-----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, FlbGruKePupwmFtu2aNGodEtI6AoGIPV+/Liy5w5sCSePhD2WPm0YVR6aCXpJ6Gs ZBRJL/UcWe0Doz5MvxpvoA== 0000950133-99-001134.txt : 19990402 0000950133-99-001134.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950133-99-001134 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTREMED INC CENTRAL INDEX KEY: 0000895051 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 581959440 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20713 FILM NUMBER: 99582721 BUSINESS ADDRESS: STREET 1: 9610 MEDICAL CENTER DR STE 200 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012179858 MAIL ADDRESS: STREET 2: 9610 MEDICAL CENTER DR STE 200 CITY: ROCKVILLE STATE: MD ZIP: 20850 10-K405 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 0-20713 ENTREMED, INC. --------------- (Exact name of registrant as specified in its charter) Delaware 58-1959440 - ----------------------------------- ---------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) Suite 200, 9610 Medical Center Drive, Rockville, MD 20850 - --------------------------------------------------- -------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 217-9858 - --------------------------------------------------- Securities registered pursuant to Section 12 (g) of the Act: Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ Common Stock, Par Value $.01 Per Share Nasdaq National Market
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 is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K [X] As of March 25, 1999, 13,138,328 shares of common stock were outstanding and the aggregate market value of the shares of common stock held by non-affiliates was approximately $278,027,000. DOCUMENTS INCORPORATED BY REFERENCE See Part III hereof with respect to incorporation by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 and the Exhibit Index hereto. ================================================================================ 2 ENTREMED, INC. AND SUBSIDIARIES FORM 10-K - FISCAL YEAR ENDED DECEMBER 31, 1998 Contents and Cross Reference Sheet
Form 10-K Form 10-K Form 10-K Part No. Item No. Description Page No. --------- --------- ----------- --------- I 1 Business The Company............................................................................3 Corporate Strategy.....................................................................5 Angiogenesis...........................................................................5 Antiangiogenesis Program...............................................................6 Cell Permeation Technology.............................................................9 Collaborations and License Agreements.................................................11 Academic Collaborations...............................................................13 Competition...........................................................................15 Manufacturing and Marketing...........................................................16 Patents and Proprietary Rights........................................................17 Government Regulation.................................................................19 Employees.............................................................................23 Risk Factors..........................................................................23 2 Properties..................................................................................34 3 Legal Proceedings...........................................................................34 4 Submission of Matters to a Vote of Security Holders.........................................35 II 5 Market for Registrant's Common Equity and Related Stockholder Matters.................................................................35 6 Selected Financial Data.....................................................................37 7 Management's Discussion and Analysis of Financial Conditions and Results of Operations Overview..............................................................................38 Results of Operations.................................................................38 Liquidity and Capital Resources.......................................................39 Year 2000.............................................................................40 Inflation.............................................................................41 7(a) Quantitative and Qualitative Disclosures about Market Risk..................................41 8 Financial Statements and Supplementary Data.................................................41 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................................41 III 10 - 13 Incorporated by reference from the Company's Proxy Statement................................41 IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................................................42 - ------------------------- Financial Statements.........................................................................................................F-1 Signatures..................................................................................................................II - 1
2 3 This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements in this Form 10-K that are not descriptions of historical facts are forward-looking statements, based on management's estimates, assumptions and projections, that are subject to risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable as of the date hereof, actual results could differ materially from those currently anticipated due to a number of factors, including risks relating to the early stage of products under development; uncertainties relating to clinical trials; dependence on third parties; future capital needs; and risks relating to the commercialization, if any, of the Company's proposed products (such as marketing, safety, regulatory, patent, product liability, supply, competition and other risks). Additional important factors that could cause actual results to differ materially from the Company's current expectations are included in the section below entitled Risk Factors. The Company assumes no obligation to update its forward-looking statements. PART I ITEM 1 BUSINESS THE COMPANY EntreMed, Inc. ("EntreMed" or the "Company") was organized in September 1991 and is engaged primarily in the research and development of biopharmaceutical products that address the role of angiogenesis, the formation of new blood vessels, in the prevention and treatment of a broad range of diseases. The Company is an innovative biopharmaceutical company with a research and product focus on the role of angiogenesis in disease. Angiogenesis is the biological process by which new blood vessels are formed and is a normal process during the first three months of embryonic development, the reproductive cycle of women, and in wound healing. At other times, angiogenesis is harmful when associated with pathology, particularly that of cancer and macular degeneration, a leading cause of blindness. The Company believes that antiangiogenic products, which inhibit the abnormal growth of blood vessels, may have fewer adverse side effects than traditional therapies for these diseases. EntreMed's portfolio of potential therapeutics include the antiangiogenic compounds, Angiostatin(R) protein, Endostatin(TM) protein, 2-Methoxyestradiol (2ME) and thalidomide which are used to block the growth of blood vessels supplying primary and metastatic tumors. The Company's product candidates have been developed primarily through sponsored research collaborations and licensing agreements. The Company's sponsored research programs are augmented by its internal capabilities in the angiogenesis field. 3 4 To date, the Company has: - Licensed from Children's Hospital four antiangiogenic molecules - Angiostatin(R) protein, thalidomide and thalidomide analogs, Endostatin(TM) protein and 2ME. - Licensed to Bristol-Myers Squibb Company commercial rights to Angiostatin(R) protein, thalidomide and thalidomide analogs. - Isolated, identified, sequenced, cloned, and recombinantly expressed Angiostatin(R) and Endostatin(TM) proteins in quantities sufficient for preclinical studies. In preclinical studies, Angiostatin(R) and Endostatin(TM) proteins appeared to inhibit vascularization and growth of primary and metastatic tumors. - Initiated scale-up manufacturing of Angiostatin(R) and Endostatin(TM) proteins for clinical studies. - Completed Phase II clinical trials evaluating the antiangiogenic effects of thalidomide in inhibiting the progression of brain cancer, prostate cancer, and Kaposi's sarcoma. - Reacquired commercial rights to thalidomide, thalidomide analogs and Angiostatin(R) protein from Bristol-Myers Squibb Company. Assumed responsibility for preclinical, pharmaceutical development and clinical studies of Angiostatin(R) protein from Bristol-Myers Squibb Company. - Signed a Cooperative Research and Development Agreement (CRADA) with the National Cancer Institute ("NCI") to undertake pharmacology and toxicology studies and also to develop commercial production methods for Endostatin(TM) protein. - Signed a sponsored research agreement with a Harvard Medical School collaborator who has determined the crystal structure of Endostatin(TM) protein. - Announced product launch of Endostatin(TM) protein ACCUCYTE(TM) Immunoassay Kit developed collaboratively with CytImmune Sciences Inc. The kit is the first commercially available immunoassay kit for the detection of human Endostatin(TM) protein in biological fluids such as blood. - Signed a contract with Covance Biotechnology Services, Inc. for Good Manufacturing Practices ("GMP") production of Endostatin(TM) protein for further preclinical and early clinical studies. - Signed an agreement to sublicense commercial rights to thalidomide to Celgene Corporation. Celgene and NCI have expanded clinical trials to additional oncology applications. 4 5 - Developed internally a portfolio of antiangiogenic molecules that are in preclinical development. CORPORATE STRATEGY The Company's strategy is to discover and develop novel antiangiogenic therapeutics as well as other promising technologies, such as cell permeation, which the Company perceives to have clinical and commercial potential. The principal elements of the Company's strategy are (i) to focus its resources on current core technologies, (ii) to broaden its product and technology portfolio through sponsored research collaborations with academic institutions, government organizations and private enterprises, (iii) to augment product development with its in-house research and development capabilities and (iv) to leverage its resources through corporate partnerships in order to minimize the cost to the Company of late-stage clinical trials and to accelerate product commercialization. The Company's product candidates are in the developmental stage and require further research, evaluation, and regulatory approval. No assurance can be given that any product candidate will result in a product capable of commercial use. ANGIOGENESIS Overview Within the human body, a network of arteries, capillaries and veins, known as the vasculature, functions to transport blood throughout the tissues. The basic network of the vasculature is developed through angiogenesis, a fundamental process by which new blood vessels are formed. The primary angiogenic period in humans takes place during the first three months of embryonic development. During this period, cytokines and growth factors, which are normally suppressed, are activated to stimulate the growth of new blood vessels. Once the general network of the blood vessels is complete, these angiogenic stimulators are inhibited and blood vessels grow longer and larger in diameter until adulthood through a different process termed vasculogenesis. Angiogenesis and Cancer The term cancer includes many different types of uncontrolled cellular growth. Clusters of cancer cells, referred to as tumors, may destroy surrounding organs, impair physiological function and often lead to death. In order to survive, cancer cells require oxygen and nutrients, which they receive from the body's blood supply. In order to access this blood supply, cancer cells initiate a biochemical mechanism that stimulates angiogenesis to provide the blood supply that nourishes the tumor. As cancer cells grow and metastasize (spread from primary sites to other parts of the body) they require continuous angiogenesis. Antiangiogenic drug candidates are intended to inhibit the growth of tumor-feeding blood vessels and may prove to be effective in treating certain cancers, with fewer adverse side effects than current therapies. Cancer is the second leading cause of death in the United States and it is estimated that approximately 1,200,000 new cases of cancer are expected to be diagnosed in 1998. (Source: American Cancer Society). 5 6 Existing cancer treatments include surgery, radiation therapy and chemotherapy. Surgery is an invasive method of removing tumors. However, some tumors are currently deemed inoperable due to their location, extent of organ infiltration or size. Radiation therapy produces ionized molecules within the body that attack cancer cells, and may also damage surrounding healthy cells. Chemotherapy involves the administration of toxic substances (cytotoxins) designed to kill cancer cells and usually produces severe side effects. In addition, resistance to chemotherapy occurs over time. The Company believes that its antiangiogenic therapeutics may prove to have significant advantages over traditional cancer therapies, including reduced toxicity, and lack of drug resistance, and may be administered in conjunction with other antiangiogenic and traditional therapies. Angiogenesis and Blindness Angiogenesis within the eye, a condition often associated with diabetes and macular degeneration, is a major cause of blindness. Macular degeneration, which is often age-related, and diabetic retinopathy, a secondary effect of diabetes, both involve the formation of new blood vessels behind, or in front of the retina, respectively. The blood vessels that grow in front of the retina block vision and the blood vessels that grow behind the retina often hemorrhage or cause retinal detachment each resulting in a decrease or loss of vision. It is estimated that approximately eight million people in the U.S. have diabetic retinopathy, and that twenty-five thousand cases result in blindness each year. It is estimated that approximately thirteen million Americans suffer from macular degeneration. Nearly two million of these people will develop vision impairment, of which one hundred thousand will develop blindness each year. (Source: Prevent Blindness America). Current treatments for diabetic retinopathy and to a more limited extent, macular degeneration involve laser-based photocoagulation therapy, which often causes additional damage to the retina and surrounding cells. Angiogenesis and Other Disease Indications A variety of other disease indications are related to angiogenesis, including rheumatoid arthritis, atherosclerosis, psoriasis and Crohn's disease. The Company believes that its antiangiogenic technologies may be applicable to such diseases. To date, the Company has not researched antiangiogenic therapy in diseases outside of cancer or macular degeneration. There can be no assurance that the Company will pursue research outside these two indications, that product candidates will result from any research undertaken, or that any products for these diseases will ever be commercialized. ANTIANGIOGENESIS PROGRAM The Company believes that certain small molecules or proteins that exhibit antiangiogenic effects may be useful as therapeutics for diseases involving angiogenesis. The Company currently focuses on angiogenesis inhibition as a treatment for oncologic and ophthalmologic indications. Product candidates under development include: (i) recombinant human Angiostatin(R) and Endostatin(TM) proteins, each an angiogenesis inhibitor naturally produced by the body; (ii) 2ME, an orally-active small molecule angiogenesis inhibitor, and its chemical analogs; and (iii) chemical analogs of thalidomide which inhibit angiogenesis. The Company is also developing vaccines 6 7 against angiogenesis, and conducting research on other endogenous proteins that exhibit potent antiangiogenic effects in preclinical studies. The Company believes that, if successfully developed, these products could be used alone or in combination with each other to treat certain angiogenic-related diseases. Product Candidates Recombinant Human Angiostatin(R) Protein and Endostatin(TM) Protein. The Company is currently developing two endogenous proteins, Angiostatin(R) protein and Endostatin(TM) protein, in a recombinant human form as potential long term cancer therapeutics to prevent metastatic disease and as therapies for primary tumors. These two proteins are different in molecular structure. Metastatic tumor growth is attributed to the implantation and growth of tumor cells at secondary sites. These tumor cells are released by a primary tumor, or are released into circulation during surgical removal of the primary tumor. Although surgeons generally remove significant amounts of healthy tissue surrounding the tumor, in many cases "seed cancer cells" have already escaped the primary tumor, circulated through the body, and become embedded elsewhere. It has been observed that in certain cases, these seed cells, or metastases, do not vascularize nor grow while the primary tumor is in place. However, after the primary tumor is removed, metastatic tumors often grow rapidly. In Company-sponsored research at Children's Hospital, a substance associated with primary tumors was identified which appears to prevent vascularization and growth of metastatic tumors. Based upon such research, the Company believes that primary tumors secrete an enzyme that cleaves plasminogen, a known protein associated with blood clotting, into a smaller, previously undiscovered protein. The Children's Hospital team isolated and identified the protein in 1995, which the Company named Angiostatin(R) protein. The Company has cloned and expressed the gene that codes for Angiostatin(R) protein, and is now pursuing recombinant production of Angiostatin(R) protein in anticipation of clinical trials. In 1996, the Children's Hospital team also isolated and identified a second endogenous protein, named Endostatin(TM) protein. The gene for Endostatin(TM) protein has been cloned and expressed by the Company. Preclinical studies, including the murine Lewis Lung Carcinoma ("LLC") metastatic model, demonstrated that both Angiostatin(R) and Endostatin(TM) proteins inhibited the growth of metastatic tumors. In addition, the Angiostatin(R) protein was shown to reduce the size of primary murine carcinomas and sarcomas as well as human prostate, breast and colon cancers grown in immunodeficient mice. Endostatin(TM) protein was also shown to reduce the size of primary rodent carcinomas, including murine Lewis lung, melanoma and rat glioma, as well as human prostate cancer grown in immonodeficient mice. The Company is addressing additional required preclinical studies for Angiostatin(R)protein and Endostatin(TM) protein. The Company is currently working to produce both proteins in quantities sufficient for clinical studies. In addition, the Company is collaborating with the NCI to pursue the preclinical and clinical development of Endostatin(TM) protein. 7 8 The Company currently anticipates that either or both the Angiostatin(R) protein or Endostatin(TM) protein, as endogenous angiogenesis inhibitors, could be administered as an adjunct therapy after cancer diagnosis and sustained thereafter. The Company believes that there may be utility in using these proteins in combination and that these proteins may also be effective in inhibiting other angiogenic diseases such as diabetic retinopathy and macular degeneration, although the Company has not conducted any research to date in these areas. The Company has obtained exclusive licenses from Children's Hospital for patent applications filed on the Angiostatin(R) and Endostatin(TM) proteins and related technology. 2-Methoxyestradiol (2ME) and 2ME Analogs. In January 1997, the Company licensed the worldwide rights to 2ME, an orally-active, small molecular weight antiangiogenic and antiproliferative agent. In preclinical studies, this natural estrogen metabolite discovered by Dr. Robert D'Amato and his colleagues, inhibited the growth of human breast tumor cells in vivo and also yielded a marked decrease in microvessel density associated with tumors. The January 1, 1997 issue of Cancer Research reported the results of collaborative preclinical trials of 2ME. Dr. D'Amato's report in this distinguished medical journal indicated that 2ME acts by inhibiting the cellular machinery involved in replicating cancer cells. However, 2ME further acts as an antiangiogenic agent. The compound exhibits minimal toxicity in preliminary animal studies and is administered orally. As a result of these initial promising results, the NCI is collaborating with the Company in the clinical development of 2ME and exploration of methods for commercial production of the molecule. In keeping with its business strategy, the Company may continue developing 2ME with the NCI, or may collaborate with a strategic partner for ultimate commercialization. Thalidomide and Thalidomide Analogs. The Company, together with its collaborator Celgene, is evaluating the antiangiogenic properties of the drug thalidomide. Thalidomide, which was widely prescribed as a sedative in Europe in the late 1950s and early 1960s, caused severe birth defects when taken by pregnant women. The Company believes that thalidomide may have affected fetal development and caused birth defects by blocking new blood vessel growth, a characteristic that may make thalidomide useful in the prevention and treatment of angiogenic disorders. Thalidomide has been shown to block angiogenesis in preclinical animal studies conducted at Children's Hospital. In order to expand the Company's small molecule antiangiogenic portfolio and obtain composition of matter patents, the Company has commenced research on chemical analogs of thalidomide which have similar mechanisms of action and focus on the antiangiogenic therapeutic potential of this drug. The Company proposes to develop a thalidomide analog as an oral therapeutic to inhibit the progression of certain angiogenic diseases, including cancer and certain causes of blindness. The Company and the NCI initiated Phase II clinical trials in 1996 to evaluate the antiangiogenic effects of thalidomide in inhibiting the progression of breast cancer, prostate cancer and Kaposi's sarcoma. The Company also initiated and expanded a Phase II clinical trial for brain cancer in 1996. In May 1997, the Company announced successful interim results in brain 8 9 cancer and Kaposi's sarcoma patients treated with thalidomide. In June 1997, the Company and the NCI announced an increase in the number of prostate cancer patients in NCI-sponsored Phase II clinical trials of thalidomide. In August 1997, the Company reacquired the commercial rights to thalidomide in exchange for renewing Bristol-Myers Squibb's warrant to purchase an additional $10,000,000 of the Company's common stock. In December 1998, the Company sublicensed commercial rights to thalidomide to Celgene in return for royalty payments on thalidomide sales. Celgene will be responsible for further clinical study and marketing of thalidomide. See "-- Collaborations and License Agreements", "--Competition", and "--Patents and Proprietary Rights". The Company continues to study the antiangiogenic effects of thalidomide analogs. Thalidomide was additionally shown to inhibit the abnormal formation of blood vessels in the eye in animal studies performed at Children's Hospital. The Company is concluding Phase II clinical trials at the Scheie Eye Institute at the University of Pennsylvania School of Medicine and with the Retina Associates of Cleveland to evaluate the antiangiogenic effects of thalidomide in blindness due to age-related macular degeneration. The Company has recently transferred this IND application to Celgene. Thalidomide has been approved for sale in the United States as a treatment for patients with leprosy. Celgene Corporation received approval from the U.S. Food and Drug Administration ("FDA") for the use of thalidomide in erythema nodosum leprosum, an inflammatory skin condition of some leprosy patients. Other Antiangiogenesis Research The Company maintains an internal discovery and development program and also continues to sponsor and support research at Children's Hospital on angiogenesis technologies with the aim of discovering additional antiangiogenic products. The Company's research in these areas is currently early stage, although the Company has identified other proteins and compounds with angiogenic or antiangiogenic properties that may be candidates for further development. CELL PERMEATION TECHNOLOGY Overview The Company is applying its expertise in the role of blood function to the development of a cell permeation technology that may facilitate the delivery into blood cells of drugs, genes or other therapeutic agents that otherwise would not readily permeate through the cell membrane. To date, the Company has focused its cell permeation research primarily on a method of enhancing the oxygen delivery capabilities of blood. Human blood is comprised of four components: red blood cells, white blood cells, plasma and platelets. The principal functions of human blood are to transport oxygen and nutrients to tissues, carry waste products away from tissues and defend the body against infection. Hemoglobin, a protein-iron molecule contained within red blood cells, is responsible for carrying oxygen from the lungs to tissues throughout the body. Tissues and organs in the body require oxygen to function properly, and oxygen deficiency may lead to tissue damage or death. In human 9 10 blood, each hemoglobin molecule normally carries four molecules of oxygen, but releases only one. It has been proposed that inositol hexaphosphate ("IHP"), a naturally occurring plant chemical, may enhance the oxygen releasing capabilities of hemoglobin by allowing the release of up to three oxygen molecules. The theory that IHP could enhance the oxygen releasing capacity of hemoglobin has been proposed for several years. Scientists have observed that a molecule similar to IHP found in the hemoglobin of birds is more efficient at facilitating the release of oxygen than a corresponding molecule (2,3 diphosphoglycerate, or 2,3 DPG) found in human hemoglobin. However, IHP does not readily diffuse through the cell membrane of human red blood cells and previous techniques used to introduce IHP into red blood cells showed significant problems and resulted in substantial cell damage. The Company's research is focused on overcoming these problems. The Company's research has led to the development of a prototype device designed to introduce IHP into red blood cells without significant cell damage. The Company intends to develop this application as a therapeutic in such chronic and acute diseases as angina, congestive heart failure, heart attacks, and other diseases involving inadequate circulation or respiratory functions. Existing methods of treatment for these diseases, including surgical remedies, drug therapies and non-surgical devices, treat such diseases by seeking to increase blood flow, rather than increasing the blood's oxygen releasing capacity. As IHP-treated blood may release more oxygen to tissues than untreated human blood, it may also be possible that a smaller amount of IHP-treated blood can be transfused to obtain equivalent tissue oxygenation. Device for Oxygen Enhanced Blood Delivery The Company has constructed a prototype device designed to introduce IHP molecules into red blood cells, which may enhance the delivery of oxygen to tissues and organs, and is sponsoring contract research and development on IHP-treated blood. Several research prototype flow electroporation devices have been constructed and the accompanying reagents have been developed, although design activities are ongoing and there can be no assurance that a clinically acceptable device will be completed. The Company intends to conduct preclinical toxicology studies required to demonstrate the safety and efficacy of IHP-treated red blood cells in enhancing the delivery of oxygen to tissues in relevant disease states. The Company's flow electroporation technology is based on Company sponsored research previously conducted at the Center for Blood Research Laboratories at Harvard Medical School ("CBRL"). In November 1992, the Company obtained an exclusive worldwide license to this technology from the CBRL in exchange for cash payments and royalties based on sales, and a United States patent was received from the U.S. Patent and Trademark office in March 1998 covering the electroporation chamber, a core component of the Company's cell permeation technology. Device and disposable component engineering and development have and continue to be conducted by a contract developer/manufacturer. Other Cell Permeation Applications In addition to IHP-treated red blood cells and platelets, the Company is also exploring another application of its cell permeation technology. This application involves platelets, which 10 11 function to participate in the formation of blood clots and to help maintain hemostatis. Through the use of the cell permeation technology and associated reagents, platelets may be preserved for several months, as opposed to the standard used today which is only five days. The Company is in discussions with medical device companies and is seeking to enter into collaborative arrangements with such companies to develop and commercialize the Company's cell permeation technology. However, there can be no assurance that any such agreements will be entered into with any of these companies or that the terms of any agreement will be favorable to the Company. COLLABORATIONS AND LICENSE AGREEMENTS General. The Company intends to continue to develop in-licensed products and to enter into collaborations and licensing agreements with corporate partners for product development, manufacturing and marketing. The Company believes that it will be necessary to enter into collaborative arrangements with other companies in the future to develop, commercialize, manufacture and market its cell permeation technology, as well as other products or technologies it may acquire or develop. Bristol-Myers Squibb Company Collaboration. In December 1995, the Company entered into the BMS Collaboration to further the development of certain antiangiogenic products. The BMS Collaboration provided for a five year research program, the grant to Bristol-Myers Squibb of an exclusive license to the Company's thalidomide, thalidomide analogs and Angiostatin(R) protein technologies and an equity investment in the Company by Bristol-Myers Squibb. The Company granted Bristol-Myers Squibb an exclusive worldwide royalty-bearing sublicense to make, use and sell products that were based upon the Company's thalidomide, thalidomide analogs and Angiostatin(R) protein. Bristol-Myers Squibb's rights were subject to the terms of the Company's licenses from Children's Hospital. The Company received an up-front license fee of $1,000,000, a portion of which was paid to Children's Hospital pursuant to the Company's license agreement with Children's Hospital. In the event that Bristol-Myers Squibb brought any antiangiogenic product to market, Bristol-Myers Squibb would pay royalties to the Company. If the Company received any royalties from Bristol-Myers Squibb, the Company would pay a portion of such royalties to Children's Hospital pursuant to its license agreement. The Company retained certain co-promotion rights in the United States if Bristol-Myers Squibb elected to seek a promotion partner with respect to any products covered by the BMS Collaboration. Pursuant to the research collaboration, Bristol-Myers Squibb provided certain funding to the Company, and the Company performed certain research in support of Bristol-Myers Squibb's efforts to develop antiangiogenic therapeutics protein. Bristol-Myers Squibb paid the Company an initial sum of $2,500,000 in consideration of know-how and research and development previously performed by the Company. In addition, Bristol-Myers Squibb paid $730,000 to reimburse the Company for thalidomide clinical studies. For research performed by the Company under the research collaboration, Bristol-Myers Squibb agreed to provide funding of $18,350,000, payable in ten semi-annual payments of $1,835,000, of which $12,845,000 has been paid to date. 11 12 Pursuant to the BMS Collaboration, Bristol-Myers Squibb purchased 541,666 shares of the Company's Common Stock for $12.00 per share in a private placement in December 1995 and purchased an additional 333,333 shares of Common Stock concurrent with the Company's June 1996 initial public offering at the initial public offering price per share of $15.00 per share. The Company has granted to Bristol-Myers Squibb certain registration rights with respect to all of these shares. Though as originally executed, the BMS Collaboration granted Bristol-Myers Squibb licenses to thalidomide and thalidomide analogs, Bristol-Myers Squibb has since relinquished its rights to these compounds. In August 1997, the Company reacquired the commercial rights to thalidomide and in October 1998, the Company reacquired the commercial rights to thalidomide analogs. In February 1999, the BMS Collaboration was modified and the Company assumed the responsibility to conduct preclinical and clinical work on the Angiostatin(R) protein. As a result, Bristol-Myers Squibb's rights of first offer with respect to products or technology arising out of the Company's agreement with Children's Hospital terminated, including those with respect to Endostatin(TM) protein. Upon completion of Phase II clinical trial(s), Bristol-Myers Squibb may elect to pay the Company a $1 million option exercise fee to reacquire further development and marketing rights to Angiostatin(R) protein. If the Company agrees to accept the Bristol-Myers Squibb payment, the financial terms applicable to commercialization will remain as in the original research collaboration, except that the Company's worldwide royalty rate will be substantially increased. The Company also has an opportunity, prior to the completion of Phase II clinical studies or the exercise of Bristol-Myers Squibb's option, to license commercial rights to Angiostatin(R) protein to a third party or to proceed with the development and/or commercialization of Angiostatin(R) protein without a corporate partner. Bristol-Myers Squibb is licensed, on a royalty free basis, to conduct further internal research with regard to the Angiostatin(R) protein and will exchange with the Company any data it obtains on the Angiostatin(R) protein. This license will continue for a minimum of one year, and thereafter until the termination of Bristol-Myers Squibb's option as described above. In addition, if Bristol-Myers Squibb exercises its option pursuant to the February 1999 modification, the Company may be entitled to receive additional payments based upon the achievement of defined and primarily late-stage clinical development and regulatory filing milestones. The Bristol-Myers Squibb eighth semi-annual research support payment due to the Company pursuant to the BMS Collaboration will be prorated in 1999 and will be the final research payment under the research collaboration. All patent and related costs incurred by the Company during the period covered by the final research payment will be reimbursed to the Company by Bristol-Myers Squibb. Under the February 1999 modification, Bristol-Myers Squibb will retain its equity interest in the Company and is restricted from selling its full interest in the Company without the Company's consent until at least December 1, 2001. 12 13 Celgene Corporation Sublicense Agreement. In December of 1998 the Company sublicensed on a worldwide basis its intellectual property covering thalidomide, but not thalidomide analogs, to Celgene Corporation. According to the agreement, Celgene will be responsible for the sales of thalidomide worldwide and for obtaining regulatory approval for indications covered by the Company's and Celgene's intellectual property. The Company will receive annual royalty payments from Celgene based on all of Celgene's net sales of thalidomide regardless of indication. Celgene has received approval from the FDA to sell thalidomide in the U.S. for erythema nodosum leprosum, an inflammatory complication of leprosy. Covance Biotechnology Services, Inc. Contract. The Company has entered into a contract with Covance under which Covance is responsible for scaling up the production of Endostatin(TM) protein and for developing procedures that will provide maximum yield of Endostatin(TM) protein. Under the contract, Covance will produce clinically relevant quantities of Endostatin(TM) protein under GMP conditions for the Company. The Company anticipates that completion of production under the agreement will take place during 1999. In February 1999, the Company entered into a letter of intent with Covance for the production of Angiostatin(R) protein under GMP conditions. ACADEMIC COLLABORATIONS General. In addition to its in-house research program, the Company collaborates with several academic institutions to sponsor research in areas of the Company's product development interests. Usually, research sponsored at outside academic institutions is performed in conjunction with additional in-house research. Often, the faculty members responsible for supervision of the research performed at the academic institution will participate further as consultants to the Company's in-house effort. Typically under these collaborations, the Company agrees to sponsor the research with a specified budget over a specified time period, usually one to three years. In return, the Company usually obtains an exclusive license, with the right to grant sublicenses, and the right to further develop and market products that arise out of the technology being sponsored. Under several of these collaborations, the Company is required to meet specified milestones or diligence requirements in order to retain its license of such technologies. There can be no assurance that the Company will satisfy these milestones and diligence requirements and be able to retain such licenses. In addition to providing research support, the Company usually is required to pay royalties to the academic institution on sales of any licensed products resulting from such research. The Company, in most instances, files and prosecutes patent applications on behalf of the institutions. Children's Hospital. The Company's primary academic collaboration is with Children's Hospital. In September 1993, the Company entered into a sponsored research agreement with Children's Hospital to sponsor research conducted under the direction of Dr. M. Judah Folkman on the role of angiogenesis in pathological conditions for a period of three years. This agreement was amended in 1995 to, among other things, extend its term through October 1999. Under the agreement, as amended in August 1995, the Company agreed to pay to Children's Hospital $11,000,000, of which $10,000,000 was paid through December 31, 1998 and the remaining 13 14 $1,000,000 is due on March 29, 1999. The Company also granted Children's Hospital options to acquire 83,334 shares of Common Stock at an exercise price of $6.00 per share and 50,000 shares of Common Stock at an exercise price of $6.38 per share. In return for the funding commitments, the Company received certain options to fund additional research projects and to obtain licenses to any intellectual property developed by Children's Hospital in any projects sponsored by the Company. The Company has an exclusive option to negotiate with Children's Hospital to fund any new projects arising from Dr. Folkman's core laboratory activities. If during this option period, no funding agreement is reached, Children's Hospital may seek third party funding. However, for a period of one year, Children's Hospital may not grant better terms to any third party without first offering the funding opportunity to the Company on similarly favorable terms. Any new technology discovered by Children's Hospital out of research sponsored by the Company shall become the property of Children's Hospital. Likewise, any new technology discovered by the Company in support of research performed at Children's Hospital shall be the property of the Company. Joint discoveries shall become the property of both the Company and Children's Hospital. The Company has an exclusive nine month option to negotiate an exclusive, worldwide, royalty-bearing license to any technology discovered by Children's Hospital in any project sponsored by the Company. This period may be extended by the Company for an additional six months if the Company pays for the filing of a non-provisional patent application for such technology. If no license agreement is reached during these periods, Children's Hospital may license the technology to a third party. However, for a period of one year, Children's Hospital may not offer a license to any third party on better terms than those last offered by the Company without first offering the Company a license on similar terms. The Company exercised its option in May 1994 to obtain exclusive worldwide licenses to certain oral antiangiogenic technology (thalidomide and its analogs), cancer diagnostic and prognostic technology, endogenous antiangiogenic technology and Angiostatin(R) protein. In December 1996, the Company exercised its option to obtain the exclusive worldwide licenses to EndostatinTM protein and 2ME, an orally available angiogenesis inhibitor. These license agreements provide for certain milestone payments by the Company to Children's Hospital as well as royalties based on sales of any products developed from the licensed technologies. The milestone payments aggregate $4,650,000, of which $915,000 has been paid through December 31, 1998, and are based upon license fees and the achievement of regulatory approvals. If the Company fails to make a required royalty payment, is not diligent in working to fulfill a milestone, or fails to achieve any milestone by the applicable deadline, Children's Hospital may have the right to terminate a license upon 90 days notice. The Company has a one year period in which to cure the lack of diligence under a milestone if the failure to meet a milestone is due to circumstances outside of the Company's control as judged at the sole discretion of Children's Hospital. The Company may sublicense any technologies licensed from Children's Hospital. The Company, however, must pay to Children's Hospital a portion of all sublicensing payments, which do not include payments to support research and development by the Company or equity 14 15 investments in the Company. The Company must also pay to Children's Hospital a portion of the royalty income it receives under any sublicense. Other Collaborators. The Company also has collaborative relationships with Columbia University (Cell Permeation Technology), Harvard Medical School (Dr. Bjorn Olsen -- Endostatin(TM) protein), the University of Cincinnati (Cell Permeation Technology), and Notre Dame University (Dr. Frances Castellino -- Angiostatin(R) protein/plasminogen). The Company is open to developing additional relationships as appropriate to further its research interests. The Company intends to continue to sponsor research at other companies, or academic or other institutions in selected areas in exchange for rights to technologies and products derived from such sponsored research. The Company expects to focus on sponsored research in areas in which it has existing expertise or where a strong market opportunity is perceived. The Company may establish subsidiaries to develop and commercialize promising technologies or products generated from this research, which may create opportunities for separately financing and managing new development programs. COMPETITION Competition in the pharmaceutical, biotechnology and biopharmaceutical industries is intense and based significantly on scientific and technological factors, the availability of patent and other protection for technology and products, the ability and length of time required to obtain governmental approval for testing, manufacturing and marketing and the ability to commercialize products in a timely fashion. Moreover, the biopharmaceutical industry is characterized by rapidly evolving technology that could result in the technological obsolescence of any products developed by the Company. The Company competes with many specialized biopharmaceutical firms, as well as a growing number of large pharmaceutical companies that are applying biotechnology to their operations. Many biopharmaceutical companies have focused their development efforts in the human therapeutics area, and many major pharmaceutical companies have developed or acquired internal biotechnology capabilities or made commercial arrangements with other biopharmaceutical companies. These companies, as well as academic institutions, governmental agencies and private research organizations, also compete with the Company in recruiting and retaining highly qualified scientific personnel and consultants. The Company's competition will be determined in part by the potential indications for which the Company's compounds may be developed and ultimately approved by regulatory authorities. The Company may rely on third parties to commercialize its products, and accordingly, the success of these products will depend in significant part on these third parties' efforts and ability to compete in these markets. The success of any collaboration will depend in part upon the Company's collaborative partners' own competitive, marketing and strategic considerations, including the relative advantages of alternative products being developed and marketed by the Company's collaborative partners and its competitors. The Company is aware of companies and research institutions investigating the role of angiogenesis generally and specifically as it may be useful in developing therapeutics to treat various diseases associated with abnormal blood vessel growth. In studies available to date, these 15 16 angiogenic inhibitors have shown varying effectiveness in inhibiting angiogenesis and differing degrees of bioavailability and toxicity. Significant further preclinical and clinical development of these products is needed prior to an assessment of the more significant competitive product candidates in the antiangiogenic disease indications targeted by the Company. The Company is aware of other companies developing thalidomide and certain of its chemical analogs for various disease indications, including its collaborative partner, Celgene Corporation, for the treatment of erythema nodosum leprosum ("ENL"), AIDS-related cachexia (or wasting) and mouth ulcers, and Andrulis Pharmaceuticals, for diabetes. Celgene has received approval from the FDA for the use of thalidomide in ENL. In 1997, two patents licensed to the Company were issued to Children's Hospital by the U.S. Patent and Trademark Office covering the use of thalidomide to treat angiogenic-mediated diseases including cancer, macular degeneration and rheumatoid arthritis. These patents have, in turn, been sublicensed by the Company to Celgene. Although the Company believes that these patent rights would preclude any company other than Celgene from marketing thalidomide for antiangiogenic indications, there can be no assurance that any patent will issue or afford meaningful protection. If a competitor of Celgene and the Company receives approval to market thalidomide for a particular disease indication, "off-label" use of thalidomide could adversely affect the Company's business and operations. Although the FDA does not permit a manufacturer or distributor to market or promote an approved drug for an unapproved off-label use or dosage level, under its "practice of medicine" policy, the FDA generally does not prohibit a physician from prescribing an approved drug product for an unapproved use or dosage. In addition, the FDA has from time to time proposed to liberalize its restrictions on the dissemination of off-label information. Although the Company's focus is on blood cell permeation, a number of companies utilize or are developing cell permeation or drug delivery technologies and competition for the development of drug delivery products is intense. The Company also anticipates that IHP-treated blood (which is not technically a blood replacement), will compete for use in blood transfusions with readily available products, including whole human blood or packed red blood cells, and products under development, such as blood substitutes. Many of the Company's existing or potential competitors have substantially greater financial, technical and human resources than the Company and may be better equipped to develop, manufacture and market products. In addition, many of these competitors have extensive experience in preclinical testing and human clinical trials and in obtaining regulatory approvals. The existence of competitive products, including products or treatments of which the Company is not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products which may be developed by the Company. MANUFACTURING AND MARKETING The Company's strategy is to enter into collaborative arrangements with pharmaceutical and other companies for the development, manufacturing and marketing of products requiring broad marketing capabilities and for overseas marketing. These collaborators are generally expected to be responsible for funding or reimbursing all or a portion of the development costs, including the costs of clinical testing necessary to obtain regulatory clearances and for commercial 16 17 scale manufacturing, in exchange for exclusive or semi-exclusive rights to market specific products in particular geographic territories. The Company had elected to partner with Bristol-Myers Squibb for the development of Angiostatin(R) protein, thalidomide, and thalidomide analogs. This partnership agreement has been significantly modified. See "-- Collaborations and License Agreements". The Company has formed a partnership with Celgene Corporation for the development and commercialization of thalidomide. In addition, the Company has entered into a contract with Covance under which Covance is responsible for scale-up production and yield development procedures for Endostatin(TM) protein manufacture. Under certain circumstances, the Company may elect to develop and/or sell products alone. See "-- Collaborations and License Agreements". The Company presently has all rights to Endostatin(TM) protein, Angiostatin(R) protein, 2ME, and thalidomide analogs. Additionally, the Company has entered into an agreement with the NCI for the preclinical and clinical development of Endostatin(TM) protein. This agreement provides useful support for these programs while preserving the Company's opportunities for commercialization either alone or with a corporate partner. The Company may, in the future, consider manufacturing or marketing certain products directly and co-promoting certain products if it believes it is appropriate under the circumstances. The Company has no experience in manufacturing or marketing products on a commercial scale and does not have the resources to manufacture or market by itself on a commercial scale any of its product candidates. In the event the Company decides to establish a manufacturing facility, the Company will require substantial additional funds, and will be required to hire and train significant additional personnel and comply with the extensive Good Manufacturing Practice regulations applicable to such a facility. PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in part on its ability to obtain patent protection for its products, both in the United States and abroad. The patent position of biotechnology and pharmaceutical companies, in general, is highly uncertain and involves complex legal and factual questions. The intellectual property that the Company has licensed exclusively from Children's Hospital includes three pending U.S. patent applications and seven issued patents covering Angiostatin(R) protein, nucleic acid coding for the Angiostatin(R) protein, the use of Angiostatin(R) protein as a therapeutic agent and the use of Angiostatin(R) protein as a diagnostic agent. The Company has two U.S. patent applications directed to peptides and proteins that bind specifically to Angiostatin(R) protein. The Company also has an exclusive, worldwide license from Children's Hospital which includes nine pending U.S patent applications and three issued patents covering the thalidomide molecule and thalidomide analogs as antiangiogenic agents for the treatment of a wide variety of diseases that are caused by uncontrolled angiogenesis. These patent applications also include composition of matter coverage for certain thalidomide analogs. Composition of matter patent 17 18 protection is not available for the molecule "thalidomide". The Company is aware of several other issued patents covering certain non-antiangiogenic uses of thalidomide. Although the Company believes that the claims in such patents will not interfere with the Company's proposed use of thalidomide, there can be no assurance that the holders of such patents will not be able to exclude the Company from using thalidomide for other non-antiangiogenic uses of thalidomide. The Company has entered into a license agreement with Celgene Corporation under which the Company has licensed to Celgene the use of thalidomide for treatment of antiangiogenic-mediated diseases. In addition, the Company has licensed technology from Children's Hospital which covers molecules related to estrogenic compounds, such as 2ME, that are anti-mitotic agents and antiangiogenic compounds. There are five pending U.S. patent applications and two issued U.S. patents covering this technology. One of the patent applications covers estrogenic-related compounds with anti-fungal activity. The Company has also exclusively licensed from Children's Hospital nine pending U.S. patent applications and one issued patent covering the Endostatin(TM) protein, nucleic acid coding for the Endostatin(TM) protein, the use of Endostatin(TM) protein as a therapeutic agent and the use of Endostatin(TM) protein as a diagnostic agent. The patent applications also cover the combination of Endostatin(TM) protein and other chemotherapeutic agents, such as Angiostatin(R) protein, as a therapeutic composition. The Company has two U.S. patent applications pending and two issued patents covering the device and method for introducing substances into cells by flow electroporation. One of these patents has been licensed from the Center for Blood Research Laboratories at Harvard University. These patent applications and patents cover the electroporation chamber in the device, the overall electroporation device and the treatment of a wide variety of diseases using cells that have been treated in the electroporation device. One of the issued patents has been exclusively licensed from the CBRL. Patent applications corresponding to the above described U.S. patent applications have been filed in Europe, Japan, Canada and other selected countries. The Company has registered the mark ENTREMED and the mark ANGIOSTATIN in the U.S. Patent and Trademark Office and has filed trademark applications in the U.S. Patent and Trademark Office for the marks "ENDOSTATIN" "VASCULOSTATIN", "THERAMED", "ENTREVEST", "WE'RE NOT MAKING BETTER BLOOD, WE'RE MAKING BLOOD BETTER" "THE ANGIOGENESIS COMPANY", "METASTATIN" and "DOING WELL BY DOING GOOD". There can be no assurance that any future patents will be granted or that patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection to the Company. Furthermore, there can be no assurance that others will not independently develop similar products or, if patents are issued to the Company or its collaborators, will not design around such patents. 18 19 Furthermore, the enactment of the legislation implementing the General Agreement on Tariffs and Trade ("GATT") has resulted in certain changes to United States patent laws that became effective on June 8, 1995. Most notably, the term of patent protection for patent applications filed on or after June 8, 1995 is no longer a period of seventeen years from the date of grant. The new term of a United States patent will commence on the date of issuance and terminate twenty years from the earliest effective filing date of the application. Because the time from filing to issuance of biotechnology patent application is often more than three years; a twenty-year term from the effective date of filing may result in a substantially shortened term of patent protection, which may adversely impact the Company's patent position if this change results in a shorter period of patent coverage. The Company's business could be adversely affected to the extent that the duration and level of the royalties it is entitled to receive from a collaborative partner is based on the existence of a valid patent. The Company's potential products may conflict with patents which have been or may be granted to competitors, universities or others. As the biotechnology industry expands and more and more patents are issued, the risk increases that the Company's potential products may give rise to claims that they infringe the patents of others. Such other persons could bring legal actions against the Company claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected products. If any such actions are successful, in addition to any potential liability for damages, the Company could be required to obtain a license to continue to manufacture or market the affected products. There can be no assurance that the Company would prevail in any such action or that any license required under any such patent would be made available on acceptable terms, if at all. If the Company becomes involved in litigation, it could consume a substantial portion of the Company's time and resources. The Company also relies on trade secret protection for its confidential and proprietary information. However, trade secrets are difficult to protect and there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to unpatented trade secrets. The Company requires its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. The agreements generally provide that trade secrets and all inventions conceived by the individual and all confidential information developed or made known to the individual during the term of the relationship shall be the exclusive property of the Company and shall be kept confidential and not disclosed to third parties except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's proprietary information in the event of unauthorized use or disclosure of such information. GOVERNMENT REGULATION The Company's development, manufacture and potential sale of therapeutics is subject to extensive regulation by United States and foreign governmental authorities. 19 20 Regulation of Pharmaceutical Products. Products being developed by the Company may be regulated by the FDA as drugs or biologics or, in some cases, as medical devices. New drugs are subject to regulation under the Federal Food, Drug, and Cosmetic Act, and biological products, in addition to being subject to certain provisions of that Act, are regulated under the Public Health Service Act. The Company believes that drug products developed by it or its collaborators will be regulated either as biological products or as new drugs. Both statutes and the regulations promulgated thereunder govern, among other things, the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising and other promotional practices involving biologics or new drugs, as the case may be. FDA approval or other clearances must be obtained before clinical testing, and before manufacturing and marketing, of biologics and drugs. Obtaining FDA approval has historically been a costly and time consuming process. Generally, in order to gain FDA premarket approval, a developer first must conduct preclinical studies in the laboratory and in animal model systems to gain preliminary information on an agent's efficacy and to identify any safety problems. The results of these studies are submitted as a part of an investigational new drug ("IND") application, which the FDA must review before human clinical trials of an investigational drug can start. The IND application includes a detailed description of the clinical investigations to be undertaken. In order to commercialize any products, the Company or its collaborator must sponsor and file an IND and be responsible for initiating and overseeing the clinical studies to demonstrate the safety, efficacy and potency that are necessary to obtain FDA approval of any such products. For Company or collaborator-sponsored INDs, the Company or its collaborator will be required to select qualified investigators (usually physicians within medical institutions) to supervise the administration of the products, and ensure that the investigations are conducted and monitored in accordance with FDA regulations, including the general investigational plan and protocols contained in the IND. Clinical trials are normally done in three phases, although the phases may overlap. Phase I trials are concerned primarily with the safety and preliminary effectiveness of the drug, involve fewer than 100 subjects, and may take from six months to over one year. Phase II trials normally involve a few hundred patients and are designed primarily to demonstrate effectiveness in treating or diagnosing the disease or condition for which the drug is intended, although short-term side effects and risks in people whose health is impaired may also be examined. Phase III trials are expanded clinical trials with larger numbers of patients which are intended to evaluate the overall benefit-risk relationship of the drug and to gather additional information for proper dosage and labeling of the drug. Clinical trials generally take two to five years to complete, but may take longer. The FDA receives reports on the progress of each phase of clinical testing, and it may require the modification, suspension, or termination of clinical trials if it concludes that an unwarranted risk is presented to patients. If clinical trials of a new product are completed successfully, the sponsor of the product may seek FDA marketing approval. If the product is regulated as a biologic, the FDA will require the submission and approval of a Biologics License Application ("BLA") before commercial marketing of the biologic. If the product is classified as a new drug, the Company must file a New Drug Application ("NDA") with the FDA and receive approval before commercial marketing of the drug. The NDA or BLA must include detailed information about the drug and its manufacture and the results of product development, preclinical studies and clinical trials. The testing and 20 21 approval processes require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all. NDAs and BLAs submitted to the FDA can take up to two to five years to receive approval. If questions arise during the FDA review process, approval can take more than five years. Notwithstanding the submission of relevant data, the FDA may ultimately decide that the NDA or BLA does not satisfy its regulatory criteria for approval and deny approval or require additional clinical studies. In addition, the FDA may condition marketing approval on the conduct of specific post-marketing studies to further evaluate safety and effectiveness. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Thalidomide is regulated by the FDA's Center for Drug Evaluation and Research. Although only recently approved for sale in the U.S. for limited indications, thalidomide has been used as an investigational agent to treat thousands of patients for leprosy and other diseases. The Company has filed an IND application and started Phase II trials in macular degeneration, a leading cause of blindness, and expects that the analysis of these results, together with availability of necessary funding, could determine whether Phase III trials may be attempted. The NCI, in collaboration with Celgene and the Company, has begun Phase II trials in breast cancer, prostate cancer, brain cancer and Kaposi's sarcoma. The Company has also filed an IND and initiated clinical studies at the Dana Farber Institute in Boston to study the effects of thalidomide in combination with BCNU in brain cancer patients. An additional brain cancer study under NCI's IND in collaboration with the Radiation Oncology Treatment Group has been initiated. Thalidomide must meet the standard regulatory requirements of any new drug, and successful Phase III clinical trials will be necessary to form the basis of an NDA. All future clinical trials with thalidomide will be the responsibility of Celgene. See "--Collaborations and License Agreements", Celgene Corporation. Analogs of thalidomide and 2ME may be regulated as new chemical entities by the FDA's Center for Drug Evaluation and Research. Although analogs of thalidomide are in the discovery phase of research, it is expected that as new chemical entities are discovered complete preclinical toxicology studies will be required prior to studies in humans. 2ME is in late preclinical research, with an IND filing for Phase I trials anticipated in 1999. The remainder of the developmental and regulatory requirements will be similar to that of any new drug. Angiostatin(R) and Endostatin(TM) proteins, each a naturally occurring substance, are considered biologics and will be regulated by the FDA's Center for Biologics Evaluation and Research. As genetically engineered and endogenous proteins, Angiostatin(R) protein and Endostatin(TM) protein will face unique and specific regulation hurdles, such as those related to the manufacture of the products and the behavior of the products in the body. The regulatory requirements for recombinant proteins have been developed for other endogenous molecules (e.g., Epogen(TM), Neupogen(TM) and interferons) and Angiostatin(R) protein and Endostatin(TM) protein are expected to follow these established guidelines. Successful preclinical studies and Phase I, II and III trials will be necessary to form the basis for a BLA. The Company has assumed responsibility 21 22 for conducting these clinical studies with Angiostatin(R) protein. See "--Collaborations and License Agreements", Bristol-Myers Squibb Company. The cell permeation technology, and specifically IHP-treated red blood cells, will be regulated by the FDA's Center for Biologics Evaluation and Research. In 1997, the FDA responded to a letter from the Company requesting a product jurisdiction determination, designating the Center for Biologics Evaluation and Research as the agency component with primary jurisdiction for the premarket review and regulation of the product. The product will be reviewed as a medical device under the premarket application ("PMA") provisions of the Federal Food, Drug and Cosmetic Act (described below). Historically, the FDA's Office of Blood Research and Review has had the most expertise and experience in regulating blood, apheresis equipment and disposables associated with the processing of human blood. Further development for IHP-treated blood is expected to follow a similar path to that of any therapeutic biologic, with successful completion of Phase I, Phase II and Phase III trials required to precede the filing of a PMA. As the cell permeation technology requires the use of red blood cells produced from humans, the Company will be required to comply with, or to contract with suppliers that comply with, stringent regulation of blood component collection. That regulation is designed to protect both donors and recipients of blood products and involves significant record-keeping and other burdens. Regulation of Devices. Any device products which may be developed by the Company are likely to be regulated by the FDA as medical devices rather than drugs. In addition, as noted, the device used to insert IHP in blood cells also may be regulated as a medical device. The nature of the FDA requirements applicable to such products depends on their classification by the FDA. A device developed by the Company would be automatically classified as a Class III device, requiring pre-market approval, unless the device was substantially equivalent to an existing device that has been classified in Class I or Class II or to a pre-1976 device that has not yet been classified or the Company could convince the FDA to reclassify the device as Class I or Class II. If the Company were unable to demonstrate such substantial equivalence and unable to obtain reclassification, it would be required to undertake the costly and time-consuming process, comparable to that for new drugs, of conducting preclinical studies, obtaining an investigational device exemption to conduct clinical tests, filing a premarket approval application, and obtaining FDA approval. If the device were a Class I product, the "general controls" of the Federal Food, Drug, and Cosmetic Act chiefly adulteration, misbranding, and Good Manufacturing Practice requirements would nevertheless apply. If substantial equivalence to a Class II device could be shown, the general controls plus "special controls" such as performance standards, guidelines for safety and effectiveness, and post-market surveillance would apply. While demonstrating substantial equivalence to a Class I or Class II product is not as costly or time-consuming as the pre-market approval process for Class III devices, it can in some cases also involve conducting clinical tests to demonstrate that any differences between the new device and devices already on the market do not affect safety or effectiveness. If substantial equivalence to a pre-1976 device that has not yet been classified has been shown, it is possible that the FDA would subsequently classify the device as a Class III device and call for the filing of premarket approval applications at 22 23 that time. If the FDA took that step, then filing an application acceptable to the FDA would be a prerequisite to remaining on the market. It is likely that the review process will nevertheless occur in the Center for Biologics Evaluation and Research. It is possible, however, that such Center would consult with relevant officials in the FDA's Center for Devices and Radiological Health. Such a consultation might further delay approval of the device and thus of this technology. Other. In addition to the foregoing, the Company's business is and will be subject to regulation under various state and federal environmental laws, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic Substance Control Act. These and other laws govern the Company's use, handling and disposal of various biological, chemical and radioactive substances used in and wastes generated by its operations. The Company believes that it is in material compliance with applicable environmental laws and that its continued compliance therewith will not have a material adverse effect on its business. The Company cannot predict, however, whether new regulatory restrictions on the marketing of biotechnology products will be imposed by state or federal regulators and agencies. EMPLOYEES As of March 26, 1999, the Company had 66 full-time employees, of which 45 were in research and development and 21 were in management and administration. The Company intends to hire additional personnel. The Company also utilizes part-time or temporary consultants on an as-needed basis. None of the Company's employees is represented by a labor union and the Company believes its relations with its employees are satisfactory. RISK FACTORS History of Losses; Accumulated Deficit and Anticipated Future Losses. To date, the Company has been engaged primarily in research and development activities and, with the exception of license fees and research and development funding under the BMS Collaboration and research grants, has not derived any revenues from operations. At December 31, 1998, the Company had an accumulated deficit of approximately $45,300,000 and significant losses have continued and are expected to continue for the foreseeable future. The Company will be required to conduct substantial research and development and clinical testing activities for all of its proposed products, which activities are expected to result in operating losses for the foreseeable future, particularly due to the extended time period before the Company expects to commercialize any products, if ever. In addition, to the extent the Company relies upon others for development and commercialization activities, the Company's ability to achieve profitability will be dependent upon the success of such third parties. There can be no assurance that the Company will be able to generate revenues from operations or achieve profitability on a sustained basis, if at all. Early Stage and Uncertainty of Product Development. The Company's proposed products and research programs are in the early developmental stage and require significant time-consuming and costly research and development, testing and regulatory clearances. The successful development of any product is subject to the risks of failure inherent in the 23 24 development of products or therapeutic procedures based on innovative technologies. These risks include the possibilities that any or all of these proposed products or procedures are found to be ineffective or toxic, or otherwise fail to receive necessary regulatory clearances; that the proposed products or procedures are uneconomical to manufacture or market or do not achieve broad market acceptance; that third parties hold proprietary rights that preclude the Company from marketing them; or that third parties market a superior or equivalent product. The failure of the Company's research and development activities to result in any commercially viable products would materially adversely affect the Company's future prospects. Angiostatin(R) protein, Endostatin(TM) protein, 2ME and thalidomide analogs, are at the preclinical stages of development. These product candidates have only been tested on animals and not on humans. Although these product candidates have demonstrated some success in preclinical studies in combating tumors in mice, there is no assurance that the agents will be similarly effective in combating tumors in humans. Although the scientific community considers the study of mice useful, it is uncertain that agents successful in treating tumors in mice will be either beneficial or non-toxic to humans. In the cancer context, testing on mice occurs under different conditions than testing in people including the manner in which tumors are introduced into mice (injection as opposed to natural development), the genetic make-up of laboratory mice populations (homogeneity as opposed to diversity), tumor location (near the skin as opposed to deep-seated), or other unidentified factors. There are many regulatory steps that must be taken before any of these product candidates will be eligible for FDA approval and subsequent sale, including the completion of preclinical (animal) and clinical (human) trials. With the exception of thalidomide, the Company does not expect any of its product candidates to be commercially available for several years, if ever. Thalidomide is currently in Phase II of human clinical trials for cancer indications. Thalidomide has received orphan drug designation from the FDA as a treatment for Kaposi's sarcoma, a form of skin cancer most frequently associated with AIDS, and for primary brain malignancies. Celgene, to whom the Company has licensed the rights to commercialize thalidomide, has received approval from the FDA to market thalidomide for the treatment of erythema nodosum leprosum, an inflammatory skin condition of some leprosy patients. The Food and Drug Administration, however, has not yet approved the marketing and sale of thalidomide for cancer. The Company and Celgene still must pass significant regulatory hurdles before thalidomide will be promoted for the treatment of cancer, if ever. Uncertainties Related to Clinical Trials. Before obtaining regulatory approvals for the commercial sale of its products, the Company or its collaborative partners will be required to demonstrate through preclinical studies and clinical trials that the proposed products are safe and effective for use in each target indication. The majority of the Company's product candidates, including Endostatin(TM) protein, Angiostatin(R) protein, 2ME and thalidomide analogs, have only been subjected to preclinical studies and have not yet been taken to clinical trials. The results from preclinical studies and early clinical trials may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that the clinical trials conducted by the Company or its partners will demonstrate sufficient safety and efficacy to obtain the required regulatory approvals or will result in marketable products. 24 25 In the future, the Company or its collaborative partners will be required to conduct clinical trials for Endostatin(TM) protein, Angiostatin(R) protein, 2ME and thalidomide analogs. The Company has limited experience in conducting clinical trials and intends to rely primarily on pharmaceutical companies, the NCI, and contract research organizations with which it may collaborate in the future for clinical development and regulatory approval of its product candidates. The Company cannot guarantee that the clinical trials conducted by it or its partners will demonstrate sufficient safety and efficacy to obtain the required regulatory approvals or will result in marketable products. Clinical trials are often conducted with patients having the most advanced stages of disease. During the course of treatment, these patients can die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested, but which can nevertheless affect clinical trial results. Various companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after attaining promising results in earlier trials. Clinical trials for the product candidates being developed by the Company and its collaborators may be delayed by many factors, including that potential candidates for testing are limited in number. Any delays in, or termination of, the clinical trials of any of the Company's product candidates, or the failure of any clinical trials to meet applicable regulatory standards, could have a material adverse effect on the Company's business, financial condition and results of operations. Marketing Risks Related to the History of Thalidomide. One of the Company's potential products, thalidomide, is believed to have caused severe birth defects in children during the late 1950s and early 1960s. Although the Company believes that the characteristics of thalidomide that may have affected fetal development and caused birth defects by blocking new blood vessel growth may make thalidomide useful in the prevention and treatment of angiogenic disorders, there can be no assurance that clinical trials with the drug will demonstrate its safety and efficacy or that the drug will not be associated with other characteristics that prevent or limit its commercial use. If thalidomide is demonstrated to be safe and effective for use in treating angiogenic disorders, the Company may face difficulties in gaining public acceptance of the drug based on its history of causing birth defects. This may adversely affect the marketing efforts of its collaborator, Celgene Corporation. In addition, the Company may be subject to liability arising out of any adverse effects of thalidomide. Pursuant to its agreement with Celgene Corporation, Celgene has agreed to indemnify the Company from any liability that may arise from its sales of thalidomide. However, there can be no assurance that the Company will be protected from such liability and the possible related losses. Dependence on Collaborative Partners and Licensees. The Company's strategy is to grant the right to conduct development, manufacturing, commercialization and marketing activities relating to certain of the Company's antiangiogenesis technologies to collaborative partners. Accordingly, the Company is substantially dependent on these partners for the development, funding and commercial success of any of these product candidates. Payments from collaborative partners may constitute a substantial portion of the Company's revenues for the next 25 26 several years. In the event a selected collaborative partner were to fail to conduct its collaborative activities successfully and in a timely manner, the preclinical and clinical development or commercialization of the licensed antiangiogenesis product candidates would be delayed or terminated. Any such delay or termination could have a material adverse effect on the Company's business, financial condition and results of operations. The success of any collaboration will depend in part upon a collaborative partner's own competitive, marketing and strategic considerations, including the relative advantages of alternative products being developed and marketed by the collaborative partner and its competitors. In addition, if a partner is unsuccessful in commercializing any product candidates, the Company's business, financial condition and results of operations would be materially adversely affected. The Company has sublicensed to Celgene Corporation all of the rights to commercialize and sell thalidomide worldwide. The Company will receive royalties on all sales of thalidomide by Celgene. The success of the Celgene relationship and the marketing of thalidomide will depend, in part, on Celgene's own competitive, marketing, and strategic considerations, including the relative advantages of alternative products being developed and marketed by its competitors. In addition, if Celgene is not successful in marketing thalidomide, the Company would be materially adversely affected. The Company has relationships with collaborators at academic and other institutions who conduct research either on the Company's behalf or whose research the Company has the right to license and use. The Company's primary research collaboration is with Children's Hospital. To date, the Company has received licenses from Children's Hospital for Endostatin(TM) protein, Angiostatin(R) protein, 2ME, thalidomide, and thalidomide analogs. The Company's agreement with Children's Hospital is scheduled to expire in October 1999. The Company may choose to or be unable to renew the agreement. The expiration of this collaboration may adversely impact the Company's ability to acquire future product candidates and adversely impact on the Company's business. The Company intends to enter into additional corporate alliances to develop and commercialize products based upon its cell permeation technology and any other technologies that may be acquired or developed by the Company. The Company expects to grant to its collaborative partners rights to commercialize any products developed under these collaborative agreements, and the Company may rely on its collaborative partners to conduct research and development efforts and clinical trials on, obtain regulatory approvals for, and manufacture and market any products licensed to these partners. The amount and timing of resources devoted to these activities generally will be controlled by each such individual partner. As the Company generally expects to retain only a royalty interest in sales or a percentage of profits of products licensed to third parties, its revenues may be less than if it retained all commercialization rights and marketed products directly. In addition, there can be no assurance that the corporate partners will not pursue alternative technologies or develop competitive products as a means for developing treatments for the diseases targeted by the Company's programs. There can be no assurance that the Company will be successful in establishing any additional collaborative arrangements, that products will be successfully commercialized under any collaborative arrangement or that the Company will derive any revenues from such 26 27 arrangements. In addition, the Company's strategy involves entering into multiple, concurrent strategic alliances to pursue commercialization of its core technologies. There can be no assurance that the Company will be able to manage simultaneous programs successfully. With respect to existing and potential future strategic alliances and collaborative arrangements, the Company will be dependent upon the expertise and dedication of sufficient resources by these outside parties to develop, manufacture or market products. Should a strategic alliance or collaborative partner fail to develop or commercialize a product to which it has rights, the Company's business, financial condition and results of operations could be materially and adversely affected. Uncertainty as to the Commercial Feasibility of Manufacturing Endostatin(TM) Protein. The Company has entered into an agreement with Covance Biotechnology Services, Inc. under which Covance is responsible for producing sufficient amounts of Endostatin(TM) protein for preclinical toxicology studies and for scaling-up the production of Endostatin(TM) protein in commercial quantities under GMP conditions for clinical trials. The Company is reliant on Covance for the production of sufficient quantities of Endostatin(TM) protein to complete clinical studies. If the Company is required to change to a new manufacturer, if any suitable manufacturer can be found, significant additional time and funds would be required for technology transfer and testing. Delays in Covance's scale-up to commercial quantities could result in delays of the Company's clinical trials, regulatory submissions, and commercialization. There is no assurance that it will be possible to manufacture commercial quantities of Endostatin(TM) protein in a cost-effective manner. Future Capital Needs and Commitments; Uncertainty of Additional Funding. The Company has incurred negative cash flows since inception and has expended, and expects to continue to expend, substantial funds to continue its research and development programs. The Company anticipates that its existing resources will be sufficient to meet the Company's planned expenditures during 1999, although there can be no assurance that the Company will not require additional funds. There can be no assurance that the results of research and development activities, progress of preclinical studies or clinical trials, changes in or terminations of relationships with strategic partners, changes in the focus, direction or costs of the Company's research and development programs, competitive and technological advances, the regulatory approval process or other factors will not result in the expenditure of the Company's resources before such time. The Company will require substantial funds in addition to existing working capital to develop its product candidates and otherwise to meet its business objective. The Company is a party to external research programs and materials production costs requiring it to fund $6,000,000 through 2000 (including $1,000,000 to Children's Hospital). Pursuant to the terms of certain license agreements, the Company is also obligated to exercise diligence in bringing potential products to market and to make certain milestone payments that, in some instances, are substantial. The Company's failure to make any required sponsored research or milestone payment could result in the termination of the relevant sponsored research or license agreement, which could have a material adverse effect on the Company. The Company may seek additional funding through collaborative arrangements and public or private financing, including equity financing. There can be no assurance that such collaborative arrangements or additional financing will be available on acceptable terms or at all. If additional 27 28 funds are raised by issuing equity securities, dilution to stockholders may result. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research and development programs or forfeit its rights to future technologies; to 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 products that the Company would otherwise seek to develop or commercialize itself; or to license the rights to such products on terms that are not favorable to the Company. Uncertainty of Government Regulatory Requirements; Lengthy Approval Process. The Company's research, development, preclinical and clinical trials, manufacturing and marketing of most of its product candidates are subject to an extensive regulatory approval process by the the FDA and other regulatory agencies in the United States and abroad. The process of obtaining FDA and other required regulatory approvals for drug and biologic products, including required preclinical and clinical testing, is lengthy, expensive and uncertain. There can be no assurance that, even after such time and expenditures, the Company will be able to obtain necessary regulatory approvals for clinical testing or for the manufacturing or marketing of any products. The Company or its collaborators may encounter significant delays or excessive costs in their efforts to secure necessary approvals or licenses. Even if regulatory clearance is obtained, a marketed product is subject to continual review, and later discovery of previously unknown defects or failure to comply with the applicable regulatory requirements may result in restrictions on a product's marketing or withdrawal of the product from the market as well as possible civil or criminal sanctions. Competition; Risk of Technological Obsolescence. The pharmaceutical biotechnology industries are intensely competitive and competition from other companies and other research and academic institutions is expected to increase. Many of these companies have substantially greater financial and research and development capabilities than the Company and have substantially greater experience in undertaking preclinical and clinical testing of products, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. The Company is aware of other companies engaged in the development of thalidomide for various disease indications, including Celgene Corporation and Andrulis Pharmaceuticals, and a number of other companies and academic institutions are pursuing angiogenesis research and are testing other angiogenesis inhibitors. If companies, other than Celgene, were to get FDA approval to market thalidomide for other disease indications, "off-label" use of thalidomide could adversely affect the Company's business and operations. The Company is aware of other companies engaged in the development of thalidomide for various disease indications. Although the FDA does not permit a manufacturer or distributor to market or promote an approved drug for an unapproved "off label" use or dosage level, under its "practice of medicine" policy, the FDA generally does not prohibit a physician from prescribing an approved drug product for an unapproved use or dosage. In addition, the FDA has from time to time proposed to liberalize its restrictions on the dissemination of off-label information. The Company's blood oxygen enhancement product candidate will also compete for certain applications with numerous other available therapeutics and with blood and blood 28 29 substitute products in development by others. In addition to competing with universities and other research institutions in the development of products, technologies and processes, the Company may compete with other companies in acquiring rights to products or technologies from universities. Moreover, the pharmaceutical and biotechnology industries are rapidly evolving fields in which developments are expected to continue at a rapid pace. There can be no assurance that the Company will develop products that are more effective or achieve greater market acceptance than competitive products, or that the Company's competitors will not succeed in developing products and technologies that are more effective than those being developed by the Company or that would render the Company's products and technologies less competitive or obsolete. Version 5 29 30 Dependence on Patents and Other Proprietary Rights; Uncertainty of Patent Position and Proprietary Rights. The Company's success will depend in part on its ability to obtain patent protection for its products, both in the United States and abroad. The patent position of biotechnology and pharmaceutical companies in general is highly uncertain and involves complex legal and factual questions. There can be no assurance that any additional patents will be granted or that patents issued to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection to the Company. Furthermore, there can be no assurance that others will not independently develop similar products or, on patents issued to the Company or its collaborators, will not design around such patents. Composition of matter patent protection is not available for thalidomide and 2ME. The Company has secured use patents for the use of thalidomide for the treatment of angiogenic diseases and the use of 2ME for the treatment of angiogenic diseases. The Company is aware of several issued patents covering certain non-antiangiogenic uses of thalidomide. Although the Company believes that the claims in such patents will not interfere with the Company's proposed use of thalidomide, there can be no assurance that the holders of such patents will not be able to exclude the Company from using thalidomide for other non-antiangiogenic uses of thalidomide. The enactment of the legislation implementing the General Agreement on Tariffs and Trade has resulted in certain changes to United States patent laws that became effective on June 8, 1995. Most notably, the term of patent protection for patent applications filed on or after June 8, 1995 is no longer a period of seventeen years from the date of grant. The new term of a United States patent will commence on the date of issuance and terminate twenty years from the earliest effective filing date of the application. As the time from filing to issuance of biotechnology patents is often more than three years, a twenty-year term from the effective date of filing may result in a substantially shortened term of patent protection, which may adversely impact the Company's patent position. If this change results in a shorter period of patent coverage, the Company's business could be adversely affected to the extent that the duration and level of the royalties it is entitled to receive from a collaborative partner is based on the existence of a valid patent. The Company's potential products may conflict with patents which have been or may be granted to competitors, universities or others. As the biotechnology industry expands and more patents are issued, the risk increases that the Company's potential products may give rise to claims that they infringe the patents of others. Such other persons could bring legal actions against the Company claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected products. Any such litigation could result in substantial cost to the Company and diversion of effort by the Company's management and technical personnel. If any such actions are successful, in addition to any potential liability for damages, the Company could be required to obtain a license in order to continue to manufacture or market the affected products. There can be no assurance that the Company would prevail in any such action or that any license required under any such patent would be made available on acceptable terms, if at all. Failure to obtain needed patents, licenses or proprietary information held by others may have a material adverse effect on the Company's business. In addition, if the Company becomes involved in such litigation, it could consume a substantial portion of the Company's time and resources. 30 31 The Company also relies on trade secret protection for its confidential and proprietary information. However, trade secrets are difficult to protect and there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to unpatented trade secrets. The Company requires its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. The agreements generally provide that all trade secrets and inventions conceived by the individual and all confidential information developed or made known to the individual during the term of the relationship shall be the exclusive property of the Company and shall be kept confidential and not disclosed to third parties except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's proprietary information in the event of unauthorized use or disclosure of such information. To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to the Company's proposed projects, disputes may arise as to the proprietary rights to such information which may not be resolved in favor of the Company. Certain of the Company's consultants are employed by or have consulting agreements with third parties and any inventions discovered by such individuals generally will not become property of the Company. Dependence Upon Key Personnel and Consultants. The Company is dependent on certain of its executive officers and scientific personnel, including John W. Holaday, Ph.D., the Company's Chairman, President and Chief Executive Officer. The Company has entered into a three-year employment agreement with Dr. Holaday effective January 1, 1999. Competition for qualified employees among pharmaceutical and biotechnology companies is intense, and the loss of certain of such persons, or an inability to attract, retain and motivate additional highly skilled scientific, technical and management personnel, could materially adversely affect the Company's business and prospects. There can be no assurance that the Company will be able to retain its existing personnel or attract and retain additional qualified employees. The Company may also be dependent, in part, upon the continued contributions of the lead investigators of the Company's sponsored research programs. The Company's scientific consultants and collaborators may have commitments to or consulting or advisory agreements with other entities that may affect their ability to contribute to the Company or may be competitive with the Company. Inventions or processes discovered by such persons will not necessarily become the property of the Company, but may remain the property of such persons or of such persons' full-time employers. 31 32 Risk of Product Liability; Availability of Insurance. The use of the Company's potential products in clinical trials and the marketing of any pharmaceutical products may expose the Company to product liability claims. The Company has obtained a level of liability insurance coverage that it deems appropriate for its current stage of development. However, there can be no assurance that the Company's present insurance coverage is adequate. Such existing coverage will not be adequate as the Company further develops products, and no assurance can be given that in the future adequate insurance coverage or indemnification by collaborative partners will be available in sufficient amounts or at a reasonable cost. A successful product liability claim could have a material adverse effect on the business and financial condition of the Company. Uncertainty Related to Health Care Reimbursement and Reform Measures. The Company's success may depend, in part, on the extent to which reimbursement for the costs of therapeutic products and related treatments will be available from third-party payors such as government health administration authorities, private health insurers, managed care programs and other organizations. Over the past decade, the cost of health care has risen significantly, and there have been numerous proposals by legislators, regulators and third-party health care payors to curb these costs. Some of these proposals have involved limitations on the amount of reimbursement for certain products. There can be no assurance that similar federal or state health care legislation will not be adopted in the future or that any products sought to be commercialized by the Company or its collaborators will be considered cost-effective or that adequate third-party insurance coverage will be available for the Company to establish and maintain price levels sufficient for realization of an appropriate return on its investment in product development. Moreover, the existence or threat of cost control measures could have an adverse effect on the willingness or ability of potential collaborators to pursue research and development programs related to the Company's product candidates. Hazardous Materials. The Company's research and development involves the controlled use of hazardous biological, chemical and radioactive materials. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could have a material adverse effect on of the Company. No Manufacturing or Marketing Capacity. The Company does not generally expect to engage directly in manufacturing or marketing of products in the near term, but may elect to do so in certain cases. The Company does not currently have the capacity to manufacture or market products or any experience in such activities. If the Company elects to perform these functions, the Company will be required to either develop these capacities, or contract with others to perform some or all of these tasks. The Company may be dependent to a significant extent on corporate partners, licensees or other entities for manufacturing and marketing of products. If the Company engages directly in manufacturing or marketing, the Company will require substantial additional funds and personnel and will be required to comply with extensive regulations 32 33 applicable to such a facility. There can be no assurance that the Company will be able to develop or contract for these capacities when required in connection with the Company's business. The manufacture of pharmaceutical products can be an expensive, time consuming, and complex process. Manufacturers often encounter difficulties in scaling up production of new products, including problems involving production yields, quality control and assurance, and shortages of personnel. Delays in formulation and scale-up to commercial quantities could result in additional expense, delays in the Company's clinical trials, regulatory submissions, and commercialization. The manufacturing processes for several of the small molecules and proteins the Company is developing as product candidates have not yet been tested at commercial levels, and there can be no assurance that it will be possible to manufacture these materials in a cost-effective manner. Any manufacturer of the Company's product candidates will be subject to applicable GMP prescribed by the FDA or other rules and regulations prescribed by foreign regulatory authorities. The Company cannot guarantee that it or any of its collaborators will be able to enter into or maintain relationships either domestically or abroad with manufacturers whose facilities and procedures comply or will continue to comply with GMP and who are able to produce the Company's small molecules and proteins. Should manufacturing agreements be entered into, the Company and its collaborators will be dependent on such manufacturers for continued compliance with GMP. Failure by a manufacturer of the Company's products to comply with GMP could result in significant time delays or the Company's inability to commercialize or continue to market a product. Changes in the Company's manufacturers could require new product testing and facility compliance inspections. In the United States, failure to comply with GMP or other applicable legal requirements can lead to federal seizure of violative products, injunctive actions brought by the federal government, and potential criminal and civil liability on the part of a company and its officers and employees. The Exercise of Outstanding Options and Warrants Will Dilute the Value of Common Stock Shares. The Company has outstanding options and warrants to purchase an aggregate of 2,650,689 shares of Common Stock at a weighted average exercise price of $9.85 per share. Holders of such options and warrants are likely to exercise them when, in all likelihood, the Company could obtain additional capital on terms more favorable than those provided by the options and warrants. In addition, the exercise of such options and warrants will result in dilution to the interests of the Company's stockholders to the extent that the exercise price is less than the fair market value of the Common Stock. See Part II Item 5 "Market for Registrant's Common Equity and Related Stockholder Matters". Risks Related to Potential Year 2000 Problems. The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, those computer programs having time-sensitive software would recognize a date using "00" as the year 1900 rather than the year 2000. Based on a recent assessment, the Company determined that its accounting software will need to be updated or modified. This should be accomplished through updates from the software 33 34 manufacturer. However, if such updates are not made, or are not completed on a timely basis, the Year 2000 issue could have a material impact on the Company. The Company has queried its most significant supplier that does not also share information systems with the Company. To date, the Company is not aware that this, or any other supplier, has a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that suppliers will be Year 2000 ready. The inability of suppliers to complete the Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by suppliers is not determinable. The Company anticipates no other Year 2000 problems which are reasonably likely to have a material adverse effect on the Company's operations. There can be no assurance, however, that such problems will not arise. The Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, and other factors. Estimates on the status of completion and the expected completion dates are based on costs incurred to date compared to total expected costs. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. ITEM 2. PROPERTIES The Company has leased a new and larger facility with an aggregate of approximately 46,000 square feet of office space (approximately 32,000 square feet of which is laboratory space) in Rockville, Maryland pursuant to a lease. The lease expires in October 2008. The lease provides for total annual rent payments of approximately $658,000 during 1999, subject to specified annual increases. In addition, the Company expects to pay approximately $89,000 in 1999 under prior lease agreements during the transition to the new company facility. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in a lawsuit initiated in August 1995 in the United States District Court for the Eastern District of Tennessee by Bolling, McCool & Twist ("BMT"), a consulting firm. In the suit, BMT asserts that the Company breached an agreement between BMT and the Company by failing to pay BMT certain fees it asserts are owed under the agreement. More specifically, BMT has asserted a claim for the payment of services rendered in the approximate amount of $50,000 and seeks a success fee in an unspecified amount in connection with the BMS Collaboration. The judge in the case bifurcated the proceeding into two phases: an adjudication of whether the Company breached its agreement with BMT and then a damage phase. After a trial on the merits the jury found in favor of BMT on the breach of contract claim. A trial to determine damages had been scheduled for April 14, 1998. However, on April 6, 1998, the court issued an Order pursuant to which damages were limited to those arising during the term of the Agreement, which terminated on November 1, 1995. Damages for this period amount to approximately $50,000 plus a possible charge for interest. The damage portion of the trial has been postponed while the court reviews certain submissions requested by the court. A hearing on certain of these submissions will be held on April 19, 1999. Despite the jury verdict on the breach of contract claim and the court's limitation with respect to damages, the Company is unable to predict with certainty the eventual outcome of the lawsuit. The Company intends to continue to contest the action vigorously and believes that this proceeding will not have a material adverse effect on the Company or on its financial condition, although there can be no assurance that this will be the case. 34 35 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS EntreMed's Common Stock trades on the Nasdaq National Market under the symbol "ENMD". The table below sets forth the high and low sales prices of the Company's Common Stock as reported by the Nasdaq National Market for the periods indicated. These prices are based on quotations between dealers, do not reflect retail mark-up, mark-down or commissions, and do not necessarily represent actual transactions.
COMMON STOCK PRICE RANGE ----------- 1997 HIGH LOW ---- ---- --- First Quarter (January 1, 1997 - March 31, 1997) $18.50 $12.25 Second Quarter (April 1, 1997 - June 30, 1997) 14.75 8.50 Third Quarter (July 1, 1997 - September 30, 1997) 12.75 8.875 Fourth Quarter (October 1, 1997 - December 31, 1997) 15.50 6.50 1998 ---- First Quarter (January 1, 1998 - March 31, 1998) $15.75 $9.75 Second Quarter (April 1, 1998 - June 30, 1998) 85.00 11.375 Third Quarter (July 1, 1998 - September 30, 1998) 36.125 15.375 Fourth Quarter (October 1, 1998 - December 31, 1998) 35.75 20.50 1999 ---- First Quarter (January 1, 1999 - March 19, 1999) $35.3125 $12.00
At March 19, 1999, there were approximately 794 shareholders of record, and as of that date, the Company estimates there were approximately 20,922 beneficial owners holding stock in nominee or "street" name. The Company has not paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future. In June 1996, the Registrant issued to Bristol-Myers Squibb Company 333,333 shares of Common Stock at a purchase price of $15.00 per share. 35 36 In January through March 1996, the Registrant issued an aggregate of 83,991 shares of Common Stock to Samuel R. Dunlap, Jr., and a director of the Registrant, upon the exercise of stock options exercisable at $1.50 per share. In December 1996, the Registrant issued to a former employee an aggregate of 15,686 shares of Common Stock upon the exercise of stock options for an aggregate consideration of $99,998 or $6.375 per share. During the year ended December 31, 1997, the Registrant issued an aggregate of 244,170 shares of Common Stock upon the exercise of stock options and warrants for an aggregate consideration of $504,632 at exercise prices ranging from $1.50 to $9.00 per share. During the year ended December 31, 1998, the Registrant issued an aggregate of 869,263 shares of Common Stock upon the exercise of stock options and warrants for an aggregate consideration of $4,748,740 at exercise prices ranging from $1.50 to $15.00 per share. Except as otherwise noted above, (i) the above transactions were private transactions not involving a public offering and were exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, (ii) the sale of securities was without the use of an underwriter and (iii) the certificates evidencing the shares bear a restrictive legend permitting the transfer thereof only upon registration of the shares or an exemption under the Securities Act of 1933, as amended. 36 37 ITEM 6. SELECTED FINANCIAL DATA Information required by this item is as follows:
Year Ended December 31 ----------------------- STATEMENTS OF OPERATIONS DATA: 1998 1997 1996 1995 1994 --------------------------------------------------------------------------------------------- Revenues Collaborative research and development $ 4,473,131 $ 4,342,369 $ 4,425,000 $ 347,501 $ - License fees 200,000 200,000 200,000 16,667 - Grant revenues 472,677 215,119 - 347,001 90,185 Other 15,675 - - - - Total revenues 5,161,483 4,757,488 4,625,000 711,169 90,185 Expenses: Research and development 15,084,993 8,998,705 7,553,793 5,939,512 3,673,929 General and administrative 5,760,215 4,915,724 3,435,501 2,458,976 1,549,705 Interest expense - 1,418 27,267 65,754 - Interest income (2,169,955) (2,621,630) (1,621,729) (44,854) (18,993) Net loss (basic and diluted) $(13,513,770) (6,536,729) $ (4,769,832) $ (7,708,219) $ (5,114,456) Net loss per share (basic and diluted) $ (1.07) $ (0.54) $ (0.50) $ (1.41) $ (1.09) Weighted average number of shares outstanding 12,681,824 12,158,372 9,532,671 5,485,763 4,712,776 Pro forma net loss per share(1) $ (0.46) $ (1.03) Pro forma weighted average number of shares outstanding (1) 10,422,781 7,485,763 BALANCE SHEET DATA: Cash and cash equivalents and short-term investments $ 35,171,060 $ 45,245,071 $ 52,720,829 $ 6,885,099 $ 218,619 Working capital 29,269,715 41,454,371 49,049,124 5,689,810 (332,427) Total assets 39,574,003 47,838,663 54,146,339 10,146,383 843,742 Deferred revenue, less current portion - 1,341,666 2,236,666 2,741,666 - Accumulated deficit (45,307,302) (31,793,532) (25,256,803) (20,486,971) (12,778,752) Total stockholders' equity 33,188,064 41,953,094 47,694,191 3,601,260 292,696
- --------- (1) Pro forma net loss per share and weighted average shares outstanding for the years ended December 31, 1995 and 1996 give effect to the automatic conversion of 3,000,000 outstanding shares of Preferred Stock into 2,000,000 shares of Common Stock on June 19, 1996, the effective date of the Company's initial public offering. See Notes 1 and 8 of Notes to Financial Statements. 37 38 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. See"-- Risk Factors". OVERVIEW Since its inception in September 1991, the Company has devoted substantially all of its efforts and resources to sponsoring and conducting research and development on its own behalf and through collaborations with corporate partners and academic research and clinical institutions, and establishing its facilities and hiring personnel. With the exception of license fees and research and development funding from Bristol-Myers Squibb and certain research grants, the Company has not generated any revenue from operations. For the period from inception to December 31, 1998, the Company incurred a cumulative net loss of approximately $45,300,000. The Company has incurred additional losses since such date and expects to incur additional operating losses for the foreseeable future. In December 1995, the Company entered into the BMS Collaboration and, through December 31, 1998, had received approximately $17,075,000 in license and research and development fees and expense reimbursements and $11,500,000 in equity investments pursuant to this alliance. The Company expects that its revenue sources for at least the next several years will include royalty payments from Celgene's sales of thalidomide, and research grants and future collaboration payments from collaborators under arrangements that may be entered into in the future. The timing and amounts of such revenues, if any, will likely fluctuate sharply and depend upon the achievement of specified milestones, and results of operations for any period may be unrelated to the results of operations for any other period. See "Business -- Collaborations and License Agreements". RESULTS OF OPERATIONS Years Ended December 31, 1998, 1997, and 1996. Revenues under collaborative research and development agreements were approximately $4,473,000, $4,342,000, and $4,425,000 and license fees were $200,000, in each of the years ended December 31, 1998, 1997, and 1996. The collaborative research and development fees relate to the amortization over five years of a one-time payment of $2,500,000 ($500,000, was recognized in each of 1998, 1997 and 1996); the amortization of the semi-annual payments of $1,835,000 as called for under the BMS Collaboration ($3,670,000, was recognized in each of 1998, 1997 and 1996); and $303,000, $172,000 and $255,000 recognized in 1998, 1997 and 1996, respectively, as reimbursement for clinical studies. The license fees represent the amortization over five years of a one-time $1,000,000 license fee under the BMS Collaboration, a portion of which was paid to Children's Hospital. In 1998, there were grant revenues of approximately 38 39 $455,000 from a Small Business Innovative Research program from the National Institutes of Health and $215,000 in 1997. Research and development expenses increased by 19.1% from approximately $7,554,000 in 1996 to $8,999,000 in 1997 and in 1998 increased by 67.6% over 1997 to approximately $15,085,000, due primarily to increased efforts in the Company's internal and sponsored research and product development programs related to its antiangiogenesis and blood cell permeation technologies. Research and development expenditures included sponsored research payments of approximately $5,677,000, $3,700,000, and $3,461,000 and internal research and development expenses of approximately $9,408,000, $5,300,000, and $4,093,000 in 1998, 1997 and 1996, respectively. General and administrative expenses increased by 17.2% in 1998 to approximately $5,760,000 from $4,916,000 in 1997 and increased by 43.1% in 1997 from $3,436,000 in 1996. The increases resulted primarily from increases in administrative costs associated with adding administrative staff to support the research and collaborative efforts the Company is conducting, investigating potential strategic relationships, obtaining professional services, and costs associated with becoming a public company. Interest income increased from $1,622,000 to $2,622,000 in 1996 and 1997, respectively, and fell to $2,170,000 in 1998. The 1997 increase was due to the Company investing the net proceeds from the IPO and the BMS Collaboration in interest-bearing securities. The 1998 decrease was due to decreases in cash balances. The Company had interest expense of approximately $1,400, and $27,000 in 1997 and 1996, respectively, as a result of capital lease obligations. LIQUIDITY AND CAPITAL RESOURCES From inception through December 31, 1998, the Company financed its operations from (i) the net proceeds of private placements of equity securities which raised approximately $17,000,000, (ii) payments from Bristol-Myers Squibb, including $9,700,000 received in December 1995 (of which $6,500,000 was an equity investment), $11,535,000 received in 1996 (of which $5,000,000 was an equity investment), $3,670,000 in 1997, and $3,670,000 in 1998, (iii) various grants from the World Health Organization and Small Business Innovation Research ("SBIR") grants totaling approximately $1,107,000, (iv) its June 1996 Initial Public Offering ("IPO") which raised net proceeds of approximately $43,541,000 and (v) proceeds of approximately $654,000 under capital leases. Bristol-Myers Squibb is obligated to make a final payment to the Company of $611,667 in June 1999. At December 31, 1998, the Company had working capital of approximately $29,300,000. The Company's cash resources have been used to finance research and development, including sponsored research, capital expenditures, including leasehold improvements to the Company's new facility, and general and administrative expenses. Over the next several years, the Company expects to incur substantial additional research and development costs, including costs related to early-stage research, preclinical and clinical trials, increased administrative expenses to support its research and development operations and increased capital expenditures for expanded research capacity, various equipment needs and facility improvements. 39 40 At December 31, 1998, the Company was a party to sponsored research agreements requiring it to fund an aggregate of approximately $2,628,000 through 2000 (including $1,000,000 to Children's Hospital) and license agreements requiring milestone payments of up to $4,650,000, of which $915,000 has been paid as of December 31, 1998, and additional payments upon attainment of regulatory milestones. One of the milestones requires the Company to file an IND application with the FDA regarding Angiostatin(R) protein during the fourth quarter of 1999. The failure of the Company to file this IND application could result in a loss of the Company's rights with regard to Angiostatin(R) protein. The Company believes that it will be able to make this filing within the required time period, but no assurance can be given that it will do so. The Company is also a party to an office lease expiring in 2008 with total future minimum lease payments of approximately $9,000,000. See Note 11 of Notes to Financial Statements. At December 31, 1998, the Company had available net operating loss carryforwards of $53,149,000 to offset any future taxable income for federal tax purposes. The utilization of the loss carryforwards to reduce future income taxes will depend on the Company's ability to generate sufficient taxable income prior to the expiration of the net operating loss carryforwards. The carryforwards begin to expire in the year 2006. However, the Tax Reform Act of 1986 limits the maximum annual use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a corporation. For financial reporting purposes, a valuation allowance has been recognized to reduce the net deferred tax assets to zero due to uncertainties with respect to the Company's ability to generate taxable income in the future sufficient to realize the benefit of deferred income tax assets. See Note 7 of Notes to Financial Statements. The Company believes that its existing resources will be sufficient to meet the Company's planned expenditures during 1999, although there can be no assurance the Company will not require additional funds. The Company's working capital requirements will depend upon numerous factors, including the progress of the Company's research and development programs (which may vary as product candidates are added or abandoned), preclinical testing and clinical trials, achievement of regulatory milestones, the Company's corporate partners fulfilling their obligations to the Company, the timing and cost of seeking regulatory approvals, the level of resources that the Company devotes to the development of manufacturing, marketing and sales capabilities, if any, technological advances, the status of competitors, the ability of the Company to maintain existing and establish new collaborative arrangements with other companies to provide funding to the Company to support these activities and other factors. The Company will require substantial funds in addition to the present existing working capital to develop its product candidates and otherwise to meet its business objectives. YEAR 2000 40 41 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, those computer programs having time-sensitive software would recognize a date using "00" as the year 1900 rather than the year 2000. Based on a recent assessment, the Company determined that its accounting software will need to be updated or modified. This should be accomplished through updates from the software manufacturer. However, if such updates are not made, or are not completed on a timely basis, the Year 2000 issue could have a material impact on the Company. The Company has queried its most significant supplier that does not also share information systems with the Company. To date, the Company is not aware that this, or any other supplier, has a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that suppliers will be Year 2000 ready. The inability of suppliers to complete the Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by suppliers is not determinable. The Company anticipates no other Year 2000 problems which are reasonably likely to have a material adverse effect on the Company's operations. There can be no assurance, however, that such problems will not arise. The Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, and other factors. Estimates on the status of completion and the expected completion dates are based on costs incurred to date compared to total expected costs. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. INFLATION Management does not believe that inflation has a material impact on the Company's results of operations. ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's interest income is sensitive to changes in the general level of U.S. interest rates. In this regard, changes in the U.S. interest rates affect the interest earned on the Company's cash equivalents and short-term investments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted in a separate section of this report. See Index to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III 41 42 The information called for by Item 10: Directors and Executive Officers of the Registrant; Item 11: Executive Compensation; Item 12: Security Ownership of Certain Beneficial Owners and Management; and Item 13: Certain Relationships and Related Transactions will be included in and is incorporated by reference from the registrant's definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the close of its fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS - See index to Consolidated Financial Statements. 2. Schedules All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the information required is set forth in the financial statements or notes thereto. 3. Exhibits 3.1* Amended and Restated Certificate of Incorporation of the Registrant 3.1(a)*** Amendment to the Certificate of Incorporation 3.1(b)**** Certificate of Amendment to Amended and Restated Certificate of Incorporation of EntreMed, Inc. 3.2* Form of Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant 3.3* By-laws of the Registrant 10.1* Research Collaboration and License Agreement, dated December 7, 1995, between the Registrant and Bristol-Myers Squibb Company ("BMS") 10.2* Restricted Stock Purchase Agreement, dated December 7, 1995, between the Registrant and BMS 10.3* Warrant to Purchase Common Stock, dated December 7, 1995, issued by the Registrant to BMS 10.4* Registration Rights Agreement, dated December 7, 1995, between the Registrant and BMS
42 43 10.5* Research Agreement, dated September 29, 1993, between the Registrant and Children's Hospital 10.6* Amendment to Research Agreement, dated August 23, 1995, between the Registrant and Children's Hospital 10.7* License Agreement, dated May 26, 1994, between Children's Medical Center Corporation ("CMCC") and the Registrant 10.8* Amendment to License Agreement, dated August 23, 1995, between CMCC and the Registrant 10.9* License Agreement, dated May 26, 1994, between CMCC and the Registrant 10.10* Amendment to License Agreement, dated August 23, 1995, between CMCC and the Registrant 10.11* Sponsored Research Agreement, dated November 5, 1992, between the Registrant and CBR Laboratories, Inc. ("CBRL") 10.12* Licensing Agreement, dated November 5, 1992, between the Registrant and CBRL 10.13* Employment Agreement, dated as of January 1, 1996, between the Registrant and John W. Holaday, Ph.D. 10.14* 1992 Stock Incentive Plan 10.15* Amended and Restated 1996 Stock Option Plan 10.16* Form of Stock Option Agreement 10.17* Consulting Agreement between the Registrant and Samuel R. Dunlap, Jr. 10.18* Consulting Agreement between the Registrant and Steve Gorlin (superseded by Exhibit 10.18a) 10.18(a)* Termination Agreement dated May 15, 1996 effective August 1, 1996, between the Registrant and Steve Gorlin 10.19* Master Equipment Lease Agreement, dated April 10, 1995, between the Registrant and MMC/GATX Partnership No. 1
43 44 10.20* Lease between the Registrant and Red Gate III Limited Partnership 10.21* Form of Indemnification Agreement 10.22* Research and License Agreement, dated August 1993, between the Registrant and Innovative Therapeutics, Inc. 10.23** Agreement between Cytokine Sciences, Inc. and Innovative Therapeutics, Inc. 10.24*** License Agreement between Children's Hospital Medical Center Corporation and EntreMed, Inc. signed December 5, 1996 regarding Endostatin(TM) protein, An Inhibitor of Angiogenesis 10.25*** License Agreement between Children's Hospital Medical Center Corporation and EntreMed, Inc. signed December 20, 1996 regarding Estrogenic Compounds as Anti-Mitotic Agents 10.26*** Agreement between Bristol-Myers Squibb and EntreMed, Inc. signed August 5, 1997 regarding Termination of Collaborative Research and License Agreement with Respect to Thalidomide Products 10.27***** Amendment to the 1996 Stock Option Plan 10.28+ License Agreement between Celgene Corporation and EntreMed, Inc. signed December 9, 1998 regarding thalidomide intellectual property 10.29+ Contract Manufacturing Agreement between Covance Biotechnology Services, Inc. and EntreMed, Inc. signed October 16, 1998 regarding Endostatin(TM) protein 10.30***** Employment Agreement dated as of January 1, 1999, between the Registrant and John W. Holaday, Ph.D. 10.31 Lease Agreement between EntreMed, Inc. and Red Gate III Limited Partnership, dated June 10, 1998 21 Subsidiaries of the Registrant 23.1 Consent of Independent Auditors 27.1 Financial Data Schedule
- ------------------------------- 44 45 * Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-3536) declared effective by the Securities and Exchange Commission on June 11, 1996. ** Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1996 previously filed with the Securities and Exchange Commission. *** Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997 previously filed with the Securities and Exchange commission. **** Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1998 previously filed with the Securities and Exchange Commission. ***** Compensatory Plan or Arrangement. + Portions of this Exhibit have been omitted pursuant to a Confidential Treatment Request, which the Company has filed separately with the Securities and Exchange Commission. - ------------------- (b) No reports on Form 8-K were filed during the last quarter of 1998. 45 46 SIGNATURES Pursuant to the requirements of the 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. ENTREMED, INC. By: /s/ John W. Holaday, Ph.D. --------------------------------------- John W. Holaday, Ph.D., Chairman of the Board, President and Chief Executive Officer March 31, 1998 POWER OF ATTORNEY The Registrant and each person whose signature appears below hereby appoint John W. Holaday, Ph.D. as attorney-in-fact with full power of substitution, severally, to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report at the attorney-in-fact acting in the premises deems appropriate and to file any such amendment to the report with the Securities and Exchange Commission. SIGNATURE Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ------ ---- /s/ John W. Holaday, Ph. D. Chairman of the Board and 3/31/98 - ---------------------------- Chief Executive Officer John W. Holaday, Ph. D. (principal executive officer) /s/ R. Nelson Campbell Chief Financial Officer 3/31/98 - ---------------------------- (principal financial and R. Nelson Campbell accounting officer) /s/ John C. Thomas, Jr. Secretary/Treasurer 3/31/98 - ---------------------------- John C. Thomas, Jr. /s/ Donald S. Brooks Director 3/31/98 - ---------------------------- Donald S. Brooks
II-1 47 /s/Samuel R. Dunlap, Jr. - ----------------------- Samuel R. Dunlap, Jr. Director 3/31/98 /s/Mark C. M. Randall - ----------------------- Mark C. M. Randall Director 3/31/98 /s/Lee F. Meier Director 3/31/98 - ----------------------- Lee F. Meier /s/Wendell M. Starke Director 3/31/98 - ----------------------- Wendell M. Starke
II-2 48 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 1998 ENTREMED, INC. ROCKVILLE, MARYLAND 49 FORM 10-K - ITEM 14(a)(1) AND (2) ENTREMED, INC. AND SUBSIDIARIES List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of EntreMed, Inc. and subsidiaries are included in Item 8: Report of Independent Auditors.........................................................................................F-1 Consolidated Balance Sheets as of December 31, 1998 and 1997...........................................................F-2 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.........................................................................................................F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996......................................................................................F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.........................................................................................................F-5 Notes to Consolidated Financial Statements.............................................................................F-6
The following consolidated financial statement schedules of EntreMed, Inc. and subsidiaries are included in Item 14(d): None All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 50 Report of Independent Auditors Board of Directors EntreMed, Inc. We have audited the accompanying consolidated balance sheets of EntreMed, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of EntreMed, Inc. at December 31, 1998 and 1997 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Atlanta, Georgia /s/ Ernst & Young LLP February 10, 1999 F-1 51 EntreMed, Inc. Consolidated Balance Sheets
DECEMBER 31, 1998 1997 ----------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 30,818,689 $ 18,232,491 Short-term investments 4,352,371 27,012,580 Accounts receivable 112,383 84,151 Interest receivable 186,927 520,457 Prepaid expenses and other 170,877 86,095 ----------------------------------------------- Total current assets 35,641,247 45,935,774 Furniture and equipment, net 2,979,237 1,498,781 Other assets 953,519 404,108 ----------------------------------------------- Total assets $ 39,574,003 $ 47,838,663 =============================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,093,017 $ 683,201 Accrued liabilities 1,332,682 1,265,905 Deferred revenue (Note 5) 2,945,833 2,532,297 ----------------------------------------------- Total current liabilities 6,371,532 4,481,403 Deferred revenue, less current portion (Note 5) - 1,341,666 Minority interest 14,407 62,500 Stockholders' equity: Convertible preferred stock, $1.00 par and $1.50 liquidation value: 5,000,000 shares authorized, none issued and outstanding at December 31, 1998 and 1997, respectively - - Common stock, $.01 par value: 35,000,000 shares authorized, 13,123,031 and 12,253,768 shares issued and outstanding at December 31, 1998 and 1997, respectively 131,230 122,538 Additional paid-in capital 78,364,136 73,624,088 Accumulated deficit (45,307,302) (31,793,532) ----------------------------------------------- Total stockholders' equity 33,188,064 41,953,094 ----------------------------------------------- Total liabilities and stockholders' equity $ 39,574,003 $ 47,838,663 ===============================================
See accompanying notes. F-2 52 EntreMed, Inc. Consolidated Statements of Operations
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------------------------------------------------------------- Revenues: Collaborative research and development (Note 5) $ 4,473,131 $ 4,342,369 $ 4,425,000 Licensing (Note 5) 200,000 200,000 200,000 Grant revenues 472,677 215,119 - Other 15,675 - - ----------------------------------------------------------------- 5,161,483 4,757,488 4,625,000 Costs and expenses: Research and development 15,084,993 8,998,705 7,553,793 General and administrative 5,760,215 4,915,724 3,435,501 ----------------------------------------------------------------- 20,845,208 13,914,429 10,989,294 Interest expense - (1,418) (27,267) Investment income 2,169,955 2,621,630 1,621,729 ----------------------------------------------------------------- Net loss $(13,513,770) $(6,536,729) $(4,769,832) ================================================================= Net loss per share (basic and diluted) $ (1.07) $ (0.54) $ (0.50) ================================================================= Weighted average number of shares outstanding (basic and diluted) 12,681,824 12,158,372 9,532,671 ================================================================= Pro forma net loss per share $ (0.46) ===================== Pro forma weighted average number of shares outstanding 10,422,781 =====================
See accompanying notes. F-3 53 EntreMed, Inc. Consolidated Statements of Stockholders' Equity Years ended December 31, 1998, 1997 and 1996
COMMON STOCK PREFERRED STOCK ------------------------- ------------------------ SHARES AMOUNT SHARES AMOUNT -------------------------------------------------- Balance at January 1, 1996 6,376,588 63,766 3,000,000 3,000,000 Issuance of common stock for options exercised 99,677 997 - - Initial public offering of 3,200,000 shares of common stock and private placement of 333,333 shares at $15.00 per share, net of offering costs of approximately $4,459,000 3,533,333 35,333 - - Automatic conversion of preferred stock to common stock upon initial public offering 2,000,000 20,000 (3,000,000) (3,000,000) Warrants issued for consulting services - - - - Net loss - - - - -------------------------------------------------- Balance at December 31, 1996 12,009,598 120,096 - - Issuance of common stock for options and warrants exercised 244,170 2,442 - - Warrants issued for consulting services - - - - Net loss - - - - -------------------------------------------------- Balance at December 31, 1997 12,253,768 $122,538 - $ - Issuance of common stock for options and warrants exercised 869,263 8,692 - - Net loss - - - - -------------------------------------------------- Balance at December 31, 1998 13,123,031 $131,230 - $ - ==================================================
ADDITIONAL PAID-IN ACCUMULATED CAPITAL DEFICIT TOTAL ----------------------------------------------- Balance at January 1, 1996 21,024,465 (20,486,971) 3,601,260 Issuance of common stock for options exercised 225,002 - 225,999 Initial public offering of 3,200,000 shares of common stock and private placement of 333,333 shares at $15.00 per share, net of offering costs of approximately $4,459,000 48,505,431 - 48,540,764 Automatic conversion of preferred stock to common stock upon initial public offering 2,980,000 - - Warrants issued for consulting services 96,000 - 96,000 Net loss - (4,769,832) (4,769,832) ----------------------------------------------- Balance at December 31, 1996 72,830,898 (25,256,803) 47,694,191 Issuance of common stock for options and warrants exercised 502,190 - 504,632 Warrants issued for consulting services 291,000 - 291,000 Net loss - (6,536,729) (6,536,729) ----------------------------------------------- Balance at December 31, 1997 $73,624,088 $(31,793,532) $41,953,094 Issuance of common stock for options and warrants exercised 4,740,048 - 4,748,740 Net loss - (13,513,770) (13,513,770) ----------------------------------------------- Balance at December 31, 1998 $78,364,136 $(45,307,302) $33,188,064 ===============================================
See accompanying notes. F-4 54 EntreMed, Inc. Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1998 1997 1996 ------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(13,513,770) $(6,536,729) %(4,769,832) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 740,847 336,668 190,960 Stock and warrants issued for compensation and consulting expense - 291,000 96,000 Minority interest (48,093) 18,358 - Changes in assets and liabilities: Accounts receivable (28,232) (84,151) 2,500,000 Interest receivable 333,530 (118,784) (397,657) Prepaid expenses and other (134,193) 9,075 (98,360) Accounts payable 998,059 82,898 233,053 Accrued liabilities 66,777 308,187 615,942 Deferred revenue (Note 5) (928,130) (871,870) (589,999) ------------------------------------------------------ Net cash used by operating activities (12,513,205) (6,565,348) (2,219,893) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments (12,257,054) (32,014,130) (34,563,369) Maturities of short-term investments 34,917,263 24,671,173 14,893,746 Other investments (500,000) (300,000) (100,000) Purchases of furniture and equipment (1,809,546) (1,010,890) (215,027) ------------------------------------------------------ Net cash used by investing activities 20,350,663 (8,653,847) (19,984,650) CASH FLOWS FROM FINANCING ACTIVITIES Sales of common stock 4,748,740 504,632 48,766,763 Payment of lease obligation - (104,152) (396,113) ------------------------------------------------------ Net cash provided by financing activities 4,748,740 400,480 48,370,650 ------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 12,586,198 (14,818,715) 26,166,107 Cash and cash equivalents at beginning of year 18,232,491 33,051,206 6,885,099 ------------------------------------------------------ Cash and cash equivalents at end of year $ 30,818,689 $ 18,232,491 $ 33,051,206 ====================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH INVESTMENT AND FINANCING ACTIVITIES Interest paid $ - $ 1,418 $ 27,267 ====================================================== Purchase of furniture and equipment in exchange for minority interest $ - $ - $ 44,118 ======================================================
See accompanying notes. F-5 55 EntreMed, Inc. Notes to Consolidated Financial Statements Years ended December 31, 1998, 1997 and 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION EntreMed, Inc. (the "Company") operates in a single segment and is engaged primarily in the research and development of biopharmaceutical products that address the role of blood and blood vessels in the prevention and treatment of a broad range of diseases. The Company's core technologies include (i) an antiangiogenesis program focused on the development of proprietary products intended to inhibit the abnormal growth of new blood vessels associated with cancer and certain causes of blindness and (ii) a blood cell permeation device designed to enhance the ability of red blood cells to deliver oxygen to organs and tissues and which may also be used to deliver drugs, genes or other therapeutic agents that otherwise would not readily diffuse through blood cell membranes. The Company's strategy is to accelerate development of its antiangiogenesis and cell permeation technologies as well as other promising technologies which the Company perceives to have clinical and commercial potential. The principal elements of the Company's strategy are (i) to focus its resources on current core technologies, (ii) to deepen its product and technology portfolio through sponsored research collaborations with academic institutions, government organizations and private enterprises, (iii) to augment product development with its in-house research and development capabilities and (iv) to leverage its resources through corporate partnerships in order to minimize the cost to the Company of late-stage clinical trials and to accelerate effective product commercialization. All of the Company's product candidates are in the development stage and require further research, development, testing and regulatory clearances. F-6 56 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED) The Company was organized in September 1991 as a Delaware Corporation and from inception through December 1995 was in the development stage. In December 1995, the Company and Bristol-Myers Squibb Company ("Bristol-Myers Squibb") entered into a collaboration to develop and commercialize certain antiangiogenic therapeutics (see Note 5). The Company received 92%, 95% and 100% of its revenues from Bristol-Myers Squibb in 1998, 1997 and 1996, respectively. The accompanying consolidated financial statements include the accounts of the Company's 85% owned subsidiary, Cytokine Sciences, Inc. Cytokine was formed in June 1996 for the purpose of acquiring the assets of Innovative Therapeutics, Inc. in July 1996 in exchange for 15% of the common stock of Cytokine valued at approximately $44,000. All intercompany balances and transactions have been eliminated in consolidation. Minority interest expense of $48,093, $18,358 and $24 is included in general and administrative expenses for the years ended December 31, 1998, 1997 and 1996, respectively. RESEARCH AND DEVELOPMENT Research and development expenses consist of independent proprietary research and development costs, the costs associated with work performed under collaborative research agreements and the Company's sponsored funding of research programs performed by others. Research and development costs are expensed as incurred. PATENT COSTS Costs incurred in filing, defending and maintaining patents are expensed as incurred. Such costs aggregated approximately $778,000, $409,000 and $565,000 in 1998, 1997 and 1996, respectively. F-7 57 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS The Company invests in various debt securities. These investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires certain debt securities to be reported at amortized cost, certain debt and equity securities to be reported at market with current recognition of unrealized gains and losses, and certain debt and equity securities to be reported at market with unrealized gains and losses as a separate component of stockholders' equity. Management determines the appropriate classification of investments as held-to-maturity or available-for-sale at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company has classified all investments as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in stockholders' equity. The amortized cost of debt securities in this category is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included as investment income. Realized gains and losses and declines in value judged to be other-than-temporary on the available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost and are depreciated over their expected useful lives. Depreciation is provided on a straight-line basis. Amortization associated with capitalized leases is included in depreciation expense. Furniture and equipment are summarized as follows:
DECEMBER 31 1998 1997 -------------------- ------------------- Furniture and equipment $4,432,566 $2,211,263 Less: accumulated depreciation (1,453,329) (712,482) -------------------- ------------------- $2,979,237 $1,498,781 ==================== ===================
F-8 58 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS Cash equivalents include cash and short-term investments with original maturities of less than 90 days. INCOME TAXES Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. REVENUE RECOGNITION Revenue from the collaborative research and development agreement is recorded when earned as defined under the terms of the agreement. Nonrefundable fees received upon contract signing are recorded as deferred revenue and recognized over the term of the agreement mentioned in Note 5. Revenues related to grants received for specific project proposals are recognized in revenue as earned in accordance with specified provisions, including performance requirements, in the contracts. Other periodic research funding payments received which are related to future performance are deferred and recognized as income when earned. NET LOSS PER SHARE Net loss per share (basic and diluted) was computed by dividing net loss by the weighted average number of shares of common stock outstanding. Common stock equivalents were anti-dilutive and therefore were not included in the computation of weighted average shares used in computing diluted loss per share. Pro forma net loss per common share is calculated using the weighted average number of common and common equivalent shares outstanding during 1996 assuming the conversion of the convertible preferred stock at the beginning of the year. F-9 59 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes new standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. These new standards require that all items recognized as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS 130 in 1998 and has not presented a statement of comprehensive income as there are no additional components of comprehensive income to be presented. STOCK BASED COMPENSATION Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation ("SFAS 123") sets forth accounting and reporting standards for stock based employee compensation plans (see Note 9). As permitted by SFAS 123, the Company continues to account for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB No. 25, no compensation expense is recognized for stock or stock options issued to employees at fair market value. Accordingly, adoption of SFAS 123 has not affected the Company's results of operations or financial position. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. F-10 60 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 2. RELATED PARTY TRANSACTIONS The Company receives legal services from a law firm in which a Company director is a partner. The cost of these services was negotiated on an arms length basis and amounted to $360,000, $160,000 and $406,000 for the years ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998 and 1997, the Company maintained approximately 51% and 87%, respectively, of its cash, cash equivalents and short-term investments under the management of a registered investment advisory firm for which the Company's Vice Chairman and director serves as chairman of the board. Such assets under management are maintained by a high quality, third party financial institution custodian. The Company has an agreement with one of its directors under which the director provides consulting services. During 1997, the Company paid $180,000 under this agreement. 3. INVESTMENTS All of the Company's investments are classified as available-for-sale and are summarized as follows:
AVAILABLE-FOR-SALE SECURITIES ------------------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------------------------- DECEMBER 31, 1998 U.S. Treasury securities $2,847,036 $ - $ - $2,847,036 U.S. corporate securities 1,505,335 1,505,335 ------------------------------------------------------------------------------- Total securities $4,352,371 $ - $ - $4,352,371 ===============================================================================
F-11 61 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
AVAILABLE-FOR-SALE SECURITIES ------------------------------------------------------------------------------- GROSS GROSS UNREALIZED ESTIMATED FAIR AMORTIZED COST UNREALIZED GAINS LOSSES VALUE ------------------------------------------------------------------------------- DECEMBER 31, 1997 U.S. Treasury securities $23,012,580 $ - $ - $23,012,580 U.S. corporate securities 4,000,000 4,000,000 ------------------------------------------------------------------------------- Total securities $27,012,580 $ - $ - $27,012,580 ===============================================================================
The Company had no realized gains or losses from the sale of short-term investments for the years ended December 31, 1998, 1997 and 1996. All U.S. Treasury and U.S. corporate securities have maturity dates of less than one year as of December 31, 1998 and 1997. 4. SPONSORED RESEARCH PROGRAM AGREEMENTS The Company has entered into several agreements to sponsor external research programs. The Company's primary external research program agreement was entered into in September 1993 with the Children's Hospital in Boston, Massachusetts, an entity affiliated with Harvard Medical School ("Children's Hospital"). Under this sponsored research agreement, the Company agreed to pay Children's Hospital $11,000,000 over a six year period to support research on the role of angiogenesis in pathological conditions. In accordance with the terms of this sponsored research agreement, $10,000,000 has been paid as of December 31, 1998 and the remaining $1,000,000 is due on March 29, 1999. This sponsored research agreement gives the Company an option to negotiate a worldwide, royalty-bearing license for technology resulting from the research at Children's Hospital in areas covered by the agreement. Amounts due under the sponsored research agreement with Children's Hospital, which is cancelable by the Company upon six months notice, are paid in advance every six months and are expensed as incurred as research and development costs. See also Note 11. The Company has also entered into an agreement with a bioprocessing services firm for the production of materials to be used in the Company's research activities. As of December 31, 1998, the Company's total commitments for all external research programs and materials production costs are as follows: F-12 62 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 4. SPONSORED RESEARCH PROGRAM AGREEMENTS (CONTINUED)
1999 $5,730,400 2000 225,400 ------------------------- Total commitments $5,955,800 =========================
5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT AND SUBSEQUENT EVENT In December 1995, the Company and Bristol-Myers Squibb entered into a collaboration to develop and commercialize certain antiangiogenic therapeutics ("Original BMS Collaboration"). The Original BMS Collaboration provided for Bristol-Myers Squibb to fund the Company's research, provided for milestone payments to the Company, and provided for the payment to the Company of royalties on net sales of any products developed under the Original BMS Collaboration. In return, the Company granted Bristol-Myers Squibb exclusive worldwide rights, held by the Company, to antiangiogenic applications of thalidomide, thalidomide analogs and the Angiostatin(R) protein and a five-year right of first refusal to negotiate for commercial rights with respect to the development of any technology licensed, or to be licensed, by the Company from Children's Hospital, in the field of antiangiogenic therapeutics. In August 1997, the Company reacquired the commercial rights to thalidomide in exchange for renewing Bristol-Myers Squibb's warrant to purchase an additional $10,000,000 of the Company's common stock as described below. In October 1998, Bristol-Myers Squibb relinquished the rights to thalidomide analogs. In February 1999, the Company assumed all responsibility for preclinical and clinical work on the Angiostatin(R) protein. Bristol-Myers Squibb was obligated under the Original BMS Collaboration to fund $18.35 million over five years for costs to be incurred by the Company related to specified research and development. The Company was eligible to receive an additional $32 million if the Company attained certain late-stage clinical development and regulatory filing milestones under the Original BMS Collaboration, a portion of which could be credited against royalties. In addition to this funding, Bristol-Myers Squibb reimbursed the Company $730,000 for clinical studies and ophthalmological trials. Bristol-Myers Squibb could terminate the Original BMS Collaboration for any reason with six months notice and on February 9, 1999, the Original BMS Collaboration was F-13 63 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT AND SUBSEQUENT EVENT (CONTINUED) modified such that the final payment under the agreement is due on June 5, 1999 (see below). As amended, Bristol-Myers Squibb has no further funding obligation to the Company after August 9, 1999. The Company also received a non-refundable, non-creditable licensing fee of $1 million in 1995 under the Original BMS Collaboration and an additional $2.5 million on March 31, 1996 in recognition of certain research and development efforts of the Company. These amounts were recorded as deferred revenue and were being recognized over five years, the initial term of the Original BMS Collaboration agreement. On June 9, 1999, the due date of the final payment under the Original BMS Collaboration, the remaining unamortized balance of such deferred revenue will be recognized as revenue. Concurrent with the signing of the Original BMS Collaboration, the Company issued Bristol-Myers Squibb 541,666 shares of common stock for aggregate cash proceeds of $6,500,000. Bristol-Myers Squibb also purchased 333,333 shares of additional common stock of the Company at the initial public offering price of $15 per share, or a total of $5,000,000, at the time the Company completed its initial public offering in June 1996 and was granted the right to purchase an additional $10,000,000 of the Company's common stock at $22.50 per share, or 444,444 shares from the Company at any time up to June 19, 1997. This warrant was renewed and expired in November 1997. During 1998, 1997 and 1996, the Company recognized approximately $4,748,000, $4,542,000 and $4,625,000 in revenue, respectively, and incurred costs of approximately $5,800,000, $5,200,000 and $4,000,000 related to the Original BMS Collaboration. On February 9, 1999 as noted above, the Company and Bristol-Myers Squibb agreed to modify the Original BMS Collaboration as follows: - - The Company will assume all responsibility for preclinical, pharmaceutical development and clinical work on the Angiostatin(R) protein. Bristol-Myers Squibb has agreed to provide the Company with advice on structuring its clinical program but otherwise will have no direct involvement with the development of the Angiostatin(R) protein. F-14 64 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT AND SUBSEQUENT EVENT (CONTINUED) - - Upon completion of Phase II clinical trials of Angiostatin(R), except as described below, Bristol-Myers Squibb will have the option to review all of the Company's data and exercise an option to reacquire further development and marketing rights to the product. If Bristol-Myers Squibb elects to do so, it will pay the Company a $1 million option exercise fee and the financial terms applicable to commercialization will remain the same as those in the existing research agreement, except that the Company's worldwide royalty will be substantially increased and will not be subject to any offsetting credits. - - If a third party wishes to license Angiostatin(R) protein and fund and conduct development of Angiostatin(R) protein and commercialize it upon FDA approval on terms satisfactory to the Company, or the Company decides to proceed with the development and commercialization of Angiostatin(R) protein without a corporate partner (in either case prior to the completion of Phase II clinical trials and Bristol-Myers Squibb's exercise of its option), Bristol-Myers Squibb's option will be terminated effective with the signing of the Company's collaboration with such a third party or its giving of written notice to Bristol-Myers Squibb that it intends to proceed without a corporate partner. - - Bristol-Myers Squibb's current rights of first offer/refusal with respect to products or technology arising out of the Company's agreement with Children's Hospital have terminated, including those rights with respect to Endostatin(TM) protein. - - Bristol-Myers Squibb is licensed, on a royalty free basis, to conduct further internal research with regard to the Angiostatin(R) protein and will exchange with the Company any data it obtains on Angiostatin(R) protein per se. This license will continue for a minimum of one year and thereafter until the termination of Bristol-Myers Squibb's option as described above. - - Bristol-Myers Squibb will retain its equity interest in the Company but has agreed to certain restrictions on its ability to sell its interest. These restrictions will prevent Bristol-Myers Squibb from selling its full interest in the Company until at least December 1, 2001, without the Company's consent. F-15 65 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT AND SUBSEQUENT EVENT (CONTINUED) - - The semi-annual research support payment due June 5, 1999 to the Company from Bristol-Myers Squibb will be prorated to cover the period from June 5 to August 9, 1999 and will be the final research payment under the agreement. All patent and related costs incurred by the Company prior to August 9, 1999 will be reimbursed to the Company by Bristol-Myers Squibb. 6. LICENSE AGREEMENT On December 9, 1998, the Company entered into a license agreement with Celgene Corporation ("Celgene") whereby the Company granted Celgene an exclusive license to certain of the Company's thalidomide patents. In exchange for this license, Celgene agreed to pay royalties to the Company on sales of any product which contains thalidomide. The royalties vary based on the volume of Celgene's sales. Celgene also assumed certain milestone payment obligations to Children's Hospital related to the license of thalidomide. 7. INCOME TAXES The Company has net operating loss carryforwards for income tax purposes of approximately $53,149,000 at December 31, 1998, that expire in years 2006 through 2013. The Company also has research and development tax credit carryforwards of approximately $2,379,000 as of December 31, 1998, that expire in years 2007 through 2013. These carryforwards include approximately $12,300,000 related to exercises of stock options in 1998 and 1997 for which the income tax benefit, if realized, would increase additional paid-in capital. The utilization of the net operating loss and research and development carryforwards may be limited in future years due to changes in ownership of the Company pursuant to Internal Revenue Code Section 382. For financial reporting purposes, a valuation allowance has been recognized to reduce the net deferred tax assets to zero due to uncertainties with respect to the Company's ability to generate taxable income in the future sufficient to realize the benefit of deferred income tax assets. Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts F-16 66 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES (CONTINUED) used for income tax purposes. Significant components of the Company's deferred income tax assets and liabilities as of December 31, 1998 and 1997 are as follows:
1998 1997 ------------------------------------------------ Deferred income tax assets (liabilities): Net operating loss carryforwards $ 20,196,000 $ 11,485,000 Research and development credit carryforward 2,379,000 1,719,000 Deferred revenues 1,119,000 918,000 Other 411,000 529,000 Depreciation 96,000 (4,000) Valuation allowance for deferred income tax assets (24,201,000) (14,647,000) ------------------------------------------------ Net deferred income tax assets $ - $ - ================================================
A reconciliation of the provision for income taxes to the federal statutory rate is as follows:
1998 1997 1996 --------------------------------------------------------------------- Tax benefit at statutory rate $(5,135,000) $(2,484,000) $(1,813,000) Tax credits (660,000) (389,000) (90,000) Other 18,000 12,000 12,000 Valuation allowance 5,777,000 2,861,000 1,891,000 --------------------------------------------------------------------- $ - $ - $ - =====================================================================
8. CONVERTIBLE PREFERRED STOCK The preferred stock had certain preferential rights in the event of liquidation or dissolution of the Company but did not have any preferences in regard to voting rights or dividend distributions. The preferred stock was automatically converted into the F-17 67 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 8. CONVERTIBLE PREFERRED STOCK (CONTINUED) Company's common stock upon the effective date of the Company's initial public offering of the Company's common stock. 9. STOCK OPTIONS AND WARRANTS In 1992 and 1996, the Company adopted incentive and nonqualified stock option plans whereby 2,983,333 shares of the Company's common stock were reserved for grants to various executive, scientific and administrative personnel of the Company as well as outside directors and consultants, of which 435,624 shares remain available for grant as of December 31, 1998. These options vest over periods varying from vesting immediately through vesting over four years and generally expire 10 years from the date of grant. Pro forma information regarding net income and loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method subsequent to December 31, 1994. Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1999. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 5.38%, 5.97% and 6.36%; no dividend yields; volatility factors of the expected market price of the Company's common stock of 1.04, 0.80 and 0.65; and a weighted-average expected life of an option of 6 years, 7 years and 7 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options and warrants granted to employees are amortized to expense over the vesting period. The weighted average fair value per option granted in 1998, 1997 and 1996 was $14.47, $7.90 F-18 68 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) and $9.73, respectively. The weighted average fair value per warrant granted to employees during 1997 was $13.00. The Company's pro forma information follows:
1998 1997 1996 ----------------------------------------------------------------------------- Pro forma net loss $(19,986,293) $(9,493,464) $(6,965,172) Pro forma loss per share $ (1.58) $ (0.78) $ (0.71)
A summary of the Company's stock options and warrants granted to employees, and related information for the years ended December 31 follows:
NUMBER OF EXERCISE PRICE OPTIONS PER SHARE ---------------------------------------------------- Outstanding at January 1, 1996 1,564,369 $1.50 - $12.00 Exercised (99,677) $1.50 - $6.38 Granted 1,188,364 $9.00 - $16.25 Canceled (73,112) $6.38 ------------------------ Outstanding at December 31, 1996 2,579,944 $1.50 - $16.25 Exercised (235,836) $1.50 - $ 9.00 Granted 761,575 $ 9.38 - $15.00 Canceled (5,734) $14.00 ------------------------ Outstanding at December 31, 1997 3,099,949 $1.50 - $16.25 Exercised (697,828) $1.50 - $15.00 Granted 325,250 $10.50 - $31.94 Canceled (76,682) $6.38 - $14.00 ------------------------ Outstanding at December 31, 1998 2,650,689 $1.50 - $31.94 ======================== Exercisable at December 31, 1998 2,172,632 $1.50 - $31.94 ========================
F-19 69 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) The following summarizes information about stock options and warrants granted to employees outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------- --------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/98 LIFE IN YEARS PRICE AT 12/31/98 PRICE - ------------------------ ------------------------------------------------------------- --------------------------------------- $1.50 367,200 3.6 $1.50 367,200 $1.50 $6.00 - $9.50 684,981 6.6 $6.41 682,465 $6.39 $10.00 - $14.00 1,288,226 8.6 $11.62 840,966 $11.91 $15.00 - 18.38 162,782 7.5 $15.32 158,126 $15.32 $23.94 - $31.94 147,500 9.5 $25.16 123,875 $26.29 --------------------- --------------------- 2,650,689 7.4 $9.85 2,172,632 $9.49 ===================== =====================
The Company also granted 50,000 and 83,334 options to purchase common stock at $6.38 and $6.00 per share during 1995 and 1993, respectively, to Children's Hospital in connection with a sponsored research agreement (see Note 4). These options are not covered by the incentive and nonqualified stock option plan and are included in the table below. F-20 70 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 9. STOCK OPTIONS AND WARRANTS (CONTINUED) In addition, the Company has granted warrants to consultants and certain third parties. Warrants granted generally expire after 10 years from the date of grant. Stock warrant activity to non-employees is as follows:
NUMBER OF EXERCISE PRICE PER WARRANTS SHARE ------------------------------------------------ Outstanding at January 1, 1996 267,336 $6.00 - $7.65 Granted 10,000 $14.00 ------------------------ Outstanding at December 31, 1996 277,336 $6.00 - $14.00 Granted 100,000 $13.00 Exercised (8,334) $6.00 ------------------------ Outstanding at December 31, 1997 369,002 $1.50 - $14.00 Exercised (171,435) $1.50 - $14.00 ------------------------ Outstanding at December 31, 1998 197,567 $6.38 - $13.00 ======================== Exercisable at December 31, 1998 177,566 $6.38 - $13.00 ========================
The Company also granted warrants to Bristol-Myers Squibb in connection with the Original BMS Collaboration described in Note 5 which expired in November 1997. 10. FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and account receivable. As of December 31, 1998 and 1997, the Company maintained approximately 51% and 87%, respectively, of its cash, cash equivalents and short-term investments (short-duration, high quality debt securities) under the management of a registered investment advisory firm for which the Company's Vice Chairman and F-21 71 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INSTRUMENTS (CONTINUED) director serves as chairman of the board. Such assets under management are maintained by a high credit quality, third party financial institution custodian. The carrying amounts reported in the balance sheet for cash and cash equivalents, short-term investments, account receivable and accounts payable approximate their fair values. 11. COMMITMENTS AND CONTINGENCIES The Company is a defendant in a lawsuit initiated in August 1995 in the United States District Court for the Eastern District of Tennessee by Bolling, McCool & Twist ("BMT"), a consulting firm. In the suit, BMT asserts that the Company breached an agreement between BMT and the Company by failing to pay BMT certain fees it asserts are owed under the agreement. More specifically, BMT has asserted a claim for the payment of services rendered in the approximate amount of $50,000 and seeks a success fee in an unspecified amount in connection with the original BMS Collaboration. The judge in the case bifurcated the proceeding into two phases: an adjudication of whether the Company breached its agreement with BMT and then a damage phase. After a trial on the merits, the jury found in favor of BMT on the breach of contract claim. A trial to determine damages had been scheduled for April 14, 1998. However, on April 6, 1998, the court issued an Order pursuant to which damages were limited to those arising during the term of the Agreement, which terminated on November 1, 1995. Damages for this period amount to approximately $50,000 plus a possible charge for interest. The damage portion of the trial has been postponed while the court reviews certain submissions requested by the court. A hearing on certain of these submissions will be held on April 19, 1999. Despite the jury verdict on the breach of contract claim and the court's limitation with respect to damages, the Company is unable to predict with certainty the eventual outcome of the lawsuit. The Company intends to contest the action vigorously and believes that this proceeding will not have a material adverse effect on the Company or on its financial condition, although there can be no assurance that this will be the case. In May 1994, the Company entered into two license agreements, whereby the Company acquired the exclusive, worldwide, royalty-bearing licenses to make, use, and sell the Angiostatin(R) protein, thalidomide (see Note 5) and thalidomide analogs, all inhibitors of angiogenesis developed by Children's Hospital. In consideration for receiving the rights, the Company must pay a royalty on any sublicensing fees, as defined in the agreements, F-22 72 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) to Children's Hospital. The Company is also required to pay certain amounts upon the attainment of certain milestones. The milestone payments aggregate $2,650,000, of which $915,000 has been paid to date, and are based upon license fees and achievement of regulatory approvals. In addition, in 1996, the Company entered into two license agreements with Children's Hospital for the exclusive, worldwide, royalty-bearing licenses to make, use and sell Endostatin(TM) protein and 2-Methoxyestradiol, both inhibitors of angiogenesis. In consideration for receiving these rights, the Company must pay a royalty on any sublicensing fees, as defined in the agreements, to Children's Hospital. Each agreement obligates the Company to pay up to $1,000,000 "upon the attainment of certain milestones." As of December 31, 1998, no payments were due under these agreements. These license agreements require the Company to pay Children's Hospital a specified percentage of the royalty income received on the first $100 million in net sales of the licensed products, and an increased percentage thereafter, with a minimum payment based on a percentage of net sales of the licensed products by any sublicensees. The Company leases its primary facilities through 2008. The lease agreement provides for escalation of the lease payments over the term of the lease, however, rent expense is recognized under the straight line method. Additionally, the Company leases office equipment under an operating lease. The future minimum payments under its facilities and equipment leases as of December 31, 1998 are as follows: 1999 $ 797,300 2000 820,900 2001 845,200 2002 859,500 2003 885,300 Thereafter 4,840,900 ------------------------- Total minimum payments $9,049,100 =========================
Rental expense for the years ended December 31, 1998, 1997 and 1996 was $253,000, $241,000 and $226,000, respectively. F-23 73 EntreMed, Inc. Notes to Consolidated Financial Statements (continued) 12. EMPLOYEE RETIREMENT PLAN The Company sponsors the EntreMed, Inc. 401(k) Plan and Trust. The plan covers substantially all employees and enables participants to contribute a portion of salary and wages on a tax-deferred basis. Contributions to the plan by the Company are discretionary. No employer contributions were made in 1998, 1997 or 1996. 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for the years ended December 31, 1998 and 1997 is as follows:
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------------------------------------------------------------------------------- 1998 Revenues $ 1,154,971 $ 1,165,485 $ 1,343,437 $ 1,497,590 Research and development costs 3,499,431 2,345,299 4,481,485 4,758,778 General and administrative expenses 1,305,890 1,221,010 1,380,387 1,852,928 Net loss (3,112,126) (1,812,631) (3,959,309) (4,629,704) Net loss per share $ (0.25) $ (0.15) $ (0.31) $ (0.35) 1997 Revenues $ 1,092,500 $ 1,092,500 $ 1,241,040 $ 1,331,448 Research and development costs 2,418,835 1,743,560 2,825,840 2,010,470 General and administrative expenses 749,660 1,219,501 882,078 2,064,485 Net loss (1,423,507) (1,180,443) (1,820,963) (2,111,816) Net loss per share $ (0.12) $ (0.10) $ (0.15) $ (0.17)
F-24 EX-10.28 2 LICENSE AGREEMENT 1 ENTREMED, INC. EXHIBIT 10.28 ["..." INDICATES MATERIAL HAS BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST, WHICH THE COMPANY HAS FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] AGREEMENT by and between ENTREMED, INC. and CELGENE CORPORATION 2 TABLE OF CONTENTS
PAGE ---- SECTION 1 - DEFINITIONS............................................................................1 1.1 "AFFILIATE"............................................................................2 1.2 "CALENDAR QUARTER".....................................................................2 1.3 "CELGENE DEVELOPED INTELLECTUAL PROPERTY"..............................................2 1.4 "CELGENE DEVELOPED PATENT RIGHTS"......................................................2 1.5 "CELGENE DEVELOPED TECHNOLOGY RIGHTS"..................................................2 1.6 "CELGENE EXISTING INTELLECTUAL PROPERTY"...............................................3 1.7 "CELGENE EXISTING PATENT RIGHTS".......................................................3 1.8 "CELGENE EXISTING TECHNOLOGY RIGHTS"...................................................3 1.9 "CMCC AGREEMENT".......................................................................3 1.10 "ENTREMED DEVELOPED PATENT RIGHTS".....................................................3 1.11 "ENTREMED DEVELOPED TECHNOLOGY RIGHTS".................................................4 1.12 "ENTREMED EXISTING PATENT RIGHTS"......................................................4 1.13 "ENTREMED EXISTING TECHNOLOGY RIGHTS"..................................................4 1.14 "ENTREMED INTELLECTUAL PROPERTY".......................................................4 1.15 "FIELD"................................................................................5 1.16 "FIRST COMMERCIAL SALE"................................................................5 1.17 "NCI AGREEMENT"........................................................................5 1.18 "NDA"..................................................................................5 1.19 "NET SALES"............................................................................5 1.20 "PATENT RIGHT(s)"......................................................................6 1.21 "PRODUCT"..............................................................................7 1.22 "SUBLICENSEE"..........................................................................7 1.23 "TECHNOLOGY RIGHTS"....................................................................7 1.24 "TERRITORY"............................................................................8 1.25 "THALIDOMIDE"..........................................................................8 1.26 "THIRD PARTY(IES)".....................................................................8 1.27 "VALID CLAIM"..........................................................................8 SECTION 2 - GRANT..................................................................................8 2.1 Grant of ENTREMED EXISTING PATENT RIGHTS and ENTREMED EXISTING TECHNOLOGY RIGHTS................................................8 2.2 Grant of ENTREMED DEVELOPED PATENT RIGHTS and ENTREMED DEVELOPED TECHNOLOGY RIGHTS.....9 2.3 CELGENE'S Right To Sublicense..........................................................9 2.4 Assignment Of Investigational New Drug and Orphan Drug Status Applications...................................................................10 2.5 Assignment Of Agreements..............................................................10 2.6 Technology Transfer...................................................................11 2.7 Understanding Regarding CMCC AGREEMENT................................................11
- i - 3 SECTION 3 - DUE DILIGENCE.........................................................................13 3.1 In the United States..................................................................13 3.2 Outside the United States.............................................................15 3.3 For PRODUCTS For Use In Animals.......................................................16 3.4 No Other ENTREMED Rights..............................................................17 3.5 Co-Promotion By CELGENE And ENTREMED..................................................17 3.6 Establishment Of A Scientific Committee...............................................19 SECTION 4 - ROYALTIES.............................................................................21 4.1 Royalty Payments......................................................................21 4.2 Sublicensing Payments and Royalties...................................................22 4.3 Later-Issued VALID CLAIM..............................................................23 4.4 "...".................................................................................23 4.5 THIRD PARTY Sales.....................................................................23 4.6 Recordkeeping.........................................................................24 4.7 Quarterly Payments and Reports........................................................25 4.8 Accounting Reports....................................................................25 SECTION 5 - CONFIDENTIALITY.......................................................................26 5.1 Confidential Information..............................................................26 5.2 Non-Confidential Information..........................................................26 5.3 Disclosure To THIRD PARTIES...........................................................27 5.4 Disclosure To Sublicensees............................................................28 5.5 Public Statements.....................................................................28 SECTION 6 - ADVERSE MEDICAL EXPERIENCES...........................................................28 6.1 Adverse Medical Experience Reporting..................................................28 SECTION 7 - PATENTS...............................................................................28 7.1 Patent Prosecution....................................................................28 7.2 Cooperation In Prosecution............................................................29 7.3 Infringement and Declaratory Judgment Actions.........................................29 SECTION 8 - REPRESENTATIONS AND WARRANTIES........................................................32 8.1 By Both Parties.......................................................................32 8.2 By ENTREMED...........................................................................32 SECTION 9 - INDEMNIFICATION AND INSURANCE.........................................................34 9.1 By CELGENE............................................................................34 9.2 By ENTREMED...........................................................................35 9.3 Conditions to Indemnification.........................................................36
-ii- 4 SECTION 10 - ASSIGNMENT AND SUCCESSORS.............................................................36 10.1 By Either Party.......................................................................36 10.2 By CELGENE............................................................................37 10.3 CELGENE As Guarantor..................................................................37 10.4 Binding Effect........................................................................37 SECTION 11 - FORCE MAJEURE.........................................................................37 SECTION 12 - TERMINATION...........................................................................38 12.1 Term..................................................................................38 12.2 By Reason Of FDA Action...............................................................38 12.3 Termination Of Royalty Obligations....................................................38 12.4 Breach................................................................................38 12.5 Insolvency............................................................................40 12.6 Work-In-Progress......................................................................41 12.7 Survival..............................................................................41 12.8 Reversion of Rights...................................................................41 SECTION 13 - GENERAL PROVISIONS....................................................................41 13.1 Relationship of Parties...............................................................41 13.2 Entire Understanding..................................................................42 13.3 Governing Law.........................................................................42 13.4 Headings..............................................................................42 13.5 No Waiver.............................................................................42 13.6 Export Controls.......................................................................42 13.7 Notices...............................................................................42 13.8 Original Counterparts.................................................................43
-iii- 5 AGREEMENT This Agreement is effective this 9th day of December, 1998 (the "EFFECTIVE DATE") by and between CELGENE CORPORATION, a Delaware corporation located at 6 Powder Horn Drive, Warren, New Jersey 07059 ("CELGENE"), and ENTREMED, INC., a Delaware Corporation located at 9610 Medical Center Drive, Rockville, Maryland 20850 ("ENTREMED"). WHEREAS, CELGENE is a company that develops, manufactures, markets and sells pharmaceutical products for healthcare, and that has developed and owns certain patents, patent applications, proprietary technology, know-how, and United States Food and Drug Administration ("FDA") filings relating to PRODUCTS, as hereinafter defined; and WHEREAS, ENTREMED is the owner or exclusive licensee of certain PATENT RIGHTS as hereinafter defined, TECHNOLOGY RIGHTS, as hereinafter defined, and FDA filings related to PRODUCTS, and has certain rights and obligations relating to PRODUCTS pursuant to agreements with THIRD PARTIES, as hereinafter defined; and WHEREAS, CELGENE desires to obtain assignments and/or exclusive rights in the TERRITORY in and to all of ENTREMED's PATENT RIGHTS, TECHNOLOGY RIGHTS, rights by agreement, and FDA filings, whether presently existing or subsequently developed, for the commercial development, use, and sale of PRODUCTS; and WHEREAS, ENTREMED is willing to grant the assignments and/or exclusive rights desired by CELGENE, as set forth herein, in order to transfer its entire present and future right, title and interest in PRODUCTS to CELGENE. NOW, THEREFORE, in consideration of the mutual promises and other good and valuable consideration, the parties agree as follows: SECTION 1 - DEFINITIONS The terms used in this Agreement have the following meaning: 6 1.1 The term "AFFILIATE" as applied to either party shall mean any company or other legal entity other than the party in question in whatever country organized, controlling controlled by or under common control with that party. The term "control" means ownership or control, directly or indirectly, of at least fifty percent (50%) of the outstanding stock or voting rights entitled to elect directors. 1.2 The term "CALENDAR QUARTER" shall mean the period of three (3) consecutive calendar months ending on March 31, June 30, September 30 or December 31, as the case may be. 1.3 The term "CELGENE DEVELOPED INTELLECTUAL PROPERTY" shall mean CELGENE DEVELOPED PATENT RIGHTS and CELGENE DEVELOPED TECHNOLOGY RIGHTS. 1.4 The term "CELGENE DEVELOPED PATENT RIGHTS" shall mean any United States or foreign patents or patent applications filed by CELGENE, or an AFFILIATE, successor or assign thereof at any time subsequent to the EFFECTIVE DATE, in which CELGENE has a transferrable interest, relating to a modification of a PRODUCT described in any ENTREMED INTELLECTUAL PROPERTY or a method of using such PRODUCT, which modification is (a) necessary for the manufacture, use, or sale of such PRODUCT, and (b) then currently in use by CELGENE at the time ENTREMED exercises its rights under Section 12.4(b), for the manufacture, use, or sale of such PRODUCT. 1.5 The term "CELGENE DEVELOPED TECHNOLOGY RIGHTS" shall mean any TECHNOLOGY RIGHTS developed, obtained, or acquired by CELGENE or an AFFILIATE, successor or assign thereof at any time subsequent to the EFFECTIVE DATE, in which CELGENE has a transferrable interest, relating to a modification of a PRODUCT described in any ENTREMED INTELLECTUAL PROPERTY or a method of using or use of such PRODUCT, which modification is (a) necessary for the -2- 7 manufacture, use, or sale of such PRODUCT, and (b) then currently in use by CELGENE at the time ENTREMED exercises its rights under Section 12.4(b), for the manufacture, use, or sale of such PRODUCT. 1.6 The term "CELGENE EXISTING INTELLECTUAL PROPERTY" shall mean CELGENE EXISTING PATENT RIGHTS and CELGENE EXISTING TECHNOLOGY RIGHTS. 1.7 The term "CELGENE EXISTING PATENT RIGHTS" shall mean the United States and foreign patents and patent applications relating to PRODUCTS in which CELGENE has an interest, jointly or solely, as owner, assignee, or licensee, whether exclusive or nonexclusive, as of the EFFECTIVE DATE. 1.8 The term "CELGENE EXISTING TECHNOLOGY RIGHTS" shall mean any TECHNOLOGY RIGHTS developed, obtained, or acquired, solely or jointly, exclusively or non-exclusively, by CELGENE or an AFFILIATE, successor or assign thereof as of the EFFECTIVE DATE. 1.9 The term "CMCC AGREEMENT" shall mean that certain License Agreement entered into by and between ENTREMED and Children's Medical Center Corporation ("CMCC"), dated May 26, 1994, as amended to the date hereof, attached hereto as Exhibit A. 1.10 The term "ENTREMED DEVELOPED PATENT RIGHTS" shall mean any United States or foreign patent applications relating to PRODUCTS assigned to, licensed to or filed, solely or jointly, by ENTREMED, or an AFFILIATE, successor or assign thereof at any time subsequent to the EFFECTIVE DATE, including any United States or foreign patent applications filed pursuant to the CMCC AGREEMENT or NCI AGREEMENT, and the patents issuing therefrom, which patent applications and patents shall be added to Appendix A and shall be -3- 8 included in this Agreement as PATENT RIGHTS and licensed to CELGENE in accordance with Section 2 of this Agreement. 1.11 The term "ENTREMED DEVELOPED TECHNOLOGY RIGHTS" shall mean any TECHNOLOGY RIGHTS developed, obtained, or acquired, solely or jointly, exclusively or non-exclusively, by ENTREMED, or an AFFILIATE, successor or assign thereof at any time subsequent to the EFFECTIVE DATE, including any TECHNOLOGY RIGHTS developed or obtained pursuant to the CMCC AGREEMENT or NCI AGREEMENT, which TECHNOLOGY RIGHTS shall be included in this Agreement and licensed to CELGENE in accordance with Section 2 of this Agreement. 1.12 The term "ENTREMED EXISTING PATENT RIGHTS" shall mean the PATENT RIGHTS in which ENTREMED has an interest, jointly or solely, as owner, assignee, or licensee, whether exclusive or nonexclusive, as of the EFFECTIVE DATE. 1.13 The term "ENTREMED EXISTING TECHNOLOGY RIGHTS" shall mean any TECHNOLOGY RIGHTS developed, obtained, or acquired, solely or jointly, exclusively or non-exclusively, by ENTREMED, or an AFFILIATE, successor or assign thereof as of the EFFECTIVE DATE, including without limitation any TECHNOLOGY RIGHTS developed or obtained pursuant to the CMCC AGREEMENT or NCI AGREEMENT. ENTREMED EXISTING TECHNOLOGY RIGHTS expressly includes any regulatory data and filings, including without limitation all FDA Investigational New Drug and Orphan Drug Status applications, as set forth in Appendix C. 1.14 The term "ENTREMED INTELLECTUAL PROPERTY" shall mean and include ENTREMED DEVELOPED PATENT RIGHTS, ENTREMED DEVELOPED TECHNOLOGY RIGHTS, ENTREMED EXISTING PATENT RIGHTS, and ENTREMED EXISTING TECHNOLOGY RIGHTS. -4- 9 1.15 The term "FIELD" shall mean the use of THALIDOMIDE in humans and animals, including without limitation any and all diagnostic, prophylactic, therapeutic, and research and development uses. 1.16 The term "FIRST COMMERCIAL SALE" shall mean, in each country of the TERRITORY, the first sale after the EFFECTIVE DATE in such country to a THIRD PARTY in connection with the nationwide introduction of any PRODUCT by CELGENE, its AFFILIATES or SUBLICENSEES following marketing and/or pricing approval by the appropriate governmental agency for the country in which the sale is to be made and, when governmental approval is not required, the first sale in that country in connection with the nationwide introduction of a PRODUCT in that country. 1.17 The term "NCI AGREEMENT" shall mean that certain Agreement by and between the Division of Cancer Treatment at the National Cancer Institute ("NCI") and ENTREMED, dated November 16, 1994, and executed on behalf of ENTREMED on November 23, 1994, and on behalf of NCI on November 18, 1994, attached hereto as Exhibit B. 1.18 The term "NDA" shall mean a New Drug Application filed with the United States Food and Drug Administration. 1.19 The term "NET SALES" means the gross amount received by CELGENE or its AFFILIATES or SUBLICENSEES for sale of PRODUCT to THIRD PARTIES, less: (i) cost of freight, postage, and freight insurance, (if paid by seller); (ii) sales taxes, value added taxes, excise taxes, and customs duties; (iii) cost of export licenses and any taxes, fees or other charges associated with the exportation or importation of PRODUCTS; (iv) rebates accrued, incurred or paid to Federal Medicaid and State Medicare and any other price reductions required by a governmental agency; (v) rejected shipments, returns, and retroactive deductions; (vi) the amount received for sales which become the subject of a subsequent temporary or partial recall -5- 10 by a regulatory agency for safety or efficacy reasons outside the control of CELGENE; and (vii) customary cash, quantity, and trade discounts; provided, however, that a sale or transfer to an AFFILIATE or SUBLICENSEE for re-sale by such AFFILIATE or SUBLICENSEE shall not be considered a sale for the purpose of this provision but the resale by such AFFILIATE or SUBLICENSEE shall be a sale for such purposes. A "sale" shall also include a transfer or other disposition for consideration, but not such transfers or dispositions, without consideration, for pre-clinical, clinical, regulatory or governmental purposes prior to receiving marketing approval for the specific indication for which such transfer is made. In the event that consideration in addition to or in lieu of money is received for PRODUCT, such consideration shall be added to the NET SALES as valued on the day of receipt thereof by CELGENE. To the extent that a PRODUCT is sold in other than an arms length transaction, NET SALES shall be the fair market value of such PRODUCT if sold in an arms length transaction, less the costs identified in subsections (i)-(vi) of this Section 1.19. PRODUCT shall be considered "sold" at the earlier of (a) the transfer of title in such PRODUCT to a person other than an AFFILIATE or SUBLICENSEE of CELGENE or (b) the shipment of such PRODUCT from the manufacturing or warehouse facilities of CELGENE or its AFFILIATE or SUBLICENSEE to a THIRD PARTY. 1.20 The term "PATENT RIGHT(s)" shall mean: (a) the United States patent applications and patents listed in Appendix A; (b) the United States and foreign patents issued from applications listed in Appendix A and from divisionals and continuations of such applications; (c) claims of United States continuation-in-part applications and of equivalent foreign applications, and of the resulting patent(s), that -6- 11 are directed to subject matter described in the United States and foreign applications listed in Appendix A; (d) claims of all later-filed foreign patent applications, and of the resulting patents, that are directed to subject matter described in the United States patents and/or patent applications described in the foregoing subsections of this Section 1.20; (e) any reissues, re-examinations or extension of United States patents described in the foregoing subsections of this Section 1.20; and (f) ENTREMED DEVELOPED PATENT RIGHTS, when assigned to, licensed to or filed, solely or jointly, by ENTREMED, or an AFFILIATE, successor or assign thereof, pursuant to Section 1.10 of this Agreement. 1.21 The term "PRODUCT" shall mean any article of manufacture, substance, material, chemical, formulation or composition for use in the FIELD which is or includes THALIDOMIDE as an active ingredient, including, without limitation, a composition that comprises THALIDOMIDE and a non-steroidal anti-inflammatory compound(s). PRODUCT expressly excludes THALIDOMIDE analogs. 1.22 The term "SUBLICENSEE" shall mean any THIRD PARTY licensed by CELGENE to make, have made, use, offer to sell, sell or import any PRODUCT. 1.23 The term "TECHNOLOGY RIGHTS" shall mean any information relating to PRODUCTS that is not covered by a patent or patent application, including without limitation technical and non-technical information, know-how, methods, processes, procedures, compositions, devices, formulae, protocols, techniques, software, designs, drawings, plans, diagrams, specifications, data, the results of tests or assays, and all other information relating to PRODUCTS. -7- 12 1.24 The term "TERRITORY" shall mean all countries of the world. 1.25 The term "THALIDOMIDE" shall mean a compound with the chemical structure described as 2-(2,6-Dioxo-3-piperidinyl)-1H-isoindole-1,3(2H)-dione, or as otherwise defined in the Merck Index, entry 9390, 12th ed., and pharmaceutically acceptable salts thereof. 1.26 The term "THIRD PARTY(IES)" shall mean a person or entity who or which is neither a party hereto nor an AFFILIATE of a party hereto. 1.27 The term "VALID CLAIM" shall mean an issued claim of an unexpired patent ("ISSUED VALID CLAIM") or a claim of a pending patent application, which shall not have been withdrawn, canceled or disclaimed, or held invalid or unenforceable by a court of competent jurisdiction in an unappealed or unappealable decision. Notwithstanding the foregoing to the contrary, a claim of a pending patent application, divisional application or continuation-in-part shall cease to be a VALID CLAIM if no patent has issued on such claim on or prior to the fifth (5th) anniversary of the EFFECTIVE DATE of this Agreement, provided that such claim shall once again become a VALID CLAIM on the issue date of a patent that subsequently issues and covers such claim. 1.28 The use herein of the plural shall include the singular, and the use of the masculine shall include the feminine. SECTION 2 - GRANT 2.1 Grant of ENTREMED EXISTING PATENT RIGHTS and ENTREMED EXISTING TECHNOLOGY RIGHTS. ENTREMED hereby grants to CELGENE and CELGENE hereby accepts from ENTREMED an exclusive, royalty bearing right and license or sublicense, as the case may be, under the ENTREMED EXISTING PATENT RIGHTS and the -8- 13 ENTREMED EXISTING TECHNOLOGY RIGHTS to make, have made, use, offer to sell, sell, and import PRODUCTS in the TERRITORY. 2.2 Grant of ENTREMED DEVELOPED PATENT RIGHTS and ENTREMED DEVELOPED TECHNOLOGY RIGHTS. ENTREMED hereby grants to CELGENE, to the extent not prohibited by the United States Government or by prior contractual obligations to any THIRD PARTY, and CELGENE hereby accepts from ENTREMED: (a) an exclusive, royalty bearing right and license under the ENTREMED DEVELOPED PATENT RIGHTS and the ENTREMED DEVELOPED TECHNOLOGY RIGHTS to make, have made, use, offer to sell, sell, and import PRODUCTS in the TERRITORY; and (b) to the extent an exclusive license is not available to CELGENE in a country under a particular ENTREMED DEVELOPED PATENT RIGHT or ENTREMED DEVELOPED TECHNOLOGY RIGHT, but a non-exclusive license would be available, ENTREMED hereby grants CELGENE a nonexclusive, royalty bearing right and license under such ENTREMED DEVELOPED PATENT RIGHT(s) and ENTREMED DEVELOPED TECHNOLOGY RIGHT(s) to make, have made, use, offer to sell, sell, and import PRODUCTS in the TERRITORY. 2.3 CELGENE'S Right To Sublicense. (a) In the United States. ENTREMED hereby grants to CELGENE the right to sublicense ENTREMED INTELLECTUAL PROPERTY in the United States with the consent of ENTREMED, to be exercised in ENTREMED's sole discretion. (b) Outside the United States. ENTREMED hereby grants to CELGENE the right to sublicense ENTREMED INTELLECTUAL -9- 14 PROPERTY outside the United States with the written consent of ENTREMED, which consent shall not be unreasonably withheld. Outside the United States, CELGENE shall use reasonable efforts to negotiate sublicensing agreements that are commercially reasonable according to contemporaneous prevailing standards within the pharmaceutical industry. 2.4 Assignment Of Investigational New Drug and Orphan Drug Status Applications. Within ten (10) days of the EFFECTIVE DATE, ENTREMED and CELGENE shall notify the Food and Drug Administration ("FDA") of the transfer of ENTREMED's rights in PRODUCTS to CELGENE by submitting to the FDA letters substantially in the form attached hereto as Exhibit C, and ENTREMED shall notify CELGENE of its compliance with this Section 2.4 by copies of such letters. ENTREMED shall take all further steps necessary or helpful to assign to CELGENE all Orphan Drug Status and Investigational New Drug applications filed by ENTREMED as of the EFFECTIVE DATE, as set forth in Appendix C. If the FDA declines to allow the assignment of any of ENTREMED's Investigational New Drug and/or Orphan Drug Status application(s) to CELGENE, for whatever reason, then ENTREMED's rights under such application(s) will be included in this Agreement as ENTREMED EXISTING TECHNOLOGY RIGHTS and will be licensed to CELGENE in accordance with Section 2 of this Agreement. 2.5 Assignment Of Agreements. Within ten (10) days of the EFFECTIVE DATE, ENTREMED shall notify CMCC and NCI of the sublicense and transfer, respectively, of its rights in PRODUCTS to CELGENE, and shall take all steps necessary or helpful to assign to CELGENE the NCI AGREEMENT, including without limitation requesting consent to assign ENTREMED's obligations and entire right, title, and interest, under such agreement to CELGENE, and upon receipt of the consent of NCI to assign the NCI AGREEMENT, CELGENE will expressly assume all of -10- 15 ENTREMED's duties and obligations thereunder. In the event that ENTREMED is not permitted to assign its rights under the NCI AGREEMENT to CELGENE, ENTREMED's rights in any PATENT RIGHTS or TECHNOLOGY RIGHTS resulting from the NCI AGREEMENT will be included in this Agreement as ENTREMED DEVELOPED PATENT RIGHTS and ENTREMED DEVELOPED TECHNOLOGY RIGHTS, respectively, and will be licensed to CELGENE in accordance with Section 2.2 of this Agreement. 2.6 Technology Transfer. As soon as reasonably possible following the EFFECTIVE DATE, but in no event later than one (1) month after such date, ENTREMED shall transfer to CELGENE all ENTREMED EXISTING TECHNOLOGY RIGHTS and ENTREMED DEVELOPED TECHNOLOGY RIGHTS not already in CELGENE's possession. ENTREMED agrees to disclose and transfer all ENTREMED DEVELOPED TECHNOLOGY RIGHTS to CELGENE promptly, as they are obtained or developed. ENTREMED also agrees to provide, upon reasonable notice from CELGENE, any technical, scientific, statistical, and/or regulatory support necessary or useful to CELGENE's understanding and/or use of ENTREMED EXISTING TECHNOLOGY RIGHTS and ENTREMED DEVELOPED TECHNOLOGY RIGHTS. 2.7 Understanding Regarding CMCC AGREEMENT. To the extent TECHNOLOGY RIGHTS and/or PATENT RIGHTS licensed to CELGENE under this Agreement are rights which ENTREMED has licensed from CMCC under the CMCC AGREEMENT, CELGENE and ENTREMED understand and agree as follows: (a) The rights licensed to CELGENE by ENTREMED are subject to the terms, limitations, restrictions and obligations of the CMCC AGREEMENT. -11- 16 (b) CELGENE will comply with the terms, obligations, limitations and restrictions of sublicensees under Articles II, V, VII, VIII, IX, X, XII, XIII, and XV of the CMCC AGREEMENT. (c) ENTREMED will, at its own expense, timely pay the milestone payment of "..." due to CMCC upon completion of a Phase II clinical trial for any indication, pursuant to Section 4.1.3 of the CMCC AGREEMENT. ENTREMED shall promptly provide written notice to CELGENE of such payment. (d) CELGENE will, at its own expense, timely pay the milestone payment of "..." due to CMCC upon completion of a Product License Application for any indication, pursuant to Section 4.1.4 of the CMCC AGREEMENT, which payment shall be made to ENTREMED and timely forwarded by ENTREMED to CMCC; provided, however, that if (i) such payment becomes due prior to January 1, 2000, and (ii) CELGENE's annual sales in the year such payment becomes due are less than "...", CELGENE may notify ENTREMED, in writing, that it wishes ENTREMED to pay such amount to CMCC directly, which ENTREMED hereby agrees to do, and, by June 30, 2000 CELGENE shall reimburse ENTREMED the amount paid to CMCC, plus interest calculated at the annual rate of the sum of one percent (1%) plus the prime interest rate quoted by Citibank, N.A. on the date said payment is due. ENTREMED shall promptly provide written notice to CELGENE of all payments under this Section 2.7(d). (e) ENTREMED will comply with the terms, obligations, limitations and restrictions of the CMCC AGREEMENT, including, without limitation, any provisions relating to due diligence, notification with respect to sublicenses, and milestone payments, subject to Sections 2.7(c) and (d) of this Agreement. -12- 17 (f) The CMCC AGREEMENT and ENTREMED's rights thereunder shall remain in full force and effect for the life of the last to expire patent issued under the Patent Rights, as defined therein, unless earlier terminated pursuant to Article XIII of the CMCC AGREEMENT. SECTION 3 - DUE DILIGENCE 3.1 In the United States. (a) CELGENE shall initiate and diligently use reasonable efforts to develop, or to file for regulatory approval of or register, and to market and sell PRODUCTS in the United States. Reasonable efforts with respect to the development and/or pursuit of regulatory approval or registration for PRODUCTS in the United States shall be demonstrated by CELGENE (i) developing and pursuing regulatory approval for PRODUCTS for those uses CELGENE, in good faith, determines to be commercially and scientifically reasonable, including but not limited to (a) one (1) "...", (b) one (1) "...", and (c) one (1) "..."; and (ii) funding and conducting clinical trials for PRODUCTS for other uses in order to enhance scientific knowledge with regard to such PRODUCTS, including for the publication of data and results in scientific journals, whether or not such clinical trials result in or facilitate the pursuit of regulatory approval. (b) ENTREMED agrees that, subject to Section 3.6 of this Agreement, (i) the decision regarding which uses to pursue regulatory approval of PRODUCTS for, and/or to fund and conduct clinical trials of PRODUCTS for, pursuant to Section 3.1(a) of this Agreement, shall be made by and in the sole discretion of CELGENE; and (ii) with respect to the manner in which regulatory approval is sought and/or clinical trials are funded and conducted, CELGENE shall -13- 18 have sole discretion, including, without limitation, complete control over all regulatory submissions of PRODUCTS to the appropriate regulatory agencies worldwide, including whether, when, and how to file, maintain, withdraw, or abandon an application for regulatory approval of PRODUCTS. (c) Within 90 days after the EFFECTIVE DATE, CELGENE shall draft a Development Plan outlining CELGENE'S development objectives for PRODUCTS, in accordance with Sections 3.1(a)(i) and (b) of this Agreement. CELGENE shall consult with ENTREMED concerning the Development Plan. The Development Plan shall include suitable clinical milestones which are reasonably intended to lead to regulatory approval of PRODUCTS, in accordance with Sections 3.1(a)(i) and (b) of this Agreement. (d) CELGENE shall provide a written summary report to ENTREMED within thirty (30) days after June 30th and December 31st of each calendar year concerning the efforts being made in accordance with this Section 3.1 with respect to PRODUCTS. CELGENE shall provide ENTREMED with any additional information reasonably requested by ENTREMED in this respect. (e) At ENTREMED'S reasonable request, CELGENE shall provide ENTREMED access to all clinical trial data for PRODUCTS conducted by CELGENE in accordance with the Development Plan set forth in this Section 3.1. In the event that rights are returned to ENTREMED under Section 3.1(f) of this Agreement, ENTREMED shall have the right to review and use the clinical trial data in its own clinical program. (f) In the event that CELGENE fails to meet any of its obligations under this Section 3.1 with respect to PRODUCTS in the United -14- 19 States, and such failure is not cured within sixty (60) days after written notice thereof is received by CELGENE from ENTREMED, then ENTREMED shall have the right and option to terminate the license granted in this Agreement and this Agreement by giving CELGENE sixty (60) days prior written notice thereof. 3.2 Outside the United States. (a) Diligence. CELGENE shall initiate and diligently use reasonable efforts to develop, or to file for regulatory approval of or register, and to market and sell PRODUCTS in Europe, in Canada, and in the Pacific Rim, Japan, and Australia (collectively, the "PACIFIC RIM"). Reasonable efforts with respect to the development and/or pursuit of regulatory approval or registration for PRODUCTS in Europe, Canada, and the PACIFIC RIM shall be demonstrated by CELGENE, or a sublicensee thereof, pursuing regulatory approval for PRODUCTS (i) in Italy, France, the United Kingdom, and Germany (in the case of Europe), and in Japan and one other country of the PACIFIC RIM (in the case of the PACIFIC RIM), within "..." from the date of the first FDA approval of a PRODUCT for an oncology indication or Crohn's disease, whichever occurs earlier; and (ii) in Canada, within "..." from the date of the first FDA approval of a PRODUCT for an oncology indication or Crohn's disease, whichever occurs earlier. (b) CELGENE's Discretion. ENTREMED agrees that, subject to Section 3.6 of this Agreement, (i) the decision regarding which uses to pursue regulatory approval of PRODUCTS for, and/or to fund and conduct clinical trials of PRODUCTS for, pursuant to Section 3.2(a) of this Agreement, shall be made by and in the sole discretion of CELGENE; and (ii) with respect to the manner in -15- 20 which regulatory approval is sought and/or clinical trials are funded and conducted, CELGENE shall have sole discretion, including, without limitation, complete control over all regulatory submissions of PRODUCTS to the appropriate regulatory agencies worldwide, including whether, when, and how to file, maintain, withdraw, or abandon an application for regulatory approval of PRODUCTS. (c) Cooperation. If CELGENE fails to use reasonable efforts in Europe, Canada, or the PACIFIC RIM, as set forth in Section 3.2(a) of this Agreement, or to sublicense its rights to a THIRD PARTY, then ENTREMED shall have the right and option to either (i) terminate the licenses granted in the region where such failure has occurred, i.e., Europe, Canada, or the PACIFIC RIM, respectively, by giving CELGENE sixty (60) days prior written notice thereof, or (ii) cooperate with CELGENE to find an appropriate SUBLICENSEE for such rights. 3.3 For PRODUCTS For Use In Animals. (a) Diligence. CELGENE shall initiate and diligently use reasonable efforts to develop, or to file for regulatory approval of or register, and to market and sell PRODUCTS for use in animals. Such reasonable efforts shall be demonstrated by CELGENE obtaining regulatory approval for the sale of a PRODUCT for use in animals within four (4) years of the EFFECTIVE DATE in the United States and, outside the United States, in one of the following countries: Italy, France, the United Kingdom, or Germany. (b) Cooperation. If CELGENE fails to use reasonable efforts either in the United States or outside the United States, as set forth in Section 3.3(a) of this Agreement, or to sublicense its rights in such regions to a THIRD PARTY, then ENTREMED shall have the -16- 21 right and option to either (i) terminate CELGENE's rights in the region where such failure has occurred, i.e., in the United States or outside the United States, respectively, in and to such PRODUCTS for use in animals by giving CELGENE sixty (60) days prior written notice thereof, or (ii) cooperate with CELGENE to find an appropriate SUBLICENSEE for such rights. 3.4 No Other ENTREMED Rights. Except as otherwise expressly provided in this Agreement, ENTREMED agrees that it has not retained any rights under ENTREMED INTELLECTUAL PROPERTY to PRODUCTS, and that is shall not (i) make, use, offer to sell, sell, or import PRODUCTS in the TERRITORY, or (ii) collaborate, negotiate, or deal with THIRD PARTIES with respect to PRODUCTS. 3.5 Co-Promotion By CELGENE And ENTREMED. (a) With Regard To PRODUCTS. If CELGENE, in its sole discretion, decides to co-promote any PRODUCT or to seek sales assistance in promoting any PRODUCT, including, but not limited to, sales assistance for indications not then promoted by CELGENE sales personnel, CELGENE shall, in good faith, consider ENTREMED for the opportunity to co-promote such PRODUCT(S) for such indications in the United States. (i) CELGENE will give ENTREMED due consideration for the opportunity to co-promote such PRODUCT(S) as set forth herein, provided that ENTREMED has a sales force capable of providing the required details to the targeted physician audience, or is capable of assembling such a sales force within six (6) months, and agrees to do so. If and only if ENTREMED either has a sales force capable of providing the required details to the targeted physician audience, or commits to assembling such a sales force -17- 22 within six (6) months, the decision to offer ENTREMED the opportunity to co-promote such PRODUCT(s) for such indications in the United States shall be made, in good faith, by CELGENE, and CELGENE shall notify ENTREMED of its decision in writing. (ii) If CELGENE offers ENTREMED the opportunity to co-promote, pursuant to Section 3.5(a)(i) of this Agreement, ENTREMED shall have thirty (30) days to accept such offer by written notice to CELGENE. If ENTREMED accepts such offer to co-promote PRODUCTS, then the parties will negotiate, in good faith, a co-promotion agreement setting forth the substance of this Section 3.5 and other normal and customary conditions within six (6) months of CELGENE's receipt of ENTREMED's acceptance pursuant to this Section 3.5(a)(ii). (iii) ENTREMED's co-promotion efforts will focus on detailing (product presentations) the PRODUCT to the targeted physician audience. In such case, ENTREMED's sales representatives will also have the opportunity, from time to time, to participate in seminars, in-service training, group presentations, and other educational and promotional activities initiated by CELGENE in consultations with ENTREMED. In addition, ENTREMED will assign a product manager to participate with the CELGENE marketing team to provide input as appropriate and to be the operational liaison between CELGENE and ENTREMED's sales force. (b) With Regard To Anti-angiogenic Compounds. If ENTREMED, in its sole discretion, decides to co-promote an anti-angiogenic compound or a composition containing, as an active ingredient, such a compound, or to seek sales assistance in promoting any -18- 23 such anti-angiogenic compound or composition, including, but not limited to, sales assistance for indications not then promoted by ENTREMED sales personnel, ENTREMED shall, in good faith, consider CELGENE for the opportunity to co-promote such anti-angiogenic compounds and/or compositions. The decision to offer CELGENE the opportunity to co-promote such anti-angiogenic compounds and/or compositions shall be made in the sole discretion of ENTREMED, and be subject, mutatis mutandis, to the terms and conditions set forth in Sections 3.5(a)(ii) and (iii) of this Agreement. 3.6 Establishment Of A Scientific Committee. CELGENE agrees to conduct and fund a development program designed to obtain approval to market PRODUCTS, in accordance with its obligations under Section 3.1(a)(i) and 3.1(b) of this Agreement (the "PROGRAM"). To ensure the continued participation of ENTREMED in these development activities, the PROGRAM will be monitored by a Scientific Committee as described herein (the "COMMITTEE"). (a) Members. Within ten (10) days of the date hereof, ENTREMED and CELGENE shall each appoint two (2) persons to serve on the COMMITTEE. Each party will have the right to change its representation on the COMMITTEE upon written notice to the other. (b) Chairperson. The COMMITTEE will be chaired by one representative of CELGENE, who shall be chosen in the sole discretion of CELGENE. (c) Responsibilities. The COMMITTEE will have authority to: (i) act in an advisory role and provide information, including without limitation technical and regulatory information and -19- 24 marketing and sales information, helpful in connection with the PROGRAM; (ii) make recommendations regarding the performance of the PROGRAM and the conduct of the work pursuant thereto, and monitor performance thereunder; (iii) propose modifications to the PROGRAM; (iv) review any and all proposed publication(s) relating to the PROGRAM and the results therefrom; and (v) review all information and data resulting from the PROGRAM. (d) Meetings. The COMMITTEE will meet not less than four (4) times a year during the term of the PROGRAM, at such dates and times as agreed to by the parties. The COMMITTEE will prepare written minutes of each meeting and a written record of all decisions whether made at a formal meeting or not. All decisions made and actions taken by the COMMITTEE will be made or taken in the sole discretion of CELGENE after good faith consideration of the position or opinion of the ENTREMED members. (e) Term and Termination. The PROGRAM will continue until there are no longer any ongoing activities in pursuit of regulatory approval, or any pending applications for regulatory approval, for PRODUCTS, pursuant to Sections 3.1(a)(i) and (b) of this Agreement. Once all such activities have been completed and all such regulatory approvals have been obtained, CELGENE may, in its sole discretion, extend the term of the PROGRAM to include PRODUCTS in clinical trials for other uses, as set forth in Sections 3.1(a)(ii) and (b) of this Agreement, in which case the PROGRAM will continue until such clinical trials have been completed or otherwise terminated or, if applicable, until regulatory approval has -20- 25 been obtained, unless the PROGRAM is sooner terminated by CELGENE. SECTION 4 - ROYALTIES 4.1 Royalty Payments. (a) First Twelve Years. CELGENE shall pay to ENTREMED the following royalties on the NET SALES of PRODUCTS sold by CELGENE or its AFFILIATES in each country of the TERRITORY (i) for the first consecutive twelve (12) years from the date of the FIRST COMMERCIAL SALE of a PRODUCT in each country of the TERRITORY, and, separately and independently, (ii) for the first consecutive twelve (12) years from the date of the FIRST COMMERCIAL SALE of each PRODUCT that contains, as a second active ingredient, a compound other than THALIDOMIDE, in each country of the TERRITORY: (i) "..." of NET SALES up to "..." dollars of such sales; (ii) "..." of NET SALES between "..." dollars and "..." dollars of such sales; (iii) "..." of NET SALES between "..." and "..." dollars of such sales; and (iv) "..." of NET SALES over "..." dollars of such sales. (b) After Twelve Years. For each PRODUCT in each country in the TERRITORY in which the twelve (12) year period provided for in Section 4.1(a) of this Agreement shall have terminated, CELGENE shall pay to ENTREMED the following royalties on the NET SALES of such PRODUCT covered by an ISSUED VALID CLAIM of the PATENT RIGHTS that are sold by CELGENE or its AFFILIATES in such country: (i) "..." of NET SALES up to "..." dollars of such sales; -21- 26 (ii) "..." of NET SALES between "..." dollars and "..." dollars of such sales; (iii) "..." of NET SALES between "..." and "..." dollars of such sales; and (iv) "..." of NET SALES over "..." dollars of such sales; and such royalties under this Section 4.1(b) shall be payable until the last to expire PATENT RIGHT containing an ISSUED VALID CLAIM covering such PRODUCT sold by CELGENE or its AFFILIATES in such country. 4.2 Sublicensing Payments and Royalties. (a) Under CELGENE's Rights. If CELGENE grants a sublicense of its exclusive rights under this Agreement, pursuant to Section 2.3 of this Agreement, in any country(ies) of the TERRITORY, CELGENE shall pay to ENTREMED (i) "..." of any non-royalty consideration, including but not limited to any sublicensing and/or milestone payments received by CELGENE pursuant to such sublicense and (ii) "..." of the royalty income paid by SUBLICENSEES to CELGENE on NET SALES of PRODUCTS. (b) CELGENE-ENTREMED Cooperation. If CELGENE grants a sublicense of any of its rights under this Agreement in any area of the FIELD or any country of the TERRITORY with respect to which ENTREMED and CELGENE are cooperating pursuant to Sections 3.2 or 3.3 of this Agreement, CELGENE shall pay to ENTREMED "..." of any non-royalty consideration, including but not limited to any sublicensing and/or milestone payments received by CELGENE pursuant to such sublicense. CELGENE shall also pay to ENTREMED, as applicable, the following: (i) if CELGENE and ENTREMED are cooperating in any country(ies) pursuant to Section 3.2 of this Agreement, "..." of the royalty income paid by SUBLICENSEES to CELGENE on NET SALES, in such country(ies), of PRODUCTS; and (ii) if CELGENE and -22- 27 ENTREMED are cooperating in any country(ies) with regard to PRODUCTS for use in animals pursuant to Section 3.3 of this Agreement, "..." of the royalty income paid by SUBLICENSEES to CELGENE on NET SALES in such country(ies) of such PRODUCTS. 4.3 Later-Issued VALID CLAIM. In the event that there is no ISSUED VALID CLAIM of a PATENT RIGHT in a country within the TERRITORY on the date the twelve (12) year period provided for in Section 4.1(a) of this Agreement expires, no royalties shall be owed by CELGENE to ENTREMED under Sections 4.1(b) and 4.2 of this Agreement on PRODUCTS sold by CELGENE or its AFFILIATES in such country, provided, however, that if a VALID CLAIM of a PATENT RIGHT thereafter issues in such country, CELGENE shall pay ENTREMED royalties on the NET SALES in such country of PRODUCTS covered by an ISSUED VALID CLAIM of the PATENT RIGHTS that are sold by CELGENE or its AFFILIATES, according to the royalty rates set forth in Sections 4.1(b) and 4.2 of this Agreement, and such royalties under this Section 4.3 shall be payable until the last to expire PATENT RIGHT containing an ISSUED VALID CLAIM covering the PRODUCTS sold by CELGENE, its AFFILIATES or SUBLICENSEE in such country. 4.4 "..." 4.5 THIRD PARTY Sales. In any country where sales by a THIRD PARTY of a PRODUCT(s) for a similar dosage form and/or route of administration: (a) are equal to or greater than "..." of the dollar market share for such PRODUCT in such country ("MARKET SHARE"), but less than "..." of the MARKET SHARE, then the royalty payable to -23- 28 ENTREMED pursuant to Sections 4.1 and 4.3 of this Agreement shall be reduced by "..."; (b) are equal to or greater than "..." of the MARKET SHARE, but less than "..." of the MARKET SHARE, then the royalty payable to ENTREMED pursuant to Sections 4.1 and 4.3 of this Agreement shall be reduced by "..."; (c) are equal to or greater than "..." of the MARKET SHARE, but less than "..." of the MARKET SHARE, then the royalty payable to ENTREMED pursuant to set Sections 4.1 and 4.3 of this Agreement shall be reduced by "..."; and (d) are equal to or greater than "..." of the MARKET SHARE, then the royalty payable to ENTREMED pursuant to Sections 4.1 and 4.3 of this Agreement shall be reduced by "..."; provided that royalties payable to ENTREMED shall never be reduced below "..." of NET SALES in each royalty bracket. For purposes of this Section 4.5, oral dosage forms shall include, without limitation, all capsule, caplet, tablet, and liquid formulations for oral administration. 4.6 Recordkeeping. CELGENE shall keep, and shall cause each of its AFFILIATES and SUBLICENSEES to keep, full and accurate books of account containing all particulars relevant to its sales of PRODUCTS that may be necessary for the purpose of calculating all royalties payable to ENTREMED. Such books of account shall be kept at their principal place of business and, with all necessary supporting data shall, for the three (3) years next following the end of the calendar year to which each shall pertain, be open for inspection by an independent certified public accountant reasonably acceptable to CELGENE, upon reasonable notice during normal business hours at ENTREMED'S expense for the sole purpose of verifying royalty statements or compliance with this Agreement. In the event the inspection determines that royalties due -24- 29 ENTREMED for any period have been underpaid by five percent (5%) or more, then CELGENE shall pay for all costs of the inspection. In all cases, CELGENE shall pay to ENTREMED any underpaid royalties promptly and with interest at the prime rate available to ENTREMED from its bank plus two percent (2%). All information and data reviewed in the inspection shall be used only for the purpose of verifying royalties and shall be treated as CELGENE CONFIDENTIAL INFORMATION subject to the obligations of this Agreement. No audit by an agent of ENTREMED shall occur more frequently than once during any twelve (12) month period. 4.7 Quarterly Payments and Reports. In each year the amount of royalty due shall be calculated quarterly as of the end of each CALENDAR QUARTER and shall be paid quarterly within the forty-five (45) days next following such date. Every such payment shall be supported by the accounting described in Section 4.8 of this Agreement. All royalties due ENTREMED are payable in United States dollars. When PRODUCTS are sold for currency other than United States dollars, the earned royalties will first be determined in the foreign currency of the country in which such PRODUCTS were sold and then converted into equivalent United States funds. The exchange rate will be that rate quoted in the Wall Street Journal on the last business day of the CALENDAR QUARTER in which such sales were made. 4.8 Accounting Reports. With each quarterly payment, CELGENE shall deliver to ENTREMED a full and accurate accounting to include at least the following information: (a) Quantity of PRODUCT subject to royalty sold, by country, by CELGENE, its AFFILIATES or SUBLICENSEES; (b) Total receipts for each PRODUCT subject to royalty, by country and, to the extent used in any royalty calculations during such -25- 30 quarter, the exchange rate set forth in Section 4.7 of this Agreement; (c) Compensation on PRODUCTS received from SUBLICENSEES pursuant to a sublicense of CELGENE's rights under this Agreement; and (c) Total royalties and/or compensation payable to ENTREMED. SECTION 5 - CONFIDENTIALITY 5.1 Confidential Information. During the term of this Agreement, it is contemplated that each party may disclose to the other, proprietary and confidential technology, inventions, technical information, material, reagents, biological materials and the like which are owned or controlled by the party providing such information or which that party is obligated to maintain in confidence and which is designated by the party providing such information as confidential ("CONFIDENTIAL INFORMATION"). Each party agrees not to disclose the CONFIDENTIAL INFORMATION and to maintain the CONFIDENTIAL INFORMATION in strict confidence, to cause all of its agents, representatives and employees to maintain the disclosing party's CONFIDENTIAL INFORMATION in confidence and not to disclose any such CONFIDENTIAL INFORMATION to a THIRD PARTY without the prior written consent of the disclosing party, and not to use such CONFIDENTIAL INFORMATION for any purpose other than as provided under this Agreement. The secrecy obligations of the parties with respect to CONFIDENTIAL INFORMATION shall continue for a period ending ten (10) years from the termination of this Agreement. 5.2 Non-Confidential Information. The obligations of confidentiality will not apply to information that: -26- 31 (a) was known to the receiving party or generally known to the public prior to its disclosure hereunder through no fault of the disclosing party or any agent, representative or employee thereof; or (b) subsequently becomes known to the public by some means other than a breach of this Agreement, including publication and/or laying open to inspection of any patent applications or patents; (c) is subsequently disclosed to the receiving party by a THIRD PARTY having a lawful right to make such disclosure and who is not under an obligation of confidentiality to the disclosing party; (d) is required by law, rule, regulation or bona fide legal process to be disclosed, provided that the disclosing party takes all reasonable stem to restrict and maintain confidentiality of such disclosure and provides reasonable notice to the non-disclosing party; or (e) is approved for release by the parties. 5.3 Disclosure To THIRD PARTIES. The obligations of Section 5.1 notwithstanding, CELGENE or ENTREMED, as the case may be, may disclose the CONFIDENTIAL INFORMATION licensed hereunder to THIRD PARTIES (a) who need to know the same in order to obtain regulatory approval for a PRODUCT under this Agreement, provided that the actions of such THIRD PARTY are not in conflict with CELGENE's rights under this Agreement, (b) who need to know the same in order to work towards the commercial development of PRODUCT on behalf of CELGENE, or (c) for whom the non-disclosing party, ENTREMED or CELGENE, as the case may be, has given prior written approval -27- 32 provided that such THIRD PARTIES are bound by obligations of confidentiality and non-use at least as stringent as those set forth herein. 5.4 Disclosure To Sublicensees. CELGENE may disclose ENTREMED's CONFIDENTIAL INFORMATION to a SUBLICENSEE without ENTREMED's approval, provided that such SUBLICENSEES are bound by obligations of confidentiality and non-use at least as stringent as those set forth herein. 5.5 Public Statements. Neither CELGENE nor ENTREMED may issue a public statement, including without limitation a press release, with regard to this Agreement without the prior written consent of the other party, which consent shall not be unreasonably withheld. In accordance with the rules and regulations promulgated by the Securities and Exchange Commission, the parties will request that this Agreement be treated as confidential. SECTION 6 - ADVERSE MEDICAL EXPERIENCES 6.1 Adverse Medical Experience Reporting. CELGENE shall comply fully with all applicable medical/adverse experience reporting requirements in all countries where CELGENE intends to carry out clinical trials and/or market PRODUCT. SECTION 7 - PATENTS 7.1 Patent Prosecution. (a) ENTREMED shall use reasonable efforts to prepare, file, prosecute and maintain patent applications and patents directed to PATENT RIGHTS and PRODUCTS through patent counsel selected by ENTREMED and reasonably acceptable to CELGENE, who shall consult with and keep CELGENE advised with respect thereto. -28- 33 (b) CELGENE shall reimburse ENTREMED for all reasonable costs and expenses incurred after the EFFECTIVE DATE for the filing, prosecution and maintenance of PATENT RIGHTS. 7.2 Cooperation In Prosecution. (a) With respect to any PATENT RIGHTS, each patent application, office action, response to office action, request for terminal disclaimer, petition, and request for reissue or reexamination of any patent issuing from such application shall be provided to CELGENE sufficiently prior to the filing of such application, response, petition, or request to allow for review and comment by CELGENE. ENTREMED shall have the right to take any action that, in its judgement, is necessary to preserve such PATENT RIGHTS. (b) Within a reasonable time from the EFFECTIVE DATE, CELGENE and ENTREMED will discuss each party's patent portfolio with regard to PRODUCTS, in accordance with prior obligations of confidentiality owed by each party to any THIRD PARTY, and will use reasonable efforts to coordinate their respective patent portfolio, to the extent possible, so as to maximize the patent protection for PRODUCTS. 7.3 Infringement and Declaratory Judgment Actions. (a) Notification. In the event that either party learns of the infringement of any PATENT RIGHT, or the filing of a Declaratory Judgement action alleging the invalidity, unenforceability, or noninfringement of any PATENT RIGHT ("DJ ACTION"), that party must promptly notify the other party of the infringement or DJ ACTION, as the case may be, in writing, and must provide reasonable evidence of the infringement. Neither -29- 34 party will notify a THIRD PARTY of the infringement of any PATENT RIGHT or of the filing of a DJ ACTION directed to any PATENT RIGHT without first obtaining consent of the other party, which consent shall not be unreasonably withheld. (b) CELGENE's Right To File Infringement Actions. To the extent ENTREMED has the right to bring a suit or action to compel the termination of infringement of the PATENT RIGHTS, including to the extent provided in Article 7 of the CMCC AGREEMENT, ENTREMED hereby grants CELGENE the right and option, but not the obligation, to bring an action for infringement or to defend against a DJ action, at its sole expense, in the name of ENTREMED and/or in the name of CELGENE, and to join ENTREMED as a party plaintiff if required. No settlement, consent judgment or other voluntary final disposition of a suit that adversely affects PATENT RIGHTS may be entered into without the consent of ENTREMED, which consent shall not be unreasonably withheld. (c) CELGENE's Right To Defend DJ ACTIONS. In the event that a DJ ACTION is brought naming CELGENE as a defendant, CELGENE shall have the right to proceed with the litigation or settle such action provided, however, that no settlement, consent judgment or other voluntary final disposition of a suit that adversely affects PATENT RIGHTS may be entered into without the consent of ENTREMED, which consent shall not be unreasonably withheld. (d) CELGENE's Recovery. In the event that CELGENE shall undertake the enforcement and/or defense of the PATENT RIGHTS by litigation, any recovery of damages by CELGENE for any such litigation shall be applied first in satisfaction of any -30- 35 unreimbursed expenses and legal fees of CELGENE relating to the suit. The balance remaining from any such recovery shall, after ENTREMED receives its royalties from lost sales, belong to CELGENE. (e) ENTREMED's Right To Litigate. In the event that CELGENE elects not to pursue an action for infringement or to defend against a DJ action, as the case may be, CELGENE shall notify ENTREMED in writing of such election and ENTREMED shall have the right and option, but not the obligation, at its cost and expense, to initiate infringement litigation and to retain any recovered damages. (f) Cooperation. In any infringement suit either party may institute to enforce or defend the PATENT RIGHTS pursuant to this Agreement, the other party hereto shall, at the request of the party initiating such suit, cooperate in all respects and, to the extent possible, have its employees testify when requested and make available relevant records, papers, information, samples, specimens, and the like. All reasonable out-of-pocket costs incurred in connection with rendering cooperation requested hereunder shall be paid by the party requesting cooperation. (g) THIRD PARTY Royalty Reduction. In the event that an infringement action is brought by a THIRD PARTY against CELGENE alleging that CELGENE's making, using, offering to sell, selling, or importing of PRODUCTS under the PATENT RIGHTS infringes a THIRD PARTY patent, and results in a judgment or settlement requiring royalties to be paid by CELGENE to such THIRD PARTY, the royalties owed by CELGENE to ENTREMED under Section 4 of this Agreement shall be reduced by an amount equal to "..." of the royalties owed -31- 36 to such THIRD PARTY, provided that the royalties owed to ENTREMED shall not be reduced under this Section 7.3(f) to less than "..." of NET SALES, nor shall any specific royalty payment be reduced under this Section 7.3(g) by more than "...". SECTION 8 - REPRESENTATIONS AND WARRANTIES. 8.1 By Both Parties. Each party hereby represents and warrants that each has the full right and authority to enter into this Agreement and that the entry into this Agreement does not require the consent of a THIRD PARTY whose consent has not been obtained. 8.2 By ENTREMED. ENTREMED represents and warrants as follows: (a) that ENTREMED has not received any notice of infringement of THIRD PARTY patents or notice of interfering subject matter; that, without having made any special investigation, ENTREMED is not aware of any THIRD PARTY patents or patent applications that contain any interfering subject matter, or any issued THIRD PARTY patents that would be infringed by the making, using, selling, offering for sale, or importing by CELGENE of PRODUCTS covered by the ENTREMED EXISTING PATENT RIGHTS or the ENTREMED EXISTING TECHNOLOGY RIGHTS in any country in the TERRITORY, or by the exercise by CELGENE of any right granted to it under this Agreement, aside from those set forth in Appendix D; (b) that the PATENT RIGHTS set forth in Appendix A and the TECHNOLOGY RIGHTS transferred to CELGENE under this Agreement, constitute the entirety of ENTREMED EXISTING PATENT RIGHTS and ENTREMED EXISTING TECHNOLOGY RIGHTS; -32- 37 (c) that ENTREMED presently has no rights in PRODUCTS, nor any option in or expectation of any rights in PRODUCTS, apart from those identified in this Agreement and set forth in the agreements listed in Appendix B, and that ENTREMED is not in material breach or default of any of the agreements set forth in Appendix B, and that if ENTREMED acquires any such rights after the EFFECTIVE DATE, the agreements setting forth those rights, including all licenses and assignments for ENTREMED DEVELOPED PATENT RIGHTS and ENTREMED DEVELOPED TECHNOLOGY RIGHTS, shall be redacted to the extent they do not relate to CELGENE's rights under this Agreement, and attached hereto as independent Exhibits and incorporated herein; (d) that, with regard to PRODUCTS, ENTREMED has no applications filed or pending with the FDA as of the EFFECTIVE DATE, including without limitation any Investigational New Drug or Orphan Drug Status applications, apart from those set forth in Appendix C; (e) that ENTREMED will comply with all obligations and duties with regard to PRODUCTS under the CMCC AGREEMENT and, unless and until it is assigned to CELGENE pursuant to Section 2.5 of this Agreement, the NCI AGREEMENT, including, without limitation, any notification provisions necessary to maintain in effect this Agreement or preserve CELGENE's exclusive or non-exclusive rights under this Agreement, including without limitation the preservation of CELGENE's rights hereunder in the event that ENTREMED shall breach or default on its obligations under the CMCC AGREEMENT or the NCI AGREEMENT; -33- 38 (f) that ENTREMED understands and agrees that it has not retained any rights under the ENTREMED INTELLECTUAL PROPERTY to PRODUCTS in the TERRITORY, and that the licenses and assignments granted in Sections 2.1, 2.2, 2.4, and 2.5 of this Agreement are exclusive of any continuing right of ENTREMED, except as otherwise provided herein; and (g) that ENTREMED will not collaborate, negotiate, or deal with THIRD PARTIES with respect to PRODUCTS, except as expressly provided herein. 8.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, ENTREMED MAKES NO REPRESENTATIONS OR EXTENDS ANY WARRANTIES OF ANY KIND EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OR VALIDITY OF ANY ENTREMED PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS. SECTION 9 - INDEMNIFICATION AND INSURANCE 9.1 By CELGENE. CELGENE will defend, indemnify and hold harmless ENTREMED, its successors, AFFILIATES and licensors and their employees, agents, officers, trustees, shareholders and directors and each of them (the "ENTREMED Indemnified Parties") from and against any and all THIRD PARTY claims, causes of action and costs (including reasonable attorney's fees) of any nature made or lawsuits or other proceedings filed or otherwise instituted against the ENTREMED Indemnified Parties in connection with any claims, suits or judgments arising out of any theory of product liability concerning the development, testing, manufacture, sale or use of any PRODUCT by CELGENE, its AFFILIATES or its SUBLICENSEES. -34- 39 9.1.1 CELGENE's indemnification under this Section 9.1 shall not apply to any liability, damage, loss or expense to the extent that it is directly attributable to the negligent activity, reckless misconduct or intentional misconduct of ENTREMED. 9.1.2 Commencing not later than the date of FIRST COMMERCIAL SALE of a PRODUCT, CELGENE shall obtain and carry in full force and effect product liability insurance against any claims, judgments, liabilities and expenses for which it is obligated to indemnify ENTREMED and others under Section 9.1 of this Agreement, in such amounts and with such deductibles as are customary at the time for companies engaged in a similar business, and shall provide ENTREMED with written evidence of such insurance upon request. 9.2 By ENTREMED. ENTREMED will defend, indemnify and hold harmless CELGENE, its successors, AFFILIATES and licensors and their employees, agents, officers, trustees, shareholders and directors and each of them (the "CELGENE Indemnified Parties") from and against any and all THIRD PARTY claims, causes of action and costs (including reasonable attorney's fees) of any nature made or lawsuits or other proceedings filed or otherwise instituted against the CELGENE Indemnified Parties in connection with any claims, suits or judgments arising out of any theory of product liability concerning the development, testing, manufacture, sale or use of any PRODUCT by ENTREMED, its AFFILIATES or its SUBLICENSEES prior to the EFFECTIVE DATE. 9.2.1 ENTREMED's represents and warrants that it presently carries, in full force and effect, and will continue to carry, product liability insurance against any claims, judgments, liabilities and expenses incurred in connection with the use of THALIDOMIDE in clinical trials by or on behalf of -35- 40 ENTREMED, and shall provide CELGENE with written evidence of such insurance upon request. 9.3 Conditions to Indemnification. A person or entity that intends to claim indemnification under this Section 9 (the "Indemnitee") shall promptly notify the party from whom indemnification is sought (the "Indemnitor"), of any loss, claim, damage, liability or action in respect of which the Indemnitee intends to claim such indemnification, and the Indemnitor shall assume the defense thereof with counsel mutually satisfactory to the Indemnitee whether or not such claim is rightfully brought; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor if Indemnitor does not assume the defense, or if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other person represented by such counsel in such proceedings. The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, only if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Section 9, but the omission so to deliver notice to the Indemnitor will not relieve it of any liability that it may have to any Indemnitee otherwise than under this Section 9. The Indemnitee under this Section 9, its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigations of any action, claim or liability covered by this indemnification. SECTION 10 - ASSIGNMENT AND SUCCESSORS 10.1 By Either Party. This Agreement shall not be assignable by either party without the written consent of the other party, except that either party may assign this Agreement to an AFFILIATE, successor in interest or -36- 41 transferee of all or substantially all of the portion of the business to which this Agreement relates without the consent of the other party. 10.2 By CELGENE. If CELGENE assigns or licenses its rights under this Agreement to a SUBLICENSEE or an AFFILIATE, such SUBLICENSEE or AFFILIATE shall be bound by the terms and conditions of this Agreement. CELGENE shall advise ENTREMED of any such assignment or license and provide ENTREMED with a copy of any sublicense within thirty (30) days of execution of such sublicense. 10.3 CELGENE As Guarantor. CELGENE shall guarantee and be responsible for the payment of all royalties due and the making of reports under this Agreement by reason of the development and sales of any PRODUCTS by CELGENE, its AFFILIATES and SUBLICENSEES and their compliance with all applicable terms of this Agreement. Performance or satisfaction of any obligations of CELGENE under this Agreement by any of its AFFILIATES or SUBLICENSEES shall be deemed performance or satisfaction of such obligation by CELGENE. 10.4 Binding Effect. This agreement shall be binding upon and inure to the benefit of said successors in interest and assignees to the parties. Any such successor or assignee of a party's interest shall expressly assume in writing the performance of all the terms and conditions of this Agreement to be performed by said party and such Assignment shall not relieve the Assignor of any of its obligations under this Agreement. SECTION 11 - FORCE MAJEURE 11.1 Neither party shall be liable to the other party for damages or loss occasioned by failure of performance by the defaulting party if the failure is occasioned by war, fire, explosion, flood, strike or lockout, embargo, or any similar cause beyond the control of the defaulting party, provided that the party claiming this exception has exerted all reasonable efforts to -37- 42 avoid or remedy such event and provided such event does not extend for more than six (6) months. SECTION 12 - TERMINATION 12.1 Term. Unless earlier terminated as hereinafter provided, this Agreement shall remain in full force and effect until CELGENE's obligations to pay royalties or other compensation under Section 4 of this Agreement, either directly or pursuant to a sublicense, terminate. 12.2 By Reason Of FDA Action. If the FDA withdraws or recalls THALIDOMIDE from the market permanently, or in any other way revokes or terminates CELGENE's regulatory approval to market and sell THALIDOMIDE and/or PRODUCTS, CELGENE shall promptly notify ENTREMED in writing, and this Agreement and all of CELGENE's and ENTREMED's rights and obligations hereunder shall terminate upon receipt by ENTREMED of such notice. 12.3 Termination Of Royalty Obligations. Upon termination of CELGENE's obligation to pay royalties and other compensation hereunder with respect to a specific country and specific PRODUCT as to which CELGENE's license is then in effect, the license granted to CELGENE with respect to such country and such PRODUCT pursuant to Section 2 shall be deemed to be fully paid and CELGENE shall thereafter have a royalty free, exclusive right to use the PATENT RIGHTS to make, have made, use, offer to sell, sell and import such PRODUCT in such country. 12.4 Breach. (a) By Either Party. This Agreement shall be terminable upon the material breach or default of either party. In the event of a material breach or default by a party ("Defaulting Party"), the other party ("Non-Defaulting Party") shall give the Defaulting Party written -38- 43 notice of the default. The Defaulting Party will then have sixty (60) days to cure the breach. If cure has not been affected within said sixty (60) days, the Non-Defaulting Party shall have the right to terminate this Agreement. (b) By CELGENE. (i) Payments. If and only if CELGENE materially breaches this Agreement by failure to pay royalties and/or sublicensing or milestone payments due under Section 4 of this Agreement, and fails to cure such material breach within sixty (60) days of receiving written notice thereof pursuant to Section 12.4(a) of this Agreement then: a) CELGENE's rights under this Agreement to ENTREMED INTELLECTUAL PROPERTY shall terminate; and b) CELGENE shall grant to ENTREMED, to the extent not prohibited by the United States Government or by prior contractual obligations to any THIRD PARTY, an exclusive, worldwide, royalty-free license, with the right to sublicense, under CELGENE DEVELOPED INTELLECTUAL PROPERTY to make, use, offer to sell, sell, and import PRODUCTS in the TERRITORY. (ii) Diligence. If and only if ENTREMED exercises its right and option to terminate the license granted to CELGENE in the entire TERRITORY, pursuant to Section 3.1(f) of this Agreement, or ENTREMED exercises its right and option to terminate the license granted to CELGENE in Europe, Canada, or the PACIFIC RIM, pursuant to Section 3.2(c)(i) of this Agreement, then, either in the entire TERRITORY -39- 44 or in the region in which such termination has occurred, i.e., Europe, Canada, or the PACIFIC RIM, as applicable: a) CELGENE's rights under this Agreement to ENTREMED INTELLECTUAL PROPERTY shall terminate; and b) CELGENE shall grant to ENTREMED, to the extent not prohibited by the United States Government or by prior contractual obligations to any THIRD PARTY, an exclusive, worldwide, royalty-free license, with the right to sublicense, under CELGENE DEVELOPED INTELLECTUAL PROPERTY to make, use, offer to sell, sell, and import PRODUCTS. The grant of rights by CELGENE to ENTREMED under this Section 12.4 expressly excludes rights in any CELGENE EXISTING INTELLECTUAL PROPERTY. (c) Termination under this Section 12.4 will be effective upon the date specified in the written notice. All termination rights shall be in addition to and not in substitution for any other remedies that may be available to the Non-Defaulting Party. Termination pursuant to this Section 12.4 shall not relieve the Defaulting Party from liability and damages to the Non-Defaulting Party for default. Waiver by either party of a single default or a succession of defaults shall not deprive such party of any right to terminate or convert this Agreement arising by reason of any subsequent default. 12.5 Insolvency. Either party to this Agreement may terminate this Agreement upon receipt of notice that the other party has become insolvent or has suspended business in all material respects hereof, or has consented to an involuntary petition purporting to be pursuant to any reorganization or insolvency law of any jurisdiction, or has made an assignment for the benefit of creditors or has applied for or consented to the appointment of a -40- 45 receiver or trustee for a substantial part of its property, by giving written notice to the other party, and termination of this Agreement will be effective upon receipt of such notice. 12.6 Work-In-Progress. Upon termination of this Agreement, CELGENE shall be entitled to, but shall not be obligated to finish any work-in-progress at the time of termination and sell the same as well as all completed inventory of PRODUCTS which remains on hand as of the date of the termination, so long as CELGENE pays to ENTREMED the royalties applicable to said subsequent sales in accordance with the same terms and conditions as set forth in this Agreement. 12.7 Survival. The obligations of Sections 5 and 9, as well as Sections 12.6, 12.7, 12.8, and 13.3, shall survive any termination of this Agreement. 12.8 Reversion of Rights. Upon termination of this Agreement or of the rights and licenses granted to CELGENE in any country of the TERRITORY, CELGENE agrees not to use the TECHNOLOGY RIGHTS or PATENT RIGHTS or information or technology derived therefrom for the manufacture, use or sale of PRODUCTS in any country other than those countries in which CELGENE retains a license under this Agreement. In addition, all rights to the TECHNOLOGY RIGHTS and PATENT RIGHTS in such country shall revert to ENTREMED and may be used by ENTREMED without restriction in any country other than those countries in which CELGENE retains a license under this Agreement. SECTION 13 - GENERAL PROVISIONS 13.1 Relationship of Parties. The relationship between ENTREMED and CELGENE is that of independent contractors. ENTREMED and CELGENE are not joint venturers, partners, principal and agent, master and servant, employer or employee, and have no relationship other than as independent contracting parties. ENTREMED shall have no power to bind -41- 46 or obligate CELGENE in any manner. Likewise, CELGENE shall have no power to bind or obligate ENTREMED in any manner. 13.2 Entire Understanding. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter thereof and supersedes all prior agreements in this respect. There shall be no amendments or modifications to these Agreements, except by a written document which is signed by both parties. 13.3 Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, U.S.A. without reference to its choice of law principles. 13.4 Headings. The headings in this Agreement have been inserted for the convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular or section or paragraph. 13.5 No Waiver. Any delay in enforcing a party's rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of a party's right to the future enforcement of its rights under this Agreement, excepting only as to an expressed written and signed waiver as to a particular matter for a particular period of time. 13.6 Export Controls. In conducting any activities under this Agreement or in connection with the manufacture use or sale of PRODUCT, CELGENE shall comply with all applicable laws and regulations including, but not limited to, all Export Administration Regulations of the United States Department of Commerce. 13.7 Notices. Any notices given pursuant to this Agreement shall be in writing and shall be deemed delivered upon the earlier of (i) when received at the address set forth below, or (ii) three (3) business days after mailed by certified or registered mail postage prepaid and properly addressed, with -42- 47 return receipt requested, or (iii) when sent, if sent by facsimile, as confirmed by certified or registered mail. Notices shall be delivered to the respective parties as indicated below: If To ENTREMED EntreMed, Inc. 9610 Medical Center Drive Rockville, MD 20850 Attn: CEO Fax: (301) 217-9594 If To CELGENE: Celgene Corporation 6 Powder Horn Drive Warren, NJ 07059 Attn: President Fax: (732) 805-3931 13.8 Original Counterparts. This Agreement may be executed in any number of separate counterpart, each of which shall be deemed to be an original, but which together shall constitute one and the same instrument. -43- 48 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. ENTREMED, INC. CELGENE CORPORATION By: /s/ Edward R. Gubish By: /s/ John W. Jackson ------------------------------- -------------------------- Name: Edward R. Gubish Name: John W. Jackson -------------------------------- --------------------------- Title: Sr. V.P. R & D Title: Chairman & CEO ------------------------------- -------------------------- -44- 49 APPENDIX A United States Patent No. 5,629,327 United States Patent No. 5,593,990 United States Patent Application Serial No. 08/025,046 United States Patent Application Serial No. 08/168,817 United States Patent Application Serial No. 08/371,987 United States Patent Application Serial No. 08/468,792 United States Patent Application Serial No. 08/918,610 United States Patent Application Serial No. 08/955,638 United States Patent Provisional Application Serial No. 60/028,708 United States Patent Application Serial No. 08/963,058 United States Patent Application Serial No. 09/107,578 United States Patent Application Serial No. 09/126,542 -45- 50 APPENDIX B 1. That certain License Agreement entered into by and between ENTREMED and Children's Medical Center Corporation ("CMCC"), dated May 26, 1994, as amended to the date hereof, attached as Exhibit A to this Agreement. 2. That certain Agreement by and between the Division of Cancer Treatment at the National Cancer Institute ("NCI") and ENTREMED, dated November 16, 1994, and executed on behalf of ENTREMED on November 23, 1994, and on behalf of NCI on November 18, 1994, attached as Exhibit C to this Agreement. -46- 51 APPENDIX C Orphan Drug Designation Application (ODA) 97-1011 Primary Brain Malignancies Orphan Drug Designation Application (ODA) 98-1149 Kaposis Sarcoma Orphan Drug Designation Application (ODA) 98-1143 Prostate Cancer Investigational New Drug Application 46,591 Ophthalmology Investigational New Drug Application 55,966 Oncology -47- 52 APPENDIX D United States Patent No. 5,605,684 to Piacquadio United States Patent No. 5,443,824 to Piacquadio United States Patent No. 5,731,325 to Andrulis, Jr. et al. United States Patent No. 5,654,312 to Andrulis, Jr. et al. United States Patent No. 5,643,915 to Andrulis, Jr. et al. United States Patent No. 5,434,170 to Andrulis, Jr. -48- 53 EXHIBIT A CMCC AGREEMENT -49- 54 EXHIBIT B NCI AGREEMENT -50- 55 EXHIBIT C LETTER TO FDA INDICATING TRANSFER OF RIGHTS IN INVESTIGATIONAL NEW DRUG AND ORPHAN DRUG APPLICATIONS TO CELGENE -51- EX-10.29 3 CONTRACT MANUFACTURING AGREEMENT 1 ENTREMED, INC EXHIBIT 10.29 ["..." INDICATES MATERIAL HAS BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST, WHICH THE COMPANY HAS FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.] BIOPROCESSING SERVICES AGREEMENT This manufacturing services agreement dated this 16th day of October 1998 (the "Agreement") between EntreMed, Inc. a Delaware corporation ("Sponsor") having its principal place of business at 9610 Medical Center Drive, Suite 200, Rockville, MD 20850 and Covance Biotechnology Services Inc., a Delaware Corporation ("CBSI"), having its principal place of business at 6051 George Watts Hill Drive, P. O. Box 13865, Research Triangle Park, NC 27709-3865. WITNESSETH WHEREAS, CBSI provides a full range of bioprocessing services to the biopharmaceutical industry, including process development, fermentation, cell culture, separation/purification, bioanalytical chemistry, quality control, quality assurance, and regulatory affairs. WHEREAS, sponsor desires CBSI to perform services in accordance with the terms of this Agreement and the Scope of Work (as hereinafter defined) related to the production of the material known as Endostatin(TM) (the "Product") and CBSI desires to perform such services. NOW, THEREFORE, in consideration of the above statements and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto agree as follows: Section 1. SCOPE OF WORK 1) A detailed Scope of Work document ("Scope") to be provided by Sponsor or prepared by CBSI under Sponsor's direction and approved by Sponsor will be attached to this agreement as Appendix 1. CBSI will perform the service or services ("Program") for Sponsor in accordance with the Scope. The Scope will specify the program design, information desired, estimated duration of the Program, and all other matters pertinent to completion of the Program, and will be deemed a part of this Agreement and is incorporated herein by reference. 2) CBSI will, at Sponsor's request, consult with Sponsor in developing the Program design in a manner consistent with current regulatory guidelines. However, CBSI does not warrant that the Product will be safe or efficacious or that the CMC section prepared as result of performing the Program will satisfy all the requirements of any regulatory agencies at the time of submission. 3) CBSI's performance of the work will be based on technical information provided by or for the Sponsor. This information will be translated into development 2 and/or manufacturing documents (development plans, batch records, specifications, etc.) which will be reviewed and approved by the Sponsor. These documents will form the basis upon which the work will be performed. Section 2. PROGRAM PERFORMANCE CBSI shall use its best efforts to provide facilities, supplies, and staff necessary to complete the Program as provided in the Scope, as it may be modified as provided herein, and in accordance with the terms of this Agreement. In the event of any conflict between the Scope/Program and this Agreement, the terms of this Agreement shall control. CBSI will appoint a CBSI representative (the "Project Director") to be responsible for the completion of the Program by CBSI. The Project Director will coordinate performance of the Program with a representative designated by Sponsor (the "Sponsor Representative"), which representative shall have responsibility over all matters relating to performance of the Program on behalf of Sponsor. Unless otherwise agreed in the Scope, all communications between CBSI and the Sponsor regarding the conduct of the Program pursuant to the Scope shall be addressed to or routed through the Project Director and Sponsor Representative, directly. CBSI may, at its option, substitute the Project Director during the course of the program. Section 3. PROGRAM MATERIALS 1) Sponsor will provide CBSI with sufficient amounts of raw materials or other substances with which to perform the Program as specified in the Scope, (the "Materials"), as well as all documentation and such other data as may be available to apprise CBSI of the stability of the Materials, process characteristics, proper storage, manufacturing and safety requirements. Sponsor will also provide CBSI with all necessary information to effect the reliable transfer of the process from the Sponsor to CBSI. 2) Upon completion of the Program, any remaining samples of the Materials or other substances provided to CBSI will be returned to Sponsor, at Sponsor's option and/or retained by CBSI in compliance with regulatory requirements. Section 4. COMPLIANCE WITH GOVERNMENT REGULATIONS 1) CBSI will perform the Program in accordance with the Scope, and the current state of the Food and Drug Administration's current Good Manufacturing Practices (cGMP's) when appropriate to do so. Subject to paragraph b. of Section 4 below, CBSI will also comply in all material respects with all applicable government regulatory requirements concerning current Good Manufacturing Practices appropriate to the Program. 2) Should such government regulatory requirements be changed, CBSI will make every reasonable effort to satisfy the new requirements. In the event that compliance with such new regulatory requirements necessitates a change in the 3 Scope for the Program, CBSI will submit to Sponsor a revised technical and cost proposal for Sponsor's acceptance prior to making any changes in the Scope or the Program. 3) In the event of a conflict in government regulations, Sponsor will designate, in writing, which regulations shall be followed by CBSI in its performance of the Program. Section 5. FACILITY VISITS Sponsor's representatives may visit CBSI's facility at appropriate times consistent with the Program to observe the progress of the Program. CBSI will assist Sponsor in scheduling such visits which will be in compliance with requirement to protect confidentiality of other clients. Section 6. COMPENSATION 1) The estimated budget for the Program is "..." for the activities leading up to clinical production and an estimated additional "..." to "..." for clinical production plus materials and other incidentals as specified in the Scope; provided that such budget is subject to adjustment if (1) Sponsor executes this Agreement later than 30 days after the date CBSI has executed this Agreement and (2) the Materials or other data or information required to conduct the Program is supplied or provided more than 30 days after the date CBSI has executed this Agreement. CBSI shall not exceed the budget for the Program without the prior written approval of Sponsor. 2) Sponsor shall make payments as defined in the Payment Schedule. The Payment Schedule with estimated payment dates is attached hereto as Appendix 2. A "..." fee equal to "..." of CBSI's actual cost of materials purchased for the Program will be added to materials invoices. The "..." fee will be waived on the purchase of any single material that costs "..." or more on a per manufacturing lot basis. "..." charges, such as for "...", will be invoiced in the month that CBSI "...". Payments are due 30 days from the date of invoice. Late payments are subject to an interest charge of "...". Any payments that are greater than 90 days past due constitute a breach of this Agreement unless there is a dispute relative to such payments which has not yet been resolved pursuant to Section 14. Section 7. CHANGE ORDERS 1) The estimated budget for the Program specified in Section 6 of this Agreement and the individual budget components and time estimates specified in the Scope are subject to a number of general and program specific assumptions. The program specific assumptions relate to the Program design and objectives, manpower requirements, timing, capital expenditure requirements, if any, and other matters relating to the completion of the Program as set forth in the Scope (the "Program Assumptions"). CBSI also assumes that the Sponsor will 4 cooperate and perform its obligations under the Agreement and Scope in a timely manner, that no event outside the control of CBSI will occur, including, without limitation, the events described in Section 17, and that there are no material changes to any applicable laws, rules or regulations which effect the Program (the foregoing assumptions together with the Program Assumptions, collectively, the "Assumptions") In the event that any of the Assumptions require modification or the Program objectives cannot be achieved based on the Assumptions (each being, a "Modification") then the Scope may be amended as provided in paragraph b) of this Section 7. 2) In the event a Modification is identified by the Sponsor or by CBSI, the identifying party shall notify the other party as soon as is reasonably possible. CBSI shall provide Sponsor with a Change Order containing an estimate of the required Modifications to the Program budget and timeline specified in the Scope within 20 business days of receiving such notice. Sponsor shall use best efforts to respond in writing to such Change Order promptly. If Sponsor does not approve such Change Order and has not terminated the Program but wants the Program to be modified to take into account the Modification, then Sponsor and CBSI shall use best efforts to agree on a Change Order that is mutually acceptable. If practicable, CBSI shall continue work on the Program during any such negotiations, but shall not commence work with respect to the Change Order unless authorized in writing. Section 8. CONFIDENTIAL INFORMATION/LEGAL PROCEEDINGS 1) CBSI will not disclose, without Sponsor's written permission, any information pertaining to Sponsor's Program unless such disclosure: 1) is to an affiliate of CBSI who is under a similar obligation to keep such information confidential; 2) is or becomes publicly available through no fault of CBSI; 3) is disclosed by a third party entitled to disclose it; 4) is already known to CBSI as shown by its prior written records; or 5) is required by any law, rule, regulation, order decision, decree, subpoena or other legal process to be disclosed. If such disclosure is requested by legal process, CBSI will make all reasonable efforts to notify Sponsor of this request promptly prior to any disclosure to permit Sponsor to oppose such disclosure by appropriate legal action. 2) CBSI will not transfer any materials without Sponsor's written permission to any third party unless such transfer is to an affiliate bound by the terms herein and is consistent with the Program. 3) If CBSI shall be obliged to provide testimony or records regarding any Sponsor Program in any legal or administrative proceeding, then Sponsor shall reimburse CBSI its out-of-pocket costs therefore plus an hourly fee for its employees or representatives equal to the internal fully burdened costs to CBSI of such employee or representative. 5 Section 9. WORK PRODUCT 1) All work outputs (e.g. reports) will be prepared on CBSI's standard format unless otherwise specified in the Scope. 2) Sponsor will have title to all Materials, raw data, documentation, records, protocols, specimens and other reports generated as a result of this Program. All such written materials will be archived by CBSI for a period of five years following completion of the Program unless otherwise defined by the Program or required by applicable laws or regulations. Five years after completion of the Program, all of the aforementioned materials will be sent to the Sponsor and a reasonable return fee will be charged. The Sponsor may elect to have the materials retained in the CBSI Archives for an additional period of time at a reasonable additional cost. If the Sponsor chooses to have CBSI dispose of the materials, a reasonable disposal fee will be charged. CBSI will continue to retain such documentation and materials as required by regulations and as may be required by law, pertaining to such activities as well as for archival purposes. Section 10. INVENTIONS, PATENTS, AND RESULTS OF THE PROGRAM Any product or product improvement inventions or discoveries, including new uses for product and related patent rights which arise as a result of the work performed by CBSI will be owned by and assigned to Sponsor and CBSI will cooperate with Sponsor in perfecting Sponsor's interest in such intellectual property. Any process or process improvement inventions or discoveries made solely by CBSI which arise as a result of the work performed by CBSI and related patent rights will be owned by CBSI. Any such process or process improvement inventions or discoveries and related patent rights which are made jointly by the parties shall be owned jointly by the parties. CBSI hereby grants to Sponsor an exclusive, royalty-free, paid up, perpetual, worldwide, sublicensable license in the field of Anti-Angiogenesis under CBSI's sole and joint inventions and related patent rights arising as a result of the work performed by CBSI hereunder in order to make, have made, use, import, sell or offer to sell Product. Section 11. INDEPENDENT CONTRACTOR CBSI shall perform the Program as an independent contractor of Sponsor and shall have complete and exclusive control over its facilities, equipment, employees and agents. Nothing in this agreement or other arrangements for which it is made shall constitute CBSI, or anyone furnished or used by CBSI in the performance of the services, as employee, joint venture, partner, or servant of Sponsor. Section 12. INSURANCE CBSI shall secure and maintain in full force and effect throughout the performance of the Program policies of insurance for (a) Workmen's Compensation, (b) General Liability, (c) Automobile Liability, and (d) Professional Liability having policy limits, deductibles and other terms appropriate to the conduct of CBSI's business in CBSI's sole and 6 exclusive judgment. Certificates evidencing such insurance will be made available for examination upon request of the Sponsor. Section 13. DEFAULT 1) If CBSI is in default of its material obligations under this Agreement, then Sponsor shall promptly notify CBSI in writing of any such default. CBSI shall have a period of 45 days from the date of receipt of such notice within which to cure such default; provided that if such default renders the Program invalid, then CBSI, shall, at Sponsor's option, either (1) repeat the Program at its cost within a time period mutually agreed to by it and Sponsor or (2) refund the contract price paid by Sponsor. If CBSI shall fail to cure such default within the specified cure period or repeat the Program, as the case may be, then this Agreement shall, at Sponsor's option, immediately terminate. In the event of such termination, Sponsor's sole remedy shall be, in the case where such default has not rendered the Program invalid, a reduction in the total contract price for the Program in an amount equal to the difference between (1) the total contract price for the Program and (2) the value of the work properly performed, and, in the case where such default does render the Program invalid, a refund of the contract price; provided however that under no circumstance shall CBSI be liable to Sponsor in an amount that, in aggregate exceeds, the contract price paid for such Program. In the event that any said default is directly attributable to the grossly negligent acts or omissions of CBSI, the limitation of remedies set forth in this section 12 (a) shall not apply. 2) If Sponsor is in default of its material obligations under this Agreement, CBSI shall promptly notify Sponsor in writing of any such default. Sponsor shall have a period of 45 days from the date of receipt of such notice within which to cure such default; provided that if Sponsor fails to cure such breach within the specified cure period, this Agreement shall, at CBSI's option, immediately terminate. 3) Not withstanding anything herein to the contrary, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE ENTITLED TO INCIDENTAL, INDIRECT, CONSEQUENTIAL OR SPECIAL DAMAGES ARISING IN CONNECTION WITH THE DEFAULT OR BREACH OF ANY OBLIGATION OF THE OTHER PARTY UNDER THIS AGREEMENT, THE SCOPE OR ANY DOCUMENTS OR APPENDICES RELATED THERETO. Section 14. DISPUTE RESOLUTION 1) In the event any dispute shall arise between the Sponsor and CBSI with respect to any of the terms and conditions of this Agreement or the Protocol; then senior executives of the Sponsor and CBSI shall meet as promptly as practicable after notice of such dispute to resolve in good faith such dispute. 7 2) If the Sponsor and CBSI are unable to satisfactorily resolve the dispute, then such dispute shall be finally settled by an arbitrator in accordance with this Section 13. The arbitration will be held in or around Raleigh, North Carolina, and except as noted below, shall be conducted in accordance with the rules of the American Arbitration Association by two arbitrators appointed, one by each party. If the arbitrators appointed cannot agree on the resolution of the dispute within sixty (60) days after the dispute is submitted to them, they shall thereupon appoint a third arbitrator, and if they fail to agree upon a third arbitrator within 30 days after a deadlock is declared by either arbitrator, a third arbitrator will be appointed by the American Arbitration Association upon the request of either arbitrator. The arbitrators shall have no authority to award consequential, punitive or exemplary damages or to vary from or ignore the terms of this Agreement and shall be bound by controlling law. Finally, the parties may seek judicial intervention for emergency relief, such as restraining orders and injunctions where appropriate. Any decision by the third arbitrator and either one of the other arbitrators shall be binding upon the parties and may be entered as final judgment in any court having jurisdiction. The cost of any arbitration proceeding shall be borne by the parties as the arbitrators shall determine if the parties have not otherwise agreed. The arbitrators shall render their final decision in writing to the parties. Section 15. INDEMNIFICATION 1) CBSI shall indemnify Sponsor and its affiliates and their respective officers, directors and employees from any loss, cost, damage or expense (a "Loss") from any lawsuit, action, claim, demand, assessment or proceeding (a "Claim") for personal injury to Program participants or personal injury to any employee of Sponsor or property damage arising or occurring during the conduct of the Program as a result of (i) CBSI's negligence, gross negligence or intentional misconduct or inaction, or (ii) CBSI's violation, non-compliance or non-performance of any terms of this Agreement; provided that if such Loss or Claim arises in whole or in part from Sponsor's negligence, gross negligence or intentional misconduct or inaction, then the amount of the Loss that CBSI shall indemnify Sponsor for pursuant to this Section 14 shall be reduced by an amount in proportion to the percentage of Sponsor's responsibilities for such Loss determined by a court of competent jurisdiction in a final and non-appealable decision or in a binding settlement between the parties. 2) Sponsor shall indemnify CBSI and its affiliates and their respective officers, directors, employees and agents (the "CBSI Group") from any Claim or Loss arising from or related to (i) personal injury to a participant in the Program or personal injury to any employee of the CBSI Group directly or indirectly caused by the raw material, Product, intermediates or the Program, (ii) CBSI's performance of or involvement with the raw material, the Product or its obligations under this Agreement or the Scope related thereto, (iii) CBSI's performance of the Program violating or infringing on the patents, trademarks, tradenames, servicemarks or copyrights of any third party with respect to Product 8 and the process to manufacture Product, Product intermiediates, or raw materials relating to Product, (iv) the harmful or otherwise unsafe effect of the raw materials or Product, including, without limitation, a Claim based upon Sponsor or any other person's use, consumption, sale, distribution or marketing of any substance, including the raw material or the Product, (v) the negligence, gross negligence or intentional misconduct or inaction of Sponsor in the performance of its obligations under this Agreement or Scope related to the Program, or (vi) the Sponsor's violation, non-compliance or non-performance of any of the terms of this Agreement; provided that if such Loss or Claim (other than a Loss or Claim described in clause (iv) hereof) arises in whole or in part from CBSI's negligence, gross negligence or intentional misconduct or inaction, then the amount of such Loss that Sponsor shall indemnify the CBSI Group for pursuant to this Section 14 shall be reduced by an amount in proportion to the percentage of CBSI's responsibilities for such Loss as determined by a court of competent jurisdiction in a final and non-appealable decision or in a binding settlement between the parties. Sponsor shall not indemnify the CBSI Group from any Loss from any claim described in clause (iv) hereof arising solely from the willful misconduct or inaction of CBSI. 3) Upon receipt of notice of any Claim which may give rise to a right of indemnity from the other party hereto, the party seeking indemnification (the "Indemnified Party") shall give written notice thereof to the other party, (the "Indemnifying Party") with a Claim for indemnity. Such Claim for indemnity shall indicate the nature of the Claim and the basis therefore. Promptly after a claim is made for which the Indemnified Party seeks indemnity, the Indemnified Party shall permit the Indemnifying Party, at its option and expense, to assume the complete defense of such Claim, provided that (i) the Indemnified Party will have the right to participate in the defense of any such Claim at its own cost and expense, (ii) the Indemnifying Party will conduct the defense of any such Claim with due regard for the business interests and potential related liabilities of the Indemnified Party and (iii) the Indemnifying Party will, prior to making any settlement, consult with the Indemnified Party as to the terms of such settlement. The Indemnified Party shall have the right, at its election, to release and hold harmless the Indemnifying Party from its obligations hereunder with respect to such Claim and assume the complete defense of the same in return for payment by the Indemnifying Party to the Indemnified Party of the amount of the Indemnifying Party's settlement offer. The Indemnifying Party will not, in defense of any such Claim, except with the consent of the Indemnified Party, consent to the entry of any judgment or enter into any settlement which does not include, as an unconditional term thereof, the giving by the claimant or plaintiff to the Indemnified Party of a release from all liability in respect thereof. After notice to the Indemnified Party of the Indemnifying Party's election to assume the defense of such Claim, the Indemnifying Party shall be liable to the Indemnified Party for such legal or other reasonable expenses subsequently incurred by the Indemnified Party in connection with the defense thereof at the request of the Indemnifying Party. As to those Claims with respect to which the Indemnifying Party does not elect to 9 assume control of the defense, the Indemnified Party will afford the Indemnifying Party an opportunity to participate in such defense at the Indemnifying Party's own cost and expense, and will not settle or otherwise dispose of any of the same without the consent of the Indemnifying Party. Section 16. REPRESENTATION Sponsor hereby represents and warrants to CBSI that it has legal title and/or a valid license to the raw material, expression systems and process patents and the Product and that, to the best of its knowledge, CBSI's performance of the Program will not violate or infringe on the patents, trademarks, tradenames, servicemarks or copyrights of any third party. Section 17. FORCE MAJEURE Either party shall be excused from performing its respective obligations under this Agreement if its performance is delayed or prevented by any event beyond such party's reasonable control, including, but not limited to, acts of God, fire, explosion, weather, disease, war, insurrection, civil strife, riots, government action, or power failure, provided that such performance shall be excused only to the extent of and during such disability. Any time specified for completion of performance in the Scope falling due during or subsequent to the occurrence of any or such events shall be automatically extended for a period of time to recover from such disability. CBSI will promptly notify Sponsor if, by reason of any of the events referred to herein, CBSI is unable to meet any such time for performance specified in the Scope. If any part of the Program is invalid as a result of such disability, CBSI will, upon written request from Sponsor, but at Sponsor's sole cost and expense, repeat that part of the Program affected by the disability. If CBSI is likely to be unable to perform for a period in excess of 60 days then the parties agree to negotiate in good faith a mutually satisfactory approach to resolve the delay resulting from this paragraph. If the parties cannot reach a mutually satisfactory approach within 60 days, then Sponsor shall be entitled to terminate this Agreement without payment of liquidated damages (Section 20). Section 18. ALLOCATION OF RESOURCES If delays in the agreed commencement or performance of the Program occur because of the Sponsor's inability to supply CBSI with agreed Materials or any information required to begin or perform the Program within 30 days of such agreed time, CBSI may reallocate resources being held for performance of the Program without incurring liability to Sponsor. Section 19. USE OF NAMES Neither party shall use the name of the other party or the names of the employees of the other party in any advertising or sales promotional material or in any publication without prior written permission of such party, except Sponsor may, as required by law or regulatory requirements, disclose that CBSI has performed the Program. 10 Section 20. TERMINATION BY SPONSOR 1) Sponsor may at any time terminate the Program prior to completion by giving 45 days written notice to CBSI. In such event CBSI shall comply with such notice to terminate work on the Program and use its best efforts to reduce cost to Sponsor, and Sponsor shall pay CBSI upon receipt of CBSI's invoice all of its costs incurred or irrevocably obligated, plus, as liquidated damages and not as a penalty, the following: (i) if termination occurs prior to initiation of large scale cGMP manufacturing, a cancellation fee equal to 10 % of the uninvoiced portion of the budget; (ii) if termination occurs after initiation of large scale cGMP manufacturing, a cancellation fee equal to 20 % of the uninvoiced portion of the budget, not withstanding the foregoing , Sponsor shall not be responsible for payment of liquidated damages in the event of CBSI's material breach or insolvency; 2) The termination of this Agreement for any reason shall not relieve either party of its obligation to the other for obligations in respect of (i) confidentiality of information, (ii) consents for advertising purposes and publications, (iii) indemnification and, (iv) compensation for services performed. Section 21. ASSIGNMENT This Agreement shall not be assigned in whole or in part by either party without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed except Sponsor may assign without consent in the event of a merger, acquisition, or transfer of all of its assets related to this Agreement. Any attempt to assign this Agreement without such consent, where required, shall be void and of no effect subject to the limitations on assignment herein. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. Section 22. NOTICE All notices to be given as required in the Agreement shall be in writing and shall be delivered personally, sent by telecopies, or mailed either by a reputable overnight carrier or first class mail, postage prepaid to the parties at the addresses set forth above or such other addresses as the parties may designate in writing. Such notice shall be effective on the date sent, if delivered personally or sent by telecopier, the date after delivery if sent by overnight carrier and on the date received if mailed first class. Section 23. CHOICE OF LAW This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware without regard to choice of law principles. Section 24. WAIVER/SEVERABILITY No waiver of any provision of this Agreement, whether by conduct or otherwise, in any 11 one or more instances shall be deemed to be or be construed as a further or continuing waiver of any such provision, or of any other provision or condition of this Agreement. If any provisions hereof shall be determined to be invalid or unenforceable, the validity and effect of the other provisions of this Agreement shall not be effected thereby. Section 25. ENTIRE AGREEMENT; MODIFICATION/COUNTERPARTS This instrument, the Confidential Disclosure Agreement with an effective date of 31 March 1998, and the Scope set forth the entire Agreement between the parties hereto with respect to the performance of the Program by CBSI for Sponsor and as such, supersedes all prior and contemporaneous negotiations, agreements, representations, understandings, and commitments with respect thereto and shall take precedence over all terms, conditions and provisions on any purchase order form or form of order acknowledgment or other document purporting to address the same subject matter. This Agreement shall not be waived, released, discharged, changed or modified in any manner except by an instrument signed by the duly authorized officers of each of the partied hereto, which instrument shall make specific reference to this Agreement and shall express the plan or intention to modify same. This Agreement may be executed in one or more counterparts each of which shall be deemed an original but all of which together shall constitute one and the same instrument. This Agreement becomes effective and binding on both parties on and as of the last date that the parties hereto have executed this Agreement. Should terms contained herein be at variance with the terms and conditions specified in Sponsor's written acceptance, then the terms and conditions contained herein take precedence. ENTREMED, INC. COVANCE BIOTECHNOLOGY SERVICES INC. By: /s/ John W. Holaday By: /s/ Charles T. White ---------------------------- ------------------------------------ Name: John W. Holaday, Ph.D. Name: Charles T. White, Ph.D. -------------------------- ---------------------------------- Title: Chairman & CEO Title: Sr. V.P., Commercial Development ------------------------- --------------------------------- Date: 10/27/98 Date: 10/16/98 ------------------------- --------------------------------- 12 APPENDIX 1 ["..." INDICATES MATERIAL HAS BEEN OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST, WHICH THE COMPANY HAS FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION] SCOPE OF WORK FOR PRODUCTION OF ANIMAL TOXICOLOGY AND HUMAN CLINICAL MATERIAL PREPARED FOR: ENTREMED PREPARED BY: CBSI DATE SUBMITTED: MAY 15, 1998 OCTOBER 16, 1998 13 APPENDIX 1 TABLE OF CONTENTS UNDERSTANDING OF THE PROJECT AND PROGRAM OBJECTIVES 3 PROGRAM ASSUMPTIONS 5 TECHNOLOGY TRANSFER 6 CELL BANKING AND TESTING 7 ASSAY QUALIFICATION 8 PROCESS DEVELOPMENT 10 PREPRODUCTION ACTIVITIES 12 "..." CGMP TOXICOLOGY RUNS 13 "..." DEMONSTRATION RUN 15 CLINICAL TRIAL MATERIAL MANUFACTURING 16 QUALITY FUNCTION 17 REGULATORY SUPPORT SERVICES 18 PROJECT MANAGEMENT 19 PRICE SUMMARY 20 Page 2 of 21 14 APPENDIX 1 UNDERSTANDING OF THE PROJECT AND PROGRAM OBJECTIVE UNDERSTANDING OF THE PROJECT molecule of interest is Endostatin molecule is expressed in Pichia pastoris fermentation development work has been performed up to "..." scale at University of Nebraska and purification development work has been performed at Sponsor "..." produce "..." of Product for use in clinical trials current fermentation process produces harvest containing "..." plan to begin pre-clinical studies in 4Q98 plan to begin Phase I clinical trials in late Q1 1999 OBJECTIVES FOR THE PROGRAM The overall objectives for this collaboration are to provide five deliverables over the course of the Program: 1) cGMP animal toxicology and pharmacology material 2) Process development services for fermentation, purification and analytical protein chemistry 3) cGMP human clinical trial material 4) CBSI shall guarantee delivery of "..." of cGMP grade Endostatin. 5) CBSI shall deliver the "..." by "...". CBSI plans to provide these deliverables as follows: Transfer existing methodology of fermentation and purification processes from Sponsor to CBSI to manufacture Product Transfer methodology and qualify assays for in-process control (IPC), for release testing of Product and for use in support of stability testing Prepare cGMP Pichia pastoris Master and Working Cell Banks Page 3 of 21 15 APPENDIX 1 Perform "..." runs at the "..."(1) scale to determine reproducibility, stability and robustness of the transferred fermentation, recovery and purification processes "..." Perform "..." demonstration runs at the "..." scale (in the "...") in preparation of the cGMP toxicology runs Perform pre-production activities in preparation for cGMP manufacturing including procurement, testing and release of raw materials, preparation of cGMP documentation, and equipment and facility set-up Perform cGMP toxicology lot production at the "..." scale and subsequent purification to produce "..." of Product. ("..." runs are anticipated) Perform "..." demonstration run at the "..." scale and perform subsequent recovery and purification to demonstrate feasibility of the process at "..." scale Perform sufficient number of cGMP runs at the "..." scale and perform subsequent recovery and purification to obtain "..." of Product to support Phase I clinical trials. ("..." runs are anticipated) Manage fill and finish of Product into the desired final package Perform Quality Control testing and Quality Assurance activities in support of release of Product Provide manufacturing and QC/QA reports in support of Phase I IND filing for Product in "..." - ----------- (1) in "..." Page 4 of 21 16 APPENDIX 1 PROGRAM ASSUMPTIONS Program assumptions have been listed to provide a framework by which the Program may proceed. If these assumptions prove to be incorrect, then alternative approaches will need to be considered to achieve the stated deliverables. 1. The fermentation can be performed "...". 2. The downstream process can be turned around to match timing from fermentations. 3. Fermentation will be performed in the "..." through the "..."; Downstream processing will occur in "...". 4. Fermentation can be performed in "...". 5. Product quality and documentation will be consistent with industry standards for "...". 6. Bulk specification for clinical material will be "...". Which are approximately: "..." "..." "..." "..." "..." "..." "..." 7. The process yield for "..." is an important term used throughout this Agreement. This yield determination is defined as follows: 1. "..." 2. "..." Yield Calculation for the purpose of determining the bench mark level of "..."is calculated as follows: Yield = "..." Example: The "..." typically contains "...". If "..." is recovered, then the yield is: "..." These yields will then be used to generate "...". Page 5 of 21 17 APPENDIX 1 TECHNOLOGY TRANSFER The purpose of this activity is to transfer from Sponsor to CBSI existing methodology and process information to obtain a complete understanding of the process as it currently exists. TECHNOLOGY TRANSFER includes the following activities: Sponsor will transfer existing methods and technical information regarding the fermentation and purification processes and analytical techniques for quantifying Product CBSI will visit existing fermentation manufacturing site (ie., Univ. of Nebraska) to view process. CBSI will interact directly and via Sponsor with Univ. of Nebraska where the fermentation and recovery processes are being developed CBSI will visit Sponsor to review the existing purification scheme CBSI will verify raw materials and purchase long lead time materials CBSI will verify equipment requirements and purchase long lead time items, if any CBSI will identify any facility or equipment engineering issues related to large scale manufacture CBSI will outline the manufacturing plan that includes identifying technical issues with the facility, scheduling of the facility, and development of detailed timelines for specific production activities, including change-over Estimated Labor This activity is expected to require approximately "..." to complete. Pricing The pricing for this section will be "...". This rate includes "...". CBSI will notify Sponsor prior to purchasing any material exceeding "..." and Sponsor will be invoiced separately. A "..." fee of the actual cost of materials purchased for the Program will be added to material invoices. The "..." fee will be waived on any single material that costs "..."."...". Page 6 of 21 18 APPENDIX 1 CELL BANKING AND TESTING The objective of these activities is to generate and test a cGMP Master Cell Bank (MCB) from a research cell bank and generate and test a Manufacturers Working Cell Bank (MWCB) from the MCB. a) CBSI will receive vials of the Pichia pastoris cell line following confirmation of purity and non-host contamination by a qualified sub-contractor. Certificates of Analysis and documentation of testing must be received by CBSI prior to receipt of cells b) CBSI will develop specifications for all raw materials based on information provided by Sponsor. CBSI will order and release raw materials according to CBSI Standard Operating Procedures c) CBSI will generate batch records for the cell bank production activities. Sponsor will review and approve all batch records prior to cell bank production d) CBSI will produce "...". CBSI Quality Group will provide support for batch record review and approval, raw material release and environmental monitoring e) CBSI will provide temporary storage for cell banks ("..."). Sponsor and CBSI will mutually determine the portion of the cell banks to be stored at CBSI and at a designated third party approved by Sponsor, on a permanent basis f) CBSI will submit samples of the MCB and MWCB to a qualified sub-contractor to perform the following. CBSI and Sponsor will agree to suitable acceptance criteria for these tests: "..." "..." "..." "..." "..." g) CBSI will provide Sponsor with copies of the completed and approved batch records. CBSI will retain the originals in its archives h) "..." is not included in the scope of this proposal Estimated Labor This activity is expected to require approximately "...". Pricing The budget for this phase of the Program will be "...". Page 7 of 21 19 APPENDIX 1 ASSAY QUALIFICATION NOTE: Please see Process Development section for development of assays. Assays developed at CBSI will be qualified as part of analytical development Phase and are not reflected in the price estimate for the assay qualification Phase. The purpose of this activity is to perform qualification of assays to assess the performance capability of the assays used in support of cGMP manufacturing and stability studies. Sponsor and CBSI will jointly determine the specific assays to be used for in-process control and Product release testing. The types of assays listed below will assess the identity, purity, strength and homogeneity of Product. The specific testing regimen will depend on the inherent properties of Product. Multiple samples of Product that are representative of the manufacturing process will be tested according to methods transferred by Sponsor. Results will be evaluated for consistency and methods may require adjustment or further development. "..." are not included in the scope of this section. (See Analytical Development Phase) Sponsor/CBSI will provide Standard Reference Material for use in all assays. This Table lists the assays that will be employed for "..." of Product.
ASSAY METHOD STATUS ---------------------------------------------------------------------------------------- "..." "..." See analytical development phase ---------------------------------------------------------------------------------------- "..." "..." See analytical development phase ---------------------------------------------------------------------------------------- "..." "..." See analytical development phase ---------------------------------------------------------------------------------------- "..." "..." See analytical development phase --------------------------- ---------------------- ------------------------------------- "..." "..." See analytical development phase ---------------------------------------------------------------------------------------- "..." "..." See analytical development phase ---------------------------------------------------------------------------------------- "..." "..." See analytical development phase ---------------------------------------------------------------------------------------- "..." "..." See analytical development phase ---------------------------------------------------------------------------------------- "..." "..." See analytical development phase ---------------------------------------------------------------------------------------- "..." "..." Qualify at CBSI ---------------------------------------------------------------------------------------- "..." "..." Qualify at CBSI ---------------------------------------------------------------------------------------- "..." "..." Qualify at CBSI
Page 8 of 21 20 APPENDIX 1
---------------------------------------------------------------------------------------- "..." "..." Qualify at CBSI ---------------------------------------------------------------------------------------- "..." "..." Qualify at CBSI ---------------------------------------------------------------------------------------- "..." "..." TBD ---------------------------------------------------------------------------------------- "..." "..." TBD ----------------------------------------------------------------------------------------
Estimated Labor The hours required for assay qualification is directly related to the number and type of assays to be used in support of the in-process control and Product release testing. Pricing The pricing for this section of the Program will be "...". CBSI will notify Sponsor prior to purchasing any material exceeding "..." and Sponsor will be invoiced separately. A "..." fee of the actual cost of materials purchased for the Program will be added to material invoices. "...". Page 9 of 21 21 APPENDIX 1 PROCESS DEVELOPMENT The first part of Process Development "..." is "...". - Perform "..." at the "..." scale to demonstrate successful process transfer and show process reproducibility. The "..." process, "..." will be used - Perform "..." at the "..." scale to demonstrate successful process transfer and show process reproducibility. The basic "..." process, "..." will be used - Develop a recovery process - "..." - Transfer/develop the following assays: "..." - Develop "..." CBSI will conduct appropriate Process Development efforts ("...") to improve both "..." and control over production of the "...". PD activities will enable greater control over the variability of these "...". This work could result in "...". These process development efforts, fermentation, purification and analytical activities, include some or all of proposals described below. The efforts could result in significant process improvements in performance and quality for both the cGMP animal toxicology and cGMP human clinical material runs. In addition, continued experimentation could result in substantial yield and process efficiency improvements over the long term. Page 10 of 21 22 APPENDIX 1
NO. OF TOTAL "..." PERSONS NO. OF WEEKS FTE-WEEKS ============================================================================================= "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- Total FTE-weeks needed "..." ---------------------------------------------------------------------------------------------
NO. OF TOTAL "..." PERSONS NO. OF WEEKS FTE-WEEKS ============================================================================================= "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- Total FTE-weeks needed "..." ---------------------------------------------------------------------------------------------
NO. OF TOTAL "..." PERSONS NO. OF WEEKS FTE-WEEKS ============================================================================================= "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- "..." "..." "..." "..." --------------------------------------------------------------------------------------------- Total FTE-weeks needed "..." ---------------------------------------------------------------------------------------------
Pricing The pricing for this section will be "...". This rate includes materials during "...". CBSI will notify Sponsor prior to purchasing any material exceeding "..." and Sponsor will be invoiced separately. A "..." fee of the actual cost of materials purchased for the Program will be added to material invoices. The "..." fee will be waived on any single material that costs "..." or more on a single lot basis. "..." Page 11 of 21 23 APPENDIX 1 PREPRODUCTION ACTIVITIES The purpose of this activity is for CBSI to perform the following activities in preparation for cGMP manufacturing: - Develop and finalize process flow sheets - Complete engineering for processes - Select, qualify and/or audit vendors, if necessary - Prepare specifications, purchase, test and release all raw materials - Procure and release all necessary supplies - Complete and qualify any necessary equipment modifications - Prepare a detailed list of specifications, test methods, SOPs, protocols and manufacturing procedures - Translate Sponsor's procedures into CBSI facility specific manufacturing procedures for implementation into the CBSI Batch Record/Manufacturing Execution System - Set up to perform small scale cGMP runs, large scale demonstration runs and large scale cGMP runs Estimated Labor This activity is expected to require approximately "...". Pricing The pricing for this phase of the Program is will be "..."2 - ------------- (2) "..." Page 12 of 21 24 APPENDIX 1 "..." cGMP TOXICOLOGY RUNS Prior to performing cGMP Toxicology runs, CBSI will initiate "..." non-GMP demonstration runs. The purpose of performing non-GMP demonstration runs at the "..." scale is to assess the reproducibility of the entire process prior to cGMP toxicology lot production at the "..." scale. - - Records for this stage of process will be kept in laboratory notebooks or standardized data sheets or draft batch records - - A limited number of analytical techniques to verify product identity and quality will be performed on material from those demonstration runs using pre-qualified assays and performed by the Process Development staff - - Specific goals for yield and purity will be mutually agreed upon between Sponsor and CBSI based on early development results, clinical needs and project timelines. Goals will be dependent on the properties of Product. The purpose of the cGMP toxicology lot production at the "..." scale is to produce "..." of cGMP material for "..." lots of "..." and "..." for animal toxicology and pharmacology studies. It is estimated that "..." runs will be needed to achieve this goal. A sufficient number of "..." runs will be pooled, following a pre-release3 of sub-lots, at the end of purification to provide the "..." lots. The pooled lots will be tested and released as one lot according to pre-determined specifications and QA review. To minimize product wastage during this Phase, "...". The "..." plan will be finalized prior to initiating any cGMP runs. Sponsor has "...". The final formulation, including "..." will be "...". The qualified Pichia pastoris MWCB will be used for cGMP manufacturing of animal toxicology material. Production activities include performance of "..." scale fermentation runs through to purified Product including IPC and QC release testing. "...". Pricing The budget of this phase of the Program will be "...". A "..." fee of the actual cost of materials purchased for the Program will be added to material invoices. The "..." fee will be waived on any single material that costs "..." or more on a single lot basis. "..." - -------------- (3) "..." Page 13 of 21 25 APPENDIX 1 The average yield ("...") from the "..." toxicology runs will be used in "..." decision points in the scope. 1) The yield determines "...". 2) "..." Page 14 of 21 26 APPENDIX 1 "..." DEMONSTRATION RUN - "..."and "..." will be performed according to the procedures transferred/developed including any change in methods determined to be useful following the "..." demonstration and cGMP toxicology runs - Additional "..." demonstration runs may be needed if unforeseen scale-up issues arise - Records for this stage of the process will be maintained using DRAFT cGMP documents (batch records and formulation records) - A limited number of "..." to verify "..." will be performed on "..." using "..." - "..." Estimated Labor The "..." activities will be performed in our "..." cGMP manufacturing area. Each manufacturing run is expected to require "..." in the "..." fermentation area and "..." in the "..." purification area. Assuming that the runs are performed in series, "..." will be required for "..." and "..." will be required for "..." and "...". There will be only "..." if the demonstration run is followed immediately by the production runs. Pricing The budget for this phase of the Program will be "...". Page 15 of 21 27 APPENDIX 1 CLINICAL TRIAL MATERIAL MANUFACTURING The purpose of this section is to produce cGMP quality material for use in Phase I clinical trials. The qualified Pichia pastoris MWCB will be used for cGMP manufacture of clinical material. cGMP documentation as prepared during pre-production activities and modified during demonstration runs will be adhered to and manufacturing will be performed under Quality Assurance oversight as described in the Quality Function section. CBSI will perform approximately "..."runs "..." to produce approximately "..." of Product. It is hoped that PD activities to improve fermentation and purification yields will result in a reduced number of runs. CBSI is investigating all options to move Product into "..." scale manufacturing by the end of 1998. If this is not possible, the option exists to produce initial clinical material at the "..." scale. If the initial clinical material is produced at the "..." scale, the price would be "...". Analytical methods to verify substance identity and quality will be performed by "..." (See "..."). Bulk Product will be "...". CBSI will provide Sponsor with copies of the completed and approved batch records. All records will be in pre-approved cGMP documents subject to full QA review. CBSI will retain the originals in its archives. "..." Estimated Pricing The budget for this phase of the Program will be determined based on yields obtained during the toxicology campaign at the "..." scale. See Pricing Summary section for pricing details. Page 16 of 21 28 APPENDIX 1 QUALITY FUNCTION The purpose of this activity is to provide Quality Control and Quality Assurance support for cGMP manufacturing activities. CBSI Quality Assurance will provide support to ensure cGMP compliance of clinical production runs through issuance of controlled production records including, but not limited to item specifications and batch records, release of all equipment and manufacturing areas for cGMP manufacturing, preparation of CofA and review of completed production records and environmental control for manufacturing areas. Product manufactured by CBSI will be tested according to qualified methods and will be compared with reference standards to be supplied by Sponsor. CBSI recommends that the Product release tests include: "..." "..." -------------------------------------- "..." "..." -------------------------------------- "..." "..." -------------------------------------- "..." "..." -------------------------------------- "..." "..." --------------------------------------
Estimated Labor The hours required for QC Product testing is directly related to the number and type of assays used to test each sample. Pricing The pricing for this section of the Program is included in the price of the appropriate section the activities are associated with. Page 17 of 21 29 APPENDIX 1 REGULATORY SUPPORT SERVICES The purpose of this activity is to support the regulatory aspects of manufacturing Product at the CBSI facility. The Regulatory support segment includes the following activities: - Prepare site documents - Prepare scale-up/development and other reports - Write the CMC sections for Phase I IND filing - Respond to any questions raised by regulatory authorities - Host any inspections Estimated Labor : This activity is expected to require approximately "...". Pricing: The budget for regulatory activities with the exception "..." will be "...". "..." Page 18 of 21 30 APPENDIX 1 PROJECT MANAGEMENT CBSI takes a "..." approach to managing all manufacturing projects. The "..." would consist of a "...". The "..." would meet "..." via teleconference or in person. The Executive Committee will meet "..." (or as required) to review Program progress, review budgetary progress and address any outstanding issues. The Project Director is responsible for coordination of all technical aspects of the Program, including monitoring financial and temporal progress of the Program and submitting periodic reports. Estimated Labor: CBSI will provide a Project Director for the duration of the project. This effort is estimated at "..." during the course of the Program. Pricing: The budget for this activity will be "...". Page 19 of 21 31 APPENDIX 1 PRICE SUMMARY "..."
ACTIVITY PRICE - ---------------------------------------------------- "..." "..." - ---------------------------------------------------- "..." "..." - ---------------------------------------------------- "..." "..." - ---------------------------------------------------- "..." "..." - ---------------------------------------------------- "..." "..." - ---------------------------------------------------- "..." "..." - ---------------------------------------------------- "..." "..." - ---------------------------------------------------- "..." "..." - ---------------------------------------------------- "..." "..." - ---------------------------------------------------- "..." "..." - ----------------------------------------------------
"...". "..." Page 20 of 21 32 APPENDIX 1 "..." The price for the "..." section will be based on "..."
- -------------------------------------------------------------------------------------- "..." "..." "..." "..." "..." "..." - -------------------------------------------------------------------------------------- "..." "..." "..." "..." "..." "..." - --------------------------------------------------------------------------------------
- ------------------------------------------------------------------------- "..." "..." "..." "..." - ------------------------------------------------------------------------- "..." "..." "..." "..." - ------------------------------------------------------------------------- "..." "..." "..." "..." - ------------------------------------------------------------------------- "..." "..." "..." "..." - ------------------------------------------------------------------------- "..." "..." "..." "..." - ------------------------------------------------------------------------- "..." "..." "..." "..." - ------------------------------------------------------------------------- "..." "..." "..." "..." - ------------------------------------------------------------------------- "..." "..." "..." "..." - -------------------------------------------------------------------------
"...". CBSI ENTREMED By: /s/ Charles T. White By: /s/ John W. Holaday ------------------------------ ------------------------- Date: 10/16/98 Date: 10/22/98 ---------------------- ---------------------- Page 21 of 21 EX-10.30 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.30 Entremed, Inc. Exhibit 10.30 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made this 1st day of January, 1999 by and between ENTREMED, INC., a Delaware corporation having its principle office at 9610 Medical Center Drive, Suite 200, Rockville, MD 20850 (the "Company") and Dr. John W. Holaday, Jr., an individual residing at 6502 Hillmead Road, Bethesda, MD 20817 ("Dr. Holaday"). FOR AND IN CONSIDERATION of the mutual premises, agreements and covenants contained herein, the parties hereto, intending to be legally bound, do hereby agrees as follows: 1. Employment; Position and Duties The Company hereby agrees to employ Dr. Holaday to act as, and to exercise all of the powers and functions of, its Chief Executive Officer and Chairman during the Term hereof (as set forth in paragraph 4 herein) and to perform such acts and duties and to generally furnish such services to the Company and its subsidiaries (if any) as is customary for a senior management person with a similar position in like companies; and he shall have such specific powers, duties and Chief Executive Officer and Chairman responsibilities as the Board of Directors of the Company (the "Board") shall from time to time reasonably prescribe, provided that such duties are consistent with Dr. Holaday's senior management position. Dr. Holaday hereby agrees to accept such employment and shall perform and discharge faithfully, diligently, and to the best of his abilities such duties and responsibilities and shall devote sufficient working time and efforts to the business and affairs of the Company and its subsidiaries; provided however, that, to the extent consistent with the needs of the Company, Dr. Holaday shall be entitled to expend a reasonable amount of time on civic, public, industry, and philanthropic activities and on the management of his own investments and assets. 2. Place of Employment During his employment hereunder, Dr. Holaday's principle place of employment shall be located at the Company's corporate headquarters, wherever located as designated from time to time by the Board; provided however, that notwithstanding the foregoing Dr. Holaday shall be required to conduct his duties and responsibilities hereunder (except for routine and customary business travel) primarily from the executive offices located in Rockville, Maryland. 2 3. Compensation (a) Base Salary. The Company shall pay to Dr. Holaday an annual base salary ("Base Salary") of $325,000, payable in accordance with the Company's customary payroll policy for its executives, and subject to applicable tax and payroll deductions. (b) Base Salary Adjustments. Dr. Holaday's Base Salary shall be reviewed annually by the Company's Board of Directors which may make such upward adjustments as within its discretion deems appropriate; however, the base salary will be increased by at least a minimum of a 10% annually. (c) Incentive Compensation. Dr. Holaday's Incentive Compensation, if any, shall be determined annually by the Company's Board of Directors. (d) Certain Other Benefits. During the Term of this Agreement, Dr. Holaday shall be entitled to equally participate in any and all employee benefit plans and arrangements which are available to senior executive officers of the company, including without limitation, group medical and life insurance plans, and automobile expense reimbursement allowances or company-provided automobiles. 4. Term The term of Dr. Holaday's employment with the Company shall be for a three-year period commencing January 1, 1999, or earlier and continuing through December 31, 2001 (the "Initial Term"); provided, however, that this Agreement shall be automatically renewed for successive one-year periods (each a "Successor Term"; and together with the Initial Term, generally referred to "The Term") unless either party hereto gives written notice of termination to the other party at least twelve months prior to the expiration of the Initial Term or of any Successor Term. By way of illustration, if neither party gives to the other party a written notice of termination by December 31, 2000, this Agreement shall be automatically renewed for a one-year period ending on December 31, 2002. 5. Stock Options Periodic stock and incentive stock option grants to Dr. Holaday if any, shall be determined by the Board of Directors. 6. Unauthorized Disclosure While employed by the Company, Dr. Holaday shall not, without the written consent of the Company, disclose to any person, other than person to whom disclosure is reasonably necessary or appropriate in connection with the performance by Dr. Holaday of his duties as an executive officer of the Company, any material confidential information obtained by Dr. Holaday while in the employ of the Company with respect to the businesses of the Company or any of its subsidiaries, including but not limited to, operations, pricing, contractual or personnel date, products, discoveries, improvements, trade secrets, license agreements, marketing information, suppliers, dealers, principles, customers, or methods of distribution, or any other confidential information the disclosure of which knows, or in the exercise of reasonable care should know will be damaging to the Company; provided, 2 3 however, that confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by Dr. Holaday) or any information so otherwise considered by the Company to be confidential. 7. Indemnification of Dr. Holaday The Company shall immediately indemnify Dr. Holaday if Dr. Holaday is made a party, or threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, because Dr. Holaday is or was an officer or director or the Company or any of its subsidiaries, affiliates, or successors, against expenses (including reasonable attorneys fees and disbursements), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent and in the manner set forth in a permitted by the General Corporation Law of the State of Delaware and any other applicable law in effect from time to time and reimburse such costs as incurred, but in any event no later than 30 days from date of presentment to the Company. Such presentment may at the option of Dr. Holaday be in the form of an invoice directly from Dr. Holaday's attorney or other provider, and in this event, the Company agrees to reimburse said provider directly, as opposed to having Dr. Holaday pay the invoice and then seek reimbursement from the Company. 8. Termination (a) Termination Upon Death. If Dr. Holaday dies during the Term of this Agreement, Dr. Holaday's legal representatives shall be entitled to receive the Base Salary through the last day of the twelve months following the month in which Dr. Holaday's death occurred. If in respect of the fiscal year in which Dr. Holaday dies he would otherwise have been entitled to receive incentive compensation under paragraph 3(c) by reason of the operations of the Company during such fiscal year, Dr. Holaday's legal representatives shall be entitled to receive a pro rata portion of such incentive compensation determined by multiplying the dollar amount of the incentive compensation involved by a fraction, the numerator of which shall be the number of complete calendar months that elapsed during the fiscal year through the end of the month in which Dr. Holaday died and denominator of which shall be twelve. (b) Termination Upon Disability or Incapacity. The Company may terminate Dr. Holaday's employment hereunder at the end of any calendar month by giving written notice of termination to Dr. Holaday in the event of Dr. Holaday's incapacity due to physical or mental illness which prevents the proper performance of the duties of Chief Executive Officer as set forth herein or established pursuant hereto for a substantial portion of any six-month period of Dr. Holaday's Term of employment hereunder. Any questions as to the existence or extent of illness or incapacity of Dr. Holaday, upon which the Company and Dr. Holaday cannot agree, shall be determined by a qualified independent physician selected by the Company and approved by Dr. Holaday(or, if Dr. Holaday is unable to give such approval, by any adult member of the immediate family or the duly appointed guardian of Dr. Holaday). The determination of such physician certified in writing to the Company and to Dr. Holaday shall be final and conclusive for all purposes 3 4 of this Agreement. In the event of any such termination pursuant to this subparagraph 8(b), Dr. Holaday shall be entitled to receive his Base Salary through the last day of the six months in which this Agreement is terminated. If in respect of the fiscal year in which Dr. Holaday's employment terminates pursuant to his subparagraph 8(b) he would otherwise have been entitled to receive incentive compensation under paragraph 3(c) by reason of the operations of the Company during such fiscal year, Dr. Holaday shall be entitled to receive a pro rata portion of such incentive compensation determined by multiplying the dollar amount of the incentive compensation by a fraction, the numerator of which shall be the number of complete calendar months that elapsed during the fiscal year through the end of the month in which Dr. Holaday's employment terminated pursuant to this subparagraph 8(b) and the denominator of which shall be twelve. (c) Termination for Cause. The Company may terminate Dr. Holaday's employment hereunder for "cause" (as hereinafter defined) by giving written notice of termination of this Agreement, the Company shall have "cause" to terminate Dr. Holaday's employment hereunder upon Dr. Holaday's (i) habitual drunkenness or drug addiction or willful failure materially to perform and discharge his duties and responsibilities hereunder, or (ii) misconduct that is materially and significantly injurious to the Company, or (iii) conviction of a felony involving the personal dishonesty of Dr. Holaday or moral turpitude, or (iv) conviction of Dr. Holaday of any crime or offense involving the property of the Company. Upon any such termination for cause under this subparagraph 8(c) the Company shall pay Dr. Holaday his Base Salary through the date of termination, and the Company shall have no further obligations under this Agreement. (d) Termination without Cause. The Company shall have the right to terminate Dr. Holaday's employment under this Agreement at any time, without cause, by giving Dr. Holaday not less than sixty (60) days prior written notice of such termination. Until the effective date of any such termination, the Company shall continue to pay to Dr. Holaday the full compensation specified in this Agreement. In addition, on the effective date of termination, the Company shall pay to Dr. Holaday the full amount of all Base Salary to which Dr. Holaday would otherwise have been paid throughout the remaining Term (including any Successor Term, if applicable) of this Agreement. 9. Reimbursement of Legal Fees The Company agrees to reimburse Dr. Holaday for reasonable attorneys fees incurred if Dr. Holaday or the Company sues on this Agreement and the Company is not wholly successful on the merits of the suit. 10. Application for Insurance The Company at its option has the right to obtain a "key-man" life insurance policy, at the Company's expense, with the Company being the sole beneficiary of such policy. Dr. Holaday hereby agrees to undergo the necessary physical examinations and disclose any pertinent disclaimers and information to obtain said policy. The Company shall also 4 5 be required to provide split-dollar insurance as is presently in place for the benefit of Dr. Holaday's beneficiaries at the Company's expense. 11. Miscellaneous (a) Assignments and Binding Effect. The respective rights and obligations of the parties under this Agreement shall be binding upon the parties hereto and their heirs, executors, administrators, successors, and assigns, including, in the case of the Company, any other corporation or entity with which the Company may be merged or otherwise combined or which may acquire all or substantially all of the Company's assets and, in the case of Dr. Holaday, his estate or other legal representatives; provided that Dr. Holaday may not assign his rights hereunder without prior written consent of the Company. (b) Governing Law. This Agreement shall be governed as to its validity, interpretation and effect by the laws of the State of Maryland. (c) Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid, illegal, or unenforceable for any reason, the remaining provisions and portions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. Such invalid, illegal or unenforceable provision(s) shall be deemed modified to the extent necessary to make it (them) valid, legal, and enforceable. (d) Entire Agreement; Amendments. This Agreement constitutes the entire Agreement and understanding of the Company and Dr. Holaday with respect to the terms of Dr. Holaday's employment with the Company and supersedes all prior discussions, understandings and agreements with respect thereto except to those agreements relating to the assignment of patents and inventions to which Dr. Holaday acknowledges signing a Combined Non-disclosure and Patent Employee Agreement which will remain in effect. (e) Captions. All captions and headings used herein are for convenient reference only and do not form part of this Agreement. (f) Waiver. The waiver of a breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. (g) Notice. Any notice or communication required or permitted under this Agreement shall be made in writing and shall be delivered by hand, or mailed by registered or certified mail, return receipt requested, first class postage prepaid, addressed as follows: If to Dr. Holaday: 6502 Hillmead Road Bethesda, Maryland 20877 5 6 If to the Company: EntreMed, Inc. 9610 Medical Center Drive, Suite 200 Rockville, Maryland 20850 Attn.: Chief Financial Officer (h) Counterparts. This Agreement may be executed in counterparts, each of which shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. /s/ JOHN W. HOLADAY, JR. ------------------------------- John W. Holaday, Jr. ENTREMED, INC. By: /S/ JOHN C. THOMAS ---------------------------- John C. Thomas, for the Board of Directors Compensation Committee 6 EX-10.31 5 LEASE AGREEMENT 1 ENTREMED, INC. EXHIBIT 10.31 LEASE AGREEMENT THIS LEASE AGREEMENT, made this 10TH day of June, 1998 by and between RED GATE III LIMITED PARTNERSHIP ("LANDLORD") and ENTREMED, INC. ("TENANT"). W I T N E S S E T H: 1. DEMISE OF PREMISES Landlord hereby demises unto Tenant, and Tenant hereby leases from Landlord for the terms and upon the conditions set forth in this Lease 46,267 square feet of space in the building located at 9640 Medical Center Drive, Shady Grove Road, Rockville, Maryland 20850 (the "Building"), all as set forth on Exhibit A and Exhibit B, hereto attached, said space being referred to as the "Premises." 2. TERM The term of this Lease shall be for a period of 10 years, commencing on the 1st day of November, 1998, and terminating on the 31st day of October, 2008, with two additional 5 year options on the same terms and conditions in this Lease, provided that Tenant shall have given the Landlord written notice of Tenant's intention to do so at least six (6) months prior to the expiration of this Lease and that Tenant is not in default under this Lease. In the event the Landlord is not able to deliver possession of the Premises to Tenant on the date this Lease is to commence because Landlord has not fully completed the Landlord's Work as set forth on Exhibit A, the commencement date shall be extended to the date said Work is completed and the expiration date shall be similarly extended. The date of delivery of the Premises by Landlord to Tenant shall be that date on which all required improvements to be furnished by Landlord as stated in Exhibit "A" have been substantially completed except for punch list items and the occupancy certificate has been issued. Rent shall be pro-rated for any portion of the initial month in which Tenant is required to commence rental payments hereunder, which does not commence with the first day thereof as set forth below. Occupancy of the 46,267 square feet will occur in four phases, i.e. by floor. Rent for each floor will commence when occupancy certificates are issued for laboratories and offices. The Lease commences upon issuance of the occupancy certificate for the third floor with rental to be paid hereunder on a pro-rated basis in accordance with Exhibit B attached hereto. At any time prior to delivery of possession of the Premises, Tenant shall have the right to enter upon the Premises for the purpose of taking measurements and for completing Tenant's construction of improvements, provided such entry does not unreasonably interfere with or obstruct the progress of work being done by the Landlord. 3. RENT The Tenant shall pay to the Landlord an annual rental (herein called "Minimum Rent") in the amount of SEVEN HUNDRED EIGHTY SIX THOUSAND FIVE HUNDRED THIRTY NINE and NO/100 DOLLARS ($786,539.00), subject to adjustment as hereinafter set forth, payable without deduction or set off in equal monthly installments of SIXTY FIVE THOUSAND FIVE HUNDRED FORTY FOUR and 92/100 DOLLARS ($65,544.92) per month in advance, the first installment of which is due and payable when occupancy certificates are issued; all subsequent installments due and payable on the first day of each calendar month thereafter during the term of the Lease until the total rent provided for herein is paid. No payment by Tenant or receipt of Landlord of a lesser amount than a monthly installment of rent herein stipulated, or endorsement or statement on any check or any letter accompanying any check for payment as rent be deemed an accord and satisfaction, and Landlord may accept such check for payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided for in this Lease. (See 2 Exhibit B for rent rate details). 4. ADJUSTMENT OF MINIMUM RENT The Minimum Rent shall be increased at the end of each lease year during the term hereby by three percent (3%) of the rent then being paid. There shall be no additional pass-throughs of increases in operating expenses except for real estate taxes or as otherwise provided for herein. 5. REAL ESTATE TAXES In the event the real estate taxes levied or assessed against the land and Building on which the Premises are a part in future tax years are greater than the real estate taxes for the Base Year, the Tenant shall pay within thirty (30) days after submission of the bill to Tenant for the increase in real estate taxes, as additional rent, a proportionate share of such increase, which proportionate share shall be computed at 100 % of the increase in taxes, but shall exclude any fine, penalty, or interest charge for late or non-payment of taxes by Landlord. The Base Year shall be July 1, 1998 to June 30, 1999. 6. UTILITIES Tenant shall be responsible for the payment of all utilities used or consumed by the Tenant in and upon the Premises. Electric, Gas, and Water shall be separately metered by Landlord. In the event any utility service to the Premises shall be interrupted for a period of more than two (2) days due to the negligence or willful misconduct of Landlord, its agents or servants, the Minimum and Additional Rent shall abate until such services are fully rendered. Landlord shall not be liable to Tenant for any damage or inconvenience caused by the cessation or interruption of any utility service, or the elevators in the Building, occasioned by fire, accident, strike or other cause beyond Landlord's control. 7. USE OF PREMISES Tenant shall use the Premises only for Offices and Laboratories purposes including animal facilities and pilot production facilities, and for no other purpose, except as approved by Landlord in advance, in writing, which approval shall not be unreasonably withheld. Tenant shall not make any use of the Premises which would disturb the quiet enjoyment of the Landlord or other tenants in the Building or prejudice or increase the fire insurance premiums for the Building, and shall comply with all laws and regulations of all governmental authorities pertaining to Tenant's use of Premises. 8. WASTE REMOVAL Tenant shall be responsible for removal of waste generated by Tenant's operation and direct payment for same. This includes waste service fees levied by local jurisdictions. 3 9. HAZARDOUS MATERIALS Tenant shall be permitted to store Hazardous Materials on the Premises and shall comply with all laws and regulations of all governmental authorities pertaining to Tenant's use of the Premises, including, without limitation, all Environmental Laws (as hereinafter defined) and laws pertaining to Hazardous Materials and Air and Water Quality. The term "Hazardous Materials" means and includes any petroleum products and/or any hazardous toxic or other dangerous waste, substance or material defined as such in the Environmental Laws. The term "Environmental Laws" means the Comprehensive Environmental Response, Compensation and Liability Act, any "Superfund" or "Superlien" law, or any other federal, state or local statute, law, ordinance, code, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning the use or storage of Hazardous Materials. All such materials must be completely removed upon expiration of this Lease, and any de-contamination certificates required by the Landlord or any government authority must be obtained and delivered to the Landlord. Tenant shall obtain and maintain, in full force and effect, all necessary government licenses, permits and approvals legally required for materials used in the conduct of its business. If the presence of any Hazardous Materials on the Premises caused or permitted by Tenant results in any contamination of the Premises or any portion of the Building or Common Areas, Tenant shall promptly take all actions, at its sole expense, necessary to return the Premises to the condition existing prior to the introduction of such Hazardous Materials, provided that all such actions shall be subject to the approval of Landlord, which approval shall not be unreasonably withheld. At the Commencement Date of the Lease and on January 15 of each year thereafter, Tenant shall disclose to Landlord the names and amounts of all Hazardous Materials which are to be stored, used or disposed of on the Premises. Any Hazardous Materials stored or used on the Premises must not in any way prejudice the Landlord's insurance or increase the fire hazards to a greater extent than necessarily incident to the business for which the Premises are leased. 10. LATE CHARGE If any installment of rent accruing hereunder or any other sums payable hereunder shall not be paid within thirty (30) days after written notice to Tenant, such installment and other sums shall be increased without affecting the Landlord's other rights under this Lease, by a late charge of five percent (5%) of the delinquent installment. 11. REPAIRS AND MAINTENANCE Landlord shall be responsible for all structural repairs, including repairs to the structure, foundation, roof, exterior walls, exterior doors, glazing systems and load-bearing walls of the Building, for maintaining the parking area and sidewalks, and the Common Areas (as hereinafter defined) in the Building. Landlord shall also be responsible for repairing damage to non load-bearing walls caused by structural defects. Landlord will provide elevator maintenance service and service to building core electric, fire protection and plumbing. The Tenant shall be responsible for the maintenance and repair of the Premises and all fixtures, appliances and equipment therein, including, but not limited to, the Heating and Air Conditioning system. Landlord will pay for major Heating and Air Conditioning component replacement and all repairs to the heating and air conditioning system in excess of Two Hundred Fifty Dollars ($250.00) per occurrence/ per Heating and Air Conditioning unit. Tenant shall also provide its own char service. Landlord will repair and replace any glass breakage, provided it is not the result of the Tenant's willful or negligent act. Tenant, at its sole expense, shall keep all Tenant fixtures and equipment in the Premises in safe and sanitary condition and good working order and repair, together with related plumbing, electrical or other utility service, whether installed by Tenant or by Landlord on Tenant's behalf. Tenant shall pay for all damage to the Building and any fixtures and appurtenances related thereto due solely to the malfunction, lack of repair, or improper installation of the Tenant's fixtures and equipment. Landlord warrants that the HVAC system will maintain at a temperature of 74(Degrees)F +/- 3(Degrees)F in the summer and 72(Degrees)F +/- 3(Degrees)F in the winter. Based on original equipment loads by Tenant, the Landlord 4 also warrants that the relative humidity in the Premises will be no higher than 50% during summer months. Exceptions to these conditions may occur in Tenant's cage wash area(s). 12. COMMON AREAS Landlord will regularly maintain live plants in the atrium and maintain external building lights. Landlord is responsible for maintaining common areas, landscaping, external window cleaning and snow removal at Landlord's expense. 13. LANDLORD'S WORK PRIOR TO COMMENCEMENT OF TERM Landlord shall make the following improvements to the Premises prior to the commencement of the term of the Lease: (a) Construction in accordance with Exhibit A. 14. TENANT ALTERATIONS All alterations, improvements, or additions to the demised Premises to be made by Tenant shall be subject to the written consent of the Landlord, which consent shall not be unreasonably withheld, provided such alterations and improvements do not weaken the structural integrity of the Building or detract from its dignity and/or uniformity. All alterations and improvements and/or additions made by Tenant shall remain upon the Premises at the expiration or earlier termination of this Lease and shall become the property of the Landlord, unless Landlord shall, at the time of approval of the alteration, provide written notice to Tenant to remove the same, in which event Tenant shall, at the expiration or earlier termination of this Lease, remove such alterations, improvements and/or additions, and restore the Premises to the same order and condition in which it was at the commencement of this Lease, reasonable wear and tear and unavoidable casualty excepted. Should Tenant fail to do so, Landlord may do so, collecting the reasonable cost and expense thereof from Tenant as additional rent. 15. TRADE FIXTURES All trade fixtures, telephone equipment, and apparatus installed by Tenant in the Premises shall remain the property of Tenant and shall be removed at the expiration or earlier termination of this Lease and, upon such removal, Tenant shall repair any damage caused by the removal and shall promptly restore the Premises to their same order and condition in which it was at the commencement of this Lease, reasonable wear and tear and unavoidable casualty excepted. Any such trade fixture not removed prior to such termination shall be considered abandoned property, but such abandonment shall not release Tenant of its obligation to pay for the cost of removing such trade fixtures and repairing any damage caused by the removal. 16. QUIET ENJOYMENT Landlord covenants that, upon payment of the rent herein provided and performance by the Tenant of all other covenants herein contained, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises for the term hereof and options. 17. SURRENDER OF PREMISES Upon the expiration or termination of this Lease, Tenant shall quit and surrender the Premises to the Landlord. Tenant shall restore the Premises to substantially the same order and condition in which it was at the commencement of this Lease, reasonable wear and tear and unavoidable casualty excepted, except as modified with Landlord's approval as stipulated in Paragraph 14. 18. INSURANCE Tenant covenants and agrees to maintain and carry, at all times during the term of this Lease, in companies qualified and authorized to transact business in the State of Maryland, general liability insurance in amounts of $500,000.00 per person, $1,000,000.00 per occurrence and $100,000.00 for damage to property on the Premises or arising out of the use thereof by Tenant or its agents. All policies of insurance shall provide that they may not be canceled, except on thirty (30) days 5 written notice to Landlord, and all such policies shall name Landlord as an additional insured. Prior to commencement, Tenant shall furnish Landlord with satisfactory proof that the insurance herein provided for is at all times in full force and effect. If either party hereto is paid any proceeds under any policy of insurance naming such party as an insured on account of any loss, damage or liability, then such party hereby releases the other party to (and only to) the extent of the amount of such proceeds, from any and all liability for such loss or damage, notwithstanding negligent or intentionally tortuous act or omission of the other party, its agents or employees; provided, such release shall be effective only as to a loss of damage occurring while the appropriate policy of insurance of the releasing party provides that such release shall not impair the effectiveness of such policy or the insured's ability to recover thereunder. Each party hereto shall use reasonable efforts to have a clause to such effect included in its said policies, and shall promptly notify the other in writing if such clause cannot be included in any such policy. 19. INDEMNIFICATION Tenant shall indemnify and hold harmless the Landlord from, and name LANDLORD as additional insured on policy regarding, any and all liability, damage, expense, cause of action, or claims arising out of injury to persons or to property on the Premises, except for the negligence or willful misconduct of Landlord, its agents, employees, or servants. 20. DAMAGE BY FIRE OR CASUALTY If the Premises are damaged by fire or other casualty, but are not thereby rendered untenantable in whole or in part, Landlord, at it's own expense, and subject to the limitations set forth in this Lease, shall cause such damage to be repaired and the Minimum Rent and Additional Rent shall not be abated. If, by reason of any damage or destruction, the Premises shall be rendered untenantable in whole or in part and cannot be repaired and made tenantable within sixty (60) days after such damage: (i) Landlord, at its option and its own expense, may cause the damage to be repaired and the Minimum Rent and Additional Rent shall be abated proportionately as to the portion of the Premises rendered untenantable while it is untenantable; or (ii) Landlord shall have the right, to be exercised by notice in writing delivered to tenant within thirty (30) days of the occurrence of such damage or destruction, to terminate this Lease, whereupon the Minimum Rent and Additional Rent shall be adjusted as of the date of such termination. Landlord shall provide Tenant with back-up space if available in another Landlord building. 21. ASSIGNMENT OR SUBLETTING Tenant acknowledges that Landlord has entered into this Lease because of Tenant's financial strength, goodwill, ability and expertise and that accordingly, this lease is personal to Tenant. Taking this into consideration, tenant shall not assign, mortgage, sublet, pledge or encumber this Lease, in whole or in part, except with the written consent of the Landlord, which shall not be unreasonably withheld or delayed. Tenant agrees that, in the event of any such assignment or subletting, Tenant shall nevertheless remain liable for the performance of all terms, covenants, and conditions of this Lease. 22. SUBORDINATION AND ATTORNMENT This Lease shall be subject to and subordinate at all times to the lien of any mortgage and/or deeds of trust and all land leases now or hereafter made on any portion of the Premises, and to all advances thereunder, provided the mortgagee or trustee named in said mortgage or deed of trust shall agree to recognize this Lease and agrees, in the event of foreclosure, not to disturb the Tenant's possession hereunder, provided Tenant is not in default under this Lease. This subordination shall be self-operative and no further instrument of subordination shall be required. If any proceedings are commenced to foreclose any mortgage or deed of trust encumbering the Premises, Tenant agrees to attorn to the purchaser at the foreclosure sale, if requested to do so by any such purchaser, and to recognize such purchaser as the Landlord under this Lease, provided purchaser shall agree that Tenant's rights hereunder shall not be disturbed so long as Tenant has not committed any event of default as to which the applicable cure period has not expired. Further, the purchaser at a foreclosure sale as Landlord will be liable for all terms, covenants and conditions of this Lease. 6 23. CONDEMNATION (a) If the whole of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain, condemnation or conveyance in lieu thereof, then this Lease shall terminate as of the date on which possession of the Premises is required to be surrendered to the condemning authority and the Tenant shall have no claim against Landlord or the condemning authority for the value of the unexpired term of this Lease. Tenant shall have the right to claim, however, the unamortized cost of any improvements or additions made to the Premises by Tenant at its cost, the value of any Tenant fixtures and furnishings and any moving expenses. (b) If a portion of the Premises shall be so taken or conveyed, and if such partial taking or conveyance shall render the Premises unsuitable for the business of the Tenant, then the term of this Lease shall cease and terminate as of the date on which possession of the portion of the Premises is surrendered to the condemning authority, and Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired term of this Lease. In the event such partial taking or conveyance is not extensive enough to render the Premises untenantable for the business of Tenant, as reasonably judged by both Landlord and Tenant, this Lease shall continue in full force and effect, except that the Minimum and Additional Rent shall be reduced in the same proportion that the floor area of the Premises so taken or conveyed bears to such floor area immediately prior to such taking or conveyance. In the event of such partial taking and continuation of Lease, Landlord shall promptly restore the Premises, at Landlord's expense, as nearly as practical to the condition comparable to that which existed prior to the condemnation. 24. EVENTS OF DEFAULT The occurrence of any of the following shall constitute an event of default hereunder: (a) Failure of Tenant to pay installment of rent hereunder within fifteen (15) days of the due date, or failure of Tenant to pay within twenty (20) days after receipt of written notice of rent or any other sum herein required to be paid by Tenant. (b) Tenant's failure to perform any other covenant or condition of this Lease within thirty (30) days after receipt of written notice and demand, unless the failure is of such a character as to require more than thirty (30) days to cure in which event Tenant's failure to proceed diligently to cure such failure shall constitute an event of default. 25. LANDLORD'S REMEDIES Upon the occurrence of any event of default, Landlord may, at Landlord's sole option, exercise any or all of the following remedies, together with any such other remedies as may be available to Landlord at law or in equity. (a) Landlord may terminate this Lease by giving Tenant written notice of its election to do so, as of a specified date not less than sixty (60) days after the date of the giving of such notice and this Lease shall then expire on the date so specified, and Landlord shall then be entitled to immediately regain possession of the Premises as if the date had been originally fixed as the expiration date of the term of this Lease. Landlord may then re-enter upon the Premises, either with or without due process of law, and remove all persons therefrom, the statutory notice to quit or any other notice to quit being hereby expressly waived by Tenant. Tenant expressly agrees that the exercise by Landlord of the right of re-entry shall not be a bar to or prejudice in any way other legal remedies available to Landlord. In that event, Landlord shall be entitled to recover from Tenant as and for liquidated damages an amount equal to the rent and additional rent reserved in this Lease less any and all amounts received by Landlord from the rental of the Premises to another tenant. Nothing herein contained, however, shall limit or prejudice the right of Landlord to 7 prove for and obtain as liquidated damages, by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which such damages are to be proved, whether or not such amount may be greater, equal to, or less than the amount of the difference referred to above, and Landlord may, in his own name, but as agent for Tenant, re-let the Premises. Any recovery by the Landlord shall be limited to the rent hereunder (plus any reasonable costs incurred in re-letting) less any rent actually paid by the new tenant. (b) No termination of this Lease or any taking of possession of the Premises shall deprive Landlord of any of its remedies or actions against Tenant for past or future rent, nor shall the bringing of any action for rent or breach of covenant, or the resort to any other remedy herein provided for the recovery of rent, be construed as a waiver of the right to obtain possession of the Premises. (c) In addition to any damages becoming due under this paragraph, Landlord shall be entitled to recover from Tenant and Tenant shall pay to Landlord an amount equal to all reasonable expenses, including reasonable attorneys' fees, if any, incurred by the Landlord in recovering possession of the Premises, and all reasonable costs and charges for the care of said Premises while vacant, which damages shall be due and payable by Tenant to Landlord at such time or times as such expenses are incurred by the Landlord. (d) In the event of a default or threatened default by Tenant of any of the terms or conditions of this Lease, Landlord shall have the right of injunction and the right to invoke any remedy allowed by law or in equity as if no specific remedies of Landlord were set forth in this Lease. (e) If default be made and a compromise and settlement shall be had thereupon, it shall not constitute a waiver of any covenant herein contained, nor of the Lease itself, unless otherwise agreed to in writing by the parties. 26. RIGHTS OF LANDLORD Landlord reserves the following rights with respect to the Premises: During normal business hours, upon having given mutual agreeable notice, to go upon and inspect the Premises, and at Landlord's option, to make repairs, and/or install equipment in support of the Building of which the Premises are a part, provided there is no interference with Tenant's occupancy. An Agent of the Tenant shall be present for inspection, if requested by Tenant. 27. HOLDING OVER If Tenant holds possession of the Premises after the termination of this Lease or any renewal or extension thereof, Tenant shall become a Tenant from month to month at 115% of the then current rental rate. 28. WAIVER OF CLAIMS Except as may result from their negligence, Landlord and Landlord's agents, employees, and contractors shall not be liable for, and Tenant hereby releases all claims for, damages to persons or property sustained by Tenant (or any person claiming through Tenant) resulting from any fire, accident, occurrence or condition in or upon the Premises or Building, including but not limited to such claims for damage resulting from (1) any defect in or failure of plumbing, heating or air-conditioning equipment, electric wiring or installation thereof, water pipes, stairs, railings or walks; (2) any equipment or apparatus becoming out of repair; (3) the bursting, leaking or running of any tank, washstand, water closet, waste pipe, drain or any other pipe or tank, upon or about such building or premises; (4) the backing up of any sewer pipe or downspout; (5) the escape of steam or hot water; (6) water, snow or ice being upon or coming through the roof of any other place upon or near the Building or Premises or otherwise; (7) the falling of any fixtures, plaster or stucco; (8) broken glass; and (9) any act or omission of occupants of adjoining or contiguous property of buildings. 29. NOTICE 8 All notices required under this Lease shall be given in writing and shall be deemed to be properly served if sent by certified or registered United States Mail, postage prepaid, or overnight courier with receipt of delivery as follows: 9 If to the Landlord: Red Gate III Limited Partnership c/o W.M. Rickman Construction Co. 15215 Shady Grove Road Rockville, Maryland 20850 If to the Tenant: EntreMed, Inc. 9640 Medical Center Drive Rockville, Maryland 20850 or to such other address as either may have designated from time to time by written notice to the other. The date of service of such notices shall be the date such notices are deposited in any United States Post Office or delivered upon receipt in the case of overnight courier service. 30. COVENANTS OF TENANT Tenant covenants and agrees: (a) To give to Landlord prompt written notice of any accident, fire, or damage occurring on or to the Premises. (b) To keep the thermostats in the Premises set at a temperature sufficient to prevent freezing of water pipes, fixtures and HVAC units. (c) To keep the Premises clean, orderly, sanitary, and free from all objectionable odors and from insects, vermin and other pests as reasonably possible. (d) To comply with the requirements of the State, Federal and County statutes, ordinances, and regulations applicable to Tenant and its use of the Premises, and to save Landlord harmless from penalties, fines, costs, and expenses resulting from failure to do so, provided Tenant shall not be obligated to make structural repairs or alterations to so comply. (e) Tenant shall promptly pay all contractors, suppliers of material and persons Tenant engages to perform work and provide materials for construction work on the Premises so as to minimize the possibility of a lien attaching to the Premises. Should any such lien be made or filed, Tenant shall cause the same to be discharged and released of record by bond or otherwise within thirty (30) days of receipt of written request from Landlord. 31. LANDLORD'S RIGHT TO ALTER SITE PLAN LANDLORD shall, from time to time, have the right to alter or modify the site plan of the Building and to rearrange the driveways and parking areas, as well as the entrance and exits to the Premises, provided such alterations do not affect Tenant's access or use and occupancy of the Premises. 32. PARKING SPACES LANDLORD agrees to furnish no less than 100 unreserved parking spaces contiguous to building 9640 Medical Center Drive. 33. ENTIRE AGREEMENT This Lease contains the entire agreement of the parties. There are no oral agreements existing between them. 10 34. SUCCESSORS AND ASSIGNS This Lease, and the covenants and conditions herein contained shall inure to the benefit of and be binding upon the Landlord, its successors and assigns, and shall inure to the benefit of and be binding upon the Tenant, its permitted successors and permitted assigns. 35. BANKRUPTCY If Tenant shall make an assignment of its assets for the benefit of creditors, or if Tenant shall file a voluntary petition in bankruptcy, or if any involuntary petition in bankruptcy or for receivership be instituted against the Tenant and the same be not dismissed within thirty (30) days of the filing thereof, or if Tenant shall be adjudged bankrupt, then and in any of said events, this Lease shall immediately cease and terminate at the option of the Landlord upon written notice to Tenant with the same force and effect as though the date of said event was the date herein fixed for expiration of the term of this Lease. 36. NON-DELIVERY In the event the Landlord shall be unable to give possession of the Premises because construction of the Building is not complete for cause(s) reasonably beyond the control of the Landlord, the Landlord shall not be liable to Tenant for any damage resulting from failure to give possession. 37. PARTIAL INVALIDITY If any term, covenant, or condition of this Lease or the application thereof to any person or circumstance shall be held to be invalid and unenforceable, the remainder of this Lease, and the application of such terms, covenants, or conditions shall be valid and enforceable to the fullest extent permitted by law. 38. FORCE MAJEUR With the exception of those provisions contained herein regarding the payment of rent, the inability of either party to perform any of the terms, covenants or conditions of this Lease shall not be deemed a default if the same shall be due to any cause beyond the reasonable control of that party. 39. ESTOPPEL CERTIFICATE The Tenant shall from time to time, within ten (10) business days after being requested to do so by the Landlord or any Mortgagee of Landlord, execute, acknowledge and deliver to the Landlord (or, at the Landlord's request, to any existing or prospective purchaser, transferee, assignee or Mortgagee of any or all of the Premises) an instrument in recordable form, certifying (a) that this Lease is unmodified and in full force and effect (or, if there has been any modification thereof, that it is in full force and effect as so modified, stating therein the nature of such modification); (b) as to the dates to which the Minimum Rent and other charges arising hereunder have been paid; (c) as to the amount of any prepaid Rent or any credit due to the Tenant hereunder; (d) that the Tenant has accepted possession of the Premises or a portion thereof, and the date on which the Term commenced; (e) as to whether, to the best knowledge, information and belief of the signer of such certificate, the Landlord or the Tenant is then in default in performing any of its obligations hereunder (and, if so, specifying the nature of each such default); and (f) as to any other fact or condition reasonably requested by the Landlord or such other addressee. In the event the Tenant fails or refuses to provide such a certificate, Tenant shall be liable to Landlord for any loss or damage (including reasonable counsel fees) arising out of or in connection with such failure or refusal. IN WITNESS WHEREOF, the parties have caused this Lease Agreement to be executed on the year and date first written. LANDLORD: ATTEST: RED GATE III LIMITED PARTNERSHIP 11 /s/ P.L. ENGLEHART /s/ WILLIAM M. RICKMAN - ------------------------ --------------------------- By: William M. Rickman TENANT: ATTEST: ENTREMED, INC. /s/ R. NELSON CAMPBELL /s/ JOHN W HOLADAY, JR. - ------------------------ --------------------------- By: EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EntreMed, Inc. Exhibit 21 SUBSIDIARIES OF ENTREMED, INC.
Subsidiary State of Incorporation - ---------- ---------------------- Cytokine Science, Inc. Delaware
EX-23.1 7 CONSENT OF INDEPENDENT AUDITORS 1 Entremed, Inc. Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the EntreMed, Inc. 1992 Stock Incentive Plan and in the Registration Statement on Form S-8 pertaining to the EntreMed, Inc. 1992 Stock Incentive Plan and the EntreMed, Inc. Amended and Restated 1996 Stock Option Plan of our report dated February 10, 1998, with respect to the consolidated financial statements of EntreMed, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. ERNST & YOUNG LLP Atlanta, Georgia March 29, 1998 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 DEC-31-1998 DEC-31-1997 30,818,689 18,232,491 4,352,371 27,012,580 112,383 84,151 0 0 0 0 35,641,247 45,935,774 4,432,566 2,211,263 1,453,329 712,482 39,574,003 47,838,663 6,371,532 4,481,403 0 0 0 0 0 0 131,230 122,538 33,056,834 41,830,556 39,574,003 47,838,663 0 0 5,161,483 4,757,488 0 0 0 0 20,845,208 13,914,429 0 0 0 1,418 (13,513,770) (6,536,729) 0 0 (13,513,770) (6,536,729) 0 0 0 0 0 0 (13,513,770) (6,536,729) (1.07) (0.54) (1.07) (0.54)
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