Agreement "adverse event" shall mean an experience which is noxious and unintended and which occurs at doses normally used in man for the prophylaxis, diagnosis or therapy of a disease or for the modification of a physiological function and any report of an overdose. (13) Government Approvals -------------------- Janssen US shall be responsible for conducting all necessary testing as well as determining what, if any, government approvals are required for the use and sale of Product licensed hereunder and shall comply with all such requirements prior to and following the sale or distribution of such Products. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 15 License Agreement Medisorb shall cooperate fully with Janssen US in obtaining regulatory approvals for Product licensed hereunder and shall, at Janssen US's request, provide appropriate regulatory authorities with any and all information concerning Medisorb's technology, Medisorb polymers and Medisorb's manufacturing process for such Product. In this respect Medisorb undertakes that it has submitted or will as soon as possible submit a type IV Drug Master File to the FDA identifying Medisorb's method of manufacture, release specifications and testing methods used in the manufacture of Medisorb Polymers and a type I Drug Master File of Medisorb's manufacturing facilities where Product may be manufactured. Medisorb will authorize Janssen U.S. at its request to cross-reference any Drug Master Files relating to the Medisorb Polymers. (14) Force Majeure: Neither party shall be liable for its failure to ------------- perform any of its obligations hereunder if such failure is occasioned by a contingency beyond its reasonable control including, but not limited to, occurrences such as strikes or other labor disturbances, lock out, riot, war, default by a common carrier, fire, flood, storm, earthquake, other acts of God, inability to obtain raw materials, failure of plant facilities or government regulation, act or failure to act. Each party shall notify the other immediately upon occurrence or cessation of any such contingencies. If such contingency continues unabated for at least 180 consecutive days, either party shall have the right to terminate this Agreement without further obligation beyond those actually incurred prior to such termination. (15) Press Communications: Neither party shall originate any publicity, -------------------- news release or public announcement, written or oral relating to this Agreement, including its existence, without the prior written approval of the other party. (16) Notices: Any legal notice required or permitted hereunder shall be ------- considered properly given if in writing and sent by first class mail, certified mail or by telefacsimile to the party being notified at the respective address of such party as follows: If to Medisorb: Medisorb Technologies International L.P. 6954 Cornell Road Cincinnati, OH 45242 Facsimile: 513-489-2348 If to Janssen US: THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 16 License Agreement Janssen U.S. 1125 Trenton-Harbourton Road P.O. Box 200 Titusville, New Jersey 08560-0200 Facsimile: 609-630-2616 with a copy to Janssen Pharmaceutica International Kollerstrasse 38 6300 Zug 6 Switzerland Facsimile: 00-41-42449565 Such notice shall be effective upon receipt or upon refusal to accept such notice. In any case, notice shall be presumed effective no later than five (5) days after such notice is sent. Neither party shall originate any publicity, news release or public announcement, written or oral, relating to this Agreement, including its existence, without the written approval of the other party. (17) Assignment: This Agreement shall not be assigned by either party ---------- without the prior written consent of the other party; provided, however, that assignment shall be permitted without such consent to any party, not less than 50% of the total interest of which owns, is owned by, or is under common control with the assigning party. In the event of any such permitted assignment the assignee shall be subject to and shall agree in writing to be bound by the terms and conditions of this Agreement. (18) Dispute Resolution: The parties shall amicably discuss and ------------------ negotiate any matters which arise under this Agreement and are not specifically set forth hereunder. If any disputes arise under this Agreement, the parties shall use their reasonable efforts to meet and resolve such disputes. In the event that the parties are unable to resolve any such disputes, then both parties hereby agree to submit said disputes to the jurisdiction of the competent courts of the State of New Jersey and agree that any litigation in any way related to this Agreement shall be submitted to such courts and that same shall be subject to the laws of the State of New Jersey without regard to its rules respecting choice of law. (19) 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 any of the parties hereto to be invalid, illegal or unenforceable such provision or provisions shall be validly reformed to as nearly approximate the intent of the THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 17 License Agreement parties as possible and, if unreformable; shall be divisible and deleted in such jurisdiction, elsewhere this Agreement shall not be affected. (20) Captions: The captions of this Agreement are for convenience -------- only, and shall not be deemed of any force or effect whatsoever in construing this Agreement. (21) Waiver: The failure on the party of a party to exercise or ------ enforce any right conferred upon it hereunder shall not be deemed to be a waiver of any such right, nor operate to bar the exercise or enforcement thereof at any time thereafter. (22) Survival: The following Articles of this Agreement shall survive -------- the termination or expiration of this Agreement: 5, 9, 10, 11, 15, 17, and 18. (23) Miscellaneous: This Agreement may be executed by the parties ------------- hereto in counterparts, each of which when so executed and delivered shall be considered to be an original, but all such counterparts shall together constitute but one and the same instrument. This Agreement is the complete agreement of the parties and supersedes all previous understandings and agreements relating to the subject matter hereof. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally , but only by an instrument in writing signed by the party against whom enforcement of the termination, amendment, supplement, waiver or modification is sought. IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto have executed this Agreement as of the day and year first above written. JANSSEN PHARMACEUTICA INC. By: /s/ Paula F. Costa ------------------------------ Name: Paula F. Costa ---------------------------- Title: President --------------------------- Date: 2/13/96 ---------------------------- (Second Janssen Signatory) - --------------------------- By: /s/ Bruce D. Given ------------------------------ Name: Bruce D. Given ---------------------------- Title: Group Vice President --------------------------- THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen US-Medisorb Page 18 License Agreement Date: 2/16/96 ---------------------------- MEDISORB TECHNOLOGIES INTERNATIONAL L.P. by: Medisorb Technologies International, Inc., its General Partner By: /s/ David R. Lohr ------------------------------ Name: David R. Lohr ---------------------------- Title: President --------------------------- Date: January 31, 1996 ---------------------------- THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.20 6 LICENSE AGREEMENT DATED 2/21/96 LICENSE AGREEMENT This Agreement is made as of the 21 day February of 1996, between -- -------- ---- MEDISORB TECHNOLOGIES INTERNATIONAL L.P., a Delaware limited partnership (hereinafter "Medisorb") and JANSSEN PHARMACEUTICA INTERNATIONAL, a division of Cilag International AG, a Swiss business corporation ("Janssen"). WHEREAS, the parties have entered into a certain Development Agreement, dated December 23, 1993 (the "Development Agreement"), for the development of a Product (as described below); and WHEREAS, Janssen has an option under the Development Agreement to enter into this License Agreement for the Medisorb technology required to make, use and sell the Product, which option Janssen has elected to exercise; and WHEREAS, the parties believe that it is in their mutual best interest for Medisorb to license to Janssen on an exclusive basis in the Territory, Medisorb Patents and Technical Information within the Field, upon the terms and conditions set forth herein; NOW, IT IS HEREBY AGREED AS FOLLOWS: (1) Definitions: The following terms shall have the meanings ascribed ----------- to them herein, unless the context otherwise requires: (a) "Affiliate" shall mean any company controlling, controlled by, or under common control with a party by ownership, directly or indirectly, of fifty percent (50%) or more of the total ownership or by the power to control the policies and actions of such company. (b) "Development Program" shall mean the development activities conducted by the parties pursuant to the Development Agreement. (c) "Field" shall mean the treatment of [ ]. (d) "Improvements" shall mean any improvements or developments to or of the Patents and Technical Information in the Field which Medisorb may acquire, THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 2 discover, invent, originate, make, conceive or have a right to, in whole or in part, during the term of this Agreement, whether or not such improvement or development is patentable. (e) "International Registration Dossier" ("IRF") shall mean the Product registration file compiled by Janssen Pharmaceutica N.V., Beerse, Belgium on behalf of Janssen, the contents and format being such that it can be submitted as such to national health authorities or be used as a basis for a national application for marketing authorization for the Products in the specific format required by such national health authorities. (f) "Medisorb Polymers" shall mean bioresorbable aliphatic polyesters based on glycolide, lactide, caprolactone and combinations of such polymers, which are manufactured by Medisorb and utilized in Product(s) licensed under this Agreement. (g) "Net Sales" shall mean the gross amounts received from sales of Products during a calendar quarter to third parties by Janssen, its Sublicensees or any Affiliate of either, less any: (i) applicable sales taxes; (ii) cash trade or quantity discounts; (iii) amounts repaid or credited by reason of rejections or return of goods; or (iv) freight, postage and duties paid for. No deduction from the gross sales price shall be made for any item of cost incurred by the seller in its own operations incident to the manufacture, sale or shipment of the product sold. For purposes hereof, Net Sales shall not include sales of a Product from Janssen or an Affiliate of Janssen to any Affiliate or Sublicensee of either; it being intended that Net Sales shall only include sales to unrelated third-parties. (h) "Patents" shall mean (i) any and all existing issued patents and patent applications or parts thereof which describe and claim a depot formulation of [ ] or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids and the production and use thereof; (ii) any other patents and patent applications filed by or on behalf of Medisorb, or under which Medisorb has the rights to grant licenses, which are needed to practice the inventions; and (iii) any reissues, extensions, substitutions, confirmations, registrations, revalidations, additions, continuations, continuations-in-part, or divisions of or to any of the foregoing which are granted hereafter or any additional protection certificate granted with respect thereto. (i) "Product(s)" shall mean any and all depot formulations of [ ] or any chemical analogues of [ ] with similar physiological activity, based on polymers of lactic and glycolic acids which are designed to deliver [ ], or any of its chemical analogues, over an extended period. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 3 (j) "Sublicensees" shall mean any company or companies, other than Janssen's Affiliates, sublicensed by Janssen. (k) "Technical Information" shall mean all unpatented information, know-how, practical experience, procedures, methodology, specifications, formulae and data whether or not the same shall be patentable which have been heretofore developed or acquired by Medisorb prior to the date of this Agreement and which are necessary in order to use, manufacture or sell Products in the Field. (l) "Territory" shall mean worldwide with the exception of the United States, its Territories, Protectorates, Commonwealths, and all other political subdivisions of the United States. (2) License Grant ------------- (a) Medisorb hereby grants to Janssen in the Territory an exclusive license under the Patents and Technical Information existing prior to the effective date of this Agreement, with the right to grant sublicenses thereunder, for all purposes within the Field to practice and use the Patents and Technical Information, including the rights to manufacture and have manufactured, to use and have used, and to sell and have sold Products. Medisorb exclusively retains all rights under the Patents and Technical Information outside the Field and for use other than in Products. The right to grant sublicenses granted hereunder is exclusive to Janssen and shall not extend to Janssen Affiliates or Sublicensees. (b) Medisorb shall offer to Janssen for incorporation into this License Agreement on reasonable terms and conditions, Medisorb Improvements in the Field which, if incorporated into Janssen's then current commercial Product(s), would: (i) result in significant changes in either the specifications for such Product(s) or the processes for producing such Product(s), and (ii) would reasonably be expected to result in enhanced market value and/or profitability of such Product(s). Examples of such Improvements would include: (i) the development by Medisorb of a non-aqueous injection vehicle which offers significant advantages with respect to ease of administration and (ii) the development by Medisorb of technology enabling[ ]. It is the parties' understanding that the effect of any such license amendment would, in general, be either an extension of the term of this Agreement for a mutually agreed period or a marginal increase in the then current royalty rate . All other Medisorb Improvements shall be made available to Janssen for its use without further agreement. Proprietary rights to Improvements jointly developed by Medisorb and Janssen shall be governed by the terms of Section 5(c) of this Agreement. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 4 (c) In the event that at any time during the term of this Agreement Medisorb is unable for any reason whatsoever to supply the Medisorb Polymers required by Janssen for use in Products, then the license granted under paragraph 2(a) above shall be expanded to include the Medisorb Technology required to make and use the Medisorb Polymers. (3) Royalties: ---------- (a) Janssen shall pay or cause to be paid to Medisorb a running royalty with respect to all Products sold to customers by Janssen, its Affiliates and Sublicensees, payable quarter-annually in arrears within sixty (60) days following the end of each three (3) month period ending on March 31, June 30, September 30 or December 31 in any year during the term hereof, as follows: (i) [ ]% of the Net Sales of each unit of Product sold during the preceding calendar quarter during the term hereof, if such unit of Product was manufactured by Medisorb pursuant to a written contract for the supply of Product; or (ii) [ ]% of the Net Sales of each unit of Product sold during the preceding calendar quarter during the term hereof, if such unit of Product was not manufactured by Medisorb pursuant to a written contract for the supply of Product. Any withholding or other tax that Janssen or any of its Affiliates are required by statute to withhold and pay on behalf of Medisorb with respect to the royalties payable to Medisorb under this Agreement shall be deducted from said royalties and paid contemporaneously with the remittance to Medisorb; provided, however, that in regard to any tax so deducted Janssen shall furnish Medisorb with proper evidence of the taxes paid on its behalf. (b) In the event that, in a country where Product is not claimed in a valid Patent, a similar product obtains a market share greater than [ ]% of the total market revenues for Products and similar products in such country, the parties agree to meet and negotiate in good faith an appropriate reduction in the royalty rate then in effect. In no event shall a reduction in royalty rates pursuant to this section result in royalty rates [ ] of the rates specified under Section 3(a)(i) and 3(a)(ii) of this Agreement. For the purposes of this section, "similar product" shall mean a generic version of the Product(s) where: (i) the active agent is [ ], or a chemical analogue thereof and (ii) the excipient is comprised of lactic and/or glycolic acids. In the event that patent protection for Product(s) becomes available subsequent to a royalty reduction pursuant to this section, the parties agree to (i) reinstitute the royalty otherwise applicable, and (ii) in the event that any recovery is obtained for prior infringement of the subsequently issued patent, the parties will first apply such recoveries to reimbursing Medisorb for royalties it would otherwise have received. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 5 (c) Janssen shall keep complete and adequate records with respect to the proceeds of Products on which it has to pay royalties payable hereunder for at least two (2) years after expiry of the year they concern. Medisorb shall have the right to have such records of Janssen inspected and examined, at Medisorb's expense, for the purpose of determining the correctness of royalty payments made hereunder. Such inspection shall be made by an independent, certified public accountant to whom Janssen shall have no reasonable objection. Such accountant shall not disclose to Medisorb any information other than that necessary to verify the accuracy of the reports and payments made pursuant to this Agreement. It is understood that such examination with respect to any quarterly accounting period shall take place not later than two (2) years following the expiration of said period. Not more than one examination per year shall take place. Based upon the verification of such reports and whenever there is reasonable doubt about the accuracy of the sales of Product realized by an Affiliate or sublicensee, Medisorb may reasonably request Janssen to audit the books of such Affiliate or such sublicensee in accordance with any applicable contractual provision, in order to confirm the accuracy of such reports. (4) Production of Product/Technology Transfer: ----------------------------------------- (a) Janssen shall use its reasonable efforts to commercialize and market Product, or to have the same commercialized and marketed. (b) In the event that Janssen determines to manufacture Product itself or have Product manufactured by a third party, Medisorb shall transfer to Janssen all relevant Technical Information, and provide such technical assistance, upon mutually agreed terms and conditions, as is required by Janssen in order to enable the manufacture of Product by Janssen or its designated third party manufacturer. However, with respect to such third party manufacturers, except as limited by a written Product manufacturing agreement between Janssen and Medisorb, Medisorb will have a right of first refusal as to the manufacture and supply to Janssen of all Product(s), and component bioabsorbable polymers utilized in such Product(s). Medisorb will have a period of thirty (30) days following written notice from Janssen of terms it is offering to, or prepared to accept from, a third party manufacturer to notify Janssen of its intention to exercise its right of first refusal to supply Product and/or component bioabsorbable polymers thereof to Janssen, its Affiliates and Licensees on terms no less favorable to Janssen than those offered by such third party manufacturer. Such third party manufacturer cannot be an in-kind competitor to Medisorb and must be reasonably acceptable to Medisorb with respect to confidential protection of THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 6 Medisorb's Technical Information. In the event that at any time during the term of this Agreement Medisorb is unable for any reason whatsoever to supply the Medisorb Polymers required by Janssen for use in Products, then the right of first refusal under this paragraph respecting the supply of the component bioabsorbable polymers shall be eliminated. For the purposes of this section, an "in-kind" competitor shall mean any organization which regularly engages in the contract development and/or contract manufacture of injectable controlled release drug delivery systems comprising a polymeric excipient based on lactic and/or glycolic acids and/or other closely related monomers. This Section 4(b) specifically supercedes Section 7(B) of the Development Agreement, which Section 7(B) shall be of no further force or effect. (c) The right of first refusal granted to Medisorb pursuant to Section 4(b) above shall be contingent upon: (i) Medisorb and Janssen reaching an agreement concerning the financing, scheduling and construction in Europe of a Medisorb manufacturing facility within twelve (12) months of the date first above written or the initiation of Phase III human clinical trials, whichever is later, and (ii) prior to the qualification of Medisorb's European manufacturing facility, Medisorb using reasonable efforts to supply from its United States manufacturing facilities all of Janssen's commercial requirements for Product pursuant to the Product Supply Agreement anticipated by Section 7(A) of the Development Agreement. (5) Proprietary Rights ------------------ (a) Medisorb will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to absorbable polymers, controlled release of active agents, and/or manufacturing methods or processes relating to such polymers and the controlled delivery systems for active agents based on such polymers previously owned by Medisorb or developed by Medisorb as a result of the Development Program or otherwise. Medisorb will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Janssen agrees to provide Medisorb with any necessary utility information. Medisorb shall inform Janssen of any patent application it wishes to file to protect proprietary rights defined in Article 5, resulting from either the Development Program or the preliminary Development Program and shall forward a copy of any such patent application to Janssen at least one month prior to filing. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 7 Medisorb shall consider any suggestions made by Janssen for amplifying such application and shall accordingly amend the application where in Medisorb's opinion it is appropriate. Nine months after the first filing, Medisorb shall propose a list of countries in which it intends to file foreign equivalents. Janssen shall be given the opportunity to propose further countries to be added to the list. In case the adding of some or all of these further countries is unacceptable to Medisorb, Janssen shall have the right to file patent applications in those countries, in Medisorb's name and at Janssen expense. Medisorb shall assist in the transfer of rights for the latter patent applications and shall provide all information necessary to file and prosecute such patent applications. Medisorb shall not abandon part or whole of any of the patents or patent applications without having first consulted Janssen, which shall have the right to further pursue any patents or patent applications which Medisorb wishes to abandon, or parts thereof, in its own name and at its own expense. (b) Janssen and/or its Affiliate will retain title to and ownership of all technology (including, without limitation, all patents, inventions, and data relating thereto) relating to [ ] or any chemical analogues of [ ] with similar physiological activity previously owned by Janssen and/or its Affiliate or developed by Janssen as a result of this Agreement or otherwise. Janssen and/or its Affiliate will pay its own costs and expenses in connection with the protection of any such technology, including all patent application and maintenance costs and Medisorb agrees to provide Janssen with any necessary utility information. (c) Any inventions, other than those falling under either section 5(a) or 5(b) hereof, having an inventorship jointly between at least one employee of Janssen or an Affiliate of Janssen and one employee of Medisorb or an Affiliate of Medisorb shall be jointly-owned by Janssen and Medisorb. Each party will cooperate fully in the filing and prosecution of such patent applications. Janssen and Medisorb shall agree on which of both shall be responsible for the filing, prosecution and maintenance of any such joint patent applications and patents (hereinafter referred to as the "Responsible Party"). In principle, the party having contributed the most to the invention to be protected shall be the responsible party, unless agreed upon differently. Upon mutual consent, the responsible party may select an agent for drafting, filing and prosecuting a joint application. However, both parties shall agree who shall be the agent and to what extent this agent shall be used. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 8 The Responsible Party shall consult the other party when drafting any new jointly owned patent application. The final draft shall be forwarded to the other party at least one month prior to filing to give the opportunity to make final comments. The Responsible Party shall propose a list of countries in which it intends to file such patent applications. The other party shall be given the opportunity to propose further countries to be added to the list. In case the adding of some or all of these further countries is unacceptable to the Responsible Party, the other party shall have the right to file patent applications in those countries, in its own name and at its own expense. The Responsible Party shall assist in the transfer of rights for the latter patent applications and shall provide all information necessary to file and prosecute such patent applications. The Responsible Party shall not abandon part or whole of any of the patents or patent applications without having first consulted the other party, which shall have the right to further pursue any patents or patent applications which the responsible party wishes to abandon, or parts thereof, in its own name and at its own expense. All out-of-pocket costs made in relation to joint patent applications and patents shall be shared equally by Janssen and Medisorb. A statement of costs shall be made up on a quarterly basis and invoiced to the other party. Medisorb shall grant to Janssen an exclusive fully-paid up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of [ ] or any chemical analogues of [ ] with similar physiological activity. However, nothing contained in this paragraph shall obviate Janssen's obligation to pay royalties under Section 3 hereof with respect to any Products developed hereunder. Janssen shall grant to Medisorb an exclusive fully paid-up royalty free license with the right to sublicense to make, have made, use and sell under any such patents or patent applications for the duration of the patents, any continuations, continuations in part, divisions, patents of addition, reissues, renewals or extensions thereof or any supplementary protection certificates granted with respect thereto, in respect of any claims concerning the application of bioabsorbable polymers in the field of human and/or veterinary medicine. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 9 (d) In addition, each party will retain exclusive title to its respective confidential information in accordance with the provisions of Article 9 below. (6) Patent Infringement ------------------- (a) In the event that either party becomes aware that any third party is infringing any patents included within the Patents in any country or countries, the party becoming aware of such infringement shall promptly give notice of such infringement to the other party. Any possible action against such alleged infringement of the Patents will be carried out by either or both of the parties in accordance with the provisions specified hereinafter in paragraphs (b), (c), (d) and (e). (b) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Medisorb retains full title and ownership pursuant to Article 5 a), Medisorb shall use all reasonable efforts to take action against such infringement in its own name, at its own expense and on its own behalf. If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Janssen shall be entitled at its own discretion and at its own expense, to take immediate action against such infringement in its own name, at its own expense and on its own behalf. If Janssen commences or assumes such action, Janssen may credit [ ] of any royalty otherwise due to Medisorb for sales in such country or countries against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen. The amount of expenses so deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen as a result of such action. Except for such repayment of royalties deducted, Janssen shall be entitled to retain all recoveries therefrom. In no event shall Medisorb settle with such infringing third party in the Field without the prior written consent of Janssen. (c) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen retains full title and ownership pursuant to Article 5 B), Janssen shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen fails to take action against such infringement, or if Janssen does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 10 in paragraph (a) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement. Medisorb shall be entitled to retain all recoveries, if any, therefrom. (d) Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen and Medisorb jointly retain full title and ownership pursuant to Article 5 (c), and whenever in such case the infringing product would be a drug product falling within the definition of the Field, Janssen shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Janssen fails to take action against such infringement, or if Janssen does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Medisorb shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Janssen will have a continuing right to take over any such action at its own expense and shall pay to Medisorb from any recoveries Janssen receives (i) Medisorb's expenses and (ii) from any sums remaining after deduction of Medisorb's and Janssen's expenses, an amount proportionate to Medisorb's expenses in relation to Janssen's expenses. Whenever it would concern a patent or patent application falling within the definition of Patents and of which Janssen and Medisorb jointly retain full title and ownership pursuant to Article 5 (c), and whenever in such case the infringing product would be a drug product falling outside the definition of the Field, Medisorb shall have the right but not the obligation to take action against such infringement in its own name, at its own cost and on its own behalf. If Medisorb fails to take action against such infringement, or if Medisorb does not use reasonable efforts in carrying out such action after commencement thereof, within thirty (30) days after the notice referred to in paragraph (a) above or after having become aware of such infringement, Janssen shall be entitled at its own discretion and at its own expense, to take action against such infringement, it being understood that Medisorb will have a continuing right to take over any such action at its own expense. If Janssen commences or assumes such action, Janssen may credit [ ]of any royalty otherwise payable to Medisorb payable hereunder against the amount of the expenses and costs of such action, including without limitation, attorney fees actually incurred by Janssen. The amount of expenses so deducted shall be paid to Medisorb out of the recoveries, if any, received by Janssen as a result of such action. Except for such repayment of royalties deducted, Janssen shall be entitled to retain all recoveries therefrom. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 11 (e) Each party agrees to cooperate reasonably with the other party in such litigation, including making available to the other party records, information, and evidence relevant to the infringement of the Patent. (7) Third Party Intellectual Property Rights ---------------------------------------- (a) Medisorb warrants that to the best of its current knowledge and belief the Products to be developed hereunder will not infringe the patent rights of any third party. (b) In the event that the manufacture, use or sale of the Product would constitute an infringement of the rights of a third party in a country because of the use of the Patents or Medisorb's know how, each party shall, as soon as it becomes aware of the same, notify the other thereof in writing, giving in the same notice full details known to it of the rights of such third party and the extent of any alleged infringement. The parties shall after receipt of such notice meet to discuss the situation, and, to the extent necessary attempt to agree on a course of action in order to permit Janssen to practice the license granted hereunder. Such course of action may include: (a) modifying the Product or its manufacture so as to be noninfringing; (b) obtaining an appropriate license from such third party; or (c) fight the claimor suit. In the event that within a short period of time, the parties fail to agree on an appropriate course of action Janssen may decide upon the course of action in the interest of the further development, manufacturing or commercialization of the Product. (c) In the event that the parties cannot agree on modifying the Product or in the case that such modification would not be economically viable or regulatorily feasible, Janssen, whenever it relates to know how, whether patented or not, owned by Janssen in accordance with the provisions of Article 5 (b) and (c), or Medisorb, whenever it relates to know how, whether patented or not, owned by Medisorb in accordance with the provisions of Article 5 (a), will have the right to negotiate with such third party for such license. Both parties hereto will in any event in good faith consult with each other with respect to such negotiations and the party negotiating such license as indicated above, will make every effort to minimize the amount of license fees and royalties payable thereunder. In no event shall either party as a result of such settlement, grant a sublicense or cross license to the third party to settle the suit, without the prior written approval of the other party. In the event that such negotiations result in a consummated agreement, any license fee and/or royalties to be paid thereunder shall be paid by the party responsible for the negotiations as indicated above, [ ] of any license fees or royalties paid by Janssen under such license will be creditable against royalties due to Medisorb with respect to such country or countries. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 12 (d) In the event that either or both parties would further to such notification under Paragraph 7 (b) decide to defend such suit or claim in which a third party alleges that the manufacture, use or selling of the Product infringes said third party's patent in a country, Janssen shall have the right to apply [ ] of the royalties due to Medisorb on the sales of the allegedly infringing Product against its litigation expenses. (8) Term: ---- (a) Except as otherwise provided herein, this Agreement and the term of the license granted to Janssen hereunder shall commence on the date first written above and shall expire (i) upon expiration of the last to expire Patent in such country or (ii) fifteen (15) years after the date of the first commercial sale of Product in such country, whichever is later; provided, that in no event shall the license granted hereunder expire later than the twentieth anniversary of the first commercial sale of Product in any country with the exception of the following countries where the fifteen (15) year minimum shall pertain regardless: Canada, France, Germany, Italy, Japan, Spain and the United Kingdom. After expiration of the license granted to Janssen hereunder, Janssen shall retain a fully paid-up non-exclusive license to manufacture, use and sell Products in the Field in the Territory. (b) Medisorb may convert the exclusive license granted under this Agreement to non-exclusive if Janssen does not maintain the following minimum annual royalty payments to Medisorb: (i) With respect to the entire Territory, excluding Japan, the minimum royalty obligation will first apply to the twelve month period following the anniversary of the end of the month in which the Product was launched in the third major country. For the purpose of this Article only, major country shall mean France, Germany, United Kingdom or Italy. During the first twelve month period that such minimum royalty obligation is applicable, the minimum royalty amount to be paid by Janssen will be calculated by multiplying the applicable royalty rate by [ ] percent of the actual aggregate net sales of other [ ] products during such twelve month period in the three major countries referred to above. As from the subsequent twelve month period the minimum annual royalty amount to be paid by Janssen will be calculated by multiplying the applicable royalty rate by [ ]% of the aggregate net sales of other [ ] products during such period in all countries where Product has been launched and marketed for a period of minimally twelve months prior to the actual reference twelve month period; and THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 13 (ii) In Japan the minimum royalty obligation will be first applied to the twelve month period following the anniversary of the end of the month in which the Product was launched. The minimum annual royalty amount to be paid by Janssen will be calculated by multiplying the applicable royalty rate by an amount representing [ ]% of the aggregate net sales of other [ ] products in Japan during such period. Janssen shall have the right to make up any shortfall in minimum royalty payments from Product sales, both in Japan and in the rest of the Territory provided, such make-up payment is made at the same time and in the same manner as required for the underlying minimum royalty obligation. Janssen may elect to have its exclusive rights converted into non-exclusive rights on a country by country basis. As a consequence thereof, such country's other [ ] products sales will no longer be taken into account for calculating the above minimum royalty obligation. (c) In the event that either party shall enter or be put into voluntary or compulsory liquidation or have a receiver appointed or default in the observance or performance of its obligations under this Agreement and shall fail to remedy such default within ninety (90) days after the delivery of written notice from the other party, the other party shall be entitled upon giving written notice to terminate this Agreement. (d) Janssen may terminate this Agreement without cause upon 30 days prior written notice. Thereafter, Janssen shall have no further rights or privileges with respect to the use of Medisorb Technology in Products and Medisorb shall be under no further obligation of non-competition or exclusive dealing. (e) Any early termination of the Agreement shall be without prejudice to the rights of either party against the other accrued under this Agreement prior to termination. (f) Upon any termination of this Agreement, any remaining inventory of Product may be sold, provided all royalties otherwise due hereunder are paid with respect to such sales. (9) Confidentiality: --------------- (a) Each party agrees to keep confidential and to not use for any purpose other than as set forth herein all technical information and materials supplied by the THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 14 other hereunder and any information a party may acquire about the other or its activities as a result of entering into this Agreement, provided that such obligation shall not apply to technical information or material which: (i) was in the receiving party's possession without restriction prior to receipt from the other party or its Affiliates; (ii) was in the public domain at the time of receipt; (iii) becomes part of the public domain through no fault of the receiving party; (iv) shall be lawfully received from a third party with a right of further disclosure; (v) shall be required to be disclosed by law, by regulation or by the rules of any securities exchange. (b) Except as may be otherwise provided herein, the confidentiality obligations as set out in this Section shall continue so long as this Agreement remains in force and thereafter for a period of seven (7) years. (c) Janssen shall cause its Affiliates and Sublicensees to abide by the obligations of confidentiality with respect to unpublished information within the Patents and Technical Information. (d) Any confidential information relating to the subject matter of this Agreement imparted to the other party prior to the execution of this Agreement shall be considered to fall under the terms of this Agreement. (10) Disclaimer of Warranty: Medisorb makes no representations or ---------------------- warranties, express or implied, with respect to the Medisorb Patents and Technical Information licensed to Janssen hereunder, including without limitation any warranties of merchantability or fitness for a particular purpose. (11) Liability --------- (a) Janssen agrees to indemnify, defend and hold harmless Medisorb from and against any liability, loss, damages and expenses (including reasonable attorney fees) Medisorb may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Medisorb by reason of personal injury or damage to property arising out or caused by Janssen's promotion, use and sale of the Product, except where such liabilities claims, demands, costs or judgments are caused by Medisorb's failure to provide Janssen with any information as specified in Section 12 (c) and Article 13. Medisorb will notify Janssen as soon as it becomes aware of any such claim or action and agrees to give reasonable assistance in the investigation and defense of such claim or action it being understood that it shall allow Janssen to control the disposition of the same. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 15 (b) Medisorb agrees to indemnify, defend and hold harmless Janssen from and against any liability, loss, damages and expenses (including reasonable attorney fees) Janssen may suffer as the result of claims, demands, costs or judgments which may be made or instituted against Janssen by reason of personal injury or damage to property arising out or caused by Medisorb's failure to provide Janssen with any information as specified in Section 12 (c) and Article 13. (c) In no event shall either party be liable for loss of profits, loss of goodwill or any consequential or incidental damages of any kind of the other party. (12) Product Information and Adverse Drug Events ------------------------------------------- (a) As Janssen has superior knowledge of the end-use applications to which Products licensed hereunder will be put, Janssen is responsible for providing third parties with adequate information as to the medical profile of such Products. Janssen will provide Medisorb with copies of the IPID (International Product Information Document) and the IPPI (International Patient Package Insert), which are all part of the IRF for the Product. For the purpose of this Agreement IPID refers to the document that summarizes all medically relevant features of the Product, including the instructions for use meant to inform the medical profession, whereas the IPPI is a patient-oriented document, based upon the IPID that summarizes all relevant information on the Product in lay language. Janssen will keep Medisorb informed of any revisions or amendments in the IPID and IPPI of the Product. (b) Medisorb does not claim the expertise to judge whether Product(s) will perform acceptably in Janssen's application(s). Janssen is the sole judge as to whether Product(s) will perform acceptably in Janssen's application(s). Janssen represents and warrants on an on-going basis during the term of this agreement that it has the capability to assess the suitability of Product(s) in Janssen's application(s) and agrees to conduct adequate testing to confirm the safety and efficacy of Products prior to commercialization. (c) Medisorb will provide to Janssen promptly after its discovery by Medisorb, any information in its possession which indicates adverse effects in humans associated with the Products, including the bioabsorbable polymeric components thereof, licensed hereunder. For the purpose of this Agreement "adverse event" shall mean an experience which is noxious and unintended and which occurs at doses normally used in man for the prophylaxis, diagnosis or therapy of a disease or for the modification of a physiological function and any report of an overdose. (13) Government Approvals -------------------- THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 16 Janssen shall be responsible for conducting all necessary testing as well as determining what, if any, government approvals are required for the use and sale of Product licensed hereunder and shall comply with all such requirements prior to and following the sale or distribution of such Products. Medisorb shall cooperate fully with Janssen in obtaining regulatory approvals for Product licensed hereunder and shall, at Janssen's request, provide appropriate regulatory authorities with any and all information concerning Medisorb's technology, Medisorb polymers and Medisorb's manufacturing process for such Product. In this respect Medisorb undertakes that it has submitted or will as soon as possible submit a type IV Drug Master File to the FDA identifying Medisorb's method of manufacture, release specifications and testing methods used in the manufacture of its bioabsorbable polymers and a type I Drug Master File of Medisorb's manufacturing facilities where Product may be manufactured. Medisorb will authorize Janssen at its request to cross-reference any Medisorb Drug Master Files relating to the Medisorb Polymers. (14) Force Majeure: Neither party shall be liable for its failure to ------------- perform any of its obligations hereunder if such failure is occasioned by a contingency beyond its reasonable control including, but not limited to, occurrences such as strikes or other labor disturbances, lock out, riot, war, default by a common carrier, fire, flood, storm, earthquake, other acts of God, inability to obtain raw materials, failure of plant facilities or government regulation, act or failure to act. Each party shall notify the other immediately upon occurrence or cessation of any such contingencies. If such contingency continues unabated for at least 180 consecutive days, either party shall have the right to terminate this Agreement without further obligation beyond those actually incurred prior to such termination. (15) Press Communications: Neither party shall originate any -------------------- publicity, news release or public announcement, written or oral relating to this Agreement, including its existence, without the prior written approval of the other party. (16) Notices: Any legal notice required or permitted hereunder shall ------- be considered properly given if in writing and sent by first class mail, certified mail or by telefacsimile to the party being notified at the respective address of such party as follows: THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 17 If to Medisorb: Medisorb Technologies International L.P. 6954 Cornell Road Cincinnati, OH 45242 USA Facsimile: 513-489-2348 If to Janssen: Janssen Pharmaceutica Kollerstrasse 38 6300 Zug 6 Switzerland Facsimile: 00-41-42449565 Such notice shall be effective upon receipt or upon refusal to accept such notice. In any case, notice shall be presumed effective no later than five (5) days after such notice is sent. Neither party shall originate any publicity, news release or public announcement, written or oral, relating to this Agreement, including its existence, without the written approval of the other party. (17) Assignment: This Agreement shall not be assigned by either party ---------- without the prior written consent of the other party; provided, however, that assignment shall be permitted without such consent to any party, not less than 50% of the total interest of which owns, is owned by, or is under common control with the assigning party. In the event of any such permitted assignment the assignee shall be subject to and shall agree in writing to be bound by the terms and conditions of this Agreement. (18) Dispute Resolution: The parties shall amicably discuss and ------------------ negotiate any matters which arise under this Agreement and are not specifically set forth hereunder. If any disputes arise under this Agreement, the parties shall use their best efforts to meet and resolve such disputes. In the event that the parties are unable to resolve any such disputes, then both parties hereby agree to submit said disputes to the jurisdiction of the competent Courts of Zurich, Switzerland, and agree that any litigation in any way related to this Agreement shall be submitted to such Courts and that same shall be subject to Swiss law. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 18 (19) 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 any of the parties hereto to be invalid, illegal or unenforceable such provision or provisions shall be validly reformed to as nearly approximate the intent of the parties as possible and, if unreformable; shall be divisible and deleted in such jurisdiction, elsewhere this Agreement shall not be affected. (20) Captions: The captions of this Agreement are for convenience -------- only, and shall not be deemed of any force or effect whatsoever in construing this Agreement. (21) Waiver: The failure on the party of a party to exercise or ------ enforce any right conferred upon it hereunder shall not be deemed to be a waiver of any such right, nor operate to bar the exercise or enforcement thereof at any time thereafter. (22) Survival: The following Articles of this Agreement shall survive -------- the termination or expiration of this Agreement: 5, 9, 10, 11, 15, 17, and 18. (23) Miscellaneous: This Agreement may be executed by the parties ------------- hereto in counterparts, each of which when so executed and delivered shall be considered to be an original, but all such counterparts shall together constitute but one and the same instrument. This Agreement is the complete agreement of the parties and supersedes all previous understandings and agreements relating to the subject matter hereof. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally , but only by an instrument in writing signed by the party against whom enforcement of the termination, amendment, supplement, waiver or modification is sought. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Janssen-Medisorb License Agreement Page 19 IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto have executed this Agreement as of the day and year first above written. JANSSEN PHARMACEUTICA INTERNATIONAL A division of Cilag International AG By: /s/ Erik Rombouts --------------------------------------- Name: Erik Rombouts ------------------------------------- Title: Operations Director ------------------------------------ Date: February 21, 1996 ------------------------------------- [Second Janssen Signatory] - ------------------------- By: /s/ Heinz Schmid --------------------------------------- Name: Heinz Schmid ------------------------------------- Title: General Manager ------------------------------------ Date: February 21, 1996 ------------------------------------- MEDISORB TECHNOLOGIES INTERNATIONAL L.P. by: Medisorb Technologies International, Inc., its General Partner By: /s/ David R. Lohr --------------------------------------- Name: David R. Lohr ------------------------------------- Title: President ------------------------------------ Date: January 31, 1996 ------------------------------------- THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.21(A) 7 AMENDMENT NO. 1 TO LOAN AGREEMENT Exhibit 10.21(a) AMENDMENT NO. 1 TO LOAN AGREEMENT THIS AMENDMENT NO. 1 TO LOAN AGREEMENT ("this Amendment"), dated as of December 31, 1994, by and between ALKERMES, INC., a Pennsylvania corporation, ALKERMES INVESTMENTS, INC., a Delaware corporation (jointly and severally, the "Borrower"), and THE DAIWA BANK, LIMITED, a Japanese banking corporation (the "Bank"), WITNESSETH: WHEREAS, the Borrower and the Bank are parties to that certain Loan Agreement dated as of December 30, 1993 (the "Loan Agreement"); and WHEREAS, the Borrower has requested the Bank to amend the terms of the Loan Agreement to revise one of the financial covenants; and WHEREAS, the Bank has agreed to amend the Loan Agreement on the terms and conditions stated herein; NOW THEREFORE, the Borrower and the Bank agree, for good and valuable consideration, as follows: SECTION 1. DEFINITIONS. All terms used herein which are not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. SECTION 2. AMENDMENTS TO LOAN AGREEMENT. ---------------------------- (a) Subsection (i) of Section 5.10 of the Loan Agreement is hereby deleted in its entirety and the following subsection is hereby inserted in replacement thereof: "(i) a minimum Net Worth, as reported on a quarterly basis, of $20 million, provided, however, that, in computing Net Worth for the purposes of this subsection, the principal balance of and accrued interest on the Convertible Promissory Note dated January 9, 1995 in the face amount of $3,500,000 payable to Genentech, Inc. which was issued pursuant to a Note Purchase Agreement dated January 9, 1995 shall be excluded from Total Liabilities;" (b) Subsection (ii) of Section 5.10 of the Loan Agreement is hereby deleted in its entirety and the following subsection is hereby inserted in replacement thereof: Amendment No. 1 To Loan Agreement Page 2 "(ii) a minimum ratio of Total Liabilities (exclusive of deferred revenues from Alkermes Clinical Partners, L.P. and loans received and interest accrued thereon from counterparties to collaborative agreements which are convertible, at the option of the Borrower, into shares of stock of Alkermes) to Net Worth, as reported on a quarterly basis, of .5:1;" SECTION 3. Representations and Warranties of the Borrower. The Borrower hereby represents and warrants that all representations and warranties of the Borrower contained in Article III of the Loan Agreement are true and correct on and as of the date hereof as though made on and as of said date (except those representations and warranties made as of a specified date, which are true and correct as of such date). SECTION 4. Conditions to Effectiveness. The effectiveness of this Amendment is subject to the following conditions: (a) The Bank shall have received a counterpart of this Amendment duly executed by the Borrower and the Bank. (b) No material adverse change shall have occurred in the business or financial condition of the Borrower. (c) No event of Default or event which with the giving of notice or the passage of time or both would become an Event of Default shall have occurred or be continuing. SECTION 5. No Waiver. Nothing contained herein nor any action taken by the Bank or the Borrower in connection with this Amendment or any other action contemplated hereby shall in any event be construed or deemed to constitute a waiver of any past, present or future Event of Default (including any Event of Default relating in any way to matters previously advised to the Bank or as to which the Bank has actual notice). SECTION 6. Entire Agreement. This Amendment represents the entire agreement of the parties with respect to the subject matter hereof and supersedes and replaces any and all oral or written agreements or understandings relating to the subject matter hereof. SECTION 7. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 2 Amendment No. 1 To Loan Agreement Page 3 SECTION 8. Severability. Any provision of this Amendment which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or thereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. SECTION 9. Continued Validity. Except as expressly amended and modified as set forth in this Amendment, the Loan Agreement is in all respects ratified and confirmed and all of the provisions thereof shall remain in full force and effect. SECTION 10. Governing Law. This Amendment shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the Borrower and the Bank have executed this Amendment as of the date and year first above written. ATTEST: ALKERMES, INC., a Pennsylvania corporation By:/s/ Patricia L. Allen By: /s/ Michael Landine --------------------- --------------------------- Title:Assistant Secretary Title: CFO and VP Finance ------------------------ ATTEST: ALKERMES INVESTMENTS, INC., a Delaware corporation By: /s/ Patricia L. Allen By: /s/ Michael Landine --------------------- -------------------------- Title:Assistant Secretary Title: CFO and VP Finance ----------------------- THE DAIWA BANK. LIMITED, a Signature Japanese banking corporation Verified /s/ DE By: /s/ Daniel G. Eastman ------------------------------- Title: Vice President and Manager ---------------------------- By: /s/ Stephen F. Sullivan --------------------------- Title: EO ------------------------ 3 EX-10.23(C) 8 THIRD LOAN MODIFICATION AGREEMENT Exhibit 10.23(c) THIRD LOAN MODIFICATION AGREEMENT This Third Loan Modification Agreement ("this Agreement") is made as of February __, 1995 between Alkermes, Inc., a Pennsylvania corporation (the "Borrower") and Fleet Bank of Massachusetts, N.A. (the "Bank" ). For good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Borrower and the Bank act and agree as follows: 1. Reference is made to (i) that certain letter agreement dated November 19, 1992 between the Borrower and the Bank, as amended (as so amended, the "Letter Agreement"), (ii) that certain $3,187,496 face amount promissory note dated December 23, 1994 (the "Term Note") made by the Borrower and payable to the order of the Bank, (iii) that certain Security Agreement dated November 19, 1992, as amended (as so amended, the "Security Agreement") given by the Borrower to the Bank, and (iv) that certain Pledge Agreement dated November 19, 1992) as amended (as so amended, the "Pledge") from the Borrower to the Bank. The Letter Agreement, the Security Agreement, the Pledge and the Term Note are hereinafter collectively referred to as the "Financing Documents". As used herein, the term "Second Modification" means that certain Second Loan Modification Agreement dated December 23, 1994 between the Bank and the Borrower. 2. The Letter Agreement is hereby amended by deleting in their entireties the third, fourth, fifth and sixth sentences of Section 1.2 of the Letter Agreement (said sentences having been inserted by Paragraph 3e of the Second Modification) and by inserting in their stead the following. "The original principal balance of the Term Loan will not exceed 100% of the total invoiced purchase price of the Equipment." 3. The Security Agreement is hereby amended by adding to original Exhibit A to the Security Agreement (as heretofore amended) the additional items of equipment described on Exhibit A attached hereto, so that all such additional items of equipment are deemed added to the "Equipment" as defined in Section 1 of the Security Agreement. The Borrower hereby grants to the Bank, and confirms the grant of, a security interest in and to all of the items of equipment described on Exhibit A hereto and all of the other Collateral (as defined in the Security Agreement), all in order to secure the obligations (as defined in the Security Agreement). 4. The Bank hereby releases the savings account "hold" in the amount of $50,000 heretofore imposed by the Bank on an account of the Borrower pursuant to the Second Modification. 5. Whenever in any Financing Document or in any certificate or opinion to be delivered in connection therewith reference is made to a "Security Agreement", from and after the date hereof same will be deemed to refer to the security Agreement, as hereby amended. 6. Except as expressly affected hereby, the Security Agreement and each of the other Financing Documents remains in full force and effect as heretofore. 7. Nothing contained herein will be deemed to constitute a waiver or a release of any provision of any of the Financing Documents. Nothing contained herein will in any event be deemed to constitute an agreement to give a waiver or release or agree to any amendment or modification of any provision of any of the Financing Documents on any other or future occasion. Executed, as an instrument under seal, as of the day and year first above written. ALKERMES, INC. By /s/ Michael Landine --------------------------------- Its FLEET BANK OF MASSACHUSETTS, N.A. By /s/ Catherine Bruton ------------------------------------ Its Vice President 2 EXHIBIT A EQUIPMENT LIST see following pages. EXHIBIT A SUPPLEMENTAL EQUIPMENT LIST ALKERMES/ACTI FIXED ASSET LIST
Date of Total Purchase Company Description Ref # Invoice Freight Sales Tax Net - ------------------------------------------------------------------------------------------------------------------ 12/20/94 CIBA Corning S/A M238 B/G W/Cal Gas 9,536.20 86.20 450.00 9,000.00 12/27/94 Crimson Tech Polaroid Slidemaker 1,595.00 0.00 0.00 1,595.00 1/13/95 Fisher Scientific Maxima vacuum pump model D8C 1,480.00 0.00 0.00 1,480.00 12/22/94 Harvard Apparatus SS Cage Rack 2,068.60 43.60 0.00 2,025.00 12/12/94 Infotech Powerbook 6,082.70 41.00 287.70 5,754.00 12/30/94 Kaye Instruments, Inc. Validator Mainframe 24,343.00 0.00 0.00 24,343.00 1/17/95 Martell Associates Rannie 8.30 H Mini-Lab 4,816.66 0.00 0.00 4,816.66 12/8/94 Terra Universal, Inc. Work Station 1,562.00 0.00 0.00 1,562.00 -------------------------------------------- 51,484.16 170.80 737.70 50,575.66 --------------------------------------------
EX-10.23(D) 9 LETTER AGREEMENT Exhibit 10.23(d) [LETTER HEAD OF FLEET BANK] August 18, 1995 Michael J. Landine Chief Financial Officer Alkermes, Inc. 64 Sidney Street Cambridge MA 02139 Dear Mike; Reference is made to the letter agreement dated November 19, 1992, as amended (the "Letter Agreement") between Alkermes Inc. ("the Borrower") and Fleet Bank of Massachusetts, N.A. ("the Bank"), and related financing documents, as amended. The Letter Agreement shall be amended by adding to the definition of "Indebtedness" contained in Section 7.1 of the Letter Agreement, at the end of such definition, the following: "Furthermore, for the purposes of Sections 3.7, 4.1 and 5.1(g) above, 'Indebtedness' will not be deemed to include the obligations of the Borrower to Schering Corporation ("Schering") to repay certain prepaid royalties in an amount of up to $[ ] (and the interest thereon) which were paid to the Borrower pursuant to the Prepaid Royalty Agreement between the Alkermes Controlled Therapeutics, Inc. ("ACTI") and Schering dated July 26, 1995; provided that the ACTI's obligations to repay such amount may (at the Borrower's option) be satisfied either by the payment of cash or by issuance to Schering of stock in the Borrower." Except as expressly set forth above, nothing contained herein will be deemed to constitute a waiver or a release of any provision of the Letter Agreement and related financing documents. Nothing contained herein will be in any event be deemed to constitute an agreement to give a waiver or release or to agree to any amendment or modification of any provision of the Letter Agreement or related financing documents on any future occasion. Very Truly Yours, /s/Catherine Bruton Catherine Bruton Vice President High Technology THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-11 10 COMPUTATION OF PER SHARE EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF PER SHARE LOSS
Year Year Year Ended Ended Ended March 31, 1996 March 31, 1995 March 31, 1994 --------------- --------------- --------------- Net Loss ($13,747,084) ($11,904,153) ($17,275,105) ============ ============ ============ Calculation of shares outstanding: Weighted average common shares outstanding used in calculating net loss per share in accordance with generally accepted accounting principles 14,774,584 13,535,339 13,361,618 ------------ ------------ ------------ Total 14,774,584 13,535,339 13,361,618 ============ ============ ============ Net loss per share ($0.93) ($0.88) ($1.29) ============ ============ ============
EX-21 11 SUBSIDIARIES OF ALKERMES Exhibit 21 SUBSIDIARIES OF ALKERMES, INC.
State or Percentage Country of Company Ownership Incorporation - ------- ---------- -------------- Alkermes Controlled 100 Pennsylvania Therapeutics, Inc. Alkermes Controlled Therapeutics Inc. II 100 Pennsylvania Alkermes Development 100 Delaware Corporation II Alkermes Europe, Ltd. 100 United Kingdom Alkermes Investments, Inc. 100 Delaware
EX-22 12 PROXY STATEMENT ALKERMES, INC. Cambridge, Massachusetts 02139 ____________________ NOTICE OF ANNUAL MEETING OF SHAREHOLDERS July 25, 1996 ____________________ TO THE SHAREHOLDERS: The annual meeting of shareholders of Alkermes, Inc. will be held at the offices of the Company, 64 Sidney Street, Cambridge, Massachusetts 02139, on Thursday, July 25, 1996, at 10:00 A.M. for the following purposes: 1. To elect eight members of the Board of Directors, each to serve until the next annual meeting of shareholders and until their respective successors are duly elected and qualified. 2. To approve the adoption of the Stock Option Plan for Non-Employee Directors. 3. To transact such other business as may properly come before the meeting. The Board of Directors has fixed June 7, 1996 as the record date for determining the holders of Common Stock entitled to notice of and to vote at the meeting. Consequently, only holders of Common Stock of record on the transfer books of the Company at the close of business on June 7, 1996 will be entitled to notice of and to vote at the meeting. Please complete, date and sign the enclosed proxy and return it promptly. If you attend the meeting, you may vote in person. Morris Cheston, Jr. Secretary June 28, 1996 ALKERMES, INC. PROXY STATEMENT INTRODUCTION The accompanying proxy is solicited by the Board of Directors of Alkermes, Inc. ("Alkermes" or the "Company") in connection with its 1996 annual meeting of shareholders to be held at the offices of the Company, 64 Sidney Street, Cambridge, Massachusetts 02139, at 10:00 a.m., on July 25, 1996 (the "Meeting"). Copies of this Proxy Statement and the accompanying proxy are being mailed on or after July 1, 1996 to the holders of record of Common Stock on June 7, 1996 (the "Record Date"). The proxy may be revoked by a shareholder at any time prior to its use by giving notice of such revocation to the Secretary of the Company, by appearing at the Meeting and voting in person or by returning a later dated proxy. The expense of this solicitation will be paid by the Company. Some of the officers and regular employees of the Company may solicit proxies personally and by telephone. Unless specific instructions are given to the contrary, the persons named in the accompanying proxy will vote FOR the named nominees to the Company's Board of Directors and FOR approval of the Stock Option Plan for Non-Employee Directors. With respect to all other matters referred to in this Proxy Statement, the persons named in the accompanying proxy will vote as stated herein. See "Other Business." Holders of Common Stock of record at the close of business on the Record Date will be entitled to cast one vote per share so held of record on such date on all items of business properly presented at the Meeting, except that the holders have cumulative voting rights in the election of directors. Therefore, each shareholder is entitled to cast as many votes in the election of directors as shall be equal to the number of shares of Common Stock held by such shareholder on the Record Date, multiplied by the number of directors to be elected. A shareholder may cast all such votes for a single nominee or may distribute votes among nominees as the shareholder sees fit. The Company had 18,348,306 shares of Common Stock outstanding on the Record Date. The presence at the Meeting in person or by proxy of the holders of a majority of the shares of Common Stock outstanding on the Record Date will constitute a quorum at the Meeting. Broker non-votes received with respect to the proposals to be acted upon at the Meeting will be counted for purposes of determining whether a quorum is present at the Meeting, but will not be considered as votes cast, and thus will have no effect on the result of the votes. ELECTION OF DIRECTORS Eight directors are to be elected at the Meeting to serve one-year terms until the 1997 annual meeting of shareholders and until their respective successors are elected and shall qualify. The persons named in the accompanying proxy intend to vote for the election of Floyd E. Bloom, Robert A. Breyer, John K. Clarke, Robert S. Langer, Richard F. Pops, Alexander Rich, Paul Schimmel and Michael A. Wall, unless authority to vote for one or more of such nominees is specifically withheld in the proxy. All of the nominees are currently directors of the Company. The persons named in the proxy will have the right to vote cumulatively and to distribute their votes among such nominees as they consider advisable. The Board of Directors is informed that all the nominees are willing to serve as directors, but if any of them should decline to serve or become unavailable for election at the Meeting, an event which the Board of Directors does not anticipate, the persons named in the proxy will vote for such nominee or nominees as may be designated by the Board of Directors, unless the Board of Directors reduces the number of directors accordingly. The eight nominees for director receiving the highest number of votes cast by shareholders entitled to vote thereon will be elected to serve on the Board of Directors. Abstentions received with respect to the election of directors will be counted for purposes of determining whether a quorum is present at the Meeting, but will not be counted as votes cast and will have no effect on the result of the vote. Set forth below is information regarding the nominees, as of June 7, 1996, including their recent employment, positions with the Company, other directorships and age. Dr. Bloom, age 59, is a founder of Alkermes and has been a director of Alkermes since 1987. Dr. Bloom has been active in neuropharmacology for more than 30 years, holding positions at Yale University, the National Institute of Mental Health and The Salk Institute. Since 1983, he has been at The Scripps Research Institute where he is currently Chairman, Department of Neuropharmacology. Dr. Bloom serves as Editor in Chief of Science. He holds an A.B. (Phi Beta Kappa) from Southern Methodist University and an M.D. (Alpha Omega Alpha) from Washington University School of Medicine in St. Louis. Mr. Breyer, age 52, has been a director and President and Chief Operating Officer of Alkermes 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. From September 1987 to August 1991, he was Senior Vice President, Marketing and Sales of IVAC Corporation, a medical device company and a subsidiary of Eli Lilly & Co. Mr. Clarke, age 42, has served as a director of Alkermes since 1987. He is a general partner of DSV Partners III and DSV Management, the general partner of DSV Partners IV. DSV Partners III and DSV Partners IV are venture capital investment partnerships. Mr. Clarke has been associated with DSV since 1982. Mr. Clarke is also a director of DNX Corporation, Inc., a biopharmaceutical company, and a number of private healthcare companies. Professor Langer, age 47, has served as a director of the Company since 1993. He is the Kenneth J. Germeshausen Professor of Chemical and Biomedical Engineering at the Massachusetts Institute of Technology and has been a member of the Massachusetts Institute of Technology faculty since July 1977. In 1989, Professor Langer was elected to the Institute of Medicine of the National Academy of Sciences and in 1992 was elected to both the National Academy of Engineering and the National Academy of Sciences. Professor Langer received his bachelor's degree from Cornell University in 1970 and a Ph.D. from Massachusetts Institute of Technology in 1974, both in chemical engineering. 2 Mr. Pops, age 34, has been a director and the Chief Executive Officer of Alkermes since February 1991. From February 1991 to June 1994, Mr. Pops was also President of Alkermes. Mr. Pops currently serves on the Board of Directors of the Biotechnology Industry Organization (BIO), and The Brain Tumor Society (a non-profit organization). Dr. Rich, age 71, is a founder of Alkermes and has been a director of Alkermes since 1987. Dr. Rich has been a professor at the Massachusetts Institute of Technology since 1958, and is the William Thompson Sedgwick Professor of Biophysics and Biochemistry. Dr. Rich earned both an A.B. (magna cum laude) and an M.D. (cum laude) from Harvard University. Dr. Rich is Co- Chairman of the Board of Directors of Repligen Corporation, a biopharmaceutical company. Dr. Schimmel, age 55, is a founder of Alkermes and has been a director of Alkermes since 1987. Dr. Schimmel is the John D. and Catherine T. MacArthur Professor of Biophysics and Biochemistry at the Massachusetts Institute of Technology, where he has been employed since 1967. A graduate of Ohio Wesleyan University, Dr. Schimmel completed his doctorate at Cornell University and the Massachusetts Institute of Technology, and did post doctoral work at Stanford University. Dr. Schimmel is Co-Chairman of the Board of Directors of Repligen Corporation and is a director of Cubist Pharmaceuticals, Inc. Mr. Wall, age 67, is a founder of Alkermes and has been Chairman of the Board of Alkermes since 1987. From April 1992 until June 30, 1993, he was a director and Chairman of the Executive Committee of Centocor, Inc. ("Centocor"), a biopharmaceutical company. From November 1987 to June 30, 1993, he was Chairman Emeritus of Centocor. Mr. Wall is a director of Kopin Corporation, a manufacturer of high definition imaging products, and Sugen, Inc., a biopharmaceutical company. The Board of Directors held six meetings during the last fiscal year. Each of the Company's directors attended at least 75% of the aggregate of all meetings of the Board and of all committees of which he was a member held during the year. The standing committees of the Board are the Audit Committee and the Compensation Committee. The Board does not have a standing nominating committee. The Audit Committee, consisting of John K. Clarke and Alexander Rich, met twice during the last fiscal year. The Audit Committee is responsible for determining the adequacy of the Company's internal accounting and financial controls. The Compensation Committee, consisting of John K. Clarke, Robert S. Langer, Paul Schimmel and Michael A. Wall, met twice during the last fiscal year. The Compensation Committee is responsible for reviewing matters pertaining to the compensation of employees of, and consultants to, the Company and for administering, and making grants and awards under the Company's stock option and restricted stock award plans. 3 APPROVAL OF STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS At the Meeting, a proposal will be presented for the shareholders to approve the Stock Option Plan for Non-Employee Directors (the "Director Plan"), under which options to purchase up to 150,000 shares of Common Stock of the Company may be granted to non-employee directors. The purpose of the Director Plan is to attract and retain independent directors and to strengthen the mutuality of interests between such directors and the Company's shareholders. The Director Plan is attached as Exhibit A to this Proxy Statement and is incorporated herein by reference. The Board of Directors adopted the Director Plan on March 18, 1996, and directed that the Director Plan be submitted to the shareholders for approval. The proposal to approve the Director Plan will become effective if it receives the affirmative vote of the holders of a majority of the shares of Common Stock present, or represented by proxy, and entitled to vote at the Meeting. Abstentions received with respect to the adoption of the Director Plan will be counted for purposes of determining whether a quorum is present at the Meeting and as votes cast, and will have the effect of a no vote. The Board of Directors recommends that you vote FOR the approval of the Director Plan. Principal Features of the Plan Administration The Director Plan will be administered and interpreted by the Board of Directors. The Board of Directors, subject to the provisions of the Director Plan, has the authority to (i) adopt, alter and repeal such rules, guidelines and practices as it deems advisable, (ii) interpret the terms and provisions of the Director Plan and any option granted under the Director Plan and (iii) otherwise administer the Director Plan. In addition, the Board of Directors may correct any defect, supply any omission or reconcile any inconsistency in the Director Plan or in any option granted in the manner and to the extent it shall deem necessary to carry the Director Plan into effect. Any decision, interpretation or other action of the Board of Directors will be final, binding and conclusive upon all persons in interest. Eligible Participants Members of the Board of Directors who are not officers or employees of the Company or any of its subsidiaries ("Eligible Directors") are eligible to be granted options under the Director Plan. Number of Shares Subject to the Director Plan Up to 150,000 shares of Common Stock may be issued under the Director Plan. The shares of Common Stock that may be issued under the Director Plan may be either authorized and unissued shares or issued shares that have been reacquired by the Company. The aggregate number of shares of Common 4 Stock issuable under the Director Plan and the number of shares subject to grants made under the Director Plan are subject to adjustment in the event of a merger, reorganization, consolidation, recapitalization, dividend (other than a regular cash dividend), stock split, or other change in corporate structure affecting the Common Stock. If any option granted under the Director Plan expires, terminates or is cancelled for any reason without having been exercised in full, the number of unpurchased shares will again be available for the purposes of the Director Plan. Granting of Options Under the Director Plan On the date the Director Plan was approved by the Board of Directors, each Eligible Director who was not a consultant to the Company was automatically granted an option to purchase 10,000 shares of Common Stock, subject to shareholder approval of the Director Plan. As of that date, one director was eligible for the one-time automatic grant. In addition, subject to shareholder approval of the Director Plan, on the date of the Meeting and on the date of each annual meeting of the Company's shareholders thereafter, for as long as the Director Plan remains in effect, each Eligible Director will automatically be granted an option to purchase 2,500 shares of Common Stock. On June 20, 1996, the average of the high and low sales price of a share of the Company's Common Stock as reported on the Nasdaq National Market was $13.25. As of that date, six directors of the Company would have been eligible to participate in the Director Plan. Stock Options The exercise price of each option granted under the Director Plan will be equal to the fair market value of the Common Stock on the date of grant. Options will be exercisable in full six months after the date of the grant. The term of each option will be ten years from the date of grant. The option price due upon exercise of any option may be paid to the Company in full in cash. Unless determined otherwise by the Board of Directors in its discretion, payment of the exercise price may also be made by tendering previously acquired shares of Common Stock or reducing the number of shares issuable upon such exercise, in each case based on the fair market value of the Common Stock on the last trading date preceding payment. Options are not transferable (other than by will or the laws of descent and distribution) and during the participant's lifetime are exercisable only by the participant. If a participant ceases to be a member of the Board of Directors because of death or disability, any then exercisable option held by the participant may be exercised by the participant, or in the case of death by his legal representative, for one year after ceasing to be a member of the Board of Directors or until the earlier expiration of the option term, and all other options are forfeited. If a participant ceases to be a member of the Board of Directors for any reason other than death or disability, any then exercisable stock option held by the participant may be exercised by the participant for the lesser of three months after ceasing to be a member of the Board of Directors or until the expiration of the option term, and all other options are forfeited. 5 Federal Tax Consequences The Federal income tax discussion set forth below is intended for general information only. State and local income tax consequences are not discussed and may vary from locality to locality. Under present Treasury regulations, an optionee who is granted a non- qualified option will not realize taxable income at the time the option is granted. In general, an optionee will be subject to tax for the year of exercise on an amount of ordinary income equal to the excess of the fair market value of the shares on the date of exercise over the option price, and the Company will receive a corresponding deduction. The optionee's basis in the shares so acquired will be equal to the option price plus the amount of ordinary income upon which he is taxed. Upon subsequent disposition of the shares, the optionee will realize capital gain or loss, long-term or short-term, depending upon the length of time the shares are held after the option is exercised. EXECUTIVE COMPENSATION AND OTHER INFORMATION Summary Compensation Table The following table sets forth a summary of the compensation paid by the Company during its last three fiscal years to its Chief Executive Officer and to each of the four other most highly compensated executive officers of the Company whose total annual salary and bonus exceeded $100,000 during the fiscal year ended March 31, 1996 and William F. Graney, an executive officer whose employment with the Company ceased on February 14, 1996 (collectively, the "Named Executive Officers").
Annual Compensation Long-Term Compensation Securities Name and Restricted Underlying Principal Stock Options/ All Other Position Year Salary ($) Bonus ($) Awards ($)(1) LSARs (#) Compensation ($) - ---------------------- ---- ----------- ------------ --------------- ----------------------- ------------------------- Richard F. Pops 1996 266,346 15,000 0 87,500 0 Chief Executive 1995 249,423 0 35,000 127,500(2) 0 Officer 1994 223,173 15,000 92,500 35,000(3) 0 Robert A. Breyer 1996 204,231 10,000 0 50,000 1,500(4) President and Chief 1995 143,077(5) 30,000(6) 0 207,500 16,735(7) Operating Officer 1994 0 0 0 0 0 Raymond T. Bartus 1996 190,692 0 0 17,500 0 Senior Vice 1995 189,000 0 10,500 75,000(8) 0 President, 1994 181,904 0 27,750 0 0 Neurobiology
6 Michael J. Landine 1996 179,231 0 0 51,500 0 Senior Vice 1995 175,000 0 21,000 57,000(9) 0 President and 1994 167,115 5,000 55,500 21,000(3) 0 Chief Financial Officer Scott D. Putney 1996 169,192 0 0 17,500 0 Vice President, 1995 167,500 0 10,500 75,000 0 Molecular Biology 1994 157,644 0 27,750 0 0 William F. Graney 1996 175,962 0 0 15,000 0 Senior Vice 1995 190,000 0 10,500 81,250(10) 0 President, 1994 182,116 0 27,750 0 0 Medical Affairs
- ------------------------- (1) All restricted stock awards have been made pursuant to the Company's 1991 Restricted Common Stock Award Plan (the "Award Plan"). All awards cease to be subject to forfeiture on an annual basis in 20% increments beginning on the first anniversary of the date of award, provided the grantee has remained an employee of the Company since the date of grant. Stock certificates are issued to the grantees on the date each portion of their award ceases to be subject to forfeiture. For purposes of the above table, the value of an award was determined by multiplying the total shares subject to the award by the closing price for the Company's Common Stock as reported on the Nasdaq National Market on the date of the award. To the extent the Company declares any dividends on its Common Stock, dividends shall be payable on awards only to the extent forfeiture restrictions with respect to such awards have lapsed and shares have been issued. The aggregate number and value (based on the closing price of the Company's Common Stock on the Nasdaq National Market on March 31, 1996) of the restricted stock awards as of June 7, 1996 of each Named Executive Officer (except for Mr. Breyer and Dr. Graney who have no awards) are as follows: Mr. Pops, 16,000 shares, $146,000; Dr. Bartus, 4,200 shares, $38,325; Mr. Landine, 9,600 shares, $87,600; Dr. Putney, 5,400, $49,275. (2) Includes options to purchase 120,000 shares of the Company's Common Stock granted, in tandem with Limited Stock Appreciation Rights ("LSARs"), in exchange for certain outstanding options previously granted to Mr. Pops. See "Ten Year Option/SAR Repricings" and "Compensation Committee Report on Repriced Options." For a discussion of the LSARs held by Mr. Pops, see "Employment Contracts and Termination of Employment and Change in Control Arrangements." (3) All options indicated were granted, in tandem with LSARs, in exchange for new options granted in fiscal 1995. For a discussion of the LSARs held by such person, see "Employment Contracts and Termination of Employment and Change in Control Arrangements." (4) Consists of payment to Mr. Breyer for opting out of the Company's health insurance plan. 7 (5) Represents cash compensation paid to Mr. Breyer for 39 weeks of employment in the fiscal year ended March 31, 1995. (6) Consists of a signing bonus paid to Mr. Breyer upon commencement of his employment in July 1994. (7) Consists of temporary living and moving expenses reimbursed to Mr. Breyer in connection with his relocation to Cambridge, Massachusetts upon commencement of his employment and a $1,154 payment to Mr. Breyer for opting out of the Company's health insurance plan. (8) Includes options to purchase 67,500 shares of the Company's Common Stock granted in exchange for all outstanding options previously granted to Dr. Bartus. See "Ten Year Option/SAR Repricings" and "Compensation Committee Report on Repriced Options." Of such options, options to purchase 56,250 shares were granted in tandem with LSARs. For a discussion of the LSARs held by Dr. Bartus, see "Employment Contracts and Termination of Employment and Change in Control Arrangements." (9) Includes options to purchase 49,500 shares of the Company's Common Stock granted, in tandem with LSARs, in exchange for certain outstanding options previously granted to Mr. Landine. See "Ten Year Option/SAR Repricings" and "Compensation Committee Report on Option Repricing." For a discussion of the LSARs held by Mr. Landine, see "Employment Contracts and Termination of Employment and Change in Control Arrangements." (10) Includes options to purchase 48,750 shares of the Company's Common Stock granted in exchange for all outstanding options previously granted to Dr. Graney. See "Compensation Committee Report on Option Repricing." 8 Options/LSAR Grants in Last Fiscal Year The following table sets forth information concerning stock options and LSARs granted during the fiscal year ended March 31, 1996 to each of the Named Executive Officers.
Potential Realizable Shares % of Total Value at Assumed Underlying Options/LSARs Annual Rates of Options/ Granted to Exercise Stock Price LSARs Employees in or Base Expiration Appreciation for Name Granted (#) Fiscal Year Price ($/Sh) Date Option Term - ---- ----------- ------------- ------------ ---------- -------------------- 5% ($) 10% ($) Richard F. Pops 47,500 11.8 3.50 6/26/05 104,554 264,960 35,000 8.7 6.50 12/14/05 143,074 362,576 5,000 1.2 6.50 12/14/05 20,439 51,797 Robert A. Breyer 30,000 7.5 3.50 6/26/05 66,034 167,343 20,000 5.0 6.50 12/14/05 81,756 207,187 Raymond T. Bartus 10,000 2.5 3.50 6/26/05 22,011 55,781 7,500 1.9 6.50 12/14/05 30,659 77,695 Michael J. Landine 35,000 8.7 3.50 6/26/05 77,040 195,233 16,500 4.1 6.50 12/14/05 67,449 170,929 Scott D. Putney 10,000 2.5 3.50 6/26/05 22,011 55,781 7,500 1.9 6.50 12/14/05 30,659 77,695 William F. Graney 5,000 1.2 3.50 6/26/05 11,006 27,890 10,000 2.5 6.50 12/14/05 40,878 103,593
9 Number/Value of Unexercised Options None of the Named Executive Officers exercised any options during the last fiscal year. The following table sets forth information concerning the number of unexercised options held by such persons at the end of the last fiscal year and the value of such unexercised options as of such date.
Number of Shares Underlying Value of Unexercised In-the-Money Unexercised Options/LSARS FY-End Options/LSARS at FY-End (1) -------------------------------- --------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - -------------------- --------------- --------------- --------------- ---------------- Richard F. Pops 216,875 173,125 $1,722,391 $ 846,334 Robert A. Breyer 51,875 205,625 269,366 1,029,347 Raymond T. Bartus 24,375 68,125 135,403 359,860 Michael J. Landine 43,375 90,125 316,918 458,890 Scott D. Putney 24,375 68,125 135,403 359,860 William F. Graney 24,375 0 135,403 0
____________________ (1) Value is measured by the difference between the closing price for the Company's Common Stock on the Nasdaq National Market on March 31, 1996 and the exercise price of the option. 10 TEN YEAR OPTION/SAR REPRICINGS The following table sets forth certain information with respect to the stock options held by the Company's current executive officers that have been repriced since the formation of the Company in 1987.
Length of Number of Original Securities Market Price of Term Underlying Stock at Time Exercise Price Remaining Options/SARS of Repricing at Time of New at Date of Repriced or or Repricing or Exercise Repricing or Name Date Amended Amendment($) Amendment($) Price($) Amendment - ------------------------ -------- --------------- ------------ --------------- --------- ------------ Richard F. Pops 7/21/94 50,000(1) $ 3.69 $11.375 $ 3.69 7 years 125 days Chief Executive 7/21/94 75,000(1) 3.69 9.00 3.69 8 years 153 days Officer 7/21/94 35,000(1) 3.69 7.94 3.69 9 years 182 days 11/25/91 50,000 11.375 15.875 11.375 9 years 324 days Raymond T. Bartus 7/21/94 75,000(1) 3.69 9.00 3.69 8 years 102 days Senior Vice President, 7/21/94 15,000(1) 3.69 9.00 3.69 8 years 153 days Neurobiology Michael J. Landine 7/21/94 25,000(1) 3.69 11.375 3.69 7 years 125 days Senior Vice President 7/21/94 20,000(1) 3.69 9.00 3.69 8 years 153 days and Chief Financial 7/21/94 21,000(1) 3.69 7.94 3.69 9 years 182 days Officer 11/25/91 25,000 11.375 15.875 11.375 9 years 324 days Don G. Burstyn 7/21/94 30,000(1) 3.69 7.875 3.69 9 years 151 days Vice President, Regulatory Affairs Scott D. Putney 7/21/94 75,000(1) 3.69 9.56 3.69 7 years 9 days Vice President, 7/21/94 15,000(1) 3.69 9.00 3.69 8 years 153 days Molecular Biology
____________________ (1) All options indicated were exchanged for options to purchase 25% fewer shares. Employment Contracts and Termination of Employment and Change-in-Control Arrangements Under an agreement between Mr. Pops and the Company, dated February 7, 1991, in the event Mr. Pops' employment with the Company is terminated for any reason other than as a result of his taking certain actions against or that have a significant deleterious effect on the Company, Mr. Pops shall be entitled to receive a payment equal to two-thirds of his then current annual base salary. Under an agreement between Mr. Breyer and the Company, dated June 13, 1994, in the event Mr. Breyer's employment with the Company is terminated by Alkermes for any reason other than as a result of his taking certain actions against or that have a significant deleterious effect on the Company, Mr. Breyer 11 shall be entitled to receive payments at the monthly rate of his then current annual base salary for up to nine months. The Company and Mr. Landine have agreed that, in the event Mr. Landine's employment with the Company is terminated for any reason other than as a result of his taking certain actions against or that have a significant deleterious effect on the Company, Mr. Landine shall be entitled to receive payments for the following six months aggregating 50% of his then current annual salary. Messrs. Pops and Landine and Dr. Bartus have been granted LSARs in connection with a portion of the stock options previously granted to them. Each LSAR provides that after the occurrence of one of several triggering events, including a reorganization or merger of the Company, a sale of the assets of the Company or the acquisition by a person or group of more than 51% of the Common Stock of the Company, the optionee will receive an amount in cash equal to the amount by which the fair market value per share of the Company's Common Stock issuable upon exercise of the option on the date such a triggering event occurs exceeds the exercise price per share of the option to which the LSAR relates. A triggering event shall be deemed to have occurred only when the fair market value of the shares subject to the underlying option exceeds the exercise price of such option. When a triggering event occurs, the related option will cease to be exercisable. Compensation of Directors Except for stock options under the Director Plan which is being submitted for approval by the shareholders at the Meeting, directors do not receive compensation for services on the Board of Directors or any committee thereof. All of the directors, however, are reimbursed for their expenses for each Board and committee meeting attended. In addition, Floyd E. Bloom, Alexander Rich, Paul Schimmel and Michael A. Wall receive consulting fees from Alkermes and Robert S. Langer receives consulting fees from Alkermes Controlled Therapeutics, Inc. ("ACTI"), a wholly owned subsidiary of the Company. During the fiscal year ended March 31, 1996, Alkermes paid consulting fees to Drs. Bloom, Rich and Schimmel and Mr. Wall aggregating $30,000, $30,000, $48,000 and $80,000, respectively, and ACTI paid consulting fees to Dr. Langer aggregating $84,744. Consulting fees are currently being paid to each of Drs. Bloom and Rich at the rate of $2,500 per month, to Dr. Schimmel at the rate of $4,000 per month, to Mr. Wall at the rate of $6,667 per month and to Professor Langer at the rate of $7,214 per month. Alkermes believes that the terms of such consulting arrangements are no less favorable to Alkermes and ACTI than those they could have received from an independent third party. Compensation Committee Interlocks and Insider Participation During the last fiscal year, the Compensation Committee consisted of John K. Clarke, Robert S. Langer, Paul Schimmel and Michael A. Wall. Mr. Wall and Dr. Schimmel are consultants to Alkermes and Professor Langer is a consultant to ACTI. See "Compensation of Directors." 12 REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee (the "Committee"), which consists entirely of non-employee directors, is responsible for reviewing and establishing the compensation of the Company's executive officers, including compensation in the form of stock options or restricted stock awards. Executive Compensation Policies The Company's executive compensation program is designed to attract, retain and motivate experienced and well qualified executive officers who will promote the Company's research and product development efforts. In establishing executive compensation levels, the Committee is guided by a number of considerations. Because the Company is still in the process of developing its portfolio of product candidates, and because of the volatile nature of biotechnology stocks, the Committee believes that traditional performance criteria, such as revenue growth, profit margins and stock price are inappropriate for evaluating and rewarding the efforts of the Company's executive officers. Rather, the Committee bases executive compensation on the achievement of certain product development, financial, strategic planning and other goals of the Company and the executive officer. In establishing compensation levels, the Committee also evaluates each officer's individual performance using certain subjective criteria, including an evaluation of each officer's initiative, contribution to overall corporate performance and managerial ability. No specific numerical weight is given to any of the above- noted subjective or objective performance criteria. In making its evaluations, the Committee consults on an informal basis with other members of the Board and, with respect to officers other than the Chief Executive Officer, reviews the recommendations of the Chief Executive Officer. Another consideration which affects the Committee's decisions regarding executive compensation is the high demand for well-qualified personnel in the biotechnology industry. Given such demand, the Committee strives to maintain compensation levels which are competitive with the compensation of other executives in the industry. To that end, the Committee reviews data obtained from a generally available outside survey of compensation and benefits in the biotechnology industry and from proxy statements or personal knowledge regarding executive compensation at a limited number of comparable companies, some of which are included in the Nasdaq Pharmaceutical Index shown in the Performance Graph on page 17. A third factor which affects compensation levels is the Committee's belief that stock ownership by management is beneficial in aligning management's and shareholders' interests in the enhancement of shareholder value. In accordance with such belief, the Committee seeks to provide a significant portion of executive compensation in the form of stock options or restricted stock awards. The Committee has not, however, targeted a range or specific number of options or awards for each executive position, but makes its decisions based on the above-mentioned survey and the general experience of Committee members. Compensation Mix The Company's executive compensation packages generally include three components: base salary; a discretionary annual cash bonus; and stock options and restricted stock awards. The Committee 13 generally reviews, and makes any changes to, the base salary and bonus of each executive officer as of the beginning of each calendar year. Base Salary The Committee seeks to establish base salaries which are competitive for each position and level of responsibility with those of executive officers at various other biotechnology companies of comparable size and stage of development. Discretionary Cash Bonus The Committee believes that discretionary cash bonuses are useful on a case by case basis to motivate executive officers. However, cash bonuses have not been a significant element of the Company's executive compensation program, as the Committee believes long-term incentives are more appropriate and help to conserve cash. Bonuses for executive officers are not guaranteed, but are awarded from time to time only in the discretion of the Committee. Bonuses were awarded to only two of the executive officers during the fiscal year at rates equal to 5% and 6% of such executive's base salary. Stock Options and Restricted Stock Awards Grants of stock options and awards of restricted stock under the Company's stock option and restricted stock award plans are designed to promote the identity of the long-term interests between the Company's executives and its shareholders and to assist in the retention of executives. Since stock options granted by the Company generally become exercisable over either a three-year or four-year period and restricted stock awards made by the Company cease to be subject to forfeiture on an annual basis over a five-year period, their ultimate value is dependent upon the long-term appreciation of the Company's stock price and the executive's continued employment with the Company. In addition, grants of stock options and awards of restricted stock may result in an increase in executive officers' equity interests in the Company, thereby providing such persons with the opportunity to share in the future value they are responsible for creating. When granting stock options or making restricted stock awards, the Committee considers the relative performance and contributions of each officer compared to that of other officers within the Company with similar levels of responsibility. The number of options granted or shares awarded to each executive officer are generally determined by the Committee on the basis of the general experience and subjective judgment of its members. Section 162(m) of the Code limits the deductibility of annual compensation over $1 million to the Chief Executive Officer and the other Named Executive Officers unless certain conditions are met. The Company's Chief Executive Officer and the other Named Executive Officers have not received annual compensation over $1 million, and the Company has not yet determined what measures, if any, it should take to comply with Section 162. 14 Compensation of the Chief Executive Officer In establishing Mr. Pops' compensation package, the Committee seeks to maintain a level of total current compensation that is competitive with that of chief executives of certain other companies in the biotechnology industry at comparable stages of development. In addition, in order to align Mr. Pops' interests with the long-term interests of the Company's shareholders, the Committee attempts to make a substantial portion of the value of his total compensation dependent on the long-term appreciation of the Company's stock price. At the Company's current stage of development, the Committee believes that Mr. Pops' performance as Chief Executive Officer of the Company must be evaluated almost exclusively using subjective criteria, including the Committee's evaluation of the Company's progress in attracting and retaining senior management, identifying new product candidates, identifying and securing corporate collaborators for the Company's existing product candidates, identifying and acquiring new product development and technology opportunities, advancing the Company's existing product candidates through the complex drug development and regulatory approval process and raising the necessary capital to fund its research and development efforts. In evaluating and establishing Mr. Pops' current compensation package, the Committee considered the following accomplishments of the Company during calendar 1995. The Company met its primary product development objective for the year with respect to RMP-7. The Company, on behalf of Alkermes Clinical Partners, L.P., initiated three Phase II clinical trials of RMP-7 and the chemotherapeutic agent carboplatin in patients with brain tumor. The Company also initiated a Phase I/II clinical trial of RMP-7 and carboplatin administered intra-arterially. In January 1995, the Company entered into a collaborative agreement with Genentech, Inc. with respect to a ProLease formulation of human growth hormone (hGH) and one other molecule for total research funding and milestone payments of up to $20 million. In July 1995, the Company entered into an expanded collaboration agreement with Schering-Plough Corporation resulting in approximately $7 million of funding in fiscal 1996. In September and October 1995, the Company completed an underwritten public offering of common stock with net proceeds to the Company of approximately $15 million. In November 1995, the Company filed an Investigational New Drug application (IND) for a ProLease formulation of Genentech's hGH. The Company initiated a Phase I clinical trial of this formulation in early 1996. Given the significant role played by Mr. Pops in each of the above-noted accomplishments, the Committee increased Mr. Pops' annual base salary in January 1996 from $260,000 to $290,000 and granted Mr. Pops a cash bonus of $15,000. As additional recognition of Mr. Pops' efforts in 1995, and in furtherance of the Committee's belief that a substantial portion of Mr. Pops' total compensation should be dependent on the long-term appreciation of the Company's stock price, in June and December 1995 the Committee granted Mr. Pops options to purchase 47,500 and 40,000 shares of Common Stock, respectively. The Committee believes that each of these actions was particularly appropriate given Mr. Pops' performance during 1995 and in order to maintain his compensation at a competitive level compared to that of the chief executive officers of other similarly sized and positioned biotechnology companies. Compensation Committee John K. Clarke Paul Schimmel Robert S. Langer Michael A. Wall 15 COMPENSATION COMMITTEE REPORT ON REPRICED OPTIONS In July 1994, the Committee granted each of the Company's employees and officers who had previously been granted options to purchase shares of Common Stock the right to exchange such options for new stock options to purchase fewer shares of Common Stock at a lower exercise price with a revised vesting schedule (the "Option Exchange Offer"). The overwhelming majority of the Company's outstanding stock options contained exercise prices that were substantially above the current market price of the Common Stock. Although such options did have some financial value based on a mathematical formula used in the investment banking community for valuing options, the Committee believed that the Company's employees did not place any value on options which were significantly out-of-the money. The Committee concluded that such options therefore were no longer effective in either aligning the interests of the Company's employees with those of its shareholders or encouraging option holders to remain in the employ of the Company. In determining to make the Option Exchange Offer, the Committee considered the fairness of such exchange in relation to the Company's other shareholders. The Committee concluded that, instead of issuing a large number of new options at the current fair market value and thereby causing further shareholder dilution, it was in the shareholders' long-term best interests to make the Option Exchange Offer so that the Company could more effectively motivate and retain its employees and officers. In this light, the Committee decided that non-officers of the Company should be given the option to exchange any of their outstanding options for a new option to purchase 10% fewer shares with a new exercise price set at the fair market value of the Company's Common Stock at the date of the Option Exchange Offer, or $3.69 per share. In order to maximize the incentive for such persons to remain in the employ of the Company, however, the Committee required that any new options issued be subject to a new vesting schedule, with options vesting ratably on an annual basis over a three-year period following the date of the Option Exchange Offer. The Committee also determined that officers of the Company should be given the option to exchange any of their outstanding options for a new option to purchase 25% fewer shares with a new exercise price of $3.69 per share. Like the new options issued to employees, any new options issued to officers were subject to a new vesting schedule, with options vesting ratably on an annual basis over a three-year period following the date of the Option Exchange Offer. It is the opinion of the Compensation Committee that the Option Exchange Offer succeeded in its objectives of minimizing shareholder dilution and providing strong incentives for the Company's employees and management. Compensation Committee John K. Clarke Paul Schimmel Robert S. Langer Michael A. Wall 16 Performance Graph - ----------------- The following graph compares the yearly percentage change in the cumulative total shareholder return on the Company's Common Stock for the last five fiscal years, with the cumulative total return on the Nasdaq Stock Market (U.S.) Index and the Nasdaq Pharmaceutical Index, which includes biotechnology companies. The comparison assumes $100 was invested on March 31, 1992 in the Company's Common Stock and in each of the foregoing indices and further assumes reinvestment of any dividends. The Company did not declare or pay any dividends during the comparison period.
[GRAPH APPEARS HERE] PERFORMANCE GRAPH Nasdaq Measurement Period Nasdaq Stock Market Pharmaceutical (Fiscal Year Ended March 31,) (U.S.) Index Index Alkermes, Inc. - ----------------------------- ------------------- -------------- -------------- 1992 100.00 100.00 100.00 1993 114.98 69.19 46.67 1994 124.05 69.88 41.48 1995 138.04 69.61 16.30 1996 187.37 122.76 54.07
17 MANAGEMENT AND PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the ownership of the Company's Common Stock as of June 7, 1996 by (i) each person who is known by the Company to be the owner of 5% or more of the Company's outstanding shares of Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers, and (iv) all the directors and executive officers of the Company as a group.
Number of Shares Percentage Beneficially Beneficially Names or Group Owned(1) Owned - -------------------------------------- --------------------- ------------- Amerindo Investment Advisors Inc...... 2,715,000(2) 14.80% One Embarcadero, Ste. 2300 San Francisco, CA 94111 Pioneering Management Corporation..... 1,174,000 6.40% 60 State Street Boston, MA 02109 Floyd E. Bloom........................ 163,500 * Robert A. Breyer...................... 109,375(3) * John K. Clarke........................ 352,034(4)(5) 1.92% Robert S. Langer...................... 223,189(6) 1.22% Richard F. Pops....................... 281,341(7) 1.51% Alexander Rich........................ 181,700(8) * Paul Schimmel......................... 300,700(8) 1.64% Michael A. Wall....................... 516,250 2.81% Raymond T. Bartus..................... 55,375(9) * Michael J. Landine.................... 123,525(10) * Scott D. Putney....................... 54,175(11) * William F. Graney..................... 3,000 *
18
Number of Shares Percentage Beneficially Beneficially Names or Group Owned(1) Owned - -------------------------------------- --------------------- ------------- All directors and executive officers as a group (15 persons)............. 2,408,239(4)(12) 12.71%
____________________ * Represents less than 1% of the outstanding shares of the Company's Common Stock. (1) Except as indicated in footnotes to this table, the persons named in this table have sole voting and investment power with respect to all shares of Common Stock owned. (2) Amerindo Investment Advisors Inc. holds these shares in its capacity as investment advisor for various fiduciary accounts. (3) Includes 109,375 shares of Common Stock subject to options which are exercisable or will become exercisable within 60 days of June 7, 1996. (4) Includes 350,000 shares of Common Stock owned by DSV Partners IV, as to which Mr. Clarke disclaims beneficial ownership. Mr. Clarke is a general partner of DSV Management, the general partner of DSV Partners IV. No other general partner of DSV Management is affiliated with the Company. (5) Includes 850 shares of Common Stock issuable upon exercise of warrants which are exercisable. (6) Includes 222,357 Shares of Common Stock held by The Wetmann Trust (the "Trust"). Professor Langer is a beneficiary of the Trust, but has no voting or investment power with respect to the shares held by the Trust. The remaining shares are held by a trust, of which Professor Langer's wife is trustee, for the benefit of his children. (7) Includes 268,750 shares of Common Stock subject to options which are exercisable or which will become exercisable within 60 days of June 7, 1996. (8) Includes 1,700 shares of Common Stock issuable upon exercise of warrants which are exercisable. (9) Includes 49,375 shares of Common Stock subject to options which are exercisable or which will become exercisable within 60 days of June 7, 1996. (10) Includes 68,625 shares of Common Stock subject to options which are exercisable or which will become exercisable within 60 days of June 7, 1996. (11) Includes 49,375 shares of Common Stock subject to options which are exercisable or which will become exercisable within 60 days of June 7, 1996. Also includes 1,200 shares of Common Stock awarded under the Award Plan which will cease to be subject to forfeiture within 60 days of June 7, 1996. 19 (12) Includes 591,625 shares of Common Stock subject to options or issuable upon exercise of warrants which are exercisable or which will become exercisable within 60 days of June 7, 1996. Also includes 1,800 shares of Common Stock awarded under the Award Plan which will cease to be subject to forfeiture within 60 days of June 7, 1996. Also includes 222,357 shares of Common Stock held by the Trust. CERTAIN TRANSACTIONS Stock Options and Awards During the last fiscal year, various executive officers and a director were granted options to purchase shares of Common Stock pursuant to the Amended and Restated Omnibus Stock Option Plan, the Amended and Restated 1989 Non-Qualified Stock Option Plan or the Director Plan (subject to shareholder approval). Product Development Agreement with Alkermes Clinical Partners, L.P. Pursuant to a Product Development Agreement dated March 6, 1992 between the Company and Alkermes Clinical Partners, L.P. (the "Partnership"), the Company conducts certain research and development on behalf of the Partnership. Alkermes Development Corporation II ("ADC II"), a wholly owned subsidiary of the Company, is the general partner of the Partnership. Richard F. Pops, a director and the Chief Executive Officer of the Company, is a director and the President and Chief Executive Officer of ADC II. The Company is reimbursed by the Partnership for its actual costs incurred in conducting such research and development, and also receives a management fee of 10% of such costs. For the fiscal year ended March 31, 1996, the Company recorded revenue of $11,182,741 from the Partnership pursuant to the Product Development Agreement. Loan to Partnership In April 1992, the Company loaned to the Partnership the aggregate principal amount of $4,735,000 (the "Alkermes Loan") to fund certain initial expenditures of the Partnership. The Alkermes Loan was paid in full on April 15, 1995 and bore interest at the rate of seven and one-half percent (7 1/2%) per annum which was paid on April 15, 1993, April 15, 1994 and April 15, 1995. OTHER BUSINESS The Board of Directors does not intend to present to the Meeting any business other than the election of directors and the approval of the Director Plan. If any other matter is presented to the Meeting which under applicable proxy regulations need not be included in this Proxy Statement or which the Board of Directors did not know a reasonable time before this solicitation would be presented, the persons named in the accompanying proxy will have discretionary authority to vote proxies with respect to such matter in accordance with their best judgment. 20 INDEPENDENT AUDITORS Deloitte & Touche LLP, independent auditors, audited the consolidated financial statements of the Company for the fiscal year ended March 31, 1996. Representatives of Deloitte & Touche LLP are expected to attend the Meeting, will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions. The Board of Directors has selected Deloitte & Touche LLP as the independent auditors to audit the Company's consolidated financial statements for the fiscal year ending March 31, 1997. DEADLINE FOR SHAREHOLDERS PROPOSALS The Company must receive any proposal which a shareholder wishes to submit at the 1997 annual meeting of shareholders before March 1, 1997 if the proposal is to be considered by the Board of Directors for inclusion in the proxy material for that meeting. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who beneficially own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of Common Stock. Executive officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Mr. Clarke and Drs. Rich and Schimmel participated in an exchange offer completed by the Company on January 27, 1995 with respect to warrants issued in 1992 in connection with the formation of the Partnership, whereby limited partners had the option to exchange their warrants received in 1992 for warrants to purchase fewer shares of Common Stock at a lower exercise price. Although these directors reported the initial acquisition of the warrants in 1992 on a timely filed Form 4, they did not report the exchange of these warrants for new warrants until June 1996. In addition, Dr. Putney made a gift of warrants to purchase shares of Common Stock of the Company to his father in January 1995 which was not reported until June 1996. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, for the fiscal year ended March 31, 1996, all Section 16(a) filing requirements applicable to its executive officers, directors, officers and greater than ten percent shareholders were complied with. By Order of the Board of Directors Morris Cheston, Jr. Secretary June 28, 1996 21 Appendix A ALKERMES, INC. STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS ARTICLE I Purpose The purpose of the Stock Option Plan for Non-Employee Directors (the "Plan") is to enable Alkermes, Inc. (the "Company") to attract and retain independent directors and to strengthen the mutuality of interests between such directors and the Company's shareholders. ARTICLE II Definitions For purposes of the Plan, the following terms shall have the following meanings: 2.1 "Board" shall mean the Board of Directors of the Company. ----- 2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- 2.3 "Common Stock" shall mean the Common Stock, par value $.01 per share, ------------ of the Company. 2.4 "Disability" shall mean a disability that results in a director's ---------- inability to carry out his or her duties as a director, as determined in the reasonable judgment of the Board. 2.5 "Effective Date" shall mean the date on which the Plan is approved by -------------- the Board. 2.6 "Eligible Director" shall mean any member of the Board who, on the ----------------- date on which Options are to be granted, is not an officer or employee of the Company or any of the Company's subsidiaries. 2.7 "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, the Nasdaq National Market ("Nasdaq"), or, if such sales prices are not available, A-1 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. 2.8 "Optionee" shall mean an individual to whom a Stock Option has been -------- granted under the Plan. 2.9 "Stock Option" or "Option" shall mean any option to purchase shares of ------------ ------ Common Stock granted pursuant to Article VI. ARTICLE III Administration 3.1 Guidelines. The Plan shall be administered by the Board. Subject to ---------- the express provisions of the Plan, the Board 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 administer the Plan. The Board 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 Board under this Section 3.1 shall impair the rights of any Optionee without such person's consent, unless otherwise required by law. 3.2 Decisions Final. Any decision, interpretation or other action made or --------------- taken in good faith by the Board arising out of or in connection with the Plan shall be final, binding and conclusive on the Company, all members of the Board 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 shall be 150,000 shares of Common Stock (subject to any increase or decrease pursuant to Section 4.2), which may be either authorized and unissued shares of Common Stock or issued Common Stock that has 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 unpurchased shares 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 that may be issued under the Plan, the number of shares for which Stock Options are to be granted A-2 to Eligible Directors pursuant to Section 6.2 and the number of shares subject to, and the option price of, 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 Eligible Directors. Only Eligible Directors shall be granted Options ------------------ under the Plan. ARTICLE VI Stock Options 6.1 Options. All Stock Options granted under the Plan shall be non- ------- qualified stock options (i.e., options that do not qualify as incentive stock ---- options under Section 422 of the Code). 6.2 Grants. On the Effective Date, each Eligible Director who is not then ------ a consultant to the Company shall automatically receive a one-time grant of Stock Options to purchase 10,000 shares of Common Stock. Thereafter, for as long as the Plan remains in effect, each Eligible Director shall automatically be granted, on the date of the annual meeting of shareholders of the Company, Stock Options to purchase 2,500 shares of Common Stock; provided, however, that an individual who ceases to be a member of the Board on such date shall not be granted any Stock Options. 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 Board 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 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 ------------ purchasable upon exercise of a Stock Option shall be equal to 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 ten years ----------- from the date of grant. (d) Exercisability. Stock Options shall become exercisable in full -------------- six months after the date of grant. A-3 (e) Method of Exercise. Stock Options may be exercised in whole or in ------------------ part at any time during the option term by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased and the option price therefor. The notice of exercise shall be accompanied by payment in full of the option price and, if requested, by the representation described in Section 9.2. The option price may be paid in cash or by check payable to the Company or in such other form as the Board deems acceptable. Unless otherwise determined by the Board in its sole discretion at or after grant, payment in full or in part may be made in the form of Common Stock duly owned by the Optionee (and for which the Optionee has good title free and clear of any liens and encumbrances) or by reduction in the number of shares issuable upon such exercise, based, in either case, on the Fair Market Value of the Common Stock on the last trading date preceding payment. Upon payment in full of the option price, as provided herein, a stock certificate representing the number of shares of Common Stock to which the Optionee is entitled shall be issued and delivered to the Optionee. An Optionee shall not be deemed to be the holder of Common Stock, or to have the rights of a holder of Common Stock, with respect to shares subject to the Option, unless and until a stock certificate representing such shares of Common Stock is issued to such Optionee. (f) Death. If an Optionee ceases to be a member of the Board by ----- reason of death, any Stock Option that was exercisable on the date of such Optionee's death may thereafter be exercised by the legal representative of the Optionee's estate for a period of one year after the date of death or until the expiration of the stated term of the Stock Option, whichever period is shorter, and any Stock Option not exercisable on the date of death shall be forfeited. (g) Disability. If an Optionee ceases to be a member of the Board by ---------- reason of Disability, any Stock Option that was exercisable on the date on which the Optionee ceased to be a member of the Board may thereafter be exercised by the Optionee for a period of one year after such date or until the expiration of the stated term of the Stock Option, whichever period is shorter, and any Stock Option not exercisable on the date on which the Optionee ceased to be a member of the Board shall be forfeited; provided, however, that if the Optionee dies during such one-year period, any unexercised Stock Options may be exercised by the legal representative of the Optionee's estate for a period of one year after the date of the Optionee's death or until the expiration of the stated term of the Stock Option, whichever period is shorter. (h) Other Termination. If an Optionee ceases to be a member of the ----------------- Board by reason of retirement or for any reason other than death or Disability, any Stock Option that was exercisable on the date on which the Optionee ceased to be a member of the Board may be exercised by the Optionee for a period of three months after such date or until the expiration of the stated term of such Stock Option, whichever period is shorter, and any Stock Option not exercisable on the date on which the Optionee ceases to be a member of the Board shall be forfeited. (i) Non-Transferability of Option. No Stock Option shall be ----------------------------- transferable by an Optionee otherwise than by will or by the laws of descent and distribution, to the extent consistent with the terms of the Plan and the Option, and all Stock Options shall be exercisable, during an Optionee's lifetime, only by the Optionee. A-4 ARTICLE VII Termination or Amendment 7.1 Termination or Amendment of the 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); provided, however, that, unless otherwise required by law, the rights of an Optionee with respect to Options granted prior to such amendment, discontinuance or termination, may not be impaired without the consent of such Optionee and, provided further, without the approval of the Company's shareholders, no amendment may be made that would (i) materially increase the aggregate number of shares of Common Stock that may be issued under the Plan (except by operation of Section 4.2); (ii) materially modify the requirements as to eligibility for participation in the Plan; or (iii) materially increase the benefits accruing to participants under the Plan. Notwithstanding the foregoing, the provisions of Articles V and VI may not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. 7.2 Amendment of Options. The Board may amend the terms of any Stock -------------------- Options theretofore granted, prospectively or retroactively, but, subject to Article IV, no such amendment or other action by the Board shall impair the rights of any Optionee without the Optionee's consent. ARTICLE VIII Unfunded Plan 8.1 Unfunded Status of Plan. The Plan is intended to constitute an ----------------------- "unfunded" plan for incentive compensation. With respect to any payment not yet made to an Optionee by the Company, nothing contained herein shall give any such individual 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, Options ------------- granted hereunder and the rights and privileges conferred thereby shall 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 such 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. A-5 9.2 Legend. The Board may require each person purchasing shares upon ------ exercise of an Option to represent to the Company in writing that the Optionee is acquiring the shares without a view to distribution thereof. The stock certificates representing such shares may include any legend which the Board deems appropriate to reflect any restrictions on transfer. All certificates representing shares of Common Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Board may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed or traded or Nasdaq, any applicable Federal or state securities law, and any applicable corporate law, and the Board 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 Board ----------- from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 9.4 No Right to Continue Relationship. Neither the Plan nor the grant of --------------------------------- any Option under the Plan shall confer upon any person any right to continue as a director of the Company or obligate the Company to nominate any director for reelection by the Company's shareholders. 9.5 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 with Nasdaq. The Company shall have no obligation to issue such shares unless and until such shares are so 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, 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 9.5, 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. 9.6 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. A-6 9.7 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. 9.8 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 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. 9.9 Costs. The Company shall bear all expenses incurred in administering ----- the Plan, including expenses of issuing Common Stock upon the exercise of Options. 9.10 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. 9.11 Successors. The Plan shall be binding upon and inure to the benefit ---------- of any successor or successors of the Company. 9.12 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 affirmative vote of the holders of a majority of the outstanding shares of Common Stock present, or represented, and entitled to vote at a duly held meeting of the shareholders of the Company. 10.2 Termination. Unless sooner terminated, the Plan shall terminate ten ----------- years after the Effective Date and no Options shall be granted thereafter. Termination of the Plan shall not affect Options granted before such date, which shall continue to be exercisable, in accordance with their terms, after the Plan terminates. A-7 EX-23 13 CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements of Alkermes, Inc. on Form S-8 (File Nos. 33-44752, 33-58330 and 33-97468) of our report dated May 24, 1996, appearing in this Annual Report on Form 10-K of Alkermes, Inc. for the year ended March 31, 1996. DELOITTE & TOUCHE LLP Boston, Massachusetts June 25, 1996 EX-27 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-K FOR THE YEAR ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRELY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 445 31,929 0 0 0 34,332 13,520 (5,098) 45,752 6,448 9,876 0 0 160 23,352 45,752 0 15,919 0 18,955 0 0 1,044 (13,747) 0 (13,747) 0 0 0 (13,747) (0.93) (0.93)
-----END PRIVACY-ENHANCED MESSAGE-----